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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________TO ____________
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COMMISSION FILE NUMBER 000-23349
DISPATCH MANAGEMENT SERVICES CORP.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3967426
(State of incorporation) (IRS Employer
Identification No.)
65 WEST 36TH STREET
NEW YORK, NEW YORK 10018
(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code: (212) 268-2910
Securities registered pursuant to Section 12(b)of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value of the common equity held by non-affiliates of
the Registrant (assuming for these purposes, but without conceding, that all
executive officers and directors are "affiliates" of the Registrant) as of April
28, 1998 (based on the last reported sales price of the Registrant's Common
Stock, par value $0.01, as reported on The Nasdaq National Market on such date)
was approximately $243,666,567. As of April 28, 1998, 11,462,474 shares of
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NOT APPLICABLE.
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TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 5
ITEM 3. LEGAL PROCEEDINGS........................................... 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 6
ITEM 6. SELECTED FINANCIAL DATA..................................... 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 15
ITEM 11. EXECUTIVE COMPENSATION...................................... 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 19
ANNEX
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING
STATEMENTS................................................ A-1
</TABLE>
THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
DISPATCH MANAGEMENT SERVICES CORP. OR ITS REPRESENTATIVES CONTAIN STATEMENTS
WHICH MAY CONSTITUTE "FORWARD LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF DISPATCH MANAGEMENT SERVICES CORP. AND
MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY
KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE
STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 AND ANNEX A TO
THIS FORM 10-K, AND ARE HEREBY INCORPORATED BY REFERENCE. THE COMPANY UNDERTAKES
NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.
i
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PART I
ITEM 1. BUSINESS
In connection with the closing of initial public offering (the "Offering")
of the common stock, $.01 par value (the "Common Stock"), of the Company 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 Company operates the brands
acquired in certain of the Combinations (each, a "Brand") through agreements
(each, a "Brand Manager Agreement") with former owners (each, a "Brand
Manager"). Unless otherwise indicated or the context otherwise requires,
references to the "Company" and "DMS" herein mean Dispatch Management Services
Corp., its subsidiaries and the Founding Companies. The Company was incorporated
under the laws of the State of Delaware on September 8, 1997. The Company's
principal executive offices are located at 65 West 36th Street, New York, New
York 10018, and its telephone number at that address is (212) 268-2910.
GENERAL
The Company was recently 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 London, New York City, San Francisco,
Atlanta, Washington, D.C. and Seattle. Although several large, national,
publicly traded companies have begun to consolidate other segments of the
delivery industry, the Company believes that it is the only courier firm focused
exclusively on consolidating the highly fragmented Point-to-Point delivery
industry. The Company's pro forma combined revenues for the year ended December
31, 1997 was $151.6 million. Prior to the consummation of the Offering, the
Company conducted no operations other than in connection with the Offering and
the Combinations and generated no revenues other than the receipt of licensing
fees.
THE DMS MODEL
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. 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.
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 a parcel within a specified
time period. Customers are not charged if the delivery is not made within the
specified time period. 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 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
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Company's founder created the DMS Model in 1991. Since 1994 and through April
28, 1998, 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 27 Founding Companies in 15 of the 20 markets
in which the Company operates. These companies collectively represented 46.4% of
the Company's 1997 pro forma combined revenues. 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,
based on the operating experience of several members of management, 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.
2
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THE FOUNDING COMPANIES
The Founding Companies are listed below by area of operation and brand
name:
NEW YORK METRO AREA
Earlybird Courier Service(1)
Atlantic Freight Systems(1)
Zoom Courier(1)
Bullit Courier Services
LONDON, U.K.
West One
Security Despatch
SAN FRANCISCO
Aero Special Delivery
S-Car-Go Courier(1)
Battery Point(1)
Zap Courier and Crosstown Messenger(1)
Studebaker(1)
ATLANTA
A Courier(1)
MLQ Express
Express Air Messenger(1)
MINNEAPOLIS/PHOENIX
American Eagle/1-800 COURIER(TM)(1)
WASHINGTON, D.C.
Washington Express(1)
Rocket Courier(1)
AFS Courier(1)
DENVER
Kangaroo Express(1)
1-800 COURIER(TM)(1)
LOS ANGELES
National Messenger(1)
1-800 COURIER(TM)
SEATTLE
Fleetfoot(1)
Jet City(1)
DETROIT
Express Messenger(1)
HOUSTON
A&W Couriers(1)
Houston Flash(1)
BOSTON
1-800 COURIER(TM)(1)
Christian Courier(1)
Time Couriers(1)
CHICAGO
Deadline Express(1)
PORTLAND
1-800 COURIER(TM)Portland(1)
DALLAS
Striders Courier(1)
United Messengers(1)
PHILADELPHIA
Time Cycle(1)
WELLINGTON, NEW ZEALAND
Kiwicorp Limited(1)
SOFTWARE COMPANY
Fleetway
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(1) Indicates Founding Companies that operate under Brand Manager Agreements
between Brand Managers and the Company pursuant to which each Brand Manager
is responsible for managing his or her Brand to maximize its revenues and
profit margin. The Brand Manager Agreement can be terminated by the Company
under certain limited conditions.
CUSTOMERS
The Company currently has more than 22,500 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
the local market. In addition, several large, national, publicly traded
companies have begun to consolidate segments of the delivery industry through
the acquisition of independent courier companies. Other companies in the
industry compete with the Company not only for the provision of
3
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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
Dispatch Management Service Centers ("DMS Centers") into a common financial
reporting platform. Information regarding customer accounts, pricing and
administrative and courier costs is available for management to monitor revenue
and gross margins, thereby enabling management to identify emerging trends and
manage customer pricing and courier commissions to maximize profitability. The
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 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.
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. 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."
EMPLOYEES AND INDEPENDENT CONTRACTORS
The Company currently has a work force of approximately 4,000 people,
including approximately 3,300 couriers, 640 operations staff and 60 people in
management positions. Of the couriers, approximately 2,000 are employees and
1,300 are independent contractors. The Company is not a party to any collective
bargaining agreements. The Company believes that its relationship with its
employees and independent contractors is good.
RECENT DEVELOPMENTS
On April 7, 1998, the Company acquired all of the outstanding capital stock
of Delta Air & Road Transport PLC ("Delta"), a company engaged primarily in
on-demand and scheduled delivery services, for $21.7 million in cash and $3.0
million of contingent consideration which may be paid in the future depending
upon the attainment of certain performance criteria. Delta, headquartered in
London, has forty offices located throughout the United Kingdom and reported
1997 revenues of approximately $33 million.
4
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ITEM 2. PROPERTIES
The Company operates from 92 leased facilities, which total approximately
330,000 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 as
well as for the strategic stockpiling of service repair items for certain
customers. The Company generally intends to continue to consolidate the
back-office operations and road operations into single DMS Centers and Road
Management Service Centers ("RMS Centers") located within each market. 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 table below summarizes the location of the Company's existing
facilities.
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NUMBER OF
LOCATION FACILITIES
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United Kingdom.............................................. 42
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
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
Philadelphia, PA............................................ 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. Furthermore, the Company believes
that suitable additional or replacement space will be available when required.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent in lieu of a special meeting of stockholders of the
Company effective as of November 26, 1997, all of the outstanding shares of
Common Stock entitled to vote approved an amendment to the Company's Certificate
of Incorporation to provide for (i) the indemnification by the Company of the
Company's officers and directors to the fullest extent permitted under Delaware
law, (ii) the advancement of expenses incurred by such directors and officers in
proceedings to which they may be party as a result of their
5
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status as directors and officers and (iii) the indemnification, at the
discretion of the Board of Directors, of other persons from time to time as
deemed appropriate by the Board of Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE INFORMATION
The Company's Common Stock began trading in The Nasdaq National Market
under the symbol "DMSC" on February 6, 1998. Accordingly, market price
information is not available for 1997. The following table details the high and
low sales prices for the Common Stock as reported by The Nasdaq National Market
for the periods indicated:
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HIGH LOW
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February 1998............................................... $17.500 $13.500(1)
March 1998.................................................. 16.875 14.750
April 1998 (through April 28, 1998)......................... 25.250 15.875
</TABLE>
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(1) The initial public offering price was $13.25 per share.
On April 28, 1998 (i) the last sale price of the Common Stock as reported
on The Nasdaq National Market was $23.875 per share and (ii) there were 167
holders of record of the Common Stock.
The Company has never paid any cash dividends on its Common Stock, and the
Board of Directors currently intends to retain all earnings for use in the
Company's business for the foreseeable future. Any future payment of dividends
will depend upon the Company's results of operations, financial condition, cash
requirements, restrictions contained in credit and other agreements and other
factors deemed relevant by the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning unregistered sales of
securities by the Company.
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.
In July 1997, the Company issued $1,000,000 principal amount of notes to
DMS Equity Investors Limited Partnership in connection with a bridge loan from
such partnership to DMS LLC for $1,000,000. In connection with this bridge loan,
DMS LLC issued Class B membership interests for $2,858 in cash. After the Merger
the membership interests were converted into shares of Series A Preferred Stock
of the Company that upon the completion of the Offering converted into shares of
Common Stock representing a 1.4% interest in the Company.
From May through September 1997, DMS LLC issued Class B membership
interests in DMS LLC to thirty-three individuals who purchased such interests
for aggregate consideration of $862,000 in cash. 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 converted into shares of Common
Stock representing a 1.3% interest in the Company (as of April 28, 1998).
In September and November 1997, the Company entered into acquisition
agreements with the Founding Companies pursuant to which the Company issued to
the owners of such Founding Companies 3,378,642 shares of Common Stock as
acquisition consideration.
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In December 1997 and January 1998, the Company issued approximately $1.1
million principal amount of notes to certain individuals in connection with the
December Bridge Loan (as hereinafter defined) for approximately $1.1 million
consideration.
The foregoing offers and sales of unregistered securities of the Company
were made in reliance on the exemption from registration contained in Section
4(2) under the Act.
USE OF PROCEEDS
In connection with the Offering, the Company's Registration Statement on
Form S-1 (Registration No. 333-39971) was declared effective on February 5,
1998. The managing underwriters were Prudential Securities Incorporated and CIBC
Oppenheimer. The Offering commenced on February 6, 1998, all securities offered
thereby were sold and the Offering has terminated. The securities registered
consisted of 6,900,000 shares (the "Offered Shares") of Common Stock, all of
which were sold for the account of the Company.
The Offered Shares were sold at a price to the public of $13.25 per share,
for aggregate gross proceeds of $91.4 million. The total expenses incurred in
connection with the Offering, including underwriting discounts and commissions,
are estimated to be approximately $15.1 million, resulting in net offering
proceeds of approximately $76.3 million.
As of April 28, 1998, the net proceeds have been used as follows: (i)
approximately $60.0 million to pay the cash portion of the purchase prices for
the Founding Companies, of which $14.7 million is subject to earn-out provisions
and (ii) approximately $8.6 million for repayment of indebtedness. The remaining
net proceeds of the Offering were used for working capital, capital expenditures
and for general corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA
On February 11, 1998, the Company acquired the Founding Companies
simultaneously with and as a condition to the closing of the Offering. In July
1996, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 97 relating to business combinations immediately prior to an initial public
offering. SAB 97 requires that these combinations be accounted for using the
purchase method of accounting. In accordance with SAB 97, 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 herein.
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<TABLE>
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TWELVE
MONTHS ENDED
DECEMBER 31, 1997
PRO FORMA
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Statement of Operations Data(1):
Revenues.................................................... $ 151,604
Cost of revenues............................................ 94,141
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Gross profit................................................ 57,463
Operating Expenses:
Sales and marketing expenses.............................. 6,660
General and administrative expenses(2).................... 14,660
Other operating expenses.................................. 26,830
Depreciation and amortization(3).......................... 4,394
----------
Operating income............................................ 4,920
Interest and other expense, net(4).......................... 92
----------
Income before income taxes.................................. 4,828
Provision for income taxes(5)............................... 2,181
----------
Net income.................................................. $ 2,647
----------
Net income per share........................................ $ 0.25
==========
Shares used in computing pro forma net income per
share(6).................................................. 10,784,673
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------------
PRO FORMA PRO FORMA AS
COMBINED(7) ADJUSTED(8)
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Balance Sheet Data:
Working capital (deficit)................................... $(45,686)(9) $ 14,425
Total assets................................................ 117,522 136,685
Long term debt, net of current maturities................... 3,154 1,654
Stockholders' equity........................................ 32,858 109,133
</TABLE>
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(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, 1997.
(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 $2.0 million and (ii) royalty payments made by certain
Founding Companies related to franchise agreements which were terminated
with the closing of the Combinations.
(3) Consists of amortization of goodwill recorded as a result of the
Combinations computed on the basis described in the Note 3 of the Notes to
the Unaudited Pro Forma Combined Financial Statements.
(4) Reflects the reduction of interest expense related to certain indebtedness
paid from the proceeds of the offering.
(5) Assumes the Company is subject to a corporate income tax rate of 38%. The
higher resulting effective tax rate is due to the amortization of certain
goodwill expenses which are not tax deductible.
(6) Includes: (i) 3,378,642 shares to be issued to owners of certain of the
Founding Companies; (ii) 1,183,884 shares held by the existing stockholders
of the Company; and (iii) the 6,222,147 shares required to be sold in the
Offering to pay the cash portion of the Combination consideration, the
expenses associated with the Offering and the Combinations, and to repay
certain indebtedness of the Company.
(7) The pro forma combined balance sheet data assume that the Combinations were
consummated on December 31, 1997.
(8) Adjusted for the sale of the 6,900,000 shares of Common Stock offered by the
Company hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
(9) Reflects $45.3 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."
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Item
6. Selected Financial Data," "Item 8. Financial Statements and Supplementary
Data," the Unaudited Pro Forma Combined Financial Statements of the Company and
the related Notes thereto, the Founding Companies' Audited Historical Financial
Statements and the related Notes thereto appearing elsewhere in this Report and
the Safe Harbor Compliance Statement for Forward-Looking Statements presented as
an Annex and as Exhibit 99.1 to this Report.
INTRODUCTION
The Company was recently formed to create one of the largest providers of
Point-to-Point delivery services in the world and consummated the Offering in
February 1998. 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's pro forma combined revenues for the years ended December 31, 1997 and
1996 were $151.6 and $136.7 million, respectively. As of December 31, 1997, the
Company conducted no operations other than in connection with the Offering and
the Combinations, and generated no revenues 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 Report would be meaningful. 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 by, among other things, 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 Differential (as discussed in the
Notes to the Unaudited Pro Forma Combined Financial Statements of the Company
included elsewhere in this Report) for the year ended December 31, 1997 was $2.0
million and has been reflected as a pro forma adjustment in the Unaudited Pro
Forma Combined Statement of Operations. In addition, the Company has reflected
as a pro forma adjustment the reduction in interest expense resulting from the
repayment of certain indebtedness of the Company and the Founding Companies. The
Unaudited Pro Forma Combined Statements of Operations include a provision for
income tax as if the Company were taxed as a C corporation.
Neither all of the anticipated savings nor all of the anticipated costs of
implementation of the DMS Model have been included in the unaudited pro forma
financial data presented herein because such matters are not presently
quantifiable with any degree of certainty. Based on experience to date, the
Company believes that it will 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 functions; and (v) consolidation of other corporate
operations, such as 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, the Company expects to incur significant additional costs and
expenditures for corporate management and administration, corporate expenses
related to being a public company, systems integration and facilities expansion.
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.
9
<PAGE> 12
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 is in the process of realigning 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.
Payments under Brand Manager Agreements and compensation to sales personnel now
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 of Fleetway Systems 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 of
Fleetway Systems has been allocated to internally developed software and will be
amortized over a period of five years. The excess of the fair value of the
consideration paid in the Combinations over the fair value of the net assets
acquired totaled approximately $75.2 million. This excess purchase price is
recorded as goodwill on the Company's balance sheet. Goodwill is 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, 1997 was approximately $2.2 million, of which approximately $1.1
million 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 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 period 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 by 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
10
<PAGE> 13
certain Founding Companies' Historical Financial Statements and the Notes
thereto appearing elsewhere in this Report.
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>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Revenues.................................................... $151,604 100.0%
Cost of revenues............................................ 94,141 62.1
-------- -----
Gross profit................................................ 57,463 37.9
Operating expenses:
Sales and marketing expenses.............................. 6,660 4.4
General and administrative expenses....................... 14,660 9.7
Other operating expenses.................................. 26,830 17.7
Depreciation and amortization............................. 4,394 2.9
-------- -----
Operating income............................................ 4,920 3.2
-------- -----
Interest and other expenses, net............................ 92 0.0
Income before income taxes.................................. 4,828 3.2
Provision for income taxes.................................. 2,181 1.4
-------- -----
Net income............................................. $ 2,647 1.8%
-------- -----
</TABLE>
REVENUES
Revenues increased approximately $14.9 million, or 10.9%, to $151.6 million
for the year ended December 31, 1997 from $136.7 million for the year ended
December 31, 1996.
Of the Founding Companies, significant increases in revenues were recorded
by West One of $4.3 million, or 17.7%; Aero Delivery of $1.3 million, or 11.7%;
Earlybird Courier of $2.1 million, or 16.1%; Security Despatch of $795,000, or
8.4%; MLQ Express of $798,000, or 15.0%; and A Courier of $1.4 million, or
23.2%. 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/1-800 COURIER of $1.6
million, or 19.3%. This decrease can be attributed to the loss of customers
associated with American Eagle/1-800 COURIER's move to a former national courier
franchise.
In the aggregate, the aforementioned companies accounted for 60.6% of the
total increase in revenues of the Company for the corresponding periods.
COST OF REVENUES
Cost of revenues increased approximately $9.2 million, or 10.8%, to $94.1
million for the year ended December 31, 1997 from $84.9 million for the year
ended December 31, 1996.
Of the Founding Companies, significant increases in cost of revenues were
recorded by West One of $3.0 million, or 18.7%; Aero Delivery of $1.1 million,
or 16.8%; Earlybird Courier of $1.6 million, or 21.1%; Security Despatch of
$471,000, or 8.5%; and A Courier of $912,000, or 26.5%. 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/1-800 COURIER of $720,000, or 13.6%. This decrease can be attributed to
the corresponding decrease in revenues noted above.
In the aggregate, the aforementioned companies accounted for 68.4% of the
total increase in cost of revenues of the Company for the corresponding periods.
11
<PAGE> 14
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased approximately $400,000, or 5.7% to
$6.7 million for the year ended December 31, 1997, from $6.3 million for the
year ended December 31, 1996. Sales and marketing expenses as a percentage of
revenues decreased to 4.4% from 4.6% for the corresponding periods.
Of the Founding Companies, a significant increase in sales and marketing
expenses was recorded by A Courier of $179,000, or 33.8%. This increase was
primarily attributable to the addition of senior level sales personnel and the
payment of commissions. This increase was offset in part by a decrease in sales
and marketing expense recorded by American Eagle/1-800 COURIER of $164,000, or
10.7%. The decrease was primarily attributable to lower sales and related sales
commissions at American Eagle/1-800 COURIER.
There were no other individually significant variances in the remaining
Founding Companies.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased approximately $2.2 million,
or 17.5%, to $14.7 million for the year ended December 31, 1997 from $12.5
million for the year ended December 31, 1996. General and administrative
expenses as a percentage of revenues increased to 9.7% from 9.1% for the
corresponding periods.
Of the Founding Companies, significant increases in general and
administrative expenses were recorded by the Company of $1.0 million; Aero
Delivery of $493,000, or 38.7%; American Eagle/1-800 COURIER of $343,000 or
36.5%; MLQ Express of $132,000, or 13.3%; 1-800 COURIER-L.A.X. of $206,000, or
69.1%; and A Courier of $241,000, or 56.0%. These increases primarily related to
administrative costs incurred related to the Offering, the establishment of a
provision for accrued payroll taxes in connection with U.S. Internal Revenue
Service (the "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 $490,000, or 73.1%, and Atlantic
Freight of $383,000, or 55.3%, which were related to the discontinuation of
non-core business operations.
There were no other individually significant variances in the remaining
Founding Companies.
OTHER OPERATING EXPENSES
Other operating expenses increased approximately $3.5 million, or 15.0%, to
$26.8 million for the year ended December 31, 1997 from $23.3 million for the
year ended December 31, 1996. Other operating expenses as a percentage of
revenues increased to 17.7% from 17.1% for the corresponding periods.
Of the Founding Companies, significant increases in other operating
expenses were recorded by West One of $617,000, or 21.7%; Bullit Courier
Services of $632,000 or 29.9%, Earlybird Courier of $347,000 or 10.9%; Atlantic
Freight of $251,000, or 11.2%; 1-800 COURIER-Denver of $181,000, or 60.7%; and A
Courier of $329,000, or 30.1%. 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.
In the aggregate, the aforementioned companies accounted for 83.8% 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 decreased $687,000, or 12.3%, to
$4.9 million for the year ended December 31, 1997 from $5.6 million for the year
ended December 31, 1996. Operating income as a percentage of revenues decreased
to 3.2% from 4.1% for the corresponding periods.
12
<PAGE> 15
Of the Founding Companies, significant increases in operating income were
recorded by Earlybird Courier of $610,000, or 77.2%; Atlantic Freight of
$273,000, or 53.2%; MLQ Express of $189,000, or 161.5%; and National Messenger
of $157,000, or 60.4%. These increases were offset in part by decreases recorded
by the Company of $900,000; Aero Delivery of $291,000, or 267.0%; American
Eagle/1-800 COURIER of $1.1 million, or 186.0%; 1-800 COURIER-Denver of
$243,000, or 736.4%; and A Courier of $262,000, or 58.7%.
NET INCOME
As a result of the above, net income remained relatively constant at
approximately $2.6 million in each period. Net Income as a percentage of
revenues remained constant at approximately 1.8%.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that conducts 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 and the unallocated net proceeds of the Offering.
In February 1998, the Company obtained a $25 million revolving line of
credit from NationsBank, N.A. pursuant to a credit agreement (the "Credit
Agreement"). All amounts drawn down under the line of credit must be repaid on
May 31, 2000. Outstanding principal balances under the line of credit bear
interest, payable monthly, at increments between 2.50% and 1.50% over the LIBOR
rate, depending on the Company's ratio of Funded Debt to EBITDA (as defined in
the Credit Agreement). The Company may borrow under the line of credit amounts
equal to 80% of the Company's Eligible Domestic Accounts Receivable. The Company
may cancel this line of credit prior to its maturity subject to a prepayment
penalty in certain circumstances [and the Company is obligated to pay certain
commitment and other fees]. Borrowings under the line of credit are secured by a
first lien on all the business assets of Company held in the United States,
including the stock of certain of the Company's subsidiaries. The Company is
required to maintain a specified ratio of Funded Debt to EBITDA and a specified
Fixed Coverage Ratio (as defined in the Credit Agreement). The Credit Agreement
also limits or prohibits (i) the amount of indebtedness the Company can incur,
(ii) the amount of equipment the Company can lease, (iii) the liens, pledges and
guarantees that can be granted by the Company, (iv) the amount of contingent
liabilities of the Company, (v) the amount of cash dividends that can be
declared by the Company and (vi) the sale of stock of the Company's
subsidiaries. Any single acquisition involving cash consideration in excess of
$3.5 million is required to be approved by the lender. The Credit Agreement
contains customary representations and warranties, covenants, defaults and
conditions. The line of credit is intended to be used for short-term working
capital, to finance certain acquisitions and for the issuance of letters of
credit.
In May 1998, NationsBank provided the Company an additional $10 million
short term line of credit facility in anticipation of closing a syndicated
credit facility. The short term line credit facility is cross-defaulted and
cross-collateralized with the revolving line of credit and matures in July 1998.
Aggregate amount available on the lines of credit amounted to $14.5 million.
Capital expenditures totaled approximately $1.7 million in the year ended
December 31, 1997, primarily for office equipment and computer and facility
upgrades. The Company expects to make capital expenditures of approximately $1.2
million 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. In addition,
application of the DMS Model requires investment in local operating centers.
Management presently anticipates that such additional capital expenditures will
total approximately $3.9 million over the next two years, including
approximately $1.8 million of computer equipment, $1.3 million of communications
equipment, and $750,000 of leasehold improvements. However, no assurance can be
made with respect to the actual timing and amount of such expenditures.
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 the
NationsBank credit facility and the unallocated net proceeds of the Offering
will be sufficient to
13
<PAGE> 16
implement its growth strategy. The Company intends to pursue further acquisition
opportunities, the timing, size, success or associated potential capital
commitments of which are unpredictable. 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 all or part 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.
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. The Company took these potential payments into
consideration in negotiating Aero Delivery's purchase price. 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 year ended December 31, 1997.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 becomes effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 requires the reporting and display of
comprehensive income and its components in the financial statements. The
adoption of SFAS No. 130 is not expected to have a material impact on the
Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131. "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 becomes effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 requires financial disclosures regarding
the Company's identifiable reporting segments. The adoption of SFAS No. 131 will
require certain financial statement disclosures and not effect the Company's
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1 in Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
14
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
R. Gregory Kidd............................ 38 Chairman of the Board of Directors
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............................ 38 Director
H. Steve Swink............................. 56 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.,
the Company's predecessor which was merged with and into the Company. From 1991
to 1996, Mr. Kidd was a managing director of Kiwi Corp., a Point-to-Point
delivery company based in New Zealand which purchased several courier firms to
test and refine the DMS Model and developed the Company's proprietary software.
Prior to his employment by Kiwi Corp., 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 September 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 September 1997) 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 November 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.
15
<PAGE> 18
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.
James K. Gardner has served as Director of Road Management Services and
President of the RMS subsidiaries of the Company since February 1998. From
February 1995 to February 1998, Mr. Gardner was 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 Management.
Bonnie Brogdon has served as the Organization Effectiveness Officer of the
Company since February 1998. 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.
Alison Davis has been a director of the Company since February 1998. 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 is Chairperson of the Audit and Compensation Committees of the
Company's Board of Directors.
Michael Fiorito has been a director of the Company since February 1998.
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 is also a
Brand Manager.
H. Steve Swink has been a director of the Company since February 1998.
Since August 1995, Mr. Swink has served as President of the Coffee and Beverage
Division of the U.S. Office Products Company. From 1977 to August 1995, Mr.
Swink served in various executive officer capacities for Coffee Butler Services,
Inc., a coffee service business, most recently as President. Mr. Swink is a
member of the Audit and Compensation Committees of the Board of Directors.
The Board of Directors of the Company is divided into three classes of
directors serving staggered three-year terms. The initial terms of Mr. Kidd and
Ms. Jenkinson expire at the 1998 Annual Meeting of Stockholders. The initial
terms of Messrs. Fiorito and Swink expire at the 1999 Annual Meeting of
Stockholders and the initial term of Ms. Davis expires at the 2000 Annual
Meeting of Stockholders. The Company's officers serve at the discretion of the
Board of Directors.
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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
No executive officer's total annual salary and bonus for 1997 exceeded
$100,000 and, accordingly, Ms. Jenkinson, the Company's Chief Executive Officer,
is the only Named Executive Officer of the Company (as defined under Item 402 of
Regulation S-K). No compensation was paid by the Company to executive
16
<PAGE> 19
officers of the Company prior to 1997. The following table sets forth a summary
of the compensation paid by the Company during 1997 to the Named Executive
Officer:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- --------------------------- ------ ------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Linda M. Jenkinson
Chief Executive Officer and
Director.......................... 1997 $45,000 $ 40,000 $ -- 98,377(2)
</TABLE>
- ---------------
(1) While the Named Executive Officer enjoyed certain perquisites for fiscal
year 1997 these did not exceed the lesser of $50,000 or 10% of the Named
Executive Officer's salary and bonus.
(2) Includes (i) 45,000 shares of Common Stock subject to stock options that
vest over a five-year period at the rate of 20% per year and (ii) 53,377
shares of Common Stock subject to stock options that vest over a two-year
period at the rate of 50% per year.
OPTION GRANTS DURING 1997 AND YEAR-END OPTION VALUES
No options were granted to the Named Executive Officer in 1997 and the
Named Executive Officer did not hold options to purchase Common Stock in 1997.
AGGREGATE OPTION EXERCISES DURING 1997 AND YEAR-END OPTION VALUES
No options to purchase Common Stock were held by the Named Executive
Officer in 1997.
COMPENSATION COMMITTEE
The Board of Directors established a Compensation Committee on May 5, 1998.
The Compensation Committee has not yet met. The Compensation Committee intends
to establish executive compensation policies at its first meeting, which is
expected to be held by June 30, 1998.
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 meeting of the Board of Directors and $1,000
for each committee meeting (unless held on the same day as a meeting of the
Board of Directors). Directors are also reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof
incurred in their capacity as directors.
EMPLOYMENT AGREEMENTS
Linda M. Jenkinson, Kevin Holder, Marko Bogoievski, Lever F. Stewart and
James K. Gardner have each entered into an employment agreement (the "Employment
Agreement") with the Company to serve in their respective capacities as
executive officers of the Company and providing for an annual base salary of
$180,000 each. Each Employment Agreement is for a term of two years commencing
February 5, 1998. Unless terminated, the term of each Employment Agreement
continues thereafter on a year-to-year basis on the same terms and conditions
existing at the time of renewal. Each Employment Agreement contains a covenant
not to compete with the Company during the term of such Employment Agreement and
for a period of one year immediately following termination of employment. In the
event of termination of employment by the Company without cause, the executive
officer will be entitled to receive from the Company pursuant to the terms of
the Employment Agreement: (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 the
greater of the remainder of the term or one year from the date of termination at
the annual rate thereof immediately preceding such termination; (iv) an annual
bonus for a period of the greater
17
<PAGE> 20
of the remainder of the term or one year 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 the greater of the
remainder of the term or one year from the date of termination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of April 28, 1998 by: (i) each
of the Company's directors; (ii) the Chief Executive Officer, who is the only
Named Executive Officer; and (iii) all executive officers and directors as a
group. No person has filed a Schedule 13D or Schedule 13G with the Commission
indicating that such person beneficially owns more than 5% of the Common Stock,
and the Company has not been notified of, and is not otherwise aware of, the
beneficial ownership of persons who may beneficially own more than 5% of the
Common Stock. 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. As of April 28, 1998, there
were 11,462,474 shares of Common Stock outstanding.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES(2) PERCENT(3)
- --------------------------------------- ---------- ----------
<S> <C> <C>
R. Gregory Kidd(4).......................................... 503,541 4.3%
Michael Fiorito(5).......................................... 362,118 3.2%
Linda M. Jenkinson.......................................... 90,587 *
Alison Davis................................................ 25,725 *
H. Steve Swink.............................................. 7,500 *
All Directors and Executive Officers as a Group (11
persons)(6)............................................... 1,380,784 11.9%
</TABLE>
- ---------------
* Less than 1%
(1) The address of the beneficial owners is 65 West 36th Street, New York, New
York 10018.
(2) Includes shares of Common Stock that may be acquired upon exercise of stock
options which are or will become exercisable within 60 days.
(3) Based on an aggregate of 11,462,474 shares of Common Stock issued and
outstanding as of April 28, 1998, plus, for each individual, the number of
shares of Common Stock issuable upon exercise of outstanding stock options
which are or will become exercisable within 60 days.
(4) Includes 47,560 shares owned of record by Kiwicorp Limited, a corporation
controlled by Mr. Kidd.
(5) Includes 350,868 shares owned of record by Earlybird Courier Service LLC, a
company controlled by Mr. Fiorito, and 11,250 shares issuable upon exercise
of stock options beneficially owned by Mr. Fiorito.
(6) Includes 112,500 shares issuable upon exercise of stock options beneficially
owned by such directors and executive officers.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Merger, DMS LLC issued membership interests to certain
directors and executive officers of the Company and third-party investors. Upon
the Merger, Class A members of DMS LLC, including certain directors and
executive officers of the Company and principals of certain Founding Companies,
received Common Stock of the Company in exchange for their Class A membership
interest and certain Class B members of DMS LLC, including certain directors and
executive officers of the Company and principals of certain Founding Companies,
received Series A Preferred Stock of the Company in exchange for their Class B
membership interests (which Series A Preferred Stock was subsequently converted
into 299,225 shares of Common Stock of the Company). Pursuant to the Merger and
in exchange for their respective membership interests in DMS LLC, R. Gregory
Kidd, the Chairman of the Company, received 431,495 shares of the Company's
Common Stock, and each of Linda M. Jenkinson, Chief Executive Officer of the
Company, Gilbert D. Carpel, President of the Company and Kevin Holder, Chief
Operating Officer of the Company, received 85,956 shares of the Company's Common
Stock.
18
<PAGE> 21
On September 9, 1997, Kiwi Express Software 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 received shares of Series B Preferred Stock that,
upon consummation of the Offering, converted into 24,487 shares of Common Stock
and 3,774 shares of Common Stock, respectively. The Company believes that the
price paid to acquire Kiwi Express was at least as favorable to the Company as
would have been available from an independent third party.
Upon consummation of the Offering, the Company acquired Earlybird Courier
for approximately $9.4 million in cash and 350,868 shares of Common Stock of the
Company. Michael Fiorito, a director of the Company, is a 45% shareholder of
Earlybird Courier. Mr. Fiorito is also a Brand Manager. In addition, the Company
has agreed to pay Mr. Fiorito a finder's fee equal to two weeks revenues of any
courier company acquired by the Company in which Mr. Fiorito identifies such
courier company and such acquisition is closed. As of April 28, 1998, the
Company paid Mr. Fiorito approximately $288,000 pursuant to such agreement in
respect of one such acquisition. The Company believes that the price paid to
acquire Earlybird Courier was at least as favorable to the Company as would have
been available from an independent third party.
Upon consummation of the Offering, the Company acquired Washington Express
for 210,717 shares of Common Stock of the Company. Gilbert D. Carpel, the
President of the Company, is a 54% shareholder of Washington Express. Mr. Carpel
is also a Brand Manager. The Company believes that the price paid to acquire
Washington Express was at least as favorable to the Company as would have been
available from an independent third party.
Upon consummation of the Offering, the Company acquired Kiwicorp Limited
for 47,560 shares of Common Stock of the Company. 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 was at
least as favorable to the Company as would have been available from an
independent third party.
Approximately $1.1 million principal amount of indebtedness was incurred by
the Company in December 1997 and January 1998 (the "December Bridge Loan") to
partially fund expenses associated with the Offering and the Combinations. This
December Bridge Loan matured upon consummation of the Offering and bore interest
at 14% per annum. In addition, commitment fees equal to the principal amount of
the loan were paid at the repayment of the loan. In January 1998, Lever F.
Stewart, an executive officer of the Company, purchased for cash $172,000
principal amount of the Company's notes as part of the December Bridge Loan. In
January 1998, Bonnie Brogdon, an executive officer of the Company, purchased for
cash $100,000 principal amount of the Company's notes as part of the December
Bridge Loan. Also in January 1998, H. Steve Swink, a director of the Company,
purchased for cash $100,000 principal amount of the Company's notes as part of
the December Bridge Loan. In December 1997, Earlybird Courier, one of the
Founding Companies of which Michael Fiorito, a director of the Company and a
Brand Manager, is a 45% stockholder, purchased for cash $100,000 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.
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.
19
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
1. Financial Statements
The following financial statements and reports of independent accountants
are included herein:
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)
Combining Statement of Operations (Unaudited)
Notes to Unaudited Pro Forma Combined Financial Statements
DISPATCH MANAGEMENT SERVICES CORP.
Report of Independent Accountants
Balance Sheet as of December 31, 1997
Statement of Stockholder's Equity for the period from
inception (November 12, 1996) through December 31, 1997
Statement of Operations for the period from inception
(November 12, 1996) through December 31, 1997
Statement of Cash Flows for the period from inception
(November 12, 1996) through December 31, 1997
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 each of the Three Years in the
Period ended September 30, 1997
Statement of Cash Flows for each of the Three Years in the
Period ended September 30, 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 December 31, 1997
Consolidated Statements of Operations for Each of the
Years ended March 31, 1996 and 1997 and Nine Months
ended December 31, 1997
Consolidated Statements of Cash Flows for Each of the
Years ended March 31, 1996 and 1997 and Nine Months
ended December 31, 1997
Notes to the Consolidated 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 1997
Combined Statements of Operations and Retained Earnings
(Accumulated Deficit) for the Three Years in the Period
Ended December 31, 1997
Combined Statements of Cash Flows for the Three Years in
the Period Ended December 31, 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 29, 1996 and
January 4, 1998
20
<PAGE> 23
Combined Statements of Operations for each of the Three
Years in the Period ended January 4, 1998
Combined Statements of Stockholders' Equity for each of
the Three Years in the Period ended January 4, 1998
Combined Statements of Cash Flows for each of the Three
Years in the Period ended January 4, 1998
Notes to Combined Financial Statements
ZOOM MESSENGER SERVICE, INC.
Report of Independent Accountants
Balance Sheets as of December 31, 1996 and 1997
Statements of Operations for the Years ended December 31,
1996 and 1997
Statements of Changes in Stockholders' Equity (Deficit)
for Years ended December 31, 1996 and 1997
Statements of Cash Flows for the Years ended December 31,
1996 and 1997
Notes to Financial Statements
BULLIT COURIER SERVICES, INC. D/B/A BULLIT COURIER
Report of Independent Accountants
Consolidated Balance Sheets as of February 29, 1996 and
February 28, 1997 and December 31, 1997
Consolidated Statements of Operations for Each of the Two
Years in the Period ended February 28, 1997 and Ten
Months ended December 31, 1997
Consolidated Statements of Stockholders' Equity for Each
of the Two Years in the Period ended February 20, 1997
and Ten Months ended December 31, 1997
Consolidated Statements of Cash Flows for Each of the Two
Years in the Period ended February 20, 1997 and Ten
Months ended December 31, 1997
Notes to Consolidated Financial Statements
AERO SPECIAL DELIVERY SERVICE, INC. D/B/A AERO DELIVERY
Report of Independent Accountants
Balance Sheets as of June 30, 1996 and 1997 and December
31, 1997
Statements of Operations for the Two Years ended June 30,
1997 and the Six Months ended December 31, 1997
Statements of Stockholder's Deficiency for the Two Years
ended June 30, 1997 and the Six Months ended December
31, 1997
Statements of Cash Flows for the Two Years ended June 30,
1997 and the Six Months ended December 31, 1997
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 1997
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997
Statements of Stockholder's Equity for each of the Three
Years in the Period ended December 31, 1997
Statements of Cash Flows for each of the Three Years in
the Period ended December 31, 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 1997
Statements of Income and Expense and Changes in Net Assets
for each of the Three Years in the Period ended
December 31, 1997
Statements of Cash Flows for each of the Three Years ended
December 31, 1997
Notes to Financial Statements
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP D/B/A ZAP COURIER
AND CROSSTOWN MESSENGER
Report of Independent Accountants
21
<PAGE> 24
Statements of Assets, Liabilities and Net Assets as of
December 31, 1997
Statement of Income and Expense and Changes in Net Assets
for the Year ended December 31, 1997
Statements of Cash Flows for the Year ended December 31,
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
December 31, 1997
Statements of Income and Expense and Changes in Net Assets
for the Year ended December 31, 1997
Statements of Cash Flows for the Year ended December 1997
Notes to Financial Statements
AMERICAN EAGLE ENDEAVORS, INC. D/B/A 1-800 COURIER-PHOENIX,
MINNEAPOLIS
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997
Consolidated Statements of Operations for each of the
Three Years in the Period ended December 31, 1997
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the Three Years in the Period ended
December 31, 1997
Consolidated Statements of Cash Flows for each of the
Three Years in the Period ended December 31, 1997
Notes to Consolidated Financial Statements
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
Statements of Stockholders' Equity (Deficiency) 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
A COURIER, INC. AND AFFILIATES
Report of Independent Accountants
Combined Balance Sheets as of December 31, 1996 and
December 31, 1997
Combined Statements of Operations for the Years ended
December 31, 1996 and December 31, 1997
Combined Statements of Stockholders' Equity for Years
ended December 31, 1996 and December 31, 1997
Combined Statements of Cash Flows for the Year ended
December 31, 1996 and December 31, 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
December 31, 1997
Statements of Operations for Each of the Two Years in the
Period ended February 28, 1997 and Ten Months ended
December 31, 1997
Statements of Changes in Stockholder's Equity for the
Years ended February 28, 1996 and 1997 and for the Ten
Month Period ended December 31, 1997
Statements of Cash Flows for Each of the Two Years ended
February 28, 1997 and for the Ten Months ended December
31, 1997
Notes to Financial Statements
KANGAROO EXPRESS OF COLORADO SPRINGS, INC. D/B/A KANGAROO
EXPRESS
Report of Independent Accountants
Balance Sheets as of December 31, 1996 and 1997
22
<PAGE> 25
Statements of Operations for each of the Three Years ended
December 31, 1997
Statements of Stockholders' Equity (Deficit) for each of
the Three Years in this Period ended December 31, 1997
Statements of Cash Flows for each of the Three Years in
this Period ended December 31, 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 1997
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997
Statements of Stockholders' Equity (Deficit) for each of
the Three Years in the Period ended December 31, 1997
Statements of Cash Flows for each of the Three Years in
the Period ended December 31, 1997
Notes to Financial Statements
NATIONAL MESSENGER, INC. D/B/A NATIONAL MESSENGER
Report of Independent Accountants
Balance Sheets as of November 30, 1996 and 1997
Statements of Operations for each of the Three Years in
the Period ended November 30, 1997
Statements of Shareholders' Equity for each of the Three
Years in the Period ended November 30, 1997
Statements of Cash Flows for each of the Three Years in
the Period ended November 30, 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, 1996 and 1997
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997
Statements of Shareholders' Deficit for each of the Three
Years in the Period ended December 31, 1997
Statements of Cash Flows for each of the Three Years in
the Period ended December 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 1997
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997
Statements of Changes in Stockholder's Equity for each of
the Three Years ended in the Period ended December 31,
1997
Statements of Cash Flows for each of the Three Years in
the Period ended December 31, 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 and December
31, 1997
Statements of Operations for Each of the Three Years in
the Period ended August 31, 1997 and for the Four
Months ended December 31, 1997
Statements of Changes in Stockholders' Equity (Deficit)
for Each of the Three Years in the Period ended August
31, 1997 and the Four Months ended December 31, 1997
Statements of Cash Flows for Each of the Three Years in
the Period ended August 31, 1997 and for the Four
Months ended December 31, 1997
Notes to Financial Statements
23
<PAGE> 26
<TABLE>
<S> <C>
A&W COURIERS, INC. D/B/A A&W COURIERS
Report of Independent Accountants
Balance Sheets as of December 31, 1996 and 1997
Statements of Operations for Each of the Three Years in the Period ended December 31, 1997
Statements of Stockholder's Equity for Each of the Three Years in the Period ended December 31, 1997
Statements of Cash Flows for Each of the Three Years in the Period ended December 31, 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 1997
Statements of Operations for each of the Three Years in the Period ended December 31, 1997
Statements of Stockholders' Equity for each of the Three Years in the Period ended December 31, 1997
Statements of Cash Flows for each of the Three Years in the Period ended December 31, 1997
Notes to Financial Statements
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
DEADLINE ACQUISITION CORP. D/B/A DEADLINE EXPRESS
Report of Independent Auditors
Balance Sheet as of December 31, 1997
Statements of Operations and Accumulated Deficit for the period from August 29, 1997 to December 31, 1997
Statements of Cash Flows for the period from August 29, 1997 to December 31, 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 December 31, 1997
Statements of Operations for Each of the Two Years in the Period ended March 31, 1997 and Nine Months ended
December 31, 1997
Statements of Cash Flows for Each of the Two Years in the Period ended March 31, 1997 and Nine Months ended
December 31, 1997
Notes to Financial Statements
</TABLE>
2. Financial Statement Schedules
No schedules have been included because of the absence of the conditions
under which they are required.
24
<PAGE> 27
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Report as filed with the Securities and Exchange Commission and those
incorporated by reference to other filings:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<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)
2.2 -- Agreement, dated as of September 15, 1997, by and among
Dispatch Management Services Corp., Aero Special Delivery
Service, Inc. and Jeanne Sparks. (2)
2.3 -- Agreement, dated as of September 30, 1997, by and among
Dispatch Management Services Corp., Bullit Courier Services,
Inc. and Theo Nicholoudis. (2)
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)
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)
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. (3)
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)
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)
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)
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)
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)
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)
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)
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)
2.15 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Profall, Inc., Thomas
Westfall, Alyson Westfall, David Prosser, and Adrienne
Prosser. (2)
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)
2.17 -- Agreement, dated as of October 23, 1997, by and among
Dispatch Management Services Corp., A & W Couriers, Inc. and
Joan Levy. (2)
2.18 -- Agreement, dated as of October 10, 1997, by and among
Dispatch Management Services Corp., Express It, Inc., and
Dave Clancy. (2)
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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)
2.20 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Kiwicorp Limited,
Lynette Williams and Tom Finlay.(2)
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)
2.22 -- Agreement, dated as of September 15, 1997, by and among
Dispatch Management Services Corp., Clover Supply, Inc., and
John J. Walker.(2)
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)
2.24 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Christian Delivery &
Chair Service, Inc., and Leo J. Gould.(2)
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)
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)
2.27 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Christopher Grealish,
Inc. and Christopher Grealish.(2)
2.28 -- Agreement, dated as of September 17, 1997, by and among
Dispatch Management Services Corp., United Messengers, Inc.
and Marla Kennedy.(2)
2.29 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., and Christopher Neal.(2)
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)
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)
2.32 -- Agreement, dated as of September 14, 1997, by and among
Dispatch Management Services Corp. and Michael
Studebaker.(2)
2.33 -- Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Delivery Incorporated
and Gary Brose.(2)
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)
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)
2.36 -- Agreement, dated as of October 6, 1997, by and among
Dispatch Management Services Corp., Bridge Wharf Investments
Limited and Riverbank Limited.(2)
2.37 -- Brand Manager Agreement, dated as of September 14, 1997,
between Dispatch Management Services Corp. and Barry
Anderson (Minneapolis).(2)
2.38 -- Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp. and Frank L.
Mullins.(2)
2.39 -- Brand Manager Agreement, dated as of September 25, 1997,
between Dispatch Management Services Corp. and Leo J. Gould
and Jodi Gould.(2)
2.40 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and John J. Walker.(2)
2.41 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Dave Clancy.(2)
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2.42 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Allen Orner.(2)
2.43 -- Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp. and Kiwicorp
Limited.(2)
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)
2.45 -- Brand Manager Agreement, dated as of October 8, 1997,
between Dispatch Management Services Corp. and Tom Cromwell
and Peter Begley.(2)
2.46 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Jeff Appeltans and Eric D.
Nordberg.(2)
2.47 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Marla Kennedy.(2)
2.48 -- Brand Manager Agreement, dated as of September 10, 1997,
between Dispatch Management Services Corp. and James Michael
Shaughnessy.(2)
2.49 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Barry Anderson (Phoenix).(2)
2.50 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Joan Levy.(2)
2.51 -- Brand Manager Agreement, dated as of September 21, 1997,
between Dispatch Management Services Corp. and Christopher
Neal.(2)
2.52 -- Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp., Leon Spirt and
Jack Spirt.(2)
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)
2.54 -- Brand Manager Agreement, dated as of September 15, 1997,
between Dispatch Management Services Corp. and The Delivery
Company Limited.(2)
2.55 -- Brand Manager Agreement, dated as of October 1, 1997,
between Dispatch Management Services Corp. and Creative
Consulting Corp.(3)
2.56 -- Brand Manager Agreement, dated as of October 1, 1997,
between Dispatch Management Services Corp. and Creative
Consulting Corp.(3)
2.57 -- Brand Manager Agreement, dated November 1, 1997, between
Dispatch Management Services Corp. and Atlantic
Transportation Consultants, Inc.(4)
2.58 -- Agreement, dated as of October 31, 1997, among Dispatch
Management Services Corp., Pacific Freight Systems, Inc.,
Thomas A. Bartley and Perry Barbaruolo.(3)
2.59 -- Agreement, dated December 2, 1997, among Dispatch Management
Services Corp., and Munther Hamoudi.(3)
2.60 -- Agreement, dated November 21, 1997, among Dispatch
Management Services Corp., Zoom Messenger Service, Inc. and
Frank Nizzare.(3)
2.61 -- Agreement, dated as of November 26, 1997, among Dispatch
Management Services Corp., A Courier of the Carolinas, LLC,
A Courier, Inc., and Tesgerat Limited Partnership.(4)
2.62 -- Agreement, dated as of November 20, 1997, among Dispatch
Management Services Corp., Express Air Management, Inc.,
Robert G. Driskell, Arthur J. Morris, Randolph H. Schneider
and DMS Subsidiary Number.(4)
2.63 -- Agreement, dated as of December 19, 1997, among Dispatch
Management Services Corp., A Courier of Tennessee, LLC, A
Courier, Inc., Scott Evatt, and Timothy E. French.(4)
2.64 -- Agreement, dated as of November 20, 1997, among Dispatch
Management Services Corp., A Courier, Inc., Robert G.
Driskell, Arthur J. Morris and Randy H. Schneider.(4)
2.65 -- Brand Manager Agreement, dated November 12, 1997, between
Dispatch Management Services Corp. and Detroit Dispatch
Management Services, Inc.(4)
2.66 -- Brand Manager Agreement, undated between Dispatch Management
Services Corp. and Michael R. Cowles.(4)
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2.67 -- Brand Manager Agreement, dated September 19, 1997, between
Dispatch Management Services Corp. and Michael
Studebaker.(4)
2.68 -- Brand Manager Agreement, dated September 15, 1997, between
Dispatch Management Services Corp. and Scott T.
Milakovich.(4)
2.69 -- Brand Manager Agreement, dated November 13, 1997, between
Dispatch Management Services Corp. and Frank Nizzare.(4)
2.70 -- Brand Manager Agreement, dated November 26, 1997, between
Dispatch Management Services Corp. and Columbine Management
Services, LLC.(4)
2.71 -- Brand Manager Agreement, dated November 20, 1997, between
Dispatch Management Services Corp. and Muiran, Inc.(4)
2.72 -- Brand Manager Agreement, dated September 30, 1997, between
Dispatch Management Services Corp. and Gregory W. Austin.(4)
2.73 -- Brand Manager Agreement, dated September 21, 1997, between
Dispatch Management Services Corp. and Christopher Neal.(4)
2.74 -- Agreement between the Registrant and Delta Air & Road
Transport PLC.(8)
3.1 -- Certificate of Incorporation, as amended (Certificate of
Incorporation filed with the Delaware Secretary of State on
September 5, 1997 and subsequently amended by Certificate of
Amendment of Certificate of Incorporation filed with the
Delaware Secretary of State on November 26, 1997).(1)
3.2 -- Amended and Restated Bylaws.(2)
4.1 -- Specimen Stock Certificate.(1)
10.1 -- Form of Officer and Director Indemnification Agreement.(3)
10.2 -- Form of Employment Agreement dated February 5, 1998 between
the Company and each of Ms. Jenkins and Messrs. Holder,
Bogoievski, Stewart and Gardner.(7)
10.3 -- Non-Competition Agreement, dated February 2, 1998, by and
between Dispatch Management Services Corp. and Gregory
Kidd.(5)
10.4 -- Form of 1997 Stock Incentive Plan.(3)
10.5 -- Form of Financing and Security Agreement by and among
Dispatch Management Services Corp., Dispatch Management
Services San Francisco Corp., Dispatch Management Services
New York Corp., Dispatch Management Services Acquisition
Corp., Road Management Services Corporation, Balmerino
Holdings Limited, Statetip Limited and Nationsbank,
N.A.(5)
10.6 -- Letter Agreement between Michael Fiorito and the Company.(1)
21.1 -- Subsidiaries of Dispatch Management Services Corp.(1)
23.1 -- Consents of Price Waterhouse LLP.(1)
23.2 -- Consents of Ernst & Young LLP.(1)
27.1 -- Financial Data Schedule.(1)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.(1)
</TABLE>
- ---------------
(1) Filed herewith.
(2) Incorporated by reference to the exhibit of like number to Registrants'
Registration Statement on Form S-1, File No. 333-39971, filed with the
Commission on November 10, 1997.
(3) Incorporated by reference to the exhibit of like number to Amendment No. 1
to the Registrants' Registration Statement on Form S-1, File No. 333-39971,
filed with the Commission on December 24, 1997.
(4) Incorporated by reference to the exhibit of like number to Amendment No. 2
to the Registrants' Registration Statement on Form S-1, File No. 333-39971,
filed with the Commission on January 13, 1997.
(5) Incorporated by reference to the exhibit of like number to Amendment No. 3
to the Registrants' Registration Statement on Form S-1, File No. 333-39971,
filed with the Commission on February 3, 1997.
28
<PAGE> 31
(6) Incorporated by reference to the exhibit of like number to Amendment No. 4
to the Registrants' Registration Statement on Form S-1, File No. 333-39971,
filed with the Commission on February 4, 1997.
(7) Incorporated by reference to the exhibit of like number to Amendment No. 5
to the Registrants' Registration Statement on Form S-1, File No. 333-39971,
filed with the Commission on February 5, 1997.
(8) Incorporated by reference to Exhibit 2 to the Registrant's Current Report on
Form 8-K dated April 7,1998, File No. 000-23349.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
(C) EXHIBITS
Exhibits are listed in Item 14(a).
(D) FINANCIAL STATEMENT SCHEDULES
Not applicable.
29
<PAGE> 32
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 5th day of
May, 1998.
DISPATCH MANAGEMENT SERVICES CORP.
(Registrant)
By: /s/ R. GREGORY KIDD
------------------------------------
R. Gregory Kidd
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on May 5, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ LINDA M. JENKINSON Chief Executive Officer and Director
- -----------------------------------------------------
Linda M. Jenkinson
/s/ GILBERT D. CARPEL President
- -----------------------------------------------------
Gilbert D. Carpel
/s/ MARKO BOGOIEVSKI Chief Financial Officer (Principal Financial
- ----------------------------------------------------- Officer and Principal Accounting Officer)
Marko Bogoievski
/s/ MICHAEL FIORITO Director
- -----------------------------------------------------
Michael Fiorito
</TABLE>
30
<PAGE> 33
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF
DISPATCH MANAGEMENT SERVICES CORP.
Introduction to Unaudited Pro Forma Combined Financial
Statements............................................. F-6
Pro Forma Combined Balance Sheet (Unaudited).............. F-7
Combining Statement of Operations (Unaudited)............. F-9
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-11
DISPATCH MANAGEMENT SERVICES CORP.
Report of Independent Accountants......................... F-16
Balance Sheet as of December 31, 1997..................... F-17
Statement of Stockholder's Equity for the period from
inception (November 12, 1996) through December 31,
1997................................................... F-18
Statement of Operations for the period from inception
(November 12, 1996) through December 31, 1997.......... F-19
Statement of Cash Flows for the period from inception
(November 12, 1996) through December 31, 1997.......... F-20
Notes to Financial Statements............................. F-21
BRIDGE WHARF INVESTMENTS LIMITED D/B/A WEST ONE
Report of Independent Accountants......................... F-28
Balance Sheets as of September 30, 1996 and 1997.......... F-29
Profit and Loss Account for each of the Three Years in the
Period ended September 30, 1997........................ F-30
Statement of Cash Flows for each of the Three Years in the
Period ended September 30, 1997........................ F-31
Notes to Financial Statements............................. F-32
SECURITY DESPATCH LIMITED (EXCLUDING THE MAIL ROOM SERVICES
OPERATIONS) D/B/A SECURITY DESPATCH
Report of Independent Accountants......................... F-43
Consolidated Balance Sheets as of March 31, 1996 and 1997
and December 31, 1997.................................. F-44
Consolidated Statements of Operations for Each of the
Years ended March 31, 1996 and 1997 and Nine Months
ended December 31, 1997................................ F-45
Consolidated Statements of Cash Flows for Each of the
Years ended March 31, 1996 and 1997 and Nine Months
ended December 31, 1997................................ F-46
Notes to the Consolidated Financial Statements............ F-47
EARLYBIRD COURIER SERVICE, LLC, TOTAL MANAGEMENT SUPPORT
SERVICES LLC AND THEIR AFFILIATES D/B/A EARLYBIRD COURIER
Report of Independent Auditors............................ F-58
Combined Balance Sheets as of December 31, 1996 and
1997................................................... F-59
Combined Statements of Operations and Retained Earnings
(Accumulated Deficit) for the Three Years in the Period
Ended December 31, 1997................................ F-60
Combined Statements of Cash Flows for the Three Years in
the Period Ended December 31, 1997..................... F-61
Notes to Combined Financial Statements.................... F-62
ATLANTIC FREIGHT SYSTEMS, INC. D/B/A ATLANTIC FREIGHT
Report of Independent Accountants......................... F-69
Combined Balance Sheets as of December 29, 1996 and
January 4, 1998........................................ F-70
Combined Statements of Operations for each of the Three
Years in the Period ended January 4, 1998.............. F-71
Combined Statements of Stockholders' Equity for each of
the Three Years in the Period ended January 4, 1998.... F-72
Combined Statements of Cash Flows for each of the Three
Years in the Period ended January 4, 1998.............. F-73
Notes to Combined Financial Statements.................... F-74
</TABLE>
F-1
<PAGE> 34
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ZOOM MESSENGER SERVICE, INC.
Report of Independent Accountants......................... F-80
Balance Sheets as of December 31, 1996 and 1997........... F-81
Statements of Operations for the Years ended December 31,
1996 and 1997.......................................... F-82
Statements of Changes in Stockholders' Equity (Deficit)
for Years ended December 31, 1996 and 1997............. F-83
Statements of Cash Flows for the Years ended December 31,
1996 and 1997.......................................... F-84
Notes to Financial Statements............................. F-85
BULLIT COURIER SERVICES, INC. D/B/A BULLIT COURIER
Report of Independent Accountants......................... F-89
Consolidated Balance Sheets as of February 29, 1996 and
February 28, 1997 and December 31, 1997................ F-90
Consolidated Statements of Operations for Each of the Two
Years in the Period ended February 28, 1997 and Ten
Months ended December 31, 1997......................... F-91
Consolidated Statements of Stockholders' Equity for Each
of the Two Years in the Period ended February 20, 1997
and Ten Months ended December 31, 1997................. F-92
Consolidated Statements of Cash Flows for Each of the Two
Years in the Period ended February 20, 1997 and Ten
Months ended December 31, 1997......................... F-93
Notes to Consolidated Financial Statements................ F-94
AERO SPECIAL DELIVERY SERVICE, INC. D/B/A AERO DELIVERY
Report of Independent Accountants......................... F-99
Balance Sheets as of June 30, 1996 and 1997 and December
31, 1997............................................... F-100
Statements of Operations for the Two Years ended June 30,
1997 and the Six Months ended December 31, 1997........ F-101
Statements of Stockholder's Deficiency for the Two Years
ended June 30, 1997 and the Six Months ended December
31, 1997............................................... F-102
Statements of Cash Flows for the Two Years ended June 30,
1997 and the Six Months ended December 31, 1997........ F-103
Notes to Financial Statements............................. F-104
S-CAR-GO COURIER, INC. D/B/A S-CAR-GO COURIER
Report of Independent Accountants......................... F-109
Balance Sheets as of December 31, 1996 and 1997........... F-110
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997..................... F-111
Statements of Stockholder's Equity for each of the Three
Years in the Period ended December 31, 1997............ F-112
Statements of Cash Flows for each of the Three Years in
the Period ended December 31, 1997..................... F-113
Notes to Financial Statements............................. F-114
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP D/B/A BATTERY POINT
MESSENGER AND ALPHA EXPRESS D/B/A BATTERY POINT
Report of Independent Accountants......................... F-118
Statements of Assets, Liabilities and Net Assets as of
December 31, 1996 and 1997............................. F-119
Statements of Income and Expense and Changes in Net Assets
for each of the Three Years in the Period ended
December 31, 1997...................................... F-120
Statements of Cash Flows for each of the Three Years ended
December 31, 1997...................................... F-121
Notes to Financial Statements............................. F-122
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP D/B/A ZAP COURIER
AND CROSSTOWN MESSENGER
Report of Independent Accountants......................... F-125
Statements of Assets, Liabilities and Net Assets as of
December 31, 1997...................................... F-126
Statement of Income and Expense and Changes in Net Assets
for the Year ended December 31, 1997................... F-127
</TABLE>
F-2
<PAGE> 35
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statements of Cash Flows for the Year ended December 31,
1997................................................... F-128
Notes to Financial Statements............................. F-129
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP D/B/A STUDEBAKER
MESSENGER SERVICE
Report of Independent Accountants......................... F-132
Statements of Assets, Liabilities and Net Assets as of
December 31, 1997...................................... F-133
Statements of Income and Expense and Changes in Net Assets
for the Year ended December 31, 1997................... F-134
Statements of Cash Flows for the Year ended December
1997................................................... F-135
Notes to Financial Statements............................. F-136
AMERICAN EAGLE ENDEAVORS, INC. D/B/A 1-800 COURIER-PHOENIX,
MINNEAPOLIS
Report of Independent Accountants......................... F-138
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997...................................... F-139
Consolidated Statements of Operations for each of the
Three Years in the Period ended December 31, 1997...... F-140
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the Three Years in the Period ended
December 31, 1997...................................... F-141
Consolidated Statements of Cash Flows for each of the
Three Years in the Period ended December 31, 1997...... F-142
Notes to Consolidated Financial Statements................ F-143
WASHINGTON EXPRESS SERVICES, INC. D/B/A WASHINGTON EXPRESS
Report of Independent Accountants......................... F-149
Balance Sheets as of September 30, 1996 and 1997.......... F-150
Statements of Operations for Each of the Three Years in
the Period ended September 30, 1997.................... F-151
Statements of Stockholders' Equity (Deficiency) for Each
of the Three Years in the Period ended September 30,
1997................................................... F-152
Statements of Cash Flows for Each of the Three Years in
the Period ended September 30, 1997.................... F-153
Notes to Financial Statements............................. F-154
A COURIER, INC. AND AFFILIATES
Report of Independent Accountants......................... F-160
Combined Balance Sheets as of December 31, 1996 and
December 31, 1997...................................... F-161
Combined Statements of Operations for the Years ended
December 31, 1996 and December 31, 1997................ F-162
Combined Statements of Stockholders' Equity for Years
ended December 31, 1996 and December 31, 1997.......... F-163
Combined Statements of Cash Flows for the Year ended
December 31, 1996 and December 31, 1997................ F-164
Notes to Financial Statements............................. F-165
MLQ EXPRESS, INC. D/B/A MLQ EXPRESS
Report of Independent Accountants......................... F-170
Balance Sheets as of February 28, 1996 and 1997 and
December 31, 1997...................................... F-171
Statements of Operations for Each of the Two Years in the
Period ended February 28, 1997 and Ten Months ended
December 31, 1997...................................... F-172
Statements of Changes in Stockholder's Equity for the
Years ended February 28, 1996 and 1997 and for the Ten
Month Period ended December 31, 1997................... F-173
Statements of Cash Flows for Each of the Two Years ended
February 28, 1997 and for the Ten Months ended December
31, 1997............................................... F-174
Notes to Financial Statements............................. F-175
KANGAROO EXPRESS OF COLORADO SPRINGS, INC. D/B/A KANGAROO
EXPRESS
Report of Independent Accountants......................... F-180
</TABLE>
F-3
<PAGE> 36
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Balance Sheets as of December 31, 1996 and 1997........... F-181
Statements of Operations for each of the Three Years ended
December 31, 1997...................................... F-182
Statements of Stockholders' Equity (Deficit) for each of
the Three Years in this Period ended December 31,
1997................................................... F-183
Statements of Cash Flows for each of the Three Years in
this Period ended December 31, 1997.................... F-184
Notes to Financial Statements............................. F-185
TRANSPEED COURIER SERVICES, INC. D/B/A 1-800 COURIER-DENVER
Report of Independent Accountants......................... F-188
Balance Sheets as of December 31, 1996 and 1997........... F-189
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997..................... F-190
Statements of Stockholders' Equity (Deficit) for each of
the Three Years in the Period ended December 31,
1997................................................... F-191
Statements of Cash Flows for each of the Three Years in
the Period ended December 31, 1997..................... F-192
Notes to Financial Statements............................. F-193
NATIONAL MESSENGER, INC. D/B/A NATIONAL MESSENGER
Report of Independent Accountants......................... F-198
Balance Sheets as of November 30, 1996 and 1997........... F-199
Statements of Operations for each of the Three Years in
the Period ended November 30, 1997..................... F-200
Statements of Shareholders' Equity for each of the Three
Years in the Period ended November 30, 1997............ F-201
Statements of Cash Flows for each of the Three Years in
the Period ended November 30, 1997..................... F-202
Notes to Financial Statements............................. F-203
PROFALL, INC. D/B/A 1-800 COURIER-L.A.X.
Report of Independent Accountants......................... F-206
Balance Sheets as of December 31, 1996 and 1997........... F-207
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997..................... F-208
Statements of Shareholders' Deficit for each of the Three
Years in the Period ended December 31, 1997............ F-209
Statements of Cash Flows for each of the Three Years in
the Period ended December 31, 1997..................... F-210
Notes to Financial Statements............................. F-211
EXPRESSIT COURIERS, INC. D/B/A 1-800 COURIER-BOSTON
Report of Independent Accountants......................... F-214
Balance Sheets as of December 31, 1996 and 1997........... F-215
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997..................... F-216
Statements of Changes in Stockholder's Equity for each of
the Three Years ended in the Period ended December 31,
1997................................................... F-217
Statements of Cash Flows for each of the Three Years in
the Period ended December 31, 1997..................... F-218
Notes to Financial Statements............................. F-219
FLEETFOOT MAX, INC. D/B/A FLEETFOOT MESSENGER
Report of Independent Accountants......................... F-223
Balance Sheets as of August 31, 1996 and 1997 and December
31, 1997............................................... F-224
Statements of Operations for Each of the Three Years in
the Period ended August 31, 1997 and for the Four
Months ended December 31, 1997......................... F-225
Statements of Changes in Stockholders' Equity (Deficit)
for Each of the Three Years in the Period ended August
31, 1997 and the Four Months ended December 31, 1997... F-226
Statements of Cash Flows for Each of the Three Years in
the Period ended August 31, 1997 and for the Four
Months ended December 31, 1997......................... F-227
Notes to Financial Statements............................. F-228
</TABLE>
F-4
<PAGE> 37
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
A&W COURIERS, INC. D/B/A A&W COURIERS
Report of Independent Accountants......................... F-234
Balance Sheets as of December 31, 1996 and 1997........... F-235
Statements of Operations for Each of the Three Years in
the Period ended December 31, 1997..................... F-236
Statements of Stockholder's Equity for Each of the Three
Years in the Period ended December 31, 1997............ F-237
Statements of Cash Flows for Each of the Three Years in
the Period ended December 31, 1997..................... F-238
Notes to Financial Statements............................. F-239
EXPRESS ENTERPRISE, INC. (GROUND OPERATIONS) D/B/A EXPRESS
MESSENGER
Report of Independent Accountants......................... F-243
Balance Sheets as of December 31, 1996 and 1997........... F-244
Statements of Operations for each of the Three Years in
the Period ended December 31, 1997..................... F-245
Statements of Stockholders' Equity for each of the Three
Years in the Period ended December 31, 1997............ F-246
Statements of Cash Flows for each of the Three Years in
the Period ended December 31, 1997..................... F-247
Notes to Financial Statements............................. F-248
RJK ENTERPRISES INC. D/B/A DEADLINE EXPRESS
Report of Independent Auditors............................ F-254
Balance Sheets as of December 31, 1996 and September 30,
1997................................................... F-255
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................................................... F-256
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........................ F-257
Notes to Financial Statements............................. F-258
DEADLINE ACQUISITION CORP. D/B/A DEADLINE EXPRESS
Report of Independent Auditors............................ F-260
Balance Sheet as of December 31, 1997..................... F-261
Statements of Operations and Accumulated Deficit for the
period from August 29, 1997 to December 31, 1997....... F-262
Statements of Cash Flows for the period from August 29,
1997 to December 31, 1997.............................. F-263
Notes to Financial Statements............................. F-264
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED D/B/A FLEETWAY
SYSTEMS
Report of Independent Accountants......................... F-266
Balance Sheets as of March 31, 1996 and 1997 and December
31, 1997............................................... F-267
Statements of Operations for Each of the Two Years in the
Period ended March 31, 1997 and Nine Months ended
December 31, 1997...................................... F-268
Statements of Cash Flows for Each of the Two Years in the
Period ended March 31, 1997 and Nine Months ended
December 31, 1997...................................... F-269
Notes to Financial Statements............................. F-270
</TABLE>
F-5
<PAGE> 38
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 acquired, in
separate combination transactions (the "Combinations") in exchange for cash and
shares of Common Stock, certain courier firms simultaneously with the closing of
the Company's initial public offering (the "Offering"), which were accounted for
using the purchase method of accounting. The Company has been identified as the
"accounting acquiror" for financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the
Combinations and the Offering as if they had occurred as of December 31, 1997.
The unaudited pro forma combined statement of operations give effect to these
transactions as if they had occurred on January 1, 1997. The purchase price has
been generally allocated to the Company's historical assets and liabilities
based on their respective carrying values, except for acquired in process
research and development (R&D) activities, acquired internally developed
technology and certain liabilities assumed in the purchase business
combinations, 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 detailed
analysis prepared by the Company. In addition, the Company has commenced the
process of evaluating its facilities, staffing and other requirements in the
various metropolitan areas in which it operates and expects to finalize such
plan during the second quarter of 1998. Therefore, the allocation of the
purchase price is considered preliminary, however, the Company does not
anticipate that the final allocation of purchase price will differ significantly
from that presented in the pro forma combined financial statements.
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,
commissions, bonuses, and benefits, these net reductions have been reflected in
the pro forma combined statement of operations. In addition, the Company has
preliminarily analyzed the reduction in interest expense that it expects to
realize from using the Offering proceeds to repay certain indebtedness of the
Company and the Founding Companies. With respect to other potential cost
savings, the Company has not and cannot quantify these savings until the
integration of the Founding Companies have been fully completed. 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 Annual Report on Form 10-K. See "Safe Harbor
Compliance Statement for Forward Looking Statements" included elsewhere as an
exhibit to this Annual Report on Form 10-K.
F-6
<PAGE> 39
DISPATCH MANAGEMENT SERVICES CORP.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
AMERICAN
WEST SECURITY EAGLE ATLANTIC WASHINGTON
DMS ONE AERO EARLY BIRD BULLIT DESPATCH ENDEAVORS FREIGHT EXPRESS
----- ----- ------ ---------- ------ -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. 354 1,097 99 3 13 17 32 85
Accounts receivable, net... 19 5,422 1,400 3,337 659 1,594 828 711 800
Prepaid and other current
assets................... 6,618 206 154 18 2,383 121 76 159
----- ----- ------ ------ ---- ------ ----- ----- -----
Total current
assets............. 6,991 6,519 1,705 3,494 690 3,977 966 819 1,044
Property and equipment,
net........................ 30 3,267 345 116 96 156 200 606 458
Other assets................. 748 124 134 89 33 132 36
Goodwill, net................ 266
----- ----- ------ ------ ---- ------ ----- ----- -----
Total assets......... 8,035 9,910 2,050 3,744 875 4,133 1,199 1,557 1,538
===== ===== ====== ====== ==== ====== ===== ===== =====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short term debt............ 1,585 1,922 82 816 270 623 300 658
Accounts payable........... 637 1,333 294 587 211 1,061 468 592 241
Accrued expenses........... 5,061 1,267 392 1,192 40 1,493 49 21
Other current
liabilities.............. 36 3,044 110 332
Payable to shareholders of
founding Co.
----- ----- ------ ------ ---- ------ ----- ----- -----
Total current
liabilities........ 7,319 4,522 3,812 2,595 521 2,554 1,140 1,023 1,231
Long-term debt, less current
maturities................. 2,336 645 1,569 245 36 227 83
Other long term
liabilities................ 253 74 241
----- ----- ------ ------ ---- ------ ----- ----- -----
Total liabilities.... 7,319 6,858 4,457 4,164 766 2,554 1,429 1,324 1,555
Stockholders' equity
Preferred Stock............ 2
Common Stock............... 9 124 200 5 25 2,051 1 15 249
Treasury Stock............. (1,331) (148) (262)
Additional paid-in
capital.................. 1,422 69 -- 2,536 5 149 --
Retained earnings.......... (717) 2,928 (2,607) 837 232 (3,008) (236) 331 (266)
----- ----- ------ ------ ---- ------ ----- ----- -----
Total stockholders'
equity............. 716 3,052 (2,407) (420) 109 1,579 (230) 233 (17)
----- ----- ------ ------ ---- ------ ----- ----- -----
Total liabilities and
stockholders'
equity............. 8,035 9,910 2,050 3,744 875 4,133 1,199 1,557 1,538
===== ===== ====== ====== ==== ====== ===== ===== =====
<CAPTION>
MLQ NAT'L 1-800
EXPRESS KANGAROO MESSENGER FLEETFOOD FLEETWAY DENVER
------- -------- --------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. 125 32 7 83 28
Accounts receivable, net... 681 330 532 280 99 121
Prepaid and other current
assets................... 77 32 8 18 45 36
----- ---- --- ---- ---- ----
Total current
assets............. 883 394 547 381 144 185
Property and equipment,
net........................ 157 110 69 94 69 66
Other assets................. 107 7 55 505 22
Goodwill, net................
----- ---- --- ---- ---- ----
Total assets......... 1,147 511 616 530 718 273
===== ==== === ==== ==== ====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short term debt............ 300 15 60 124 202
Accounts payable........... 28 16 11 21 112 56
Accrued expenses........... 206 140 259 68
Other current
liabilities.............. 225 46 50 132
Payable to shareholders of
founding Co.
----- ---- --- ---- ---- ----
Total current
liabilities........ 759 77 61 221 627 326
Long-term debt, less current
maturities................. 71 131 17 26
Other long term
liabilities................ 415 400 20
----- ---- --- ---- ---- ----
Total liabilities.... 759 563 461 372 644 352
Stockholders' equity
Preferred Stock............
Common Stock............... 2 52 330 125
Treasury Stock............. (126)
Additional paid-in
capital.................. 18 109 141
Retained earnings.......... 370 (161) 153 91 (256) (204)
----- ---- --- ---- ---- ----
Total stockholders'
equity............. 388 (52) 155 158 74 (79)
----- ---- --- ---- ---- ----
Total liabilities and
stockholders'
equity............. 1,147 511 616 530 718 273
===== ==== === ==== ==== ====
</TABLE>
F-7
<PAGE> 40
DISPATCH MANAGEMENT SERVICES CORP.
PRO FORMA COMBINED BALANCE SHEET -- (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
PROFALL
EXPRESS 1-800- 1-800 A&W
MESSENGER COUR BOSTON COURIERS DEADLINE ZOOM A COURIER STUDEBAKER ZAP
--------- ------- ------ -------- -------- ----- --------- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... 0 5 0 170 82 88 19 50
Accounts receivable, net........... 163 183 148 176 115 1,067 947 77 166
Prepaid and other current assets... 1 25 2 46 6 8 146 14
--------- ------- ------ -------- -------- ----- ----- --- ---
Total current assets......... 164 213 150 392 121 1,157 1,181 96 230
Property and equipment, net......... 34 63 46 59 36 44 209 37 41
Other assets........................ 122 27 2 494 402 61 2 101
Goodwill, net.......................
--------- ------- ------ -------- -------- ----- ----- --- ---
Total assets................. 320 276 223 453 651 1,603 1,451 135 372
========= ======= ====== ======== ======== ===== ===== === ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt.................... 31 135 14 900 405 14 116
Accounts payable................... 77 20 90 68 19 476 191 3 3
Accrued expenses................... 96 54 30 20 122 241 6 15
Other current liabilities.......... 422 228 130 0
Payable to shareholders of founding
Co. .............................
--------- ------- ------ -------- -------- ----- ----- --- ---
Total current liabilities.... 204 631 134 296 39 1,628 837 23 134
Long-term debt, less current
maturities......................... 26 170 33
Other long term liabilities......... 6
--------- ------- ------ -------- -------- ----- ----- --- ---
Total liabilities............ 236 631 134 296 209 1,628 837 23 167
Stockholders' equity
Preferred Stock....................
Common Stock....................... 1 10 1 3 1 19 2
Treasury stock..................... (250)
Additional paid-in capital......... 83 72 88 58 459 54
Retained earnings.................. (437) 96 (18) (44) 808 112 205
--------- ------- ------ -------- -------- ----- ----- --- ---
Total stockholders' equity... 84 (355) 89 157 442 (25) 614 112 205
--------- ------- ------ -------- -------- ----- ----- --- ---
Total liabilities and
stockholders' equity....... 320 276 223 453 651 1,603 1,451 135 372
========= ======= ====== ======== ======== ===== ===== === ===
<CAPTION>
OTHER PRO FORMA PRO
S*CAR*GO BATTERY FOUNDING COMBINED MERGER FORMA OFFERING AS
COURIER POINT COMPANIES TOTAL ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
-------- ------- --------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... 146 11 291 2,837 -- 2,837 10,699 13,536
Accounts receivable, net........... 227 138 1,048 21,268 -- 21,268 21,268
Prepaid and other current assets... 2 74 10,275 -- 10,275 (6,200) 4,075
--- --- ----- ------ ------ ------- ------- -------
Total current assets......... 373 151 1,413 34,380 -- 34,380 4,499 38,879
Property and equipment, net......... 27 5 299 6,739 (2,409) 4,330 4,330
Other assets........................ 12 37 63 3,315 -- 3,315 14,664 17,979
Goodwill, net....................... -- 266 75,231 75,497 75,497
--- --- ----- ------ ------ ------- ------- -------
Total assets................. 412 193 1,775 44,700 72,822 117,522 19,163 136,685
=== === ===== ====== ====== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt.................... 50 32 413 9,067 -- 9,067 (5,534) 3,533
Accounts payable................... 2 2 148 6,767 -- 6,767 6,767
Accrued expenses................... 110 22 251 11,155 -- 11,155 (4,750) 6,405
Other current liabilities.......... 63 131 4,949 2,800 7,749 7,749
Payable to shareholders of founding
Co. ............................. -- -- 45,328 45,328 (45,328) --
--- --- ----- ------ ------ ------- ------- -------
Total current liabilities.... 225 56 943 31,938 48,128 80,066 (55,612) 24,454
Long-term debt, less current
maturities......................... 109 5,724 (2,570) 3,154 (1,500) 1,654
Other long term liabilities......... 35 1,444 -- 1,444 1,444
--- --- ----- ------ ------ ------- ------- -------
Total liabilities............ 225 56 1,087 39,106 45,558 84,664 (57,112) 27,552
Stockholders' equity
Preferred Stock.................... 2 -- 2 (2) --
Common Stock....................... 1 44 3,270 (3,228) 42 73 115
Treasury stock..................... -- (2,117) 2,117 -- -- --
Additional paid-in capital......... 161 5,424 28,800 34,224 76,204 110,428
Retained earnings.................. 186 137 483 (985) (425) (1,410) -- (1,410)
--- --- ----- ------ ------ ------- ------- -------
Total stockholders' equity... 187 137 688 5,594 27,264 32,858 76,275 109,133
--- --- ----- ------ ------ ------- ------- -------
Total liabilities and
stockholders' equity....... 412 193 1,775 44,700 72,822 117,522 19,163 136,685
=== === ===== ====== ====== ======= ======= =======
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-8
<PAGE> 41
DISPATCH MANAGEMENT SERVICES CORP.
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN
WEST SECURITY EAGLE ATLANTIC WASHINGTON
DMS ONE AERO EARLY BIRD BULLIT DESPATCH ENDEAVORS FREIGHT EXPRESS
------- ------- ------- ---------- ------ -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $ 313 $28,434 $12,283 $15,308 $9,125 $10,235 $6,889 $8,725 $5,756
Cost of Revenues............ 195 19,033 7,394 8,975 5,106 6,041 4,573 5,781 2,935
------- ------- ------- ------- ------ ------- ------ ------ ------
Gross profit.............. 118 9,401 4,889 6,333 4,019 4,194 2,316 2,944 2,821
Operating expenses:
Sales and marketing....... 561 879 455 449 223 1,371 126 447
General and administrative
expenses................ 1,032 3,181 1,767 180 915 492 1,283 310 578
Other operating
expenses................ 3,455 2,448 3,532 2,748 2,105 2,483 1,677
Depreciation and
amortization............ 15 406 195 122 4 84 173 265 120
------- ------- ------- ------- ------ ------- ------ ------ ------
Operating income (loss)... (929) 1,798 (400) 2,044 (97) 1,290 (511) (240) (1)
Other (income) expense:
Interest expense.......... 105 375 66 446 41 68 71 76 95
Other, net................ (7) 33 (16) (47) (67) (109)
------- ------- ------- ------- ------ ------- ------ ------ ------
Income (loss) before
provision for income...... (1,027) 1,390 (450) 1,598 (138) 1,222 (535) (249) 13
Provision for income
taxes..................... (413) 432 51 (69) 307 (214) (170) 12
------- ------- ------- ------- ------ ------- ------ ------ ------
Net income (loss)........... (614) 958 (450) 1,547 (69) 915 (321) (79) 1
======= ======= ======= ======= ====== ======= ====== ====== ======
Net income per share........
Shares used in computing pro forma net income per share (See Note 5)
<CAPTION>
MLQ NAT'L 1-800
EXPRESS KANGAROO MESSENGER FLEETFOOT FLEETWAY DENVER
------- -------- --------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $6,108 $2,874 $2,884 $2,570 $1,254 $1,211
Cost of Revenues............ 3,651 2,004 1,604 1,651 371 758
------ ------ ------ ------ ------ ------
Gross profit.............. 2,457 870 1,280 919 883 453
Operating expenses:
Sales and marketing....... 246 21 138 26 57
General and administrative
expenses................ 1,123 309 479 307 962 86
Other operating
expenses................ 714 457 224 413 479
Depreciation and
amortization............ 67 66 22 44 41
------ ------ ------ ------ ------ ------
Operating income (loss)... 307 17 417 129 (79) (210)
Other (income) expense:
Interest expense.......... 27 9 40 18 21
Other, net................ (27) (6) (47) (17) (8)
------ ------ ------ ------ ------ ------
Income (loss) before
provision for income...... 307 14 417 136 (80) (223)
Provision for income
taxes..................... 214 6 44 0
------ ------ ------ ------ ------ ------
Net income (loss)........... 93 14 411 92 (80) (223)
====== ====== ====== ====== ====== ======
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-9
<PAGE> 42
DISPATCH MANAGEMENT SERVICES CORP.
COMBINING STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
EXPRESS PROFALL 1-800 A&W
MESSENGER 1-800-COURLA BOSTON COURIERS DEADLINE ZOOM A COURIER STUDEBAKER
--------- ------------ ------ -------- -------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ 1,981 1,636 1,476 1,698 1,264 8,413 7,419 446
Cost of Revenues........................ 1,222 821 952 1,020 894 6,456 4,359 244
------ ------ ------ ------ ------ ------ ------ ----
Gross profit..................... 759 815 524 678 370 1,957 3,060 202
Operating expenses:
Sales and marketing.................... 10 27 89 170 184 709 17
General and administrative expenses.... 365 504 104 270 169 712 671 44
Other operating expenses............... 305 283 237 263 169 1,320 1,422 46
Depreciation and amortization.......... 36 27 59 10 185 74 14
------ ------ ------ ------ ------ ------ ------ ----
Operating income (loss)................ 43 1 97 46 (138) (444) 184 81
Other (income) expense:
Interest expense....................... 14 26 9 3 97 3 2
Other, net............................. (34) 16 (7) (99) 11 20
------ ------ ------ ------ ------ ------ ------ ----
Income (loss) before provision for
income taxes........................... 29 9 72 53 (42) (552) 161 79
Provision for income taxes.............. 9
------ ------ ------ ------ ------ ------ ------ ----
Net income (loss)....................... $ 29 $ 9 $ 72 $ 44 $ (42) $ (552) $ 161 $ 79
====== ====== ====== ====== ====== ====== ====== ====
Net income per share....................
Shares used in computing pro forma net
income per share (See Note 5)..........
<CAPTION>
OTHER PRO FORMA
S*CAR*GO BATTERY FOUNDING COMBINED MERGER PRO FORMA OFFERING
ZAP COURIER POINT COMPANIES TOTAL ADJUSTMENTS COMBINED ADJUSTMENT
---- -------- ------- --------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ 900 1,714 905 9,783 151,604 151,604
Cost of Revenues........................ 467 1,030 463 6,141 94,141 94,141
---- ------ ---- ------ -------- ------- -------- -------
Gross profit..................... 433 684 442 3,642 57,463 57,463
Operating expenses:
Sales and marketing.................... 73 109 30 243 6,660 6,660
General and administrative expenses.... 46 220 32 1,428 17,569 (2,910) 14,660
Other operating expenses............... 130 169 137 1,562 26,830 26,830
Depreciation and amortization.......... 19 16 16 137 2,165 2,229 4,394
---- ------ ---- ------ -------- ------- -------- -------
Operating income (loss)................ 165 170 227 272 4,239 681 4,920
Other (income) expense:
Interest expense....................... 7 6 3 72 1,700 1,700 (1,185)
Other, net............................. (12) (423) (423)
---- ------ ---- ------ -------- ------- -------- -------
Income (loss) before provision for
income taxes........................... 158 164 224 212 2,962 681 3,643 1,185
Provision for income taxes.............. 69 -- 15 293 1,438 1,731 450
---- ------ ---- ------ -------- ------- -------- -------
Net income (loss)....................... $158 $ 95 224 $ 197 $ 2,669 $ (757) $ 1,912 $ 735
==== ====== ==== ====== ======== ======= ======== =======
Net income per share.................... $ 0.25
=======
Shares used in computing pro forma net
income per share (See Note 5).......... 10,784,673
=======
<CAPTION>
AS ADJUSTED
-----------
<S> <C>
Revenues................................ 151,604
Cost of Revenues........................ 94,141
----------
Gross profit..................... 57,463
Operating expenses:
Sales and marketing.................... 6,660
General and administrative expenses.... 14,660
Other operating expenses............... 26,830
Depreciation and amortization.......... 4,394
----------
Operating income (loss)................ 4,920
Other (income) expense:
Interest expense....................... 515
Other, net............................. (423)
----------
Income (loss) before provision for
income taxes........................... 4,828
Provision for income taxes.............. 2,181
----------
Net income (loss)....................... $ 2,647
==========
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-10
<PAGE> 43
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. GENERAL
Dispatch Management Services Corp. (the "Company") was recently formed to
create one of the largest providers of urgent, on-demand, point-to-point
delivery services in the world. The Company acquired the Founding Companies
concurrently with and as a condition to the closing of the 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.
Information presented for the year ended December 31, 1997 reflects the
operating results of the Founding Companies for such period except that West
One, Washington Express and National Messenger operating results are for the
years ended September 30, 1997, September 30, 1997 and November 30, 1997,
respectively. The audited historical financial statements included elsewhere
herein have been included in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES
Concurrently and as a condition with the closing of the Offering, the
Company acquired the Founding Companies in separate transactions, in exchange
for cash or shares of its Common Stock or a combination of both. The
acquisitions were accounted for using the purchase method of accounting with the
Company being identified as the accounting acquiror. The carrying value of
intangible assets is periodically reviewed by the Company based on the expected
future undiscounted operating cash flows of the related business unit.
The following table sets forth the consideration 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
purchase price for accounting purposes, the value of shares is determined using
an estimated fair value of $9.94 per share, which represents a discount of 25
percent from the initial public offering price of $13.25 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 the Offering. When these
amounts are earned they will be recorded as additional costs of the acquired
companies resulting in additional goodwill. Finder's fees aggregating
approximately $800,000 are included in the determination of the purchase price.
The purchase price has been generally allocated to the Company's historical
assets and liabilities based on their respective carrying values, except for
acquired in process research and development (R&D) activities, acquired
internally developed technology and certain liabilities assumed in the purchase
business combinations, as these carrying values are deemed to represent the fair
market value of these assets and liabilities. The liabilities assumed in the
purchase business combinations are based on costs to exit certain activities of
the acquired companies to the extent such costs are related to contractual
obligations of the acquired companies that existed prior to the acquisition date
and will not be associated with future revenues of the Company. The fair market
value of the in process R&D of and internally developed technology was
determined based on a detailed analysis prepared by the Company. The Company has
not allocated any of the purchase price to other identified intangible assets
such as non-compete agreements and customer lists, as these assets are deemed to
have nominal value and are not considered material. With respect to the customer
lists, the Company has determined that virtually all of the Founding Companies
operate on an "at will" basis with their customers, and consequently no value
has been allocated to this asset. Additionally, the Company has entered into
non-compete agreements, with Founding Company shareholders, who have also
entered into employment or Brand Manager agreements, as such, management
believes the non-compete agreements have nominal value.
F-11
<PAGE> 44
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, the Company has not allocated a portion of the purchase price to
the non-compete agreements. The allocation of the purchase price is considered
preliminary, however the Company does not anticipate that the final allocation
of purchase price will differ significantly from that presented.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
--------------------- ALLOCATION
FAIR MARKET OF
VALUE OF ADJUSTED PURCHASE
FOUNDING COMPANY SHARES STOCK CASH TOTAL NET ASSETS PRICE GOODWILL
- ---------------- --------- ----------- ------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
West One.................................. 186,943 $ 1,858 $16,734 $18,592 $ 218 $18,374
Aero Special Delivery Service, Inc........ 275,094 2,734 1,392 4,126 (2,507) 6,633
Earlybird Courier Service, LLC............ 350,868 3,487 9,034 12,521 910 11,611
Bullit Services Inc....................... 226,415 2,250 3,576 5,826 109 5,717
Security Despatch Limited................. 7,205 7,205 1,579 5,626
American Eagle Endeavors, Inc............. 321,811 3,198 3,198 (230) 3,428
Atlantic Freight Systems, Inc............. 316,981 3,150 61 3,211 233 2,978
Washington Express Services, Inc.......... 210,717 2,094 2,094 (17) 2,111
MLQ Express, Inc.......................... 4,424 4,424 388 4,036
Kangaroo Express.......................... 81,434 809 60 869 (227) 1,096
National Messenger, Inc................... 91,343 908 270 1,178 130 1,048
Fleetfoot Max, Inc........................ 96,543 959 260 1,219 158 1,061
Fleetway.................................. 152,151 1,512 842 2,354 74 $ 700(a)
740(b) 840
1-800 Denver.............................. 58,415 581 581 (304) 885
Battery Point............................. 32,279 321 3 324 95 229
Detroit Express........................... 56,604 563 93 656 9 647
1-800 Courier LAX......................... 33,962 338 17 355 (355) 710
Expressit Couriers, Inc................... 48,000 477 78 555 89 466
A&W Couriers, Inc......................... 56,951 566 14 580 157 423
Deadline Courier.......................... 69,660 692 692 111 581
Zoom Courier.............................. 150,943 1,500 1,500 (25) 1,525
A Courier................................. 144,906 1,440 900 2,340 564 1,776
Michael Studebaker, Sole Prop............. 13,577 135 41 176 73 103
Chris Neil, Sole Prop Zap................. 35,660 354 37 391 115 276
S-Car-Go Courier, Inc..................... 48,181 479 34 513 187 326
Other Founding Companies.................. 319,204 3,170 253 3,423 698 2,725
--------- ------- ------- ------- ------- ------ -------
3,378,642 $33,575 $45,328 $78,903 $ 2,232 $1,440 $75,231
========= ======= ======= ======= ======= ====== =======
</TABLE>
- ---------------
(a) Represents amount allocated to in process research and development
activities.
(b) Represents amount allocated to acquired internally developed technology.
F-12
<PAGE> 45
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 -------------------------- OFFERING
(A) (B) (C) (D) ADJUSTMENTS (E) (F) (G) ADJUSTMENTS
------- ------ ---- ------ ----------- ------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... 77,725 (59,992) (7,034) 10,699
Accounts receivable,
net...................
Prepaid and other
current assets........ (6,200) (6,200)
------- ------ ---- ------ ------ ------- ------- ------ -------
Total current
assets.............. 71,525 (59,992) (7,034) 4,499
Property and equipment,
net..................... (2,059) (350) (2,409)
Other assets.............. 700 (700) 14,664 14,664
Goodwill, net............. 72,081 350 2,800 75,231
------- ------ ---- ------ ------ ------- ------- ------ -------
Total assets.......... 70,722 (700) 2,800 72,822 71,525 (45,328) (7,034) 19,163
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Short term debt......... (5,534) (5,534)
Accounts payable........
Accrued expenses........ (4,750) (4,750)
Other current
liabilities........... 2,800 2,800
Payable to shareholders
of Founding
Companies............. 45,328 45,328 (45,328) (45,328)
------- ------ ---- ------ ------ ------- ------- ------ -------
Total current
liabilities......... 45,328 2,800 48,128 (4,750) (45,328) (5,534) (55,612)
Long-term debt, less
current maturities...... (2,570) (2,570) (1,500) (1,500)
Other long term
liabilities.............
------- ------ ---- ------ ------ ------- ------- ------ -------
Total liabilities..... 45,328 (2,570) 2,800 45,558 (4,750) (45,328) (7,034) (57,112)
Stockholders' equity
Preferred Stock......... (2) (2)
Common Stock............ (3,228) (3,228) 73 73
Treasury stock.......... 2,117 2,117
Additional paid-in
capital............... (45,328) 74,128 28,800 76,204 76,204
Retained earnings....... 275 (700) (425)
------- ------ ---- ------ ------ ------- ------- ------ -------
Total stockholders'
equity.............. (45,328) 73,292 (700) 27,264 76,275 76,275
------- ------ ---- ------ ------ ------- ------- ------ -------
Total liabilities and
stockholders'
equity.............. 70,722 (700) 2,800 72,822 71,525 (45,328) (7,034) 19,163
======= ====== ==== ====== ====== ======= ======= ====== =======
</TABLE>
- ---------------
(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 $45,328 (net
of $14,664 of earnout) in cash and 3,378,642 shares of common stock valued
at $9.94 per share (or $33,575), for a total estimated purchase price of
$78,903. Adjustment also reflects $2,059 of certain assets which were not
acquired and $2,570 of certain liabilities which were not 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
$75,231.
F-13
<PAGE> 46
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(C) Records the write-off of the acquired in-process research and development
from a Founding Company and the write-down of certain computer and office
equipment to their estimated market value.
(D) Records certain liabilities assumed in the Combinations, including:
Liabilities related to settle certain sales commission obligations of West
One which are related to and originated with the acquisition of certain
businesses in the early 1990's. Costs to buy-out such commitments are
estimated to be $2,500 and are considered to be liabilities assumed in the
acquisition of West One as the individuals receiving such commissions are
not required to actively manage the ongoing business to be eligible to
receive such commissions. Management has already consummated buy-out
agreements with individuals which require payment by the Company of
approximately $1,900 in return for terminating the remaining commission
obligations, and expects to finalize the remaining buy-out arrangements by
mid-1998.
Net deferred income tax liabilities 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. 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 ($59,992) 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
certain indebtedness of the Company and the Founding Companies.
F-14
<PAGE> 47
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997:
<TABLE>
<CAPTION>
MERGER ADJUSTMENTS PRO FORMA OFFERING PRO FORMA
---------------------- MERGER ADJUSTMENTS OFFERING
(A) (B) (C) (D) ADJUSTMENTS (E) ADJUSTMENTS
------ ---- ------ ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ -- -- -- -- -- -- --
Cost of Revenues................ -- -- -- -- -- -- --
------ ---- ------ ------ ------ ------ ------
Gross Profits................. -- -- -- -- -- -- --
Operating expenses:
Sales and marketing............. -- -- -- -- -- --
General and administrative
expenses...................... (1,972) (938) -- -- (2,910) -- --
Other operating expenses........ -- -- -- -- -- -- --
Depreciation and amortization... -- -- 2,229 -- 2,229 -- --
------ ---- ------ ------ ------ ------ ------
Operating income (loss)....... 1,972 938 (2,229) -- 681 -- --
Other (income) expense:
Interest expense.............. (1,185) (1,185)
Other, net.................... -- -- -- -- -- -- --
------ ---- ------ ------ ------ ------ ------
Income (loss) before provision
for income taxes.............. 1,972 938 (2,229) -- 681 1,185 1,185
Provision for income taxes...... -- -- -- 1,438 1,438 450 450
------ ---- ------ ------ ------ ------ ------
Net income (loss)............... 1,972 938 (2,229) (1,438) (757) 735 735
====== ==== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(A) Reflects the reductions in salaries, bonuses and benefits to the owners and
managers 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 34.1 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 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 38% and that a majority of the goodwill is
non-deductible.
(E) Reflects the reduction of interest expense related to certain indebtedness
repaid from the proceeds of the offering. The Company paid off at closing
substantially all of the acquired companys' debt obligations except to the
extent such obligations related to capitalized lease obligations and certain
debt obligations of West One.
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
Includes (i) 1,183,884 shares issued to existing shareholders of the
Company, (ii) 3,378,642 shares issued to the owners of the Founding Companies,
and (iii) 6,222,147 of the 6,900,000 shares sold in the Offering necessary to
pay the cash portion of the Purchase Consideration and certain indebtedness of
the acquired Founding Companies.
F-15
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Dispatch Management Services Corp.
In our opinion, the accompanying balance sheet and related statements of
operations, of stockholder's equity and of cash flows presents fairly, in all
material respects, the financial position of Dispatch Management Services Corp.
at December 31, 1997, and the results of its operations and cash flows for the
period from inception (November 12, 1996) to December 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 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.
As discussed in Notes 1 and 11, on February 11, 1998, the Company acquired
the Founding Companies. The effects of any purchase adjustments are not
reflected in the accompanying financial statements.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Bloomfield Hills, Michigan
May 1, 1998
F-16
<PAGE> 49
DISPATCH MANAGEMENT SERVICES CORP.
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 354
Accounts receivable......................................... 19
Prepaid and other expenses.................................. 18
------
Total current assets.............................. 391
Equipment, net.............................................. 30
Debt issue costs, net of amortization of $6................. 12
Goodwill, net of amortization of $12........................ 266
Deposit (Note 7)............................................ 323
Deferred taxes.............................................. 413
Deferred offering costs..................................... 6,600
------
Total assets...................................... $8,035
======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current portion of notes payable (Note 6)................... $1,585
Accrued liabilities......................................... 5,061
Accounts payable............................................ 637
Accounts payable to related parties......................... 36
------
Total current liabilities......................... 7,319
Stockholder's equity
Preferred stock, $.01 par, 10,000,000 shares authorized
Series A 181,446 shares issued and outstanding......... 2
Series B 100 shares issued and outstanding............. --
Common stock, $.01 par 100,000,000 shares authorized,
846,923 shares issued and outstanding.................. 9
Additional paid-in capital.................................. 1,422
Accumulated deficit......................................... (717)
------
Total stockholder's equity........................ 716
------
Total liabilities and stockholder's equity........ $8,035
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 50
DISPATCH MANAGEMENT SERVICES CORP.
STATEMENT OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<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 TOTAL
------- --------- --------- ------ --------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization of
Company................... 846,923 $9 $-- $ -- $ (7) $ 2
Issuance of Series A
preferred stock........... 151,366 2 880 882
Issuance of Series A
preferred stock in
relation to Note payable
(Note 8).................. 30,080 167 167
Issuance of Series B
preferred stock in
relation to acquisition
(Note 4).................. 100 375 375
Net loss.................... (710) (710)
------- ------- --- -- --- ------ ----- -----
December 31, 1997........... 846,923 181,446 100 $9 $ 2 $1,422 $(717) $ 716
======= ======= === == === ====== ===== =====
</TABLE>
The above statement summarizes stockholders' equity activity since the
inception of DMS LLC conformed to the current capital structure of the Company.
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 51
DISPATCH MANAGEMENT SERVICES CORP.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(NOVEMBER 12, 1996) TO
DECEMBER 31, 1997
----------------------
<S> <C>
Revenue from license fees (Note 4).......................... $ 313
Cost of sales (Note 4)...................................... 195
-------
Gross margin.............................................. 118
General and administrative expense.......................... 1,128
Depreciation and amortization............................... 15
-------
Loss from operations...................................... (1,025)
Interest expense............................................ 105
Interest income............................................. (7)
-------
Loss before income tax benefit.............................. (1,123)
Income tax benefit.......................................... 413
-------
Net loss.................................................. $ (710)
=======
Net loss per basic and diluted share........................ $ (.84)
=======
Weighted average basic and diluted shares outstanding....... 846,823
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 52
DISPATCH MANAGEMENT SERVICES CORP.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(NOVEMBER 12, 1996) TO
DECEMBER 31, 1997
----------------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (710)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 15
Deferred taxes......................................... (413)
Accreted interest expense.............................. 58
Changes in assets and liabilities:
Accounts receivable and prepaid expenses............... 58
Accounts payable, accrued liabilities and other........ 5,734
Deferred offering costs................................ (6,600)
-------
(1,858)
Cash flows from investing activities:
Purchase of equipment..................................... (33)
Deposit related to acquisition............................ (323)
-------
(356)
Cash flows from financing activities:
Proceeds from notes payable............................... 1,681
Proceeds from issuance of stock........................... 885
-------
2,566
Acquired cash from Kiwi Express Software LLC................ 2
-------
Net increase in cash and cash equivalents................... $ 354
=======
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
As discussed in Note 4, the Company acquired Kiwi Express Software LLC in a
non-cash transaction. Acquired net assets of Kiwi Express Software LLC were
approximately $97 and mainly consisted of receivables from the Company.
No interest or taxes were paid during 1997.
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 53
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 the
initial public offering (the "Offering") of securities that occurred on February
6, 1998 and was accounted for at historical cost because both entities were
commonly controlled.
In order to create a nationwide network of same-day, on-demand delivery
services, the Company entered into definitive agreements (the "Mergers") to
acquire both U.S. and foreign companies (the "Founding Companies") and
concurrently completed the "Offering" of its common stock on February 11, 1998
and acquisition of the Founding Companies. The Company will continue to expand
its operations, through business combinations of strategically identified
companies.
The Company has not conducted any significant operations through the
Offering date, other than activities primarily related to the Offering and the
Mergers.
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 December 31, 1997 aggregated $3.
Cash and cash equivalents
The Company considers all highly liquid debt instruments with an original
maturity date of approximately three months or less to be cash equivalents.
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Accordingly,
deferred tax assets and liabilities are recognized at the applicable income tax
rates based upon future tax consequences of temporary differences between the
tax basis and financial reporting basis of the assets and liabilities.
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.
F-21
<PAGE> 54
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition
Revenue related to license fees is recognized when earned.
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
December 31, 1997.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
("SFAS No. 128") replaces the presentation of primary earnings per share ("EPS")
with the presentation of basic EPS, and requires dual presentation of basic and
diluted EPS on the face of the statement of operations. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
that then shared in the earnings of the Company. Dilutive securities are
excluded from the computation in periods in which they have an anti-dilutive
effect, and net income available to common shareholders is adjusted accordingly
for the effect of cumulative dividends on convertible preferred stock. The
Company adopted SFAS No. 128 during the fourth quarter of 1997, as required.
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 were 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. Upon the Offering of securities, each share of Series A preferred stock
was converted into one share of common stock.
The Company effected a 84,692.3-for-one stock split effective on the day
preceding the Offering. The effect of the common stock split has been
retroactively reflected in the accompanying balance sheet and statement of
stockholder's equity.
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. On
February 6, 1998, the Company granted employees and non-employee directors
options to purchase 865,133 shares of Common Stock of the Company upon
completion of the Offering, of which 218,883 shares are immediately exercisable
at the Offering price of $13.25. Additional options of 396,250 and 250,000 will
vest and become exercisable at the rate of 20% and 50% per year, respectively,
at the Offering price of $13.25. As of May 1, 1998 no options have been
exercised.
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
F-22
<PAGE> 55
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
2. STOCKHOLDERS' EQUITY (CONTINUED)
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. DEFERRED OFFERING COSTS
In connection with the Offering, the Company has incurred costs which are
directly attributable to the Offering. These costs which include legal fees,
accounting fees, printing fees and other costs of approximately $6.6 million
have been deferred as of December 31, 1997 and will be charged against the
proceeds of the Offering.
Subsequent to December 31, 1997, the Company incurred approximately $2.1
million of additional legal, accounting and printing costs which were directly
attributable to the Offering.
4. 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. Certain
shareholders of Kiwi are also the shareholders of the Company. Upon the
Offering, each share of Series B preferred stock was converted into 1,479 shares
of common stock. 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 being amortized over seven years.
Amortization expense through December 31, 1997 is approximately $12.
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 percentage (1%) of the
sub-licensee's adjusted receipts related to point-to-point delivery services.
Through December 31, 1997, the Company received approximately $313 of 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 has not been presented
because the information is not deemed meaningful.
5. 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 December 31, 1997, approximately $18 has been paid related to
this license agreement.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 becomes effective for fiscal years beginning
after December 15, 1997 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires the reporting and
display of comprehensive income and its components in the financial statements.
Comprehensive income is the change in equity during
F-23
<PAGE> 56
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
6. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
the period from transactions from non-owner sources. Comprehensive income
includes net income and other comprehensive income including foreign currency
translation adjustments and gains and losses on certain marketable securities.
The adoption of SFAS No. 130 is not expected to have a material impact on the
Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 becomes effective for fiscal years beginning
after December 15, 1997 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 131 requires financial disclosures
regarding the Company's identifiable reporting segments. Reportable segments are
primarily the basis for which management evaluates its operations, such as by
product, service or geographical area. The adoption of SFAS No. 131 will require
certain financial statement disclosures and not effect the Company's results of
operations.
7. LINE OF CREDIT
On February 2, 1998, the Company entered into a financing and security
agreement for a $25.0 million line of credit with a major commercial bank, which
matures May 2000 and bears interest at the LIBOR rate plus one percent. The line
of credit is secured by substantially all the assets of the Company. The
financing agreement requires the Company to comply with various loan covenants
including; (1) maintenance of certain financial ratios; (2) restrictions on
additional indebtedness; (3) restrictions on the type, size and number of
acquisitions. The credit facility is intended to be used for working capital,
general corporate purposes and future acquisitions.
8. NOTES PAYABLE
During July 1997 the Company entered into a $1,000 secured debt agreement
with DMS Equity Investors Limited Partnership ("Partnership"), an unrelated
party. This note bears interest at the rate of 10% and matured February 11,
1998. Proceeds from the Offering were used to retire the note, including accrued
interest.
In conjunction with entering into the debt 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 purchased
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
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 of the 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 agreements is considered paid-in capital. Accordingly, based on
the discounted stock price, additional paid-in capital of $167 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 and are being
amortized over eighteen months. Interest and amortization expense through
December 31, 1997 is approximately $50.
During December 1997 and January 1998, the Company entered into several
unsecured subordinated debt agreements in the amount of $1,088, with related
parties, to provide temporary financing prior the Company's Offering. The notes
bear interest at 14% and require the Company to pay a commitment fee in an
amount equal to the face value of the note on the Offering date. Proceeds from
the February 11, 1998 Offering were used to retire the notes, including accrued
interest, in their entirety. The outstanding balance was $700 as of December 31,
1997.
F-24
<PAGE> 57
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
9. PURCHASE AGREEMENTS
In August 1997 the Company entered into a definitive share purchase
agreement to acquire the outstanding shares of Brookside Systems and Programming
Limited ("Brookside") contemporaneously with the Offering and made a
nonrefundable down-payment of approximately $323. Brookside was purchased on
February 11, 1998 for approximately $2.9 million.
10. INCOME TAXES
The provision for income taxes for the year ended December 31, 1997 is
comprised of the following:
<TABLE>
<S> <C>
Deferred
Federal................................................... $(393)
State..................................................... (110)
-----
Total deferred............................................ (503)
Less valuation allowance.................................. 90
-----
Total income tax benefit.................................. $(413)
=====
</TABLE>
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. The primary temporary difference that gives rise to the deferred
tax asset is the net operating loss carryforward. The net operating loss
carryforward of $900 expires in 2012. A valuation allowance of $90 was provided
for during 1997 against the net deferred tax asset due to the uncertainty of
realizing the benefits of any state net operating loss carryforwards.
11. SUBSEQUENT EVENTS
Acquisition
On April 7, 1998, the Company acquired Delta Air & Road Transport, Plc.
("Delta"), a London-based delivery services firm with 1997 revenues of
approximately $33.0 million. At the acquisition date, the Company paid
approximately $21.7 million to Delta shareholders. An additional $3.0 million in
consideration is contingent upon achievement of certain performance criteria.
The Company used its line of credit to finance the acquisition. The acquisition
will be accounted for using the purchase method of accounting. The excess
purchase price over the net assets acquired, based on the fair value of such
assets and liabilities, will be amortized to expense over a forty-year period.
The effects of any purchase adjustments will be recorded in 1998 at acquisition
date, and are not reflected in the accompanying financial statements.
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 and accordingly, the purchase price will be allocated to the net
assets acquired based on the fair value at the date of the acquisitions. The
aggregated consideration paid by the Company to acquire the Founding Companies
was $45,328 in cash and 3,378,642 shares of common stock.
F-25
<PAGE> 58
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
11. SUBSEQUENT EVENTS (CONTINUED)
The consideration paid and the preliminary allocation of consideration to
the net assets and resulting goodwill is as follows:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
--------------------- ALLOCATION
FAIR MARKET OF
VALUE OF ADJUSTED PURCHASE
FOUNDING COMPANY SHARES STOCK CASH TOTAL NET ASSETS PRICE GOODWILL
- ---------------- --------- ----------- ------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
West One.................................. 186,943 $ 1,858 $16,734 $18,592 $ 218 $18,374
Aero Special Delivery Service, Inc........ 275,094 2,734 1,392 4,126 (2,507) 6,633
Earlybird Courier Service, LLC............ 350,868 3,487 9,034 12,521 910 11,611
Bullit Services Inc....................... 226,415 2,250 3,576 5,826 109 5,717
Security Despatch Limited................. 7,205 7,205 1,579 5,626
American Eagle Endeavors, Inc............. 321,811 3,198 -- 3,198 (230) 3,428
Atlantic Freight Systems, Inc............. 316,981 3,150 61 3,211 233 2,978
Washington Express Services, Inc.......... 210,717 2,094 -- 2,094 (17) 2,111
MLQ Express, Inc.......................... 4,424 4,424 388 4,036
Kangaroo Express.......................... 81,434 809 60 869 (227) 1,096
National Messenger, Inc................... 91,343 908 270 1,178 130 1,048
Fleetfoot Max, Inc........................ 96,543 959 260 1,219 158 1,061
Fleetway.................................. 152,151 1,512 842 2,354 74 $ 700(a)
740(b) 840
1-800 Denver.............................. 58,415 581 -- 581 (304) 885
Battery Point............................. 32,279 321 3 324 95 229
Detroit Express........................... 56,604 563 93 656 9 647
1-800 Courier LAX......................... 33,962 338 17 355 (355) 710
Expressit Couriers, Inc................... 48,000 477 78 555 89 466
A&W Couriers, Inc......................... 56,951 566 14 580 157 423
Deadline Courier.......................... 69,660 692 -- 692 111 581
Zoom Courier.............................. 150,943 1,500 -- 1,500 (25) 1,525
A Courier................................. 144,906 1,440 900 2,340 564 1,776
Michael Studebaker, Sole Prop............. 13,577 135 41 176 73 103
Chris Neil, Sole Prop Zap................. 35,660 354 37 391 115 276
S-Car-Go Courier, Inc..................... 48,181 479 34 513 187 326
Other Founding Companies.................. 319,204 3,170 253 3,423 698 2,725
--------- ------- ------- ------- ------- ------ -------
3,378,642 $33,575 $45,328 $78,903 $ 2,232 $1,440 $75,231
========= ======= ======= ======= ======= ====== =======
</TABLE>
- ---------------
(a) Represents amount allocated to in process research and development
activities.
(b) Represents amount allocated to acquired internally developed technology.
The total consideration does not reflect contingent consideration which may
be issued pursuant to earn out arrangements included in the definitive
agreements for the Founding Companies. These arrangements provide for the
Company to pay additional consideration of up to $14.6 million based on earnings
before taxes for the years ended December 31, 1998 to 1999. Contingent
consideration, if earned, will be recorded in a manner consistent with the
consideration paid at closing for each respective Founding Company. The purchase
price has been allocated to each Company's historical assets and liabilities
based on their respective estimated fair values, with the exception of
in-process research and development costs and existing technology of Fleetway.
F-26
<PAGE> 59
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
11. SUBSEQUENT EVENTS (CONTINUED)
The unaudited pro forma results of operations, assuming that the
acquisition of the Founding Companies was consummated on January 1, 1997, are as
follows:
<TABLE>
<S> <C>
Revenue..................................................... $151,604
Net Income.................................................. $ 2,647
Earnings per basic and diluted share........................ $ .25
</TABLE>
Pro forma financial information is presented for informational purposes
only and may not be indicative of what actual results of operations might have
been if the merger had been effective as of January 1, 1997. The unaudited
results of operations include adjustments to the Company's unaudited historical
results of operations which provide for; (1) reductions in salaries, bonuses and
benefits to stockholders and managers of the Founding Companies to which they
agreed prospectively; (2) amortization of goodwill to be recorded as a result of
the Mergers over a period of 5 to 40 years; (3) reduction in royalty payments
made by certain Founding Companies in accordance with Franchise Agreements which
will terminate as a result of the Combinations; (4) reflects (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, income taxes on S corporation
income, and (d) the fact that the majority of the goodwill is not deductible;
and (5) reflects the reduction in interest expense on debt repaid from the
proceeds of the Offering.
F-27
<PAGE> 60
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, 1996 and 1997, 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,
1996 and 1997, 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 profit expressed in pounds sterling for each of the three
years in the period ended September 30, 1997 and the determination of
shareholders equity and financial position also expressed in pounds sterling at
September 30, 1997, 1996 and 1995. Note 26 to the financial statements
summarizes this effect for the years ended September 30, 1995, 1996 and 1997 and
as at September 30, 1995, 1996 and 1997.
/s/ PRICE WATERHOUSE
Price Waterhouse
London, England
December 12, 1997
F-28
<PAGE> 61
BRIDGE WHARF INVESTMENTS LIMITED
BALANCE SHEET
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1997
------- -------
<S> <C> <C>
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 3,286
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................................... L 1,416 L 1,845
======= =======
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 62
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 recognized gains and losses are included in the profit and loss account.
See accompanying notes to financial statements.
F-30
<PAGE> 63
BRIDGE WHARF INVESTMENTS LIMITED
STATEMENT OF CASH FLOWS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
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-31
<PAGE> 64
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.
Amortization
Amortization 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>
10 years straight
Goodwill............................................ 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 capitalized 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............................................ L5 L1 L3
</TABLE>
F-32
<PAGE> 65
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:
Amortization.............................................. 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>
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.
F-33
<PAGE> 66
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
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, 1995 and
1996 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>
9. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
GOODWILL
--------
<S> <C>
COST:
Balance bought forward/carried forward for all periods.... L145
----
AMORTIZATION:
Balance brought forward September 30, 1995................ 40
Amortization charge for the year.......................... 15
----
Balance carried forward September 30, 1996................ 55
Amortization 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..................................... L 75
====
</TABLE>
F-34
<PAGE> 67
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 L127 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......................... 14 322 58 42 436
Disposals..................................... -- -- -- (16) (16)
Charge........................................ 14 88 37 32 171
---- ---- ---- ---- ------
At September 30, 1996......................... 28 410 95 58 591
Disposals..................................... -- (40) -- (16) (56)
Charge........................................ 14 79 32 107 232
---- ---- ---- ---- ------
At September 30, 1997......................... 42 449 127 149 767
NET BOOK VALUE
At September 30, 1996......................... 684 303 128 296 1,411
---- ---- ---- ---- ------
At September 30, 1997......................... L670 L548 L 96 L666 L1,980
==== ==== ==== ==== ======
</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 Dispatch 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 Dispatch.
12. DEBTORS
<TABLE>
<CAPTION>
AS AT
SEPTEMBER 30,
---------------
1996 1997
------ ------
<S> <C> <C>
Amounts due within one year:
Trade debtors............................................. L2,974 L3,205
Prepayments and accrued income............................ 62 81
------ ------
L3,036 L3,286
====== ======
</TABLE>
F-35
<PAGE> 68
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
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>
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>
AUTHORIZED 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>
F-36
<PAGE> 69
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
16. RESERVES
<TABLE>
<CAPTION>
PROFIT AND
LOSS ACCOUNT
------------
<S> <C>
At September 30, 1995....................................... L 891
Profit for the year......................................... 450
------
At September 30, 1996....................................... 1,341
Profit for the year......................................... 429
------
At September 30, 1997....................................... L1,770
======
</TABLE>
17. RECONCILIATION OF SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
---------------
1996 1997
------ ------
<S> <C> <C>
Profit for the financial year............................... L642 L621
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>
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 L 1,049 L1,090
Amortization................................................ 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/(Decrease) in creditors............................ 162 466 (214)
----- ------- ------
Net cash inflow from operating activities................... L 588 L 642 L 904
===== ======= ======
</TABLE>
F-37
<PAGE> 70
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
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........................... L(945) L(281) L(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>
20. ANALYSIS OF CHANGES IN NET DEBT CASH AT BANK AND IN HAND
<TABLE>
<CAPTION>
NON
AT SEPTEMBER 30, CASH CASH AT SEPTEMBER 30,
1994 FLOWS FLOWS 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>
NON
AT SEPTEMBER 30, CASH CASH AT SEPTEMBER 30,
1995 FLOWS FLOWS 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>
F-38
<PAGE> 71
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
NON
AT SEPTEMBER 30, CASH CASH AT SEPTEMBER 30,
1996 FLOWS FLOWS 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>
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 cash inflow/outflow 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............................... L 79 L262
Amounts payable between 2 to 5 years........................ 75 443
Less: finance charges relating to future periods............ (13) (84)
---- ----
L141 L621
==== ====
</TABLE>
24. CAPITAL COMMITMENTS
There was no capital expenditure either authorized or contracted for as at
September 30, 1995, September 30, 1996 and September 30, 1997.
F-39
<PAGE> 72
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
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>
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 crystallize 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 realized
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........................ LNil LNil LNil
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 L 94
==== ==== ====
</TABLE>
The US GAAP provision is comprised as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
UK Corporation tax provision................................ L224 L207 L214
Net deferred tax liability in accordance with US GAAP....... 17 48 94
---- ---- ----
US Corporation tax provision................................ L241 L255 L308
==== ==== ====
</TABLE>
F-40
<PAGE> 73
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)
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) (31) (46)
---- ---- ----
Net Profit under US GAAP.................................... L488 L611 L575
==== ==== ====
</TABLE>
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) (31) (46)
---- ------ ------
Shareholders' funds under US GAAP........................... L949 L1,385 L2,060
==== ====== ======
</TABLE>
iv) Cash Flow Information
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 capitalized), interest on finance leases and taxation
would be included within operating activities under FAS 95. Capitalized 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-41
<PAGE> 74
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 summarize 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 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.................................................... L11,840 L 15,093 L 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...................................... L 851 L 1,049 L 1,090
------- -------- --------
</TABLE>
F-42
<PAGE> 75
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, 1996 and 1997 and December 31, 1997, and
the related consolidated statements of operations and change in cash flows for
the years ended March 31, 1996 and 1997 and nine months ended December 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, 1996 and 1997 and December 31, 1997, and the results of the Group's
operations and its cash flows for the years and the nine month period then ended
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 the
years ended March 31, 1996 and 1997, and the nine months ended December 31, 1997
and the determination of the consolidated shareholder's equity and consolidated
financial position also expressed in pounds sterling at March 31, 1996 and 1997
and December 31, 1997. Note 23 to the consolidated financial statements
summarizes this effect for the years ended March 31, 1996 and 1997, and as at
March 31, 1996 and 1997.
As discussed in Note 1, on February 11, 1998, the Group sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE
Price Waterhouse
London, England
April 27, 1998
F-43
<PAGE> 76
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
CONSOLIDATED BALANCE SHEETS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets........................................... L 91 L 110 L 95
CURRENT ASSETS
Debtors due within one year............................ 1,021 1,106 1,021
Debtors due in greater than one year................... -- 199 797
Intra division......................................... 177 384 592
Cash at bank and in hand............................... 31 -- --
------- ------- -------
Total assets...................................... 1,229 1,689 2,410
Creditors: amounts falling due within one year.............. (1,118) (1,298) (1,548)
------- ------- -------
NET CURRENT ASSETS.......................................... 111 391 862
------- ------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... L 202 L 501 L 957
======= ======= =======
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) 167
Goodwill.................................................. (1,990) (1,990) (1,990)
------- ------- -------
TOTAL SHAREHOLDERS' FUNDS................................... L 202 L 501 L 957
======= ======= =======
Equity shareholders' deficit.............................. (1,048) (599) (143)
Non equity shareholders' funds............................ 1,250 1,100 1,100
------- ------- -------
L 202 L 501 L 957
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE> 77
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
CONSOLIDATED STATEMENTS OF OPERATIONS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
TURNOVER.................................................... L5,240 L5,900 L4,736
Cost of sales............................................... 3,920 4,466 3,632
------ ------ ------
GROSS PROFIT................................................ 1,320 1,434 1,104
Administrative expenses..................................... 627 624 457
------ ------ ------
OPERATING PROFIT............................................ 693 810 647
Interest payable and similar charges........................ 24 13 37
------ ------ ------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............... 669 797 610
Taxation on profits from ordinary activities................ 220 239 154
------ ------ ------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION................ 449 558 456
Dividends (non equity)...................................... 164 134 --
------ ------ ------
RETAINED PROFIT FOR THE FINANCIAL YEAR...................... L 285 L 424 L 456
====== ====== ======
</TABLE>
All amounts relate to continuing activities.
All recognized gains and losses are included in the profit and loss account.
See accompanying notes to financial statements.
F-45
<PAGE> 78
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
CASH INFLOWS FROM OPERATING ACTIVITIES (SEE NOTE 1 BELOW)... L 568 L 570 L 404
Returns on investments and servicing of finance............. (188) (147) (184)
Taxation.................................................... (97) (191) (220)
Capital expenditure and financial investment................ (51) (70) (24)
----- ----- -----
Cash inflow (outflows) before use of liquid resources and
financing................................................. 232 162 (24)
Net financing cash flows.................................... (295) (125) (262)
----- ----- -----
INCREASE/(DECREASE) IN CASH IN THE YEAR..................... L (63) L 37 L(286)
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
NOTE 1
Analysis of operating cashflows
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Net operating cashflows (as shown above).................... L568 L570 L404
Add back:
Net operating cashflows paid on behalf of the mailroom
division............................................... 177 207 208
Net operating cashflows paid on behalf of the parent
company................................................ -- -- 239
---- ---- ----
Net operating cashflows relating to the courier
business............................................... L745 L777 L851
==== ==== ====
</TABLE>
F-46
<PAGE> 79
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 reorganization in February 1997
designed to enable some shareholders to realize 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
reorganization.
The unaudited management accounts of Security Business Services Limited
indicate that in the period to December 31, 1997 expenses of L336 were charged,
consisting primarily of loan interest of L196, facility fees of L49 and
directors remuneration of L91. Fixed assets at December 31, 1997 consisted
solely of the investment in Security Despatch Limited. Net current liabilities
at December 31, 1997 consisted primarily of corporation tax recoverable of L122,
accrued interest payable of L98 and accrued management charges of L5. Borrowings
at December 31, 1997 consisted of a L1,488 loan from Barclays Bank and loan
stock held by the shareholders of L2,111. The Barclays Bank loan has
subsequently been repaid.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock concurrent
with the consummation of the initial public offering of the common stock of DMS.
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 December 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 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.
F-47
<PAGE> 80
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
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 and costs relating to radio equipment, because in the
opinion of the directors this is the most appropriate disclosure.
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
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 crystallize in the foreseeable future.
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>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
--------------- ------------
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Operating profit for the year was arrived at after charging:
Depreciation of tangible fixed assets....................... L 49 L 51 L 39
Operating lease rentals of:
Plant and machinery.................................... 17 11 9
Land and buildings..................................... 34 34 23
Auditors' remuneration...................................... 9 7 9
Wages and salaries.......................................... 1,100 1,134 951
Social security costs....................................... 106 119 92
------ ------ ------
L1,315 L1,356 L1,123
====== ====== ======
The average number of employees including directors
employed by the group during the year was as
follows.............................................. 63 75 76
====== ====== ======
</TABLE>
F-48
<PAGE> 81
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
4. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
----------- ------------
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Bank loans and overdrafts................................... L 24 L 13 L 37
==== ==== ====
</TABLE>
All loans and overdrafts are wholly repayable within five years.
5. TAXATION ON PROFITS FROM ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
----------- ------------
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
UK corporation tax charge................................... L204 L239 L154
Underprovision in respect of prior years.................... 16 -- --
---- ---- ----
L220 L239 L154
==== ==== ====
</TABLE>
6. DIVIDENDS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
----------- ------------
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Preference-paid............................................. L164 L134 L --
==== ==== ====
</TABLE>
F-49
<PAGE> 82
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
7. TANGIBLE ASSETS
<TABLE>
<CAPTION>
FURNITURE
RADIO AND OFFICE
EQUIPMENT COMPUTERS EQUIPMENT TOTAL
--------- --------- ---------- -----
<S> <C> <C> <C> <C>
COST
At March 31, 1996...................................... L 214 L 129 L 75 L 418
Additions.............................................. 12 35 23 70
------- ------- ------- -----
At March 31, 1997...................................... 226 164 98 488
Additions.............................................. 2 17 5 24
------- ------- ------- -----
At December 31, 1997................................... L 228 L 181 L 103 L 512
======= ======= ======= =====
DEPRECIATION
At March 31, 1996...................................... L 175 L 101 L 51 L 327
Charge for year........................................ 19 21 11 51
------- ------- ------- -----
At March 31, 1997...................................... 194 122 62 378
Charge for year........................................ 13 17 9 39
------- ------- ------- -----
At December 31, 1997................................... L 207 L 139 L 71 L 417
======= ======= ======= =====
NET BOOK VALUE
At March 31, 1996...................................... L 39 L 28 L 24 L 91
======= ======= ======= =====
At March 31, 1997...................................... L 32 L 42 L 36 L 110
======= ======= ======= =====
At December 31, 1997................................... L 21 L 42 L 32 L 95
======= ======= ======= =====
</TABLE>
8. INVESTMENTS
Details of the subsidiary undertaking are as follows:
<TABLE>
<CAPTION>
NATURE OF BUSINESS
------------------------------
COUNTRY OF PROPORTION OF MARCH 31, DECEMBER 31,
NAME REGISTRATION VOTING RIGHTS 1996 1997 1997
- ---- ------------ ------------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Security Despatch Couriers
Limited....................... England 100% Courier Dormant Dormant
Security Despatch London
Limited....................... England 100% Courier Dormant Dormant
Security Despatch (Admin)
Limited....................... England 100% Dormant Dormant Dormant
</TABLE>
9. DEBTORS
<TABLE>
<CAPTION>
AS AT
------------------------------
MARCH 31, DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Amounts due within one year:
Trade debtors.......................................... L 968 L1,077 L 966
Other debtors.......................................... 6 -- 4
Prepayments and accrued income......................... 47 29 51
------ ------ ------
L1,021 L1,106 L1,021
====== ====== ======
Amounts falling due after more than one year:
Amounts owed by parent undertaking.......................... L -- L 199 L 797
====== ====== ======
</TABLE>
F-50
<PAGE> 83
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
10. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
AS AT
------------------------------
MARCH 31, DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Bank overdrafts (secured)................................... L 252 L 184 L 470
Trade creditors............................................. 147 234 173
Other taxation and social security.......................... 385 413 588
Other creditors............................................. 82 84 99
Accruals and deferred income................................ 77 160 61
Corporation tax............................................. 155 207 157
ACT payable................................................. 20 16 --
------ ------ ------
L1,118 L1,298 L1,548
====== ====== ======
</TABLE>
The bank overdrafts are secured by a fixed and floating charge over the
assets of the company.
11. SHARE CAPITAL
<TABLE>
<CAPTION>
AS AT
---------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1997 1997 1997 1997
--------- ------------ --------- ------------
NOS. NOS.
<S> <C> <C> <C> <C>
AUTHORIZED
Ordinary shares of 10p each....................... 1,114,443 1,114,443 L 111 L 111
"A" ordinary shares of L1 each.................... 20,000 20,000 20 20
"B" ordinary shares of 10p each................... 592,728 592,728 59 59
"C" ordinary shares of 1p each.................... 651,190 651,190 7 7
"D" ordinary shares of L1 each.................... 20,000 20,000 20 20
11% cumulative preference shares of L1 each....... 1,866,176 1,866,176 1,866 1,866
------ -------
L2,083 L 2,083
====== =======
ALLOTTED, CALLED UP AND FULLY PAID
Ordinary shares of 10p each....................... 788,140 788,140 L 79 L 79
"A" ordinary shares of L1 each.................... -- -- -- --
"B" ordinary shares of 10p each................... 592,728 592,728 59 59
"C" ordinary shares of 1p each.................... 527,466 527,466 5 5
--------- --------- ------ -------
Total Equity Shares 1,271,869..................... 1,908,334 1,908,334 143 143
11% cumulative preference shares of L1 each (non
equity)......................................... 1,100,000 1,100,000 1,100 1,100
------ -------
L1,243 L 1,243
====== =======
</TABLE>
i) During the year ended March 31, 1996 300,000 preference shares were
redeemed at par.
ii) 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.
F-51
<PAGE> 84
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
11. SHARE CAPITAL (CONTINUED)
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.
12. RESERVES
<TABLE>
<CAPTION>
SHARE CAPITAL PROFIT
PREMIUM REDEMPTION AND LOSS
ACCOUNT RESERVE ACCOUNT GOODWILL
------- ---------- -------- --------
<S> <C> <C> <C> <C>
At March 31, 1996........................................ L752 L616 L(563) L(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)
Profit for period........................................ -- -- 456 --
---- ---- ----- -------
At December 31, 1997..................................... L771 L766 L 167 L(1,990)
==== ==== ===== =======
</TABLE>
13. RECONCILIATION OF SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
Profit for the financial year............................... L 449 L 558 L456
Dividends................................................... (164) (134) --
----- ----- ----
Retained profit for the financial year...................... 285 424 456
New shares issued........................................... 5 25 --
Goodwill written off........................................ -- -- --
Redemption of preference shares at par...................... (300) (150) --
----- ----- ----
Net increase/(decrease) in shareholders' funds.............. (10) 299 456
Shareholders' funds at the beginning of the year............ 212 202 501
----- ----- ----
Shareholders' funds at the end of the year.................. L 202 L 501 L957
===== ===== ====
</TABLE>
F-52
<PAGE> 85
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
14. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
Operating profit............................................ L 693 L 810 L 647
Depreciation charges........................................ 49 51 39
Increase in debtors......................................... (242) (491) (312)
Increase in creditors....................................... 68 200 30
----- ----- -----
Net cash inflow from operating activities................... L 568 L 570 L 404
===== ===== =====
</TABLE>
15. ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
Returns on investments and servicing of finance:
Interest paid............................................. L (24) L (13) L (38)
Interest paid on behalf of parent company................. (146)
Preference dividend paid.................................. (164) (134)
----- ----- -----
Net cash outflow from returns on investments and servicing
of finance................................................ L(188) L(147) L(184)
===== ===== =====
Capital expenditure and financial investment Purchase of
tangible fixed assets.................................. L (51) L (70) L (24)
----- ----- -----
Net cash outflow for capital expenditure and financial
investment................................................ L (51) L (70) L (24)
===== ===== =====
Financing:
Issue of ordinary share capital........................... L 5 L 25 L
Redemption of preference share capital.................... (300) (150)
Loan repayment on behalf of parent company................ (262)
----- ----- -----
Net cash outflow from financing............................. L(295) L(125) L(262)
===== ===== =====
</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 March 31, 1996........................................... L 31 L252 L221
Cash flows.................................................. (31) (68) (37)
---- ---- ----
At March 31, 1997........................................... L L184 L184
Cash flows.................................................. 286 286
---- ---- ----
At December 31, 1997........................................ L -- L470 L470
==== ==== ====
</TABLE>
F-53
<PAGE> 86
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
17. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
YEAR
ENDED NINE MONTHS
MARCH 31, ENDED
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Net decrease/(increase) in cash in the year and movement in
net debt in the year...................................... L 63 L(37) L286
Net debt at beginning of year............................... 158 221 184
---- ---- ----
Net debt at end of year..................................... L221 L184 L470
==== ==== ====
</TABLE>
18. CONTINGENT LIABILITIES
At December 31, 1997 the company had guaranteed amounts advanced to its
parent, Security Business Services Limited. At the year end the potential
liability was L1,488 (March 31, 1997: L1,750). The company is involved in a
legal dispute in relation to a purchase agreement whereby the company acquired
the business of the plaintiff.
The potential exposures relating to this claim have not been provided
against as the directors believe the claim to be wholly without foundation.
19. ANNUAL COMMITMENTS UNDER OPERATING LEASES
The Group had annual commitments under non cancellable operating leases as
follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Plant and machinery:
Within one year.......................................... L 1 L 9 L 2
Between two and five years............................... 16 2 2
--- --- ---
17 11 3
Land and buildings:
Within one year.......................................... -- 34 10
Between two and five years............................... 34 -- --
--- --- ---
34 34 10
--- --- ---
Total operating lease commitments................ L51 L45 L14
=== === ===
</TABLE>
20. CAPITAL COMMITMENTS
There was no capital expenditure either authorized or contracted for as at
December 31, 1997.
21. RELATED PARTY TRANSACTIONS
The assets and liabilities of the mailroom service operation were
transferred into a separate company, Mailroom Management Services Limited,
during the period ended 31 December 1997. Security Business Services Limited
owns 100% of the share capital of this company. As at December 31, 1997, an
amount of L592k was owed to the Group by the mailroom services division.
F-54
<PAGE> 87
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
22. ULTIMATE PARENT COMPANY
At December 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.
23. 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.
The UK deferred tax asset can be reconciled as follows to the US GAAP net
deferred tax asset:
<TABLE>
<CAPTION>
MARCH 31,
-----------
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>
F-55
<PAGE> 88
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
The US GAAP provision is comprised as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------
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,
-----------
1996 1997
---- ----
<S> <C> <C>
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>
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,
---------------
1996 1997
------ ------
<S> <C> <C>
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.
F-56
<PAGE> 89
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
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.
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,
-------------
1996 1997
----- -----
<S> <C> <C>
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>
VI) 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
MARCH 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Turnover.................................................... L 5,240 L 5,900
Cost of sales in accordance with UK GAAP.................. (3,920) (4,466)
US adjustment............................................. 905 1,052
Cost of Sales in accordance with US....................... (3,015) (3,414)
------- -------
Gross margin.............................................. 2,225 2,486
Net Operating expenses/income -- UK GAAP.................. (627) (624)
US adjustments............................................ (905) (1,052)
Operating profit -- US.................................... 693 810
------- -------
</TABLE>
F-57
<PAGE> 90
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 1997, and the related combined
statements of operations and retained earnings (accumulated deficit), and cash
flows for each of the three years in the period ended December 31, 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 1997 and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
New York, New York
April 29, 1998
F-58
<PAGE> 91
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
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 3,337
Prepaid expenses.......................................... 99 54
Other current assets...................................... 2 --
Due from stockholder (Note 9)............................. 350 100
------- -------
Total current assets........................................ 2,919 3,494
Property and equipment -- net (Notes 4 and 5)............... 356 116
Intangible assets -- net of accumulated amortization of $431
(1996) and $483 (1997) (Note 5)........................... 65 13
Due from affiliate.......................................... 33 38
Other noncurrent assets..................................... 100 83
------- -------
$ 3,473 $ 3,744
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable, current portion (Note 5)................... $ 1,426 $ 816
Accounts payable.......................................... 866 587
Accrued salaries and payroll taxes payable................ 274 489
Accrued expenses.......................................... 587 566
Allowance for loss from discontinued operations (Note
2)..................................................... -- 132
Other current liabilities................................. 5 5
------- -------
Total current liabilities................................... 3,158 2,595
Notes payable (Note 5)...................................... 857 669
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) 837
------- -------
Total stockholders' deficiency.............................. (1,442) (420)
------- -------
$ 3,473 $ 3,744
======= =======
</TABLE>
See accompanying notes.
F-59
<PAGE> 92
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)
(DOLLARS IN THOUSANDS)
(NOTES 2 AND 10)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net sales (Note 8).......................................... $21,967 $22,894 $15,308
Cost of sales............................................... 15,187 15,860 8,975
------- ------- -------
Gross margin.............................................. 6,780 7,034 6,333
Operating expenses.......................................... 4,595 5,436 3,532
Sales and marketing......................................... 1,072 1,072 455
General and administrative expenses......................... 506 670 180
Depreciation and amortization excluding amortization of
covenant not to compete................................... 138 195 122
------- ------- -------
Operating income (loss)..................................... 469 (339) 2,044
Other expenses:
Interest expense (Note 5)................................. 260 219 446
Covenant not to compete (Note 5).......................... 85 85 --
------- ------- -------
Income (loss) before provision for local income taxes....... 124 (643) 1,598
Provision for local income taxes (Note 6)................... 30 2 51
------- ------- -------
Income (loss) from continuing operations.................... 94 (645) 1,547
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) 1,022
Retained earnings (accumulated deficit), beginning of
year...................................................... 366 460 (185)
------- ------- -------
Retained earnings (accumulated deficit), end of year........ $ 460 $ (185) $ 837
======= ======= =======
Unaudited pro forma information (Note 6):
Historical income (loss) from continuing operations before
provision for income taxes............................. $ 94 $ (645) $ 1,022
Provision (benefit) for income taxes...................... 42 (290) 460
------- ------- -------
Pro forma net income (loss) from continuing operations...... $ 52 $ (355) $ 562
======= ======= =======
</TABLE>
See accompanying notes.
F-60
<PAGE> 93
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations.................. $ 94 $(645) $ 1,547
Discontinued operations................................... -- -- (525)
----- ----- -------
Net income (loss)......................................... 94 (645) 1,022
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 273 315 174
Allowance for doubtful accounts........................ -- -- 30
Estimated loss on discontinued operations.............. -- -- 132
Loss on abandonment of fixed assets.................... -- -- 154
Non-cash compensation expense.......................... -- -- 250
Changes in operating assets and liabilities:
Accounts receivable.................................... (390) (554) (905)
Prepaid expenses....................................... (101) 7 45
Other current assets................................... 82 13 2
Due (to) from affiliate................................ (1) (5) (5)
Other noncurrent assets................................ (71) (12) 17
Accounts payable and accrued expenses.................. 262 559 (300)
Accrued salaries and payroll taxes payable............. 217 (128) 215
Deferred revenue....................................... 36 (36) --
Other current liabilities.............................. (124) (2) --
----- ----- -------
Net cash provided by (used in) operating activities.... 277 (488) 831
INVESTING ACTIVITIES
Purchases of property and equipment.................... (291) (75) (36)
----- ----- -------
Net cash used in investing activities.................. (291) (75) (36)
FINANCING ACTIVITIES
Proceeds from notes payable............................ -- 925 --
Payments on notes payable.............................. (553) (258) (798)
Payments to former owners.............................. (250) (100) --
Financing costs........................................ (96) -- --
Proceeds from subordinated notes payable............... 900 -- --
----- ----- -------
Net cash provided by (used in) financing activities.... 1 567 (798)
----- ----- -------
Net increase (decrease) in cash and cash equivalents... (13) 4 (3)
----- ----- -------
Cash and cash equivalents at beginning of period....... 15 2 6
----- ----- -------
Cash and cash equivalents at end of period............. $ 2 $ 6 $ 3
===== ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.......................................... $ 250 $ 209 $ 187
===== ===== =======
Local income taxes paid................................ $ 26 $ 2 $ 2
===== ===== =======
</TABLE>
See accompanying notes.
F-61
<PAGE> 94
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 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.
In February, 1998, the Company, pursuant to a definitive agreement with
Dispatch Management Services Corp. ("DMS"), sold certain net assets of the
Company for cash and shares of DMS common stock concurrent with the consummation
of the initial public offering of the common stock of DMS.
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. Under the terms of the sale agreement, the
Company entered into a covenant not-to-compete in the facilities management
business for 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>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Net sales................................................... $4,089
Cost of sales............................................... 3,215
------
Gross margin................................................ $ 874
======
Accounts receivable......................................... $ 55
======
</TABLE>
F-62
<PAGE> 95
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)
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 month period 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
$916,000 at December 31, 1997.
Net sales, cost of sales and gross margin from the operations of the
discontinued segment amounted to $10,004,000, $8,555,000 and $1,449,000,
respectively, for the year ended December 31, 1997.
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.
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-63
<PAGE> 96
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 TOTAL
MEMBERS NUMBER OF PAID-IN TREASURY (ACCUMULATED STOCKHOLDERS'
CAPITAL SHARES AMOUNT CAPITAL STOCK DEFICIT) DEFICIENCY
------- -------------- ------ ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Management Support
Services, Inc. (200
shares authorized)....... $ -- 50 $ 1 $69 $ (199) $ 581 $ 452
Earlybird Messenger
Service, Inc. (200 shares
authorized).............. -- 35 4 -- (1,132) (215) (1,343)
---- -- --- --- ------- ------ -------
Balance at December 31,
1994..................... -- 85 5 69 (1,331) 366 (891)
Earlybird Courier Service,
LLC...................... -- -- -- -- -- -- --
Total Management Support
Services, LLC............ -- -- -- -- -- -- --
Total Management LLC....... -- -- -- -- -- -- --
Net income for the year
ended December 31,
1995..................... -- -- -- -- -- 94 94
---- -- --- --- ------- ------ -------
Balance at December 31,
1995..................... -- 85 5 69 (1,331) 460 (797)
Net loss for the year ended
December 31, 1996........ -- -- -- -- -- (645) (645)
---- -- --- --- ------- ------ -------
Balance at December 31,
1996..................... -- 85 5 69 (1,331) (185) (1,442)
Net income for the year
ended December 31,
1997..................... -- -- -- -- -- 1,022 1,022
---- -- --- --- ------- ------ -------
Balance at December 31,
1997..................... $ -- 85 $ 5 $69 $(1,331) $ 837 $ (420)
==== == === === ======= ====== =======
</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,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Cost:
Furniture and fixtures.................................... $ 572 $328
Leasehold improvements.................................... 199 62
Computer equipment........................................ 489 445
Automobiles............................................... 8 8
------ ----
1,268 843
Less accumulated depreciation............................. 912 727
------ ----
$ 356 $116
====== ====
</TABLE>
F-64
<PAGE> 97
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,
---------------------------
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)................................................ 1,214 628
Copytex equipment loan(b)................................... 21 --
Notes payable to former stockholder(c)...................... 1,031 857
------ ------
2,283 1,485
Less current portion due within one year.................... 1,426 816
------ ------
$ 857 $ 669
====== ======
</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 $640,000 at December
31, 1996 and 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 $217,000 at December
31, 1996 and 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 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.
F-65
<PAGE> 98
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998........................................................ $153
1999........................................................ 119
2000........................................................ 25
2001........................................................ 13
----
Total minimum payments required............................. $310
====
</TABLE>
Rent expense amounted to approximately $260,000, $355,000 and $312,000 for
the years ended December 31, 1995, 1996 and 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 year ended December 31, 1996, one customer, an office supplies
manufacturer and distributor, and another customer, a financial services firm,
accounted for 14% and 12%, respectively, of the Company's total revenue.
F-66
<PAGE> 99
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 $872,000 at December 31, 1996 and
December 31, 1997, respectively.
10. BUSINESS SEGMENTS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net sales:
Courier services.......................................... $13,867 $13,189 $15,308
Facilities management..................................... 8,100 9,705 --
------- ------- -------
21,967 22,894 15,308
------- ------- -------
Cost of sales:
Courier services.......................................... 8,195 7,412 8,975
Facilities management..................................... 6,992 8,448 --
------- ------- -------
15,187 15,860 8,975
------- ------- -------
Gross margin:
Courier services.......................................... 5,672 5,777 6,333
Facilities management..................................... 1,108 1,257 --
------- ------- -------
6,780 7,034 6,333
------- ------- -------
Operating expenses:
Courier services.......................................... 3,873 3,185 3,532
Facilities management..................................... 722 2,251 --
------- ------- -------
4,595 5,436 3,532
------- ------- -------
Sales and marketing:
Courier services.......................................... 515 303 455
Facilities management..................................... 557 769 --
------- ------- -------
1,072 1,072 455
Depreciation and amortization:
Courier services.......................................... 107 137 122
Facilities management..................................... 31 58 --
------- ------- -------
138 195 122
------- ------- -------
General and administrative.................................. 506 670 180
------- ------- -------
Operating income (loss)..................................... $ 469 $ (339) $ 2,044
======= ======= =======
Identifiable assets:
Courier services.......................................... $ 2,403 $ 2,356 $ 2,828
Facilities management..................................... 655 1,117 916
------- ------- -------
$ 3,058 $ 3,473 $ 3,744
======= ======= =======
Capital expenditures:
Courier services.......................................... $ 161 $ 23 $ 15
Facilities management..................................... 130 52 21
------- ------- -------
$ 291 $ 75 $ 36
======= ======= =======
</TABLE>
F-67
<PAGE> 100
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. AGREEMENT WITH DMS
In February 1998, the Company completed a transaction with Dispatch
Management Services Corp. ("DMS") pursuant to a definitive agreement and
exchanged certain net assets of the Company for cash and shares of DMS common
stock concurrent with the consummation of the initial public offering of the
common stock of DMS. Pursuant to the agreement, 73% was paid in cash and 27% was
paid in stock of DMS, which is subject to adjustment in accordance with an
earn-out provision as defined in the purchase agreement. Prior to the sale, the
lender exercised the warrants and converted the subordinated notes payable to
equity. The proceeds from the sale were used to reduce debt and pay
distributions to members.
F-68
<PAGE> 101
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 at December
29, 1996 and January 4, 1998, and the results of their operations and their cash
flows for each of the three years in the period ended January 4, 1998, 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.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Philadelphia, PA
April 21, 1998
F-69
<PAGE> 102
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 29, JANUARY 4,
1996 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 71 $ 32
Accounts receivable, net.................................. 1,158 711
Prepaid and other current assets.......................... 63 21
Related party receivable.................................. -- 55
------ ------
Total current assets.............................. 1,292 819
Property and equipment, net................................. 802 606
Other assets................................................ 119 132
------ ------
Total assets...................................... $2,213 $1,557
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ -- $ 135
Accounts payable.......................................... 794 592
Accrued expenses.......................................... 64 21
Short-term lease obligations.............................. 165 165
Related party payable..................................... 361 110
------ ------
Total current liabilities......................... 1,384 1,023
Deferred income taxes....................................... 243 71
Long-term lease obligations................................. 405 227
Other liabilities........................................... 18 3
------ ------
Total liabilities................................. 2,050 1,324
------ ------
Commitments and contingencies: (Notes 6 and 9)
Stockholders' Equity:
Common stock; $1.00 par value; 15,000 shares authorized;
15,000 shares issued, 10,000 shares outstanding........ 15 15
Paid-in-capital........................................... -- 149
Retained earnings......................................... 410 331
Less Treasury stock, at cost (5,000 shares)............... (262) (262)
------ ------
Total stockholders' equity........................ 163 233
------ ------
Total liabilities and stockholders' equity........ $2,213 $1,557
====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-70
<PAGE> 103
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 29, JANUARY 4,
1995 1996 1998
------------ ------------ ----------
<S> <C> <C> <C>
Net sales.................................................. $ 6,104 $ 8,728 $ 8,725
Cost of sales.............................................. (3,546) (5,941) (5,781)
------- ------- -------
Gross margin............................................... 2,558 2,787 2,944
Operating expenses......................................... 1,454 2,232 2,483
Sales and marketing expenses............................... 115 105 126
General and administrative expenses........................ 659 693 310
Depreciation and amortization.............................. 153 270 265
------- ------- -------
Operating income (loss).................................... 177 (513) (240)
------- ------- -------
Other (income)/expense
Interest expense......................................... 43 83 76
Other (income)/expense, net.............................. (12) 36 (67)
------- ------- -------
Income (loss) before income taxes.......................... 146 (632) (249)
Provision (benefit) for income taxes....................... 76 (123) (170)
------- ------- -------
Net income (loss).......................................... $ 70 $ (509) $ (79)
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-71
<PAGE> 104
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------
NUMBER OF PAID-IN- TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS
--------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994......................... 10,000 $15 -- $(262) $ 849
1995 Net income.................................... 70
------ --- ---- ----- -----
Balance at December 31, 1995....................... 10,000 15 -- (262) 919
1996 Net loss...................................... (509)
------ --- ---- ----- -----
Balance at December 29, 1996....................... 10,000 15 -- (262) 410
Capital contribution............................... $149
1997 Net income.................................... (79)
------ --- ---- ----- -----
Balance at January 4, 1998......................... 10,000 $15 $149 $(262) $ 331
====== === ==== ===== =====
</TABLE>
See accompanying notes to combined financial statements.
F-72
<PAGE> 105
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 29, JANUARY 4,
1995 1996 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ 70 $(509) $ (79)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities
Depreciation and amortization........................ 153 270 265
Gain on sale of investments.......................... -- -- (50)
Changes in assets and liabilities:
Accounts receivable................................ (163) (208) 447
Related party receivable........................... (22) 125 (55)
Prepaid and other current assets................... (3) (10) 42
Other assets....................................... (51) (14) (33)
Accounts payable................................... 123 425 (202)
Accrued expenses and other liabilities............. 85 (8) (58)
Deferred income taxes.............................. 63 (85) (172)
----- ----- -----
Net cash provided by (used for) operating
activities.................................... 255 (14) 105
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net................ (531) (414) (60)
Proceeds from sale of investment........................ -- -- 50
----- ----- -----
Net cash used for investing activities.......... (531) (414) (10)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in line of credit.............................. -- -- 135
(Payments of) borrowings from related parties........... (33) 282 (166)
Capital contribution.................................... -- -- 75
Principal payments under lease obligations.............. 313 175 (178)
----- ----- -----
Net cash provided by (used for) financing
activities.................................... 280 457 (134)
----- ----- -----
NET INCREASE(DECREASE) IN CASH AND EQUIVALENTS............ 4 29 (39)
Cash and equivalents at beginning of the period......... 38 42 71
----- ----- -----
Cash and equivalents at end of the period............... $ 42 $ 71 $ 32
===== ===== =====
</TABLE>
See accompanying notes to combined financial statements.
F-73
<PAGE> 106
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 during 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.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock 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.
Fiscal year
The fiscal year of the Company ends on the Sunday nearest to December 31.
Reference to 1995, 1996 and 1997 are for the 52 weeks ended December 31, 1995
and December 29, 1996 and the 53 weeks ended January 4, 1998, respectively.
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.
F-74
<PAGE> 107
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 approximate carrying value. Additionally, interest rates on
outstanding debt are at rates which approximate market rates for debt with
similar terms and average maturities.
Cash flow information
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments with original maturities of three months or less as
cash equivalents. Supplemental cash flow disclosures are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 29, JANUARY 4,
1995 1996 1998
------------ ------------ ----------
<S> <C> <C> <C>
Cash paid during the year for interest.............. $43 $83 $ 76
=== === ====
Cash paid (received) during the year for taxes...... $-- $ 3 $(28)
=== === ====
Non-cash investment and financing activities:
Capital contribution.............................. $-- $-- $ 74
Exchange of investment for relief of related party
payable........................................ -- -- 11
--- --- ----
$-- $-- $ 85
=== === ====
</TABLE>
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 63% of sales in 1995, 1996 and 1997.
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. In 1997, the Company's two largest customers
accounted for approximately 23% and 11% of sales.
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-75
<PAGE> 108
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 29, 1996........................... $ 66 $536 $(377) $225
Year ended January 4, 1998............................. $225 $ 76 $(158) $143
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 29, JANUARY 4,
1996 1998
------------ ----------
<S> <C> <C>
Equipment................................................... $ 181 $ 227
Furniture and fixture....................................... 14 14
Vehicles.................................................... 963 964
Other....................................................... 122 122
------ ------
1,280 1,327
Less: Accumulated depreciation and amortization............. 478 721
------ ------
Property and equipment, net................................. $ 802 $ 606
====== ======
</TABLE>
Depreciation expense for 1995, 1996 and 1997 was approximately $149, $270
and $256, respectively. Vehicles totaling $862 at December 29, 1996 and January
4, 1998 represent capitalized leases.
5. LINE OF CREDIT
During 1997, the Company entered into a line of credit agreement, as
amended, with a bank providing for borrowings up to $300 through January 31,
1999. Commitment fees are nominal. Interest is variable at a per annum rate
equal to the sum of prime plus 1.25% (9.75% at January 4, 1998). 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 2002. 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-76
<PAGE> 109
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
January 4, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
FISCAL YEAR LEASES LEASES
- ----------- ----------- ---------
<S> <C> <C>
1998........................................................ $203 $ 459
1999........................................................ 160 305
2000........................................................ 101 229
2001........................................................ -- 124
2002........................................................ -- 117
---- ------
Total minimum lease payments...................... 464 $1,234
======
Imputed interest............................................ (72)
----
Present value of minimum capitalized lease payments....... 392
----
Current portion............................................. 165
----
Long-term capitalized lease obligations..................... $227
====
</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 $249 in 1995, 1996 and 1997, respectively. Rental expense charged
to operations was approximately $330, $431 and $549 for 1995, 1996 and 1997,
respectively. The aggregate future minimum rentals for subleases are $420 at
January 4, 1998.
7. INCOME TAXES
The provision (benefit) for income taxes comprises:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-----------------------------------------
DECEMBER 31, DECEMBER 29, JANUARY 4,
1995 1996 1998
------------ ------------ -----------
<S> <C> <C> <C>
Current tax expense
Federal.......................................... $ 7 $ -- $ --
State and local.................................. 2 2 2
--- ----- -----
9 2 2
Deferred tax expense (benefit)..................... 67 (125) (172)
--- ----- -----
Provision (benefit) for income taxes............... $76 $(123) $(170)
=== ===== =====
</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>
FOR THE YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 29, JANUARY 4,
1995 1996 1998
------------ ------------ ----------
<S> <C> <C> <C>
Taxes computed at federal statutory rate (35%)...... $71 $(214) $ (91)
State taxes (net of federal benefit)................ 13 (40) (17)
Other, net.......................................... (8) 131 (62)
--- ----- -----
Provision (benefit) for income taxes.............. $76 $(123) $(170)
=== ===== =====
</TABLE>
F-77
<PAGE> 110
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES (CONTINUED)
Temporary differences giving rise to the Company's deferred tax assets and
liabilities comprised the following:
<TABLE>
<CAPTION>
DECEMBER 29, JANUARY 4,
1996 1998
------------ ----------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards.................................... $ 251 $ 299
----- -----
Gross deferred tax assets................................... 251 299
Deferred tax valuation allowance............................ (137) (116)
----- -----
Net deferred tax assets................................... 114 183
Deferred tax liabilities:
Cash to accrual adjustment................................ 134 36
Property and equipment.................................... 223 218
----- -----
Net deferred liabilities assets........................... $(243) $ (71)
===== =====
</TABLE>
At December 31, 1997, the Company has net operating loss carryovers of
approximately $830. Due to the change in ownership as described in Note 1, there
may be limitations on the amount of these net operating losses that can be
utilized to reduce future taxable income. The valuation allowance is based on
management's assessment as to the likelihood of realizing the net operating
losses at certain inactive affiliated companies.
8. RELATED PARTY TRANSACTIONS
The Company provided distribution services to an affiliated air freight
services company, amounting to $130, $117 and $34 in 1995, 1996 and 1997,
respectively. The Company believes that the amounts charged to the affiliated
company approximate the fair value of the services provided. 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 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 29, 1996 and January 4,
1998, the amounts owed to related parties were $361 and $110, respectively. As
of December 29, 1996 and January 4, 1998, the amounts due from related parties
were $0 and $55, 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 $2 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.
F-78
<PAGE> 111
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 $273 of
revenues in 1997; these facilities commenced operations in 1996.
In June 1997, the Company sold its 65% ownership interest in Lognet, Inc.,
a transportation industry Internet service provider. 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.
F-79
<PAGE> 112
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, of changes in stockholders' equity (deficit) 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 1997, and the
results of its operations and its cash flows for the years ended December 31,
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.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Philadelphia, Pennsylvania
April 7, 1998
F-80
<PAGE> 113
ZOOM MESSENGER SERVICE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 16 $ 82
Accounts receivable, net of allowance for doubtful
accounts of $10 and $15 for 1996 and 1997,
respectively........................................... 1,506 1,067
Prepaid and other current assets.......................... 18 8
------ ------
Total current assets.............................. 1,540 1,157
Property and equipment, net................................. 56 44
Intangible assets, net of accumulated amortization of $320
and $491 for 1996 and 1997, respectively.................. 526 355
Other assets................................................ 13 47
------ ------
$2,135 $1,603
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit............................................ $ 803 $ 900
Accounts payable.......................................... 381 476
Accrued expenses.......................................... 80 122
Shareholder payable....................................... 129 115
Capital lease obligation, current......................... 9 10
Customer list liability................................... 181 5
------ ------
Total current liabilities......................... 1,583 1,628
Customer list long term liability........................... 15 --
Capital lease obligation, long term......................... 10 --
------ ------
Total liabilities................................. 1,608 1,628
------ ------
Commitments and contingencies (Note 10)
Stockholder's Equity
Common stock; no par value; 220 shares authorized and
outstanding............................................ -- --
Additional paid-in-capital................................ 19 19
Retained earnings (deficit)............................... 508 (44)
------ ------
Stockholders' Equity........................................ 527 (25)
------ ------
$2,135 $1,603
====== ======
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE> 114
ZOOM MESSENGER SERVICE, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1997
------ ------
<S> <C> <C>
Net sales................................................... $8,404 $8,413
Cost of sales............................................... 6,314 6,456
------ ------
Gross margin.............................................. 2,090 1,957
Operating expenses.......................................... 1,317 1,320
Sales and marketing expenses................................ 173 184
General and administrative expenses......................... 747 712
Depreciation and amortization............................... 191 185
------ ------
Operating loss.............................................. (338) (444)
------ ------
Other income (expense)
Interest expense.......................................... (63) (97)
Other, net................................................ 30 (11)
------ ------
Net loss.................................................... $ (371) $ (552)
====== ======
Unaudited pro forma information
Pro forma net loss before benefit for income taxes........ $ (371) $ (552)
Benefit for income taxes.................................. 148 188
------ ------
Pro forma net income (loss) (see Note 2).................... $ (223) $ (364)
====== ======
</TABLE>
See accompanying notes to financial statements.
F-82
<PAGE> 115
ZOOM MESSENGER SERVICE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ADDITIONAL RETAINED STOCKHOLDERS'
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 loss..................................... (552) (552)
--- ---- --- ----- -----
Balance at December 31, 1997................. 220 $ -- $19 $ (44) $ (25)
=== ==== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE> 116
ZOOM MESSENGER SERVICE, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(371) $(552)
Adjustments to reconcile net loss to net cash used for
operating activities
Depreciation and amortization.......................... 191 185
Changes in assets and liabilities
Accounts receivable.................................. (290) 439
Prepaid and other assets............................. (1) 10
Shareholder receivable/payable....................... 153 (14)
Other assets......................................... (34)
Accounts payable..................................... 173 95
Accrued expenses..................................... 25 42
Customer list liability.............................. (390) (191)
----- -----
Net cash used for operating activities............ (510) (20)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (10) (2)
Capital lease payments...................................... (10) (9)
----- -----
Net cash used for investing activities............ (20) (11)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in line of credit.................................. 803 97
Payments on long-term debt.................................. (275) --
----- -----
Net cash provided by financing activities......... 528 97
----- -----
NET (DECREASE) INCREASE IN CASH............................. (2) 66
Cash at beginning of the period............................. 18 16
----- -----
Cash at end of the period................................... $ 16 $ 82
===== =====
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................................... $ 56 $ 102
===== =====
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE> 117
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
Zoom Messenger Services, Inc. (the Company) provides same-day, on-demand
delivery services in the New York City metropolitan area.
On February 11, 1998, the Company's shareholders, pursuant to a definitive
agreement with Dispatch Management Service Corp. ("DMS"), exchanged all of the
common stock of the Company 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.
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 analysis of future
undiscounted cash flows from the underlying operations. Management believes that
there has been no impairment of intangible assets at December 31, 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.
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
The Company's two largest customers accounted for approximately 45% of
sales for the years ended December 31, 1996 and 1997.
F-85
<PAGE> 118
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 31, 1997, the
carrying amounts of the Company's net assets exceeds the tax bases by
approximately $73.
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. The
Company's S corporation status terminated when it was acquired by DMS.
3. ACCOUNTS RECEIVABLE
Accounts Receivable comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
<S> <C> <C>
Accounts receivable, trade.................................. $1,516 $1,082
Allowance for doubtful accounts............................. (10) (15)
------ ------
$1,506 $1,067
====== ======
</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................. $ 5 $10 $(5) $ 10
Year ended December 31, 1997................. $10 $10 $(5) $ 15
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------------
USEFUL 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) (140)
----- -----
$ 56 $ 44
===== =====
</TABLE>
Computers with an aggregate cost and accumulated depreciation of $49 and
$29, respectively, in 1996 and $49 and $39, respectively, in 1997, are recorded
under capital leases.
F-86
<PAGE> 119
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- -----
<S> <C> <C>
Payroll and payroll taxes................................... $14 $ 85
Commissions................................................. 11 13
Deferred city taxes......................................... 32 15
Bank overdraft.............................................. 21 --
Other....................................................... 2 9
--- ----
Total accrued expenses.................................... $80 $122
=== ====
</TABLE>
6. LONG-TERM DEBT
Debt comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- -----
<S> <C> <C>
Bank line of credit......................................... $803 $900
Capital lease obligations................................... 19 10
---- ----
Total..................................................... 822 910
Less current portion........................................ 812 910
---- ----
Long-term debt............................................ $ 10 $ --
==== ====
</TABLE>
The Bank line of credit is payable on demand and provides for maximum
borrowings of $900. Interest accrues at prime plus 2% per annum. The interest
rate at December 31, 1997 was 10.5%.
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>
1998........................................................ $ 98
1999........................................................ 98
2000........................................................ 100
2001........................................................ 98
2002........................................................ 85
----
$479
====
</TABLE>
Rental expense was approximately $94 for the year ended December 31, 1996
and $96 for the years ended December 31, 1997.
F-87
<PAGE> 120
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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 December 31, 1996 and December 31, 1997, the Company has amounts
payable to its stockholders for $130 and $115, respectively, for which there are
no formal repayment terms.
In addition, the stockholder payable balance at December 31, 1996 and
December 31, 1997 include amounts payable to the stockholders for $129 and $0,
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 and $3,051 for the years ended December 31,
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.
F-88
<PAGE> 121
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 29, 1996,
February 28, 1997 and December 31, 1997 and the results of their operations and
their cash flows for each of the two years in the period ended February 28, 1997
and for the ten month period ended December 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.
As discussed in Note 1, on February 11, 1998, the Company and its
stockholders sold its outstanding stock to Dispatch Management Services Corp.
The accompanying financial statements do not reflect the effects of any purchase
adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Stamford, Connecticut
May 1, 1997
F-89
<PAGE> 122
BULLIT COURIER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................. $ 150 $ 63 $ 13
Accounts receivable, less allowance for uncollectible
accounts of $18.......................................... 697 693 659
Other assets............................................... 57 48 18
------ ---- -----
Total current assets............................. 904 804 690
Property and equipment, net................................ 112 99 96
Deferred tax asset......................................... 11 44 78
Other assets............................................... 13 13 11
------ ---- -----
Total assets..................................... $1,040 $960 $ 875
====== ==== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to former shareholder........................ $ 9 $ 17 $ --
Line of credit............................................. 50 154 236
Current portion long-term debt............................. 34 34 34
Accounts payable........................................... 232 314 211
Payroll taxes.............................................. 80 26 31
Accrued expenses and other liabilities..................... 97 10 9
------ ---- -----
Total current liabilities........................ 502 555 521
Note payable to former shareholder......................... 17
Bank loans payable......................................... 306 273 245
------ ---- -----
Total long-term debt............................. 323 273 245
------ ---- -----
Total liabilities................................ 825 828 766
------ ---- -----
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.......................................... 338 255 232
------ ---- -----
Total stockholders' equity....................... 215 132 109
------ ---- -----
Total liabilities and stockholders' equity....... $1,040 $960 $ 875
====== ==== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-90
<PAGE> 123
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
--------------------------- ENDED
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.................................................. $6,704 $7,696 $7,810
Cost of sales.............................................. 4,119 4,639 4,345
------ ------ ------
Gross margin............................................. 2,585 3,057 3,465
Operating expenses....................................... 1,758 2,116 2,371
Sales and marketing...................................... 373 358 365
General and administrative expenses...................... 489 642 798
Depreciation............................................. 14 6 3
------ ------ ------
Operating loss............................................. (49) (65) (72)
Interest expense........................................... 8 107 17
Other income............................................... (12) (56) --
------ ------ ------
Loss before benefit for income taxes....................... (45) (116) (89)
Benefit for income taxes................................... (11) (33) (66)
------ ------ ------
Net loss................................................... $ (34) $ (83) $ (23)
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-91
<PAGE> 124
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ------------------
NUMBER RETAINED NUMBER
OF SHARES AMOUNT EARNINGS OF SHARES AMOUNT TOTAL
--------- ------ -------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, February 28, 1995....... 60 $25 $372 140 $(148) $249
Net loss...................................... (34) (34)
-- --- ---- --- ----- ----
Stockholders' equity, February 29, 1996....... 60 25 338 140 (148) $215
Net loss...................................... (83) (83)
-- --- ---- --- ----- ----
Stockholders' equity, February 28, 1997....... 60 25 255 140 (148) 132
Net loss...................................... (23) (23)
-- --- ---- --- ----- ----
Stockholders' equity, December 31, 1997....... 60 $25 $232 140 $(148) $109
== === ==== === ===== ====
</TABLE>
See accompanying notes to consolidated financial statements.
F-92
<PAGE> 125
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
--------------------------- ENDED
FEBRUARY 28, FEBRUARY 29, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss................................................... $(34) $ (83) $ (23)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation............................................. 14 6 3
Deferred taxes........................................... (11) (33) (34)
Other.................................................... -- 7 2
Changes in assets and liabilities
Accounts receivable...................................... (166) 4 34
Other current assets..................................... 44 9 30
Accounts payable......................................... 86 82 (103)
Payroll taxes payable.................................... (31) (54) 5
Other accrued expenses................................... (12) (87) (1)
---- ----- -----
Net cash used in operating activities............ (110) (149) (87)
---- ----- -----
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on note payable to former shareholder........... (39) (9) (17)
Repayments on long-term bank loans......................... (33) (33) (28)
Short-term bank borrowings, net............................ 25 104 82
---- ----- -----
Net cash provided by (used in) financing
activities..................................... (47) 62 37
---- ----- -----
NET DECREASE IN CASH AND CASH EQUIVALENTS.................. (157) (87) (50)
Cash and cash equivalents, beginning of year............... 307 150 63
---- ----- -----
Cash and cash equivalents, end of year..................... $150 $ 63 $ 13
==== ===== =====
SUPPLEMENTAL DATA
Cash paid for income taxes............................... $ 10 $ 31 $ 12
==== ===== =====
Cash paid for interest................................... $ 8 $ 107 $ 21
==== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-93
<PAGE> 126
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 other 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 from 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.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company 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
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 ("On-Line"),
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-94
<PAGE> 127
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.
3. TRADE RECEIVABLES
At February 29, 1996, February 28, 1997, and December 31, 1997, three
customers represented 26%, 18%, and 10%; and 20%, 10% and 9%; and 22%, 16% and
11%, respectively, of total receivables. For the two
F-95
<PAGE> 128
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. TRADE RECEIVABLES (CONTINUED)
years ended February 28, 1997 and the ten months ended December 31, 1997, the
three customers represented 23%, 14%, and 12%; and 19%, 11%, and 9%; and 21%,
20%, and 6%, 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
Ten months ended December 31, 1997............. 18 58 58 18
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Furniture and equipment........................... $462 $462 $462
Automobiles....................................... 38
Leasehold improvements............................ 104 104 104
---- ---- ----
604 566 566
Less accumulated depreciation..................... 492 467 470
---- ---- ----
Property and equipment, net....................... $112 $ 99 $ 96
==== ==== ====
</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 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 (11.25% at December 31, 1997). There
are no compensating balances, however, the loan is personally guaranteed by the
officers of the Company. At February 29, 1996, February 28, 1997 and December
31, 1997, the current and long-term portions outstanding are as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
SBA loan........................................... $340 $307 $279
Less current portion............................... 34 34 34
---- ---- ----
Total long-term.......................... $306 $273 $245
==== ==== ====
</TABLE>
Annual maturity on the SBA loan outstanding at December 31, 1997 is as
follows: 1998, $34; 1999, $34; 2,000, $34; 2001, $34; 2002, $34; 2003 and
thereafter, $109. Interest expense on the SBA loan for the ten months ended
December 31, 1997 and the two years ended February 28, 1997 was $29, $38, and
$8, respectively.
F-96
<PAGE> 129
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
6. DEBT (CONTINUED)
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, February
28, 1997, and December 31, 1997 borrowings under this agreement were $50, $154
and $236. Interest expense related to the credit line for the ten months ended
December 31, 1997 and the two years ended February 28, 1997 was: $6, $13, and $3
(11.5% at December 31, 1997). At December 31, 1997, the unused borrowing
capacity under the line of credit totaled $64.
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>
7. INCOME TAXES
The following are the components of the income tax provision:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
--------------------------- ENDED
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal.......................................... $ -- $ -- $ --
State and local.................................. -- -- --
---- ---- ----
Deferred
Federal.......................................... (11) (33) (66)
State and local.................................. -- -- --
---- ---- ----
Income tax benefit............................... $(11) $(33) $(66)
==== ==== ====
</TABLE>
Reconciliation between income tax 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 TEN MONTHS
---------------------------- ENDED
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax provision computed at U.S.
statutory rate............................... $(15) $(39) $(90)
Meals and entertainment........................ 4 6 14
---- ---- ----
Income tax benefit............................. $(11) $(33) $(76)
==== ==== ====
</TABLE>
The primary temporary difference that gives rise to the Company's deferred
tax asset is the net operating loss carry forward, which expires in 2012.
F-97
<PAGE> 130
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 December
31, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------
<S> <C>
1998........................................................ $59
1999........................................................ 38
---
Total............................................. $97
===
</TABLE>
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 two years ended February
28, 1997 and the ten month period ended December 31, 1997 was as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Corporate offices.................................. $ 68 $ 68 $138
Warehouses......................................... 68 68 112
---- ---- ----
Total.................................... $136 $136 $250
==== ==== ====
</TABLE>
10. SUBSEQUENT EVENT
In connection with the initial public offering of DMS on February 11, 1998,
the outstanding balance of the SBA loan and the line of credit was paid in full.
F-98
<PAGE> 131
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 December 31, 1997 and the results of its
operations and its cash flows for the two years ended June 30, 1997, and the
six-month period ended December 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 provides a
reasonable basis for the opinion expressed above.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
April 22, 1998
F-99
<PAGE> 132
AERO SPECIAL DELIVERY SERVICE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 79 $ 173 $ 99
Accounts receivable, net.................................. 1,123 1,253 1,400
Prepaid and other current assets.......................... 122 249 206
------- ------- -------
Total current assets................................... 1,324 1,675 1,705
Property and equipment, net................................. 341 442 345
------- ------- -------
$ 1,665 $ 2,117 $ 2,050
======= ======= =======
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities
Accounts payable.......................................... $ 222 $ 392 $ 294
Accrued expenses.......................................... 328 362 392
Accrued payroll taxes, interest and penalties in
dispute................................................ 1,936 2,681 3,044
Current portion of capital lease obligation............... 49 89 82
Borrowings under a line of credit and notes payable....... 288 20
------- ------- -------
Total current liabilities......................... 2,823 3,544 3,812
Due to related party........................................ 544 589 548
Capital lease obligation.................................... 90 131 97
------- ------- -------
Total liabilities...................................... 3,457 4,264 4,457
------- ------- -------
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) (2,607)
------- ------- -------
Total stockholder's deficiency......................... (1,792) (2,147) (2,407)
------- ------- -------
$ 1,665 $ 2,117 $ 2,050
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-100
<PAGE> 133
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JUNE 30, ENDED
----------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Sales....................................................... $10,496 $11,818 $6,000
Cost of sales............................................... 5,972 6,887 3,732
------- ------- ------
Gross margin...................................... 4,524 4,931 2,268
Operating expenses.......................................... 2,155 2,375 1,186
Sales and marketing......................................... 865 961 368
General and administrative expenses......................... 886 940 507
Payroll taxes, interest and penalties in dispute............ 522 745 363
Depreciation and amortization............................... 77 168 105
------- ------- ------
Total expenses.................................... 4,505 5,189 2,529
------- ------- ------
Operating income (loss)..................................... 19 (258) (261)
------- ------- ------
Related party interest expense.............................. 54 57 35
Other expense (income), net................................. 28 40 (36)
------- ------- ------
82 97 (1)
------- ------- ------
Loss before provision for income taxes...................... (63) (355) (260)
Provision for income taxes.................................. -- -- --
------- ------- ------
Net loss.................................................... $ (63) $ (355) $ (260)
======= ======= ======
</TABLE>
See accompanying notes to financial statements.
F-101
<PAGE> 134
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIENCY
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<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 six months ended December 31, 1997......... (260) (260)
------ ---- ------- -------
Balance, December 31, 1997.............................. 20,000 $200 $(2,607) $(2,407)
====== ==== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-102
<PAGE> 135
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JUNE 30, ENDED
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (63) $(355) $(260)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 77 168 105
Loss on disposition of property and equipment............. 10 50 --
Changes in assets and liabilities:
Accounts receivable.................................... 15 (130) (147)
Prepaid and other current assets....................... (41) (127) 43
Accounts payable....................................... (38) 170 (98)
Accrued expenses....................................... (40) 34 30
Accrued payroll taxes, interest and penalties in
dispute............................................... 522 745 363
----- ----- -----
Net cash provided by operating activities................. 442 555 36
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................... (132) (172) (8)
----- ----- -----
Net cash used for investing activities.................... (132) (172) (8)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in due to related party, net............ 34 45 (41)
Repayments under line of credit and notes payable, net...... (230) (268) (20)
Repayments of capital lease obligations..................... (35) (66) (41)
----- ----- -----
Net cash used for financing activities.................... (231) (289) (102)
----- ----- -----
Net increase (decrease) in cash and cash equivalents........ 79 94 (74)
Cash and cash equivalents at beginning of period............ -- 79 173
----- ----- -----
Cash and cash equivalents at end of the period.............. $ 79 $ 173 $ 99
===== ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 55 $ 52 $ 77
===== ===== =====
Taxes paid, net of refunds received....................... $ 1 $ (31) $ 53
===== ===== =====
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of property and equipment under capital
leases................................................. $ 157 $ 147 $ --
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-103
<PAGE> 136
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.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock 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.
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.
F-104
<PAGE> 137
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and $37 for the
six-month period ended December 31, 1997.
3. PAYROLL TAX ASSESSMENTS
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 and December 31, 1997, the Company had
recorded withholding tax liabilities of $1,176, $1,281 and $1,339, 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 $1,705 as of December 31, 1997 ($1,400 at June 30, 1997 and $760 at
June 30, 1996) to cover the estimated withholding taxes, interest and penalties
on similar allowances paid in years subsequent to 1993.
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
Six months ended December 31, 1997............... 187 144 (144) 187
</TABLE>
F-105
<PAGE> 138
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------- DECEMBER 31,
1996 1997 1997
----- ------ ------------
<S> <C> <C> <C>
Vehicles.................................................. $ 609 $ 609 $ 609
Vehicles under capital leases............................. 175 322 322
Furniture and equipment................................... 48 102 102
Computer equipment........................................ 71 124 132
Leasehold improvements.................................... 76 82 82
----- ------ ------
979 1,239 1,247
Accumulated depreciation and amortization................. (638) (797) (902)
----- ------ ------
$ 341 $ 442 $ 345
===== ====== ======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Salaries and wages.......................................... $125 $139 $144
Payroll taxes............................................... 85 94 126
Accrued vacation............................................ 100 111 104
Other....................................................... 18 18 18
---- ---- ----
$328 $362 $392
==== ==== ====
</TABLE>
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 the bank's prime rate plus 3 1/2% (11.75% at June 30, 1996). The
outstanding balance was paid in full in December 1996.
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.
F-106
<PAGE> 139
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
7. LINE OF CREDIT AND NOTES PAYABLE (CONTINUED)
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........................................................ $110
1999........................................................ 69
2000........................................................ 14
----
193
Less imputed interest....................................... (14)
----
179
Less: current portion....................................... (82)
----
$ 97
====
</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 SIX MONTHS
JUNE 30, ENDED
------------ DECEMBER 31,
1996 1997 1997
---- ----- ------------
<S> <C> <C> <C>
Tax benefit computed at federal statutory rate (34%)....... $(23) $(121) $(117)
State tax benefit.......................................... (5) (22) (20)
Adjustment to deferred tax asset valuation allowance....... 23 139 123
Other...................................................... 5 4 14
---- ----- -----
$ -- $ -- $ --
==== ===== =====
</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 and
December 31, 1997. Accordingly, no benefit has been recorded for the loss for
the years then ended.
Temporary differences which otherwise would give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Payroll taxes and interest in dispute.................. $ 776 $ 1,075 $ 1,318
Net operating loss carryforwards....................... 436 135 84
Accrued vacation, interest and allowance for doubtful
accounts............................................. -- 176 153
Cash basis to accrual basis adjustment................. (186) (153) (123)
Others, net............................................ 32 (7) 18
------- ------- -------
Net deferred tax asset................................. 1,058 1,226 1,450
Valuation allowance.................................... (1,058) (1,226) (1,450)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-107
<PAGE> 140
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
8. INCOME TAXES (CONTINUED)
At December 31, 1997, the Company had available net operating loss
carryforwards of $247 for federal income tax purposes. The carryforwards are
limited to future taxable earnings of the Company and expire in 2009.
9. RELATED PARTY TRANSACTIONS AND BALANCES
Due to related party consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
Note payable to stockholder, interest payable at 9%, due
February 2000............................................. $ 591 $ 591 $591
Note payable to stockholder, interest payable at 9%, due
July 2000 Accrued interest................................ 28 48 48
Note payable to stockholder, non-interest bearing, due on
demand.................................................... 107 164 113
726 803 762
Receivable from stockholder, non-interest bearing, due on
demand.................................................... (182) (214) (214)
----- ----- ----
$ 544 $ 589 $548
===== ===== ====
</TABLE>
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 December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1998........................................................ $199
1999........................................................ 152
2000........................................................ 111
2001........................................................ 65
----
$527
====
</TABLE>
Rental expense charged to operations was $155, $217 and $119 for the years
ended June 30, 1996 and 1997 and the six-month period ended December 31, 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 and results of operations or cash flows.
F-108
<PAGE> 141
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 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 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 our audits
provide a reasonable basis for the opinion expressed above.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
April 27, 1998
F-109
<PAGE> 142
S-CAR-GO COURIER, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
---- -----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 75 $146
Accounts receivable....................................... 185 227
---- ----
Total current assets.............................. 260 373
Intangible assets, net...................................... 7 2
Property and equipment, net................................. 18 27
Other assets................................................ -- 10
---- ----
$285 $412
==== ====
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 8 $ 2
Accrued expenses.......................................... 117 54
Taxes payable............................................. 29 56
Deferred income taxes..................................... 21 63
Notes payable to related parties.......................... 16 48
---- ----
Total current liabilities......................... 191 223
---- ----
Stockholder's equity
Common stock $1.00 par value; 1,000 shares authorized and
issued; 500 shares issued and outstanding.............. 1 1
Retained earnings......................................... 93 188
---- ----
Total stockholder's equity........................ 94 189
---- ----
$285 $412
==== ====
</TABLE>
See accompanying notes to financial statements.
F-110
<PAGE> 143
S-CAR-GO COURIER, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $ 963 $1,263 $1,714
Cost of sales............................................... 614 801 1,030
------ ------ ------
Gross margin.............................................. 349 462 684
------ ------ ------
Operating expenses.......................................... 96 140 169
Sales and marketing expenses................................ 32 87 109
General and administrative expenses......................... 110 206 220
Depreciation and amortization............................... 16 15 16
------ ------ ------
Total expenses.................................... 254 448 514
------ ------ ------
Operating income............................................ 95 14 170
Interest expense............................................ 2 2 6
------ ------ ------
Income before provision for income taxes.................... 93 12 164
Provision for income taxes.................................. 40 7 69
------ ------ ------
Net income.................................................. $ 53 $ 5 $ 95
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-111
<PAGE> 144
S-CAR-GO COURIER, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<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.................................................. 95 95
--- -- ---- ----
Balance, December 31, 1997.................................. 500 $1 $188 $189
=== == ==== ====
</TABLE>
See accompanying notes to financial statements.
F-112
<PAGE> 145
S-CAR-GO COURIER, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 53 $ 5 $ 95
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization............................. 16 14 16
Changes in assets and liabilities:
Accounts receivable.................................... (51) (44) (42)
Other assets........................................... -- 1 (10)
Accounts payable....................................... (19) 1 (6)
Accrued expenses....................................... (35) 87 (63)
Income taxes payable................................... -- 28 27
Deferred income taxes.................................. 39 (22) 42
---- ---- ----
Net cash provided by operating activities.............. 3 70 59
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (4) (4) (20)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of (repayments on) notes payable to related
parties, net.............................................. (4) (20) 32
---- ---- ----
Net (decrease) increase in cash............................. (5) 46 71
Cash at beginning of period................................. 34 29 75
---- ---- ----
Cash at end of period....................................... $ 29 $ 75 $146
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-113
<PAGE> 146
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%, 29% and
26% of revenues for each of the three years in the period ended December 31,
1997, respectively.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock 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-114
<PAGE> 147
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSET
The intangible asset is a covenant not to compete agreement entered into
with a former stockholder in connection with the redemption 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,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Equipment................................................... $ 67 $ 67
Vehicles.................................................... 12 32
---- ----
79 99
Less: Accumulated depreciation.............................. (61) (72)
---- ----
$ 18 $ 27
==== ====
</TABLE>
Depreciation expense was $11, $10 and $11 for each of the three years in
the period ended December 31, 1997.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Payroll and payroll taxes................................... $ 43 $ 37
Bonus....................................................... 63 --
Consulting.................................................. 11 --
Other....................................................... -- 17
---- ----
Total accrued expenses............................ $117 $ 54
==== ====
</TABLE>
F-115
<PAGE> 148
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current tax expense
Federal................................................... $ 1 $ 23 $21
State..................................................... -- 6 6
--- ---- ---
1 29 27
--- ---- ---
Deferred tax expense
Federal................................................... 30 (17) 32
State..................................................... 9 (5) 10
--- ---- ---
39 (22) 42
--- ---- ---
$40 $ 7 $69
=== ==== ===
</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 DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Taxes computed at federal statutory rate (34%).............. $ 31 $ 4 $ 55
State taxes (net of federal benefit)........................ 6 1 10
Other....................................................... 3 2 4
----- ----- -----
Provision for income taxes................................ $ 40 $ 7 $ 69
===== ===== =====
Effective rate............................................ 43.0% 58.3% 42.7%
===== ===== =====
</TABLE>
The temporary differences giving rise to the Company's deferred tax
liabilities consist primarily of accounts receivable and accounts payable since
the Company is a cash basis taxpayer.
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-
F-116
<PAGE> 149
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
compensated officer of SFDBC. The total expenses attributed to the Company were
$107, $154 and $188 for each of the three years in the period ended December 31,
1997, respectively. SFDBC also provides similar services to other messenger
companies. The resulting profit is distributed to the founding companies
monthly. These profits totaled $11, $14, and $19 for each of the three years in
the period ended December 31, 1997, respectively.
F-117
<PAGE> 150
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 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 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.
As discussed in Note 1, on February 11, 1998, the Company sold its net
assets to Dispatch Management Services Corp. The accompanying financial
statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
April 27, 1998
F-118
<PAGE> 151
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
STATEMENTS OF ASSETS, LIABILITIES AND NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 2 $ 11
Accounts receivable....................................... 115 138
Prepaid and other current assets.......................... 9 2
---- ----
Total current assets.............................. 126 151
Property and equipment, net................................. 7 5
Intangible assets, net...................................... 21 37
---- ----
$154 $193
==== ====
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable.......................................... $ 2 $ 2
Accrued payroll........................................... 10 13
Other accrued liabilities................................. 9
Borrowings under line of credit........................... 21 32
---- ----
Total current liabilities......................... 33 56
Net assets.................................................. 121 137
---- ----
$154 $193
==== ====
</TABLE>
See accompanying notes to financial statements.
F-119
<PAGE> 152
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
STATEMENTS OF INCOME AND EXPENSE AND CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $576 $ 732 $ 905
Cost of sales............................................... 315 397 463
---- ----- -----
Gross margin.............................................. 261 335 442
---- ----- -----
Operating expenses.......................................... 82 113 137
Sales and marketing......................................... 3 24 30
General and administrative expenses......................... 26 31 32
Depreciation and amortization............................... 7 10 16
---- ----- -----
118 178 215
---- ----- -----
Operating income............................................ 143 157 227
Interest expense............................................ 2 3 3
---- ----- -----
Net income.................................................. 141 154 224
Net assets at beginning of period........................... 46 106 121
Distributions to owner...................................... (81) (139) (208)
---- ----- -----
Net assets at end of period................................. $106 $ 121 $ 137
==== ===== =====
Unaudited pro forma information:
Pro forma income before income taxes...................... $141 $ 154 $ 224
Provision for income taxes................................ (56) (62) (89)
---- ----- -----
Pro forma net income........................................ $ 85 $ 92 $ 135
==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-120
<PAGE> 153
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $141 $ 154 $ 224
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization............................. 7 10 16
Changes in assets and liabilities:
Accounts receivable.................................... (49) (13) (23)
Prepaid and other current assets....................... (4) (2) 7
Accounts payable....................................... 3 (4) --
Accrued expenses....................................... 1 4 12
---- ----- -----
Net cash provided by operating activities......... 99 149 236
---- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for customer lists................................. (18) (12) (30)
Purchases of property and equipment, net.................... (10) -- --
---- ----- -----
Net cash used for investing activities............ (28) (12) (30)
---- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) on line of credit, net.............. 9 2 11
Distributions to owner...................................... (81) (139) (208)
---- ----- -----
Net cash used for financing activities............ (72) (137) (197)
---- ----- -----
Net (decrease) increase in cash............................. (1) 9
Cash at beginning of period................................. 3 2 2
---- ----- -----
Cash at end of period....................................... $ 2 $ 2 $ 11
---- ----- -----
</TABLE>
See accompanying notes to financial statements.
F-121
<PAGE> 154
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.
On February 11, 1998, the Company, pursuant to a definitive agreement with
Dispatch Management Services Corporation ("DMS") sold significantly all of the
assets of the Company in 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 and $23 at December 31, 1996
and 1997. Amortization expense was $3, $6 and $14 for each of the three years
ended December 31, 1997, respectively.
F-122
<PAGE> 155
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, $20 and
$5 for each of the three in the period years ended December 31, 1997,
respectively.
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. The Company's sole proprietorship status
terminated when it was acquired by DMS (See Note 1). Subsequent to acquisition,
the results of the Brand's operations will be included in the results of DMS's
operations and accordingly will be taxed at DMS's corporate tax rate. 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.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
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, $4 and $2 for each of the three years ended
December 31, 1997, respectively.
F-123
<PAGE> 156
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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, 1996 and 13% at December 31, 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 and general manager of the SFDBC and was paid an annual
salary of $24. Effective November 1, 1997, Mr. Austin resumed his position as
general manager of SFDBC and is paid an annual salary of $60. 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, $113 and $137 for each of the three years in the period ended
December 31, 1997, respectively.
F-124
<PAGE> 157
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
December 31, 1997, and the results of operations and cash flows for the year
ended December 31, 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.
As discussed in Note 1, on February 11, 1998, the Company sold its net
assets to Dispatch Management Services Corp. The accompanying financial
statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
April 27, 1998
F-125
<PAGE> 158
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
STATEMENT OF ASSETS, LIABILITIES AND NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 50
Accounts receivable....................................... 166
Other current assets...................................... 14
----
Total current assets.............................. 230
Property and equipment, net................................. 41
Intangible assets, net...................................... 101
----
$372
====
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable.......................................... $ 3
Accrued payroll........................................... 15
Current portion of long-term debt......................... 78
Borrowings under line of credit........................... 38
----
Total current liabilities......................... 134
Long-term debt (net of current portion)..................... 33
----
Total liabilities................................. 167
Net assets.................................................. 205
----
$372
----
</TABLE>
See accompanying notes to financial statements.
F-126
<PAGE> 159
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>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Net sales................................................... $900
Cost of sales............................................... 467
----
Gross margin.............................................. 433
----
Operating expenses.......................................... 130
Sales and marketing......................................... 73
General and administrative expenses......................... 46
Depreciation and amortization............................... 19
----
268
Operating income............................................ 165
Interest expense, net....................................... (7)
----
Net income.................................................. 158
Net assets at beginning of period........................... 82
Distributions to owner...................................... (35)
----
Net assets at end of period................................. $205
====
Unaudited pro forma information:
Pro forma income before income taxes...................... $158
Provision for income taxes................................ (63)
----
Pro forma net income........................................ $ 95
====
</TABLE>
See accompanying notes to financial statements.
F-127
<PAGE> 160
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $158
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization............................. 19
Changes in assets and liabilities:
Accounts receivable.................................... (66)
Other current assets................................... (6)
Accounts payable....................................... (11)
Accrued expenses....................................... 7
----
Net cash provided by operating activities.............. 101
----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of customer list................................... (10)
Purchases of property and equipment, net.................... (34)
----
Net cash used for investing activities................. (44)
----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit and long-term debt, net........ 22
Distributions to owner...................................... (35)
----
Net cash provided by (used for) financing activities... (13)
----
Net increase in cash........................................ 44
Cash at beginning of period................................. 6
----
Cash at end of period....................................... $ 50
====
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-128
<PAGE> 161
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 Metropolitan 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.
On February 11, 1998, the Company's sole proprietor pursuant to a
definitive agreement with Dispatch Management Services Corporation ("DMS") sold
significantly all of the assets of the Company 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 method. Amortization expense
for the year ended December 31, 1997 and accumulated amortization at December
31, 1997 was $9. 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 December 31, 1997.
F-129
<PAGE> 162
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)
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 $25 for the year ended December 31, 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. The Company's sole proprietorship status
terminated when it merged with DMS (see Note 1). Subsequent to the merger, the
results of the branch's operations will be included in the results of DMS'
operations and, accordingly, will be taxed at DMS' corporate rate. 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.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Communication equipment..................................... $ 13
Vehicles.................................................... 43
----
56
Accumulated depreciation.................................... (15)
----
$ 41
====
</TABLE>
F-130
<PAGE> 163
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BORROWINGS
LINE OF CREDIT
The Company has a $53 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 13.0% at December 31, 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
12.5%. Payments under these notes are due as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1998................................................. $ 78
1999................................................. 33
----
$111
====
</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.
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 $130 for the year ended
December 31, 1997.
F-131
<PAGE> 164
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 December
31, 1997, and the results of operations and cash flows for the year ended
December 31, 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.
As discussed in Note 1, on February 11, 1998, the Company sold its net
assets to Dispatch Management Service Corp. The accompanying financial
statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
April 27, 1998
F-132
<PAGE> 165
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
STATEMENT OF ASSETS, LIABILITIES AND NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 19
Accounts receivable....................................... 77
----
Total current assets.............................. 96
Property and equipment, net................................. 37
Other assets................................................ 2
----
$135
====
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable.......................................... $ 3
Accrued payroll........................................... 6
Borrowings under line of credit........................... 14
----
Total current liabilities......................... 23
Net assets.................................................. 112
----
$135
====
</TABLE>
See accompanying notes to financial statements.
F-133
<PAGE> 166
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
STATEMENTS OF INCOME AND EXPENSE AND CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net sales................................................... $446
Cost of sales............................................... 244
----
Gross margin.............................................. 202
----
Operating expenses.......................................... 46
Sales and marketing......................................... 17
General and administrative expenses......................... 44
Depreciation................................................ 14
----
121
----
Operating income............................................ 81
Interest expense............................................ 2
----
Net income.................................................. 79
Net assets at beginning of period........................... 83
Distributions to owner...................................... (50)
----
Net assets at end of period................................. $112
====
Unaudited pro forma information:
Pro forma income before income taxes...................... $ 81
Provisions for income taxes............................... 32
----
Pro forma net income........................................ $ 49
====
</TABLE>
See accompanying notes to financial statements.
F-134
<PAGE> 167
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 79
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation.............................................. 14
Changes in assets and liabilities:
Accounts receivable.................................... (22)
Other assets........................................... (1)
Accrued payroll........................................ (3)
----
Net cash provided by operating activities......... 67
----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................... (11)
----
Net cash used for investing activities............ (11)
----
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in borrowings under line of credit, net.............. (1)
Distributions to owner...................................... (50)
----
Net cash used for financing activities............ (51)
----
Net increase in cash........................................ 5
Cash at beginning of period................................. 14
----
Cash at end of period....................................... $ 19
====
</TABLE>
See accompanying notes to financial statements.
F-135
<PAGE> 168
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
Studebaker Messenger Services (the Company) was founded in 1990 by Michael
S. Studebaker (the Proprietor) and operates as a sole proprietorship. The
Company is a premium 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.
On February 11, 1998, the Company's sole proprietor pursuant, to a
definitive agreement with Dispatch Management Services Corp. ("DMS"), sold
significantly all of the assets of the Company for cash and shares of DMS common
stock 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.
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
$13 for the year ended December 31, 1997.
F-136
<PAGE> 169
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company's sole proprietorship status
terminated when it merged with DMS (see Note 1). Subsequent to the merger, the
results of the brand's operations will be included in the results of DMS'
operations, and, accordingly, will be taxed at DMS' corporate tax rate.
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.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Vehicles.................................................... $40
Communication equipment..................................... 14
Computer equipment.......................................... 17
Furniture and fixtures and other............................ 15
---
86
Accumulated depreciation.................................... (49)
---
$37
===
</TABLE>
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 December 31, 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 $46 for the year ended
December 31, 1997.
F-137
<PAGE> 170
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 (deficit) 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
1997 and the results of their operations and their cash flows for each of the
three years in the period ended December 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.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Bloomfield Hills, Michigan
April 8, 1998
F-138
<PAGE> 171
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 139 $ 17
Accounts receivable, net of reserve of $29 and $42 in 1996
and 1997, respectively................................. 843 828
Prepaid income taxes...................................... -- 111
Prepaid and other current assets.......................... 41 10
------ ------
Total current assets.............................. 1,023 966
Notes receivable from officers.............................. 181 17
Other assets, net........................................... 14 16
Property and equipment, net................................. 355 200
------ ------
$1,573 $1,199
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit....................................... $ -- $ 350
Accounts payable.......................................... 288 468
Accrued expenses.......................................... 110 49
Current maturities of long-term debt...................... 143 53
Current maturities of subordinated debt to stockholders... 47 220
Accrued income taxes...................................... 240 --
------ ------
Total current liabilities......................... 828 1,140
Subordinated debt to stockholders........................... 268 173
Long-term debt, less current maturities..................... 90 36
Deferred income taxes....................................... 116 80
------ ------
Total liabilities...................................... 1,302 1,429
Minority interest in subsidiary............................. 29 --
Commitments and contingencies (note 12)
Stockholders' equity (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 (236)
------ ------
Total stockholders' equity (deficit)................... 242 (230)
------ ------
$1,573 $1,199
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-139
<PAGE> 172
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $8,573 $8,536 $6,889
Cost of sales............................................... 5,420 5,293 4,573
------ ------ ------
Gross margin...................................... 3,153 3,243 2,316
Operating expenses
Sales and marketing....................................... 1,528 1,535 1,371
General and administrative expenses....................... 890 940 1,283
Depreciation and amortization............................. 165 174 173
------ ------ ------
Operating income (loss)..................................... 570 594 (511)
------ ------ ------
Other (income) expense
Interest expense.......................................... 103 62 71
Minority interest in subsidiary net income................ (12) 13 --
Other, net................................................ (4) 20 (47)
------ ------ ------
Income (loss) before benefit (provision) for income taxes... 483 499 (535)
Benefit (provision) for income taxes........................ (190) (200) 214
------ ------ ------
Net income (loss)........................................... $ 293 $ 299 $ (321)
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-140
<PAGE> 173
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
<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......................................... (321) (321)
------ -- ----- ----- -----
Balance at December 31, 1997..................... 10,500 $1 $ 5 $(236) $(230)
====== == ===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements
F-141
<PAGE> 174
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 293 $ 299 $(321)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities
Depreciation and amortization............................. 165 174 173
Minority interest......................................... (12) 13 (29)
Deferred taxes............................................ 165 (49) (36)
Changes in assets and liabilities:
Accounts receivable.................................... (94) 60 15
Prepaid and other assets............................... 4 (10) (82)
Accounts payable....................................... 22 (94) 180
Accrued expenses....................................... (236) 22 (61)
Income taxes payable................................... 22 237 (240)
----- ----- -----
Net cash provided by (used for) operating
activities...................................... 329 652 (401)
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase and retirement of minority stock................... (151)
(Increase) decrease in officer notes receivable............. (181) 164
Purchases of property and equipment, net.................... (44) (81) (18)
----- ----- -----
Net cash used for investing activities............ (44) (262) (5)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) for line of credit.................. (364) (50) 350
Payments on long-term debt, net............................. 95 (262) (66)
----- ----- -----
Net cash provided by (used for) financing
activities...................................... (269) (312) 284
----- ----- -----
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS............. 16 78 (122)
Cash and equivalents at beginning of the period............. 45 61 139
----- ----- -----
Cash and equivalents at end of the period................... $ 61 $ 139 $ 17
===== ===== =====
Schedule of noncash investing and financing activities:
Property and equipment acquired under capital lease
agreements................................................ $ -- $ 56 $ --
===== ===== =====
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes........................................... $ 4 $ 10 $ 173
===== ===== =====
Interest............................................... $ 108 $ 65 $ 72
===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements
F-142
<PAGE> 175
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.
On February 11, 1998, the Company and its stockholder, pursuant to a
definitive agreement with Dispatch Management Services Corp. ("DMS"), exchanged
its common stock for cash and shares of DMS common stock concurrent with the
consummation of the initial public offering of the Common Stock of DMS.
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., and National Management
Traffic 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>
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
F-143
<PAGE> 176
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT COSTS AND BALANCE
BEGINNING EXPENSES AT END
OF PERIOD WRITE-OFFS 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
Year ended December 31, 1997........................... $ 43 $23 $(24) $42
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Equipment................................................... $ 481 $ 491
Furniture and fixture....................................... 332 335
Vehicles.................................................... 128 128
Leasehold improvements...................................... 101 101
------ ------
1,029 1,055
Accumulated depreciation and amortization................... 674 (855)
------ ------
$ 355 $ 200
====== ======
</TABLE>
Property and equipment above includes leased equipment with a cost of $144
and $145 and accumulated depreciation of $63 and $92 at December 31, 1996 and
1997, respectively. Depreciation expense for the periods ended December 31,
1995, 1996 and 1997 was $162, $174 and $173, respectively.
F-144
<PAGE> 177
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Payroll and payroll taxes................................... $ 41 $16
Accrued vacation............................................ 24 21
Other....................................................... 45 12
---- ---
Total accrued liabilities................................... $110 $49
==== ===
</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 (10.0 percent at December 31,
1997), are subject to borrowing base availability, are secured by substantially
all of the Company's assets, and are guaranteed by the Company's stockholders.
Outstanding borrowings against the line of credit were $350 and $0 at December
31, 1997, and 1996 respectively.
The financing agreement contains provisions requiring compliance with
several financial covenants. At December 31, 1996 and 1997, the Company was in
violation of certain covenants. A waiver of these covenant violations was
received through December 31, 1997.
As described in Note 1, the Company and its shareholders have completed a
transaction with Dispatch Management Services Corp. ("DMS"), pursuant to which
the Company will merge with DMS. Under the agreement DMS will assume the
obligations of American Eagle Endeavors, Inc.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
----- ----
<S> <C> <C>
Term note payable to bank, secured by substantially all
Company assets, due in monthly installments of $10, plus
interest at the bank's prime lending rate plus 1.5%, to
April 1998................................................ $ 160 $ 40
9.75% capital lease obligation, due in installments of $.8,
including interest to January 2002, secured by
equipment................................................. 46 40
10% equipment financing note, due in installments of $.7,
including interest to January 1999, secured by
equipment................................................. 17 9
Other equipment financing notes, due in 1999................ 10 --
----- ----
233 89
Less current maturities..................................... (143) (53)
----- ----
$ 90 $ 36
===== ====
</TABLE>
F-145
<PAGE> 178
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
7. LONG-TERM DEBT (CONTINUED)
Approximate aggregate maturities of long-term debt as of December 31, 1997,
are as follows:
<TABLE>
<S> <C>
1998........................................................ $54
1999........................................................ 8
2000........................................................ 8
2001........................................................ 8
Thereafter.................................................. 11
---
$89
===
</TABLE>
8. SUBORDINATED DEBT TO STOCKHOLDERS
Subordinated debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- -----
<S> <C> <C>
6% stockholder note payable, due in monthly installments of
$6, including interest to August 2001, unsecured.......... $269 $ 245
14% stockholder notes payable, due on or before September
1999, unsecured........................................... 46 148
---- -----
Stockholder note payable, no due date....................... 315 393
Less current maturities..................................... (47) (220)
---- -----
$268 $ 173
==== =====
</TABLE>
These notes payable are subordinated to borrowings under its bank financing
agreement which allows monthly payments of $6.
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 2003. Future minimum lease payments required under leases
that have noncancelable lease terms in excess of one year at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING NONCANCELLABLE
FISCAL YEAR LEASES LEASES SUBLEASES
- ----------- ------- --------- --------------
<S> <C> <C> <C>
1998.................................................... $14 $ 476 $(50)
1999.................................................... 8 446 (11)
2000.................................................... 8 265
2001.................................................... 8 83
2002.................................................... 11 87
Thereafter.............................................. 92
--- ------ ----
Net leases.............................................. $49 $1,449 $(61)
=== ====== ====
</TABLE>
Rental expense charged to operations was approximately $208, $211 and $295,
and rental income was approximately $22, $24 and $88 for the years ended
December 31, 1995, 1996, and 1997, respectively.
F-146
<PAGE> 179
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
10. INCOME TAXES
The provision for income taxes comprises:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Current tax expense (benefit)
Federal................................................... $ 6 $212 $(151)
State and local........................................... 2 37 (27)
---- ---- -----
8 249 (178)
Utilization of net operating loss carryforward.............. 147
Deferred tax expense (benefit).............................. 35 (49) (36)
---- ---- -----
Provision (benefit) for income taxes........................ $190 $200 $(214)
==== ==== =====
</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
DECEMBER 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Tax provision (benefits) computed at federal statutory rate
(35%)..................................................... $ 169 $ 175 $(187)
State taxes (net of federal benefit)........................ 50 25 (27)
Other....................................................... (29)
----- ----- -----
Provision (benefit) for income taxes........................ $ 190 $ 200 $(214)
===== ===== =====
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,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Deferred tax assets
Allowance for doubtful accounts........................... $ 12 $ 43 $ 17
Accrued liabilities....................................... 22 18 7
Other..................................................... 11 -- --
----- ----- -----
45 61 24
Deferred tax liabilities
Accrual to cash basis adjustment.......................... (210) (154) (103)
Other..................................................... (23) (1)
----- ----- -----
Net deferred tax liability............................. $(165) $(116) $ (80)
===== ===== =====
</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
December 31, 1997.
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
F-147
<PAGE> 180
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
11. RELATED PARTY TRANSACTIONS(CONTINUED)
the minority interest was held by a related party, the assets and liabilities of
the subsidiary are presented at their historical cost basis.
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 fees were 10 percent of applicable gross receipts, as defined by the
agreement. In 1997 the franchise fees were reduced to 7.25 from 8.25 percent.
The stockholders of the Company were 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 license payments
totaling approximately $1,806, payable through September 2007.
The franchiser is responsible for billing and collecting amounts from
customers approved by the Company and then submitting the receipts, less the
franchise fees, to the Company. Franchise fees paid to the franchisor totaled
approximately $38 and $474 for the year ended December 31, 1996 and 1997,
respectively. At December 31, 1997, the remaining gross receivable from the
franchises relating to customer accounts was approximately $109.
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 franchise. Based on the financial position of the
franchise, the Principal Shareholders believe that the Forfeited Shares in the
Franchisor have no value.
F-148
<PAGE> 181
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, 1996 and 1997, 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
Bloomfield Hills, Michigan
November 7, 1997, except for
Note 15, as to which the date
is February 11, 1998
F-149
<PAGE> 182
WASHINGTON EXPRESS SERVICES, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1996 1997
------ ------
<S> <C> <C>
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-150
<PAGE> 183
WASHINGTON EXPRESS SERVICES, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
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-151
<PAGE> 184
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-152
<PAGE> 185
WASHINGTON EXPRESS SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
See Note 14 for additional disclosure of non-cash transactions.
See accompanying notes to financial statements.
F-153
<PAGE> 186
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).
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>
F-154
<PAGE> 187
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets comprised the following:
<TABLE>
<CAPTION>
SEPTEMBER
30,
-----------
1996 1997
---- ----
<S> <C> <C>
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,
-------------
1996 1997
---- ------
<S> <C> <C>
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.
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.
F-155
<PAGE> 188
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses comprised the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1996 1997
----- -----
<S> <C> <C>
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,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
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.
The temporary differences that gave to a net deferred tax liability are
shown below, net of their tax effect:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1996 1997
----- -----
<S> <C> <C>
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>
F-156
<PAGE> 189
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. 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 SEPTEMBER 30,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
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.
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>
F-157
<PAGE> 190
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. NOTES PAYABLE
Notes Payable consists of the following at September 30, 1997:
<TABLE>
<C> <S> <C>
(a) 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 institution................................... $117
(b) Equipment loan at an interest rate of 12.50% payable in 36
equal monthly installments through September, 1999.......... 65
----
182
Less: current portion....................................... (84)
----
$ 98
====
</TABLE>
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.
F-158
<PAGE> 191
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. SUBSEQUENT EVENTS
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with DMS Corporation ("DMS"), exchanged all of the outstanding common
stock of the Company for cash and stock concurrent with the consummation of the
initial public offering of the common stock of DMS.
F-159
<PAGE> 192
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 1997 and the
results of their operations and their cash flows for each of the years ended
December 31, 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.
As discussed in Note 1, on February 11, 1998, the Company sold its net
assets to Dispatch Management Services Corp. The accompanying financial
statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Atlanta, Georgia
March 27, 1998
F-160
<PAGE> 193
A COURIER, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 16 $ 88
Accounts receivable, net.................................. 845 947
Prepaid insurance......................................... 49 18
Other current assets...................................... 18 18
Due from affiliate........................................ -- 110
------ ------
Total current assets.............................. 928 1,181
Property and equipment, net................................. 247 209
Goodwill, net............................................... 65 60
Deposits.................................................... -- 1
------ ------
$1,240 $1,451
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 170 $ 191
Accrued expenses and other liabilities.................... 72 241
Note payable related parties.............................. 152 100
Current maturities long-term debt......................... 46 285
Current maturities long-term debt related parties......... 18 20
------ ------
Total current liabilities......................... 458 837
Long-term debt, net of current maturities................... 38
Long-term debt related parties, net of current maturities... 13
------ ------
Total liabilities................................. 509 837
------ ------
Commitments and contingencies
Stockholder's equity
Common stock: A Courier, Inc. $1.00 par value 425 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......................................... 727 808
------ ------
731 864
Less treasury stock, 75 shares, A Courier, Inc............ -- 250
------
Total stockholders' equity........................ 731 614
------ ------
$1,240 $1,451
====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-161
<PAGE> 194
A COURIER, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1997
------ ------
<S> <C> <C>
Net sales................................................... $6,020 $7,419
Cost of sales............................................... 3,447 4,359
------ ------
Gross margin................................................ 2,573 3,060
Operating expenses.......................................... 1,093 1,422
Sales and marketing......................................... 530 709
General and administrative expenses......................... 430 671
Depreciation and amortization............................... 74 74
------ ------
Total expenses.................................... 2,127 2,876
------ ------
Operating income............................................ 446 184
Other (income) expense
Interest income........................................... (1) (2)
Interest expense.......................................... 14 5
(Gain) loss on disposal of assets......................... (6) 20
Other, net................................................ (21)
------ ------
Net income.................................................. $ 460 $ 161
====== ======
Unaudited pro forma information
Pro forma net income before provision for income taxes.... $ 460 $ 161
Provision for income taxes................................ 174 61
------ ------
Pro forma net income (see Note 1)......................... $ 286 $ 100
====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-162
<PAGE> 195
A COURIER, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------
EXPRESS
MANAGEMENT,
A COURIER, INC. INC. ADDITIONAL TOTAL
--------------- --------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ------ ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... 500 $1 500 $1 $-- $ 507 $ -- $ 509
Distribution to stockholders.... -- -- -- -- -- (240) -- (240)
Contribution from
stockholders.................. -- -- -- -- 2 -- -- 2
Net income...................... -- -- -- -- -- 460 -- 460
--- -- --- -- --- ----- ----- -----
Balance at December 31, 1996.... 500 1 500 1 2 727 -- 731
Distribution to stockholders.... -- -- -- -- -- (80) -- (80)
Debt converted to equity
(Note 7)...................... -- -- -- -- 52 -- -- 52
Purchase of 75 shares of stock
(Note 9)...................... (75) -- -- -- -- -- (250) (250)
Net income...................... -- -- -- -- -- 161 -- 161
--- -- --- -- --- ----- ----- -----
Balance at December 31, 1997.... 425 $1 500 $1 $54 $ 808 $(250) $ 614
=== == === == === ===== ===== =====
</TABLE>
F-163
<PAGE> 196
A COURIER, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1997
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income.................................................. $ 460 $ 161
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................. 74 78
(Gain) loss on disposal of assets......................... (6) 20
Changes in assets and liabilities
Accounts receivable.................................... (274) (102)
Prepaid insurance and other current assets............. (13) 31
Due from affiliate..................................... -- (110)
Deposits............................................... (1)
Accounts payable....................................... 142 21
Accrued expenses and other current liabilities......... (19) 169
----- -----
Net cash provided by operating activities......... 364 267
Cash flows from investing activities
Proceeds from sale of property and equipment.............. 117 30
Purchases of property and equipment....................... (341) (85)
----- -----
Net cash used for investing activities............ (224) (55)
----- -----
Cash flows from financing activities
Proceeds from short-term notes payable.................... 30 --
Proceeds from notes payable-related party................. 145 15
Proceeds from long-term debt -- other..................... -- 300
Repayment on long-term debt-related party................. (57) (26)
Repayment on long-term debt -- other...................... (12) (99)
Contribution from stockholders............................ 2 --
Distribution to stockholders.............................. (240) (80)
Purchase of treasury stock................................ -- (250)
----- -----
Net cash used for financing activities............ (132) (140)
----- -----
Net increase in cash........................................ 8 72
Cash at beginning of the period............................. 8 16
----- -----
Cash at end of the period................................... $ 16 $ 88
===== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... 14 5
===== =====
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 year ended December 31, 1997
</TABLE>
See accompanying notes to combined financial statements.
F-164
<PAGE> 197
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 trade name of A Courier. These services are provided
to the metropolitan and suburban areas surrounding Atlanta, Georgia, Nashville,
Tennessee and Charlotte, North Carolina.
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 been acquired by Dispatch Management Services Corp. (DMS), as
discussed in Note 10. These companies are collectively referred to as A Courier,
Inc. and affiliates or the Company throughout these financial statements. All
significant intercompanying transactions have been eliminated. A Courier of
Connecticut, Inc., a wholly owned subsidiary of A Courier, Inc., is not being
acquired by DMS, and is excluded from the accompanying financial statements.
On February 11, 1998, the Company and its shareholders completed a
transaction with Dispatch Management Services Corp. ("DMS") whereby
significantly all of the assets of the Company were exchanged for cash and
shares of DMS common stock concurrent with the consummation of the initial
public offering of the common stock of DMS.
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-165
<PAGE> 198
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
MAJOR CUSTOMERS
For the years ended December 31,1996 and 1997, the Company's largest
customer accounted for approximately 16% and 13% of sales, respectively.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and are amortized on a straight-line
basis over fifteen years. Accumulated amortization amounted to $7 and $12 as of
December 31, 1996 and 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 December 31,
1997, the carrying amounts of the Company's net assets exceeds the tax bases by
approximately $533.
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. The Company's "S Corporation" status terminated when it was acquired
by DMS.
2. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGED TO AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996................... $43 $-- $-- $43
Year ended December 31, 1997................... $43 $18 $13 $48
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Equipment................................................... $ 238 $ 255
Furniture and fixtures...................................... 19 22
Other....................................................... 107 99
----- -----
364 376
Less accumulated depreciation............................... (117) (167)
----- -----
$ 247 $ 209
===== =====
</TABLE>
Depreciation expense for the year ended December 31, 1996 and 1997 was
approximately $69 and $74, respectively.
F-166
<PAGE> 199
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Payroll and payroll taxes................................... $55 $ 51
Commissions................................................. 12 71
Severance reserve........................................... 78
Other....................................................... 5 41
--- ----
Less accumulated depreciation............................... $72 $241
=== ====
</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 for
each of the years ended December 31, 1996 and 1997, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ -------------
<S> <C> <C>
Note payable due in monthly installments of $10, including
interest at prime plus one-half percent per annum through
October 2000. (The prime rate at December 31, 1997 was
8.5%); secured by equipment at cost of $35................ $ -- $285
Note payable due in monthly installments of $1, including
interest at prime plus one percent per annum through
September 1998. (The prime rate at December 31, 1996 was
8.25%); secured by equipment at a cost of $35 (note
payable was liquidated in 1997)........................... $ 22 $ --
Note payable due in monthly installments of $2, including
interest at 9.25% per annum through March 1999; secured by
equipment at a cost of $60 (note payable was liquidated in
1997)..................................................... $ 47 $ --
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 a cost of $20......... $ 12 $ 4
Note payable to related party due in monthly installments of
$.5, including interest at 12% per annum through September
1998; secured by equipment and vehicle at a cost of $12... $ 16 $ 5
Note payable to related party due in monthly installments of
$.2, including interest at 12% per annum through November
1998; secured by equipment at a cost of $3................ $ 3 $ 2
Note payable to related party due in monthly installments of
$.3, including interest at 12% per annum through January
1999; secured by furniture and fixtures at a cost of $7... $ -- $ 4
</TABLE>
F-167
<PAGE> 200
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ -------------
<S> <C> <C>
6. LONG-TERM DEBT (CONTINUED)
Note payable to related party due in monthly installments of
$1, including interest at 12% per annum through March
1999; secured by furniture and fixtures at a cost of $6... $ -- $ 4
Note payable to related party due in monthly installments of
$.07, including interest at 12% per annum through April
1999; secured by furniture and fixtures at a cost of $2... $ -- $ 1
Note Payable due in annual installments of $15 plus interest
at 6% per annum through October 1997...................... 15 --
---- ----
Total....................................................... 115 305
Less current portion........................................ (64) 305
---- ----
$ 51 $ --
==== ====
</TABLE>
7. RELATED PARTY
Due from affiliate represents advances for unused services to 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 December 31, 1997. The notes bear interest at 9%
due semi-annually, with the principal balance due on demand. The interest
expense for the years ended December 31, 1996 and 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 1997.
8. OPERATING LEASES
The Company leases certain office and warehousing facilities under
operating lease agreements expiring on various dates through 2004.
Future minimum lease payments required under the noncancelable lease terms
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1998........................................................ $ 152
1999........................................................ 143
2000........................................................ 141
2001........................................................ 141
2002........................................................ 136
Thereafter.................................................. 388
------
$1,101
======
</TABLE>
Rental expense charged to operations was approximately $80 and $113 for the
years ended December 31, 1996 and 1997, respectively.
F-168
<PAGE> 201
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
In October, 1997 A Courier, Inc. agreed to acquire 100% of one of its
shareholder's interest for $250,000. Incident to the purchase, the shareholder
agreed not to compete with A Courier for a period of eighteen months. For
consideration of the noncompete agreement, A Courier will pay $100,000 in eight
monthly installments.
F-169
<PAGE> 202
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, changes in stockholder's equity and cash flows present fairly, in
all material respects, the financial position of MLQ Express, Inc. at February
28, 1996, 1997 and December 31, 1997 the results of its operations and of its
cash flows for each of the two years in the period ended February 28, 1997 and
for the ten-month period ended December 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.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Atlanta, Georgia
March 28, 1998
F-170
<PAGE> 203
MLQ EXPRESS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 28,
------------- DECEMBER 31,
1996 1997 1997
---- ------ ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 1 $ 1 $ 125
Accounts receivable, net.................................. 504 763 681
Prepaid and other current assets.......................... 96 124 77
---- ------ ------
Total current assets.............................. 601 888 883
Property and equipment, net................................. 138 133 157
Other assets................................................ 95 86 107
---- ------ ------
$834 $1,107 $1,147
==== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Line of credit............................................ $115 $ -- $ --
Current maturities long-term debt......................... 65 -- --
Accounts payable.......................................... 19 97 28
Accrued expenses.......................................... 122 179 206
Note payable -- related parties........................... -- 394 300
Current maturities long-term debt -- related parties...... 110 -- --
Deferred income taxes..................................... 86 118 225
---- ------ ------
Total current liabilities......................... 517 788 759
Long-term debt, net of current maturities................... 48 -- --
Long-term debt -- related parties, net of current
maturities................................................ 30 -- --
---- ------ ------
Total liabilities................................. 595 788 759
---- ------ ------
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......................................... 221 301 370
---- ------ ------
Total stockholder's equity........................ 239 319 388
---- ------ ------
$834 $1,107 $1,147
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-171
<PAGE> 204
MLQ EXPRESS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TEN
YEAR ENDED MONTHS
FEBRUARY 28, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Net sales................................................... $4,053 $5,310 $5,121
Cost of sales............................................... 2,430 3,296 3,053
------ ------ ------
Gross margin.............................................. 1,623 2,014 2,068
Operating expenses.......................................... 511 579 690
Sales and marketing......................................... 188 233 202
General and administrative expenses......................... 853 991 833
Depreciation and amortization............................... 91 94 59
------ ------ ------
Total expenses............................................ 1,643 1,897 1,784
------ ------ ------
Operating income (loss)................................... (20) 117 284
Other (income) expense
Interest expense.......................................... 30 43 22
Other, net................................................ (62) (38) (21)
------ ------ ------
Income before provision for income taxes.................... 12 112 283
Provision for income taxes.................................. 13 32 214
------ ------ ------
Net income (loss)........................................... $ (1) $ 80 $ 69
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-172
<PAGE> 205
MLQ EXPRESS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 1996 AND 1997
AND FOR THE TEN MONTH PERIOD ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
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....................................... -- -- -- 69 69
--- --- --- ---- ----
Balance at December 31, 1997..................... 150 $-- $18 $370 $388
=== === === ==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-173
<PAGE> 206
MLQ EXPRESS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TEN
FOR THE YEARS MONTHS
ENDED FEBRUARY 28, ENDED
------------------- DECEMBER 31,
1996 1997 1997
------- --------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ (1) $ 80 $ 69
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................. 91 94 59
Changes in assets and liabilities
Accounts receivable.................................... (17) (259) 82
Prepaid and other current assets....................... (54) (28) 47
Other assets........................................... (22) (19) (21)
Accounts payable....................................... (22) 78 (69)
Accrued expenses....................................... (26) 57 27
Deferred income taxes.................................. 13 32 107
----- ------- ----
Net cash provided (used) by operating
activities...................................... (38) 35 301
----- ------- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (48) (61) (83)
----- ------- ----
Net cash used for investing activities............... (48) (61) (83)
----- ------- ----
CASH FLOWS FROM FINANCING ACTIVITIES
(Increase) decrease in line of credit....................... 30 (115) --
Borrowings on notes payable................................. 155 1,451 30
Payments on notes payable................................... (120) (1,310) (124)
----- ------- ----
Net cash provided (used) by financing activities..... 65 26 (94)
----- ------- ----
Net (decrease) increase in cash and equivalents............. (21) -- 124
Cash and cash equivalents at beginning of the period........ 22 1 1
----- ------- ----
Cash and cash equivalents at end of the period.............. $ 1 $ 1 $125
===== ======= ====
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest............................................... $ 32 $ 45 $ 22
===== ======= ====
Income taxes........................................... 44 -- 20
===== ======= ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-174
<PAGE> 207
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1996, 1997 AND DECEMBER 31, 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.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock concurrent
with the consummation of the initial public offering of the common stock of DMS.
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-175
<PAGE> 208
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTANGIBLE ASSETS
Intangible assets represent the purchase price of an 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".
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
Ten month period ended December 31, 1997........... $11 $7 $-- $18
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
Equipment............................................. $ 222 $ 247 $319
Furniture and fixtures................................ 134 146 156
Other................................................. 53 51 52
----- ----- ----
409 444 527
Less accumulated depreciation......................... (271) (311) (370)
----- ----- ----
$ 138 $ 133 $157
===== ===== ====
</TABLE>
Depreciation expense for the years ended February 28, 1996, 1997 and for
the ten month period ended December 31, 1997 was approximately $60, $66 and $59,
respectively.
4. LINE OF CREDIT
The Company had a line of credit with a commercial bank with an available
limit of $150 which was due on demand, with interest at prime and was guaranteed
by the sole stockholder. As of February 28, 1996, $115 was outstanding. There
were no borrowings outstanding as of February 28, 1997. The line of credit
expired during May 1997 and was not renewed.
F-176
<PAGE> 209
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
------------ DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Payroll and payroll taxes................................. $ 33 $ 56 $ 47
Commissions............................................... 28 64 21
Profit sharing contribution............................... 52 52 44
Current income taxes...................................... 87
Other..................................................... 9 7 7
---- ---- ----
$122 $179 $206
==== ==== ====
</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 $52, $53
and $42 for the years ended February 28, 1996, 1994 and the ten month period
ended December 31, 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, TEN MONTHS ENDED
------------ DECEMBER 31,
1996 1997 1997
---- ---- ----------------
<S> <C> <C> <C>
Current tax expense (benefit)
Federal............................................. $ -- $ -- $ 97
State and local..................................... -- -- 10
---- ---- ----
-- -- 107
Deferred tax expense (benefit)........................ 13 32 107
---- ---- ----
Provision for income taxes............................ $ 13 $ 32 $214
==== ==== ====
</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-177
<PAGE> 210
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <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 loan bears interest at prime less 1/2 percent due quarterly, with
the principal balance due on demand. The outstanding balance at February 28,
1997 and December 31, 1997 amounted to $394 and $300, respectively.
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 which increases annual rental by
3.5% over the previous year's rent. Future minimum lease payments required under
the noncancelable lease terms at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------
<S> <C>
1998........................................................ $302
1999........................................................ 242
2000........................................................ 204
2001........................................................ 174
2002........................................................ 8
----
$930
====
</TABLE>
F-178
<PAGE> 211
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
10. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Rental expense charged to operations was approximately $73, $99 and $88 for
the years ended February 28, 1996 and 1997 and the ten month period ended
December 31, 1997, respectively.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with its sole shareholder which
expires on July 31, 1998. The agreements provide for salary and payment of other
benefits. The aggregate commitment for future salaries at December 31, 1997
excluding other benefits was $116, (see note 9).
11. CONCENTRATIONS OF CREDIT RISK
The Company markets and sells its products to a broad base of clients. Two
of the Company's clients accounted for approximately 16% and 15% of net sales
for the ten month period ended December 31, 1997. During the year ended February
28, 1997, one of the Company's clients accounted for approximately 19%. No other
clients constituted 10% or more of net sales in any of the periods.
12. BUSINESS SEGMENT
Summarized data for the Company's courier division and attorney services
division are as follows:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTH PERIOD
FEBRUARY 28, ENDED
---------------- DECEMBER 31,
1996 1997 1997
------ ------ ----------------
<S> <C> <C> <C>
Revenues -- unaffiliated customers
Courier division................................ $3,550 $4,823 $4,699
Attorney service division....................... 503 487 422
Operating income (loss)
Courier division................................ $ 32 $ 112 $ 251
Attorney service division....................... (52) 5 33
</TABLE>
F-179
<PAGE> 212
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kangaroo Express of Colorado Springs, Inc.
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 of
Colorado Springs, Inc. (the "Company") at December 31, 1996 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 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 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.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Denver, Colorado
March 31, 1998
F-180
<PAGE> 213
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 29 $ 32
Accounts receivable, net of allowance for doubtful
accounts............................................... 305 330
Prepaid and other current assets.......................... 23 32
----- -----
Total current assets.............................. 357 394
Property and equipment, net................................. 138 110
Notes receivable, employees................................. 11 3
Deposits.................................................... 5 4
----- -----
$ 511 $ 511
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 16 $ 16
Accrued payroll........................................... 70 38
Accrued vehicle leasing................................... 32 8
Current maturities long-term debt......................... 36 15
----- -----
Total current liabilities......................... 154 77
Deferred rent............................................... 16 15
Other long-term liabilities................................. 300 400
Long-term debt.............................................. 63 71
----- -----
Total liabilities................................. 533 563
Commitments and contingencies
Stockholders' Equity (Deficit)
Common stock $.001 par value; 100 shares authorized,
issued and outstanding Additional paid-in capital...... 109 109
Retained deficit....................................... (131) (161)
----- -----
Total stockholders' equity (deficit).............. (22) (52)
----- -----
$ 511 $ 511
===== =====
</TABLE>
See accompanying notes to financial statements.
F-181
<PAGE> 214
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $2,032 $2,650 $2,874
Cost of sales............................................... 1,387 1,878 2,004
------ ------ ------
Gross margin.............................................. 645 772 870
Operating expenses.......................................... 394 405 457
Sales and marketing......................................... 17 27 21
General and administrative expenses......................... 211 265 309
Depreciation and amortization............................... 42 50 66
------ ------ ------
Operating income (loss)................................... (19) 25 17
------ ------ ------
Other (income) expense
Interest expense.......................................... 12 10 9
Other, net................................................ (2) (2) (6)
------ ------ ------
Net income (loss)........................................... $ (29) $ 17 $ 14
====== ====== ======
Unaudited pro forma information:
Pro forma net income (loss) before provision for income
taxes.................................................. $ (29) $ 17 $ 14
Provision (benefit) for income taxes...................... (11) 6 5
------ ------ ------
Pro forma net income (loss)................................. $ (18) $ 11 $ 9
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-182
<PAGE> 215
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNT)
<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..................................... 14 14
Owners' withdrawal............................. (44) (44)
--- ---- ---- ----- ----
Balance at December 31, 1997................... 100 $ -- $109 $(161) $(52)
=== ==== ==== ===== ====
</TABLE>
See accompanying notes to financial statements.
F-183
<PAGE> 216
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(29) $ 17 $ 14
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 42 50 66
Provision for doubtful accounts........................... -- -- 3
Loss on sale of fixed assets.............................. -- -- (1)
Changes in assets and liabilities:
Accounts receivable.................................... (42) (52) (28)
Prepaid expenses....................................... 32 (20) (9)
Other assets........................................... (5) 1 1
Accounts payable....................................... 17 (14) --
Accrued payroll........................................ 11 22 (32)
Accrued vehicle leasing................................ 11 4 (24)
Other long-term liabilities............................ 100 100 100
Deferred rent.......................................... -- 16 (1)
---- ---- ----
Net cash provided by operating activities......... 137 124 89
---- ---- ----
Cash flows from investing activities
Purchases of property and equipment......................... (59) (48) (39)
Proceeds from sale of property and equipment................ 18 -- 2
(Increase) decrease in notes receivable, employees.......... (4) (5) 8
Proceeds from notes receivable, employees................... 3 4 --
---- ---- ----
Net cash used for investing activities............ (42) (49) (29)
---- ---- ----
Cash flows from financing activities
Proceeds from long-term debt................................ 57 22 24
Principal payments on long-term debt........................ (97) (44) (37)
Owners withdrawal........................................... (25) (57) (44)
---- ---- ----
Net cash used for financing activities............ (65) (79) (57)
---- ---- ----
Net increase (decrease) in cash............................. 30 (4) 3
Cash at beginning of the period............................. 3 33 29
---- ---- ----
Cash at end of the period................................... $ 33 $ 29 $ 32
==== ==== ====
Supplemental disclosures of cash flow information:
Interest paid.......................................... $ 12 $ 10 $ 9
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 $ --
Accumulated depreciation on assets sold................ -- 25 --
Related notes receivable............................... -- 2 --
</TABLE>
See accompanying notes to financial statements.
F-184
<PAGE> 217
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
Kangaroo Express of Colorado Springs, Inc. (the "Company") provides
same-day, on-demand delivery services in the Colorado Springs and Denver
metropolitan areas.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock 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
(5 and 7 years); leasehold improvements are amortized over their useful lives or
the term of the respective lease, whichever is shorter.
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 December 31, 1997, the
financial reporting bases of the Company's net assets are less than the tax
reporting bases by approximately $330.
F-185
<PAGE> 218
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Equipment................................................... $ 43 $ 43
Furniture and fixture....................................... 38 52
Vehicles.................................................... 187 197
Leasehold improvements...................................... 16 16
----- -----
284 308
Accumulated depreciation and amortization................... (146) (198)
----- -----
$ 138 $ 110
===== =====
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was approximately $42, $50 and $66, respectively.
4. LONG-TERM DEBT
Long-term debt outstanding consists of the following:
<TABLE>
<CAPTION>
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 4
Due September 25, 1998, bearing interest at 8%, secured by a
1994 Chevy Van............................................ 7 3
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 11
Due January 1, 2001, bearing interest at 8.5%, secured by a
1995 GMC Truck............................................ 32 25
Due April 1, 2001, bearing interest at 8.5%, secured by a
1994 GMC Van.............................................. 18 14
Due July 1, 2000, bearing interest at 9.5%, secured by a
1987 Toyota Truck......................................... 5 3
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 86
Less current portion........................................ (36) (15)
---- ----
$ 63 $ 71
==== ====
</TABLE>
The above term loans were due to various banks.
F-186
<PAGE> 219
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
4. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt as of December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1998........................................................ $15
1999........................................................ 49
2000........................................................ 21
2001........................................................ 1
---
$86
===
</TABLE>
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. On November 5, 1997, the Company again renewed its line of
credit, increasing its borrowing capacity to $150, bearing interest of 9.5% and
a maturity date of January 31, 1998. As of December 30, 1996 and 1997, $0 was
outstanding on this line of credit. The line is secured by all accounts
receivable, vehicles and computer systems.
5. OPERATING LEASES
The Company leases certain office equipment under operating leases expiring
on various dates through 2002. Future minimum lease payments required under
leases that have noncancelable lease terms in excess of one year at December 31,
1997 are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1998........................................................ $ 71
1999........................................................ 58
2000........................................................ 59
2001........................................................ 33
2002........................................................ 3
----
$224
====
</TABLE>
Rental expense charged to operations for the years ended December 31, 1995,
1996 and 1997 was approximately $20, $74 and $91, respectively.
6. RELATED PARTY TRANSACTIONS
In 1995, the Company paid off a note payable due to shareholder in the
amount of $35. In 1997, the Company purchased computer equipment on behalf of
DMS Corporation ("DMS"), see Note 1. A note receivable due from DMS was
established in the amount of $18. Payment was received at the time of closing.
F-187
<PAGE> 220
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 (deficit) 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 1997, and the results of
its operations and its cash flows for each of the three years in the period
ending December 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 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.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse, LLP
Denver, Colorado
April 3, 1998
F-188
<PAGE> 221
TRANSPEED COURIER SERVICES, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................... $ 47 $ 28
Accounts receivable, net of allowance for doubtful accounts
of $1 and $15 for 1996 and 1997, respectively............. 144 121
Prepaid and other current assets............................ 40 36
---- ----
Total current assets.............................. 231 185
Property and equipment, net................................. 95 66
Other non-current assets.................................... 19 --
Goodwill and intangibles, net............................... 34 22
---- ----
$379 $273
==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Line of credit.............................................. $120 $156
Accounts payable............................................ 30 56
Accrued liabilities......................................... 47 68
Current maturities long-term debt........................... 67 46
---- ----
Total current liabilities......................... 264 326
Long-term debt.............................................. 26 26
---- ----
Total liabilities................................. 290 352
Commitments and contingencies............................... -- --
Stockholders' Equity (deficit)
Common stock; no par value; 40,000 shares authorized; 32,000
issued and outstanding for 1996; 34,286 issued and
outstanding for 1997...................................... 1 125
Retained earnings (deficit)................................. 88 (204)
---- ----
Stockholders' equity (deficit).............................. 89 (79)
---- ----
$379 $273
==== ====
</TABLE>
See accompanying notes to financial statements.
F-189
<PAGE> 222
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $1,100 $1,247 $1,211
Cost of sales............................................... 746 764 758
------ ------ ------
Gross margin.............................................. 354 483 453
Operating expenses.......................................... 214 298 479
Sales and marketing......................................... 46 58 57
General and administrative expenses......................... 59 58 86
Depreciation and amortization............................... 31 36 41
------ ------ ------
Operating income (loss)................................... 4 33 (210)
------ ------ ------
Other (income) expense
Interest expense.......................................... 15 19 21
Other, net................................................ 8 4 (8)
------ ------ ------
Net income (loss)........................................... $ (19) $ 10 $ (223)
====== ====== ======
Unaudited pro forma information:
Pro forma net income (loss) before provision for income
taxes..................................................... $ (19) $ 10 $ (223)
Provision (benefit) for income taxes........................ (3) 2 (76)
------ ------ ------
Pro forma, net income (loss)................................ $ (16) $ 8 $ (147)
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-190
<PAGE> 223
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' 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 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.................................................... (223) (223)
------ ---- ----- -----
Balance at December 31, 1997................................ 34,286 $125 $(204) $ (79)
====== ==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-191
<PAGE> 224
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(19) $ 10 $(223)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities Depreciation
and amortization.......................................... 31 36 41
Shareholder payment on behalf of the Company.............. 55
Provision for doubtful accounts........................... 14
Loss on sale of property and equipment.................... 6 6
Changes in assets and liabilities net of effects of the
purchase of Maxwell Express Courier Accounts
receivable............................................. (78) 25 9
Prepaid expenses and other current assets.............. (14) (9) 4
Accounts payable....................................... 25 (3) 26
Accrued liabilities.................................... 22 11 21
Other non-current assets............................... (19) 19
---- ---- -----
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES... (33) 57 (28)
---- ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (57) (41) (10)
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) (6)
---- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in line of credit.................................. 89 20 36
Proceeds from long-term debt................................ 65 67 61
Principal payments on long-term debt........................ (39) (57) (82)
---- ---- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 115 30 15
---- ---- -----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (3) 46 (19)
Cash and cash equivalents at beginning of the period........ 4 1 47
---- ---- -----
Cash and cash equivalents at end of the period.............. $ 1 $ 47 $ 28
==== ==== =====
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 14 $ 18 $ 22
</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-192
<PAGE> 225
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.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock 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.
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 December 31, 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-193
<PAGE> 226
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.
The unaudited pro forma tax information included in the Statement of
Operation 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.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At December 31, 1997, the
financial reporting bases of the Company's net assets exceeds the tax reporting
bases by approximately $124.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Computers and equipment..................................... $ 58 $ 55
Vehicles.................................................... 103 100
---- ----
161 155
Accumulated depreciation and amortization................... (66) (89)
---- ----
$ 95 $ 66
==== ====
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and 1997,
was approximately $22, $24 and $29, 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 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>
F-194
<PAGE> 227
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
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) (43)
---- ----
$ 34 $ 22
==== ====
</TABLE>
Amortization expense for the years ended December 31, 1995, 1996, and 1997
was approximately $9, $12, and $12, respectively.
6. ACCRUED LIABILITIES
Accrued liabilities comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Payroll and payroll taxes.................................. $33 $38
Other...................................................... 14 30
--- ---
$47 $68
=== ===
</TABLE>
7. LONG-TERM DEBT
Long-term debt outstanding consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
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 --
Due in monthly installments though May 2, 1998, bearing
interest at 11%, secured by vehicle...................... 9 3
Due in monthly installments through October 31, 1999,
bearing interest at 10%, secured by vehicles............. 20 14
Due in monthly installments through November 26, 1999,
bearing interest at 10%, secured by vehicle.............. 6 4
Due in monthly installments through February 12, 2000,
bearing interest at 10%, secured by vehicle.............. 4
</TABLE>
F-195
<PAGE> 228
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
7. LONG-TERM DEBT (CONTINUED)
Notes payable to corporations and individuals:
Due April 29, 1998 non-interest bearing.................... -- 3
Due in monthly installments through June 1, 1998, bearing
interest at 10%.......................................... 11 4
Due in monthly installments through August 11, 1998,
bearing interest between 8.6% and 9.5%................... 36 25
Due June 30, 2000, bearing interest at 10%................. -- 15
--- ---
Total............................................ 93 72
Less current portion....................................... (67) (46)
--- ---
$26 $26
=== ===
</TABLE>
Maturities of long-term debt as at December 31, 1997 are summarized as
follows:
<TABLE>
<S> <C>
1998........................................................ $46
1999........................................................ 11
2000........................................................ 15
---
$72
===
</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 April 10, 1998. The line of credit is secured with a deed of trust on
a stockholder's home. As of December 31, 1997 the balance outstanding on the
line of credit was $50. In connection with the acquisition, the debt was assumed
by DMS.
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% (10% at December 31, 1997) and matures on March 10,
1998. The line of credit is secured by all accounts receivable and equipment. As
of December 31, 1995, 1996 and 1997 the balance outstanding on the line of
credit was $100, $120, and $106, respectively. In connection with the merger,
the debt was assumed by DMS.
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 December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 65
1999........................................................ 52
2000........................................................ 60
2001........................................................ 9
----
$186
====
</TABLE>
Rental expense charged to operations was approximately $26, $26 and $59 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-196
<PAGE> 229
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 during year ended
December 31, 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 year ended December 31, 1997 were
approximately $106. The Company terminated the franchise agreement effective
January 11, 1998.
F-197
<PAGE> 230
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 and of cash flows present fairly, in all
material respects, the financial position of National Messenger, Inc. at
November 30, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended November 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.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse, LLP
Los Angeles, California
April 7, 1998
F-198
<PAGE> 231
NATIONAL MESSENGER, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------
1996 1997
----- -----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 90 $ 7
Accounts receivable, net of allowance for doubtful
accounts of $22, and $39............................... 309 532
Prepaid and other current assets.......................... 4 8
---- ----
Total current assets.............................. 403 547
Property and equipment, net................................. 50 69
---- ----
$453 $616
==== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ -- $ 11
Accrued compensation...................................... 67 50
Advances from shareholders................................ 70 --
---- ----
Total current liabilities......................... 137 61
---- ----
Other long-term liabilities................................. 300 400
---- ----
Commitments
Shareholders' equity:
Common stock; no par value; 100,000 shares authorized;
1,800 shares issued and outstanding.................... 2 2
Retained earnings......................................... 14 153
---- ----
Total shareholders' equity........................ 16 155
---- ----
$453 $616
==== ====
</TABLE>
See accompanying notes to financial statements.
F-199
<PAGE> 232
NATIONAL MESSENGER, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $1,728 $2,413 $2,884
Cost of sales............................................... 1,029 1,446 1,604
------ ------ ------
Gross margin.............................................. 699 967 1,280
Operating expenses.......................................... 123 154 224
Selling and marketing expenses.............................. 72 86 138
General and administrative expenses......................... 321 454 479
Depreciation................................................ 7 13 22
------ ------ ------
Income before provision for income taxes.................... 176 260 417
Provision for income taxes.................................. 4 5 6
------ ------ ------
Net income.................................................. $ 172 $ 255 $ 411
====== ====== ======
Unaudited pro forma information (Note 2):
Income before provision for income taxes.................. 176 260 417
Pro forma provision for income taxes...................... 70 104 167
------ ------ ------
Pro forma net income........................................ $ 106 $ 156 $ 250
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-200
<PAGE> 233
NATIONAL MESSENGER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(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................................................ 411 411
Dividends paid............................................ (272) (272)
----- -- ----- -----
Balance at November 30, 1997................................ 1,800 $2 $ 153 $ 155
===== == ===== =====
</TABLE>
See accompanying notes to financial statements.
F-201
<PAGE> 234
NATIONAL MESSENGER, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 172 $ 255 $ 411
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 7 13 22
Provision for doubtful accounts........................... 8 14 17
Changes in assets and liabilities:
Accounts payable....................................... -- -- 11
Accounts receivable.................................... (44) (118) (240)
Prepaid expenses and other current assets.............. (5) 1 (4)
Other long-term liabilities............................ 100 100 100
Accrued compensation................................... 15 18 (17)
----- ----- -----
Net cash provided by operating activities......... 253 283 300
----- ----- -----
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment......................... (3) (60) (41)
----- ----- -----
CASH FLOWS USED IN FINANCING ACTIVITIES:
Dividends paid.............................................. (200) (236) (272)
Repayment of advances from shareholders..................... (70)
----- ----- -----
Net cash used in financing activities....................... (200) (236) (342)
----- ----- -----
Net increase (decrease) in cash............................. 50 (13) (83)
Cash at beginning of the period............................. 53 103 90
----- ----- -----
Cash at end of the period................................... $ 103 $ 90 $ 7
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-202
<PAGE> 235
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.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock 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
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-203
<PAGE> 236
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................................ 17
---
Balance at November 30, 1997................................ $39
===
</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 November 30, 1997, the net difference between the
tax bases and the reported amounts of the Company's assets and liabilities
approximated $79.
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. The pro
forma financial information is presented for information purposes only and may
not be indicative of what the actual results of operations might have been if
the transaction described in Note 6 had been effective at the beginning of 1997.
3. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------
1996 1997
----- -----
<S> <C> <C>
Furniture and fixtures...................................... $ 5 $ 5
Machinery and equipment..................................... 97 138
Vehicles.................................................... 16 16
---- ----
118 159
Accumulated depreciation.................................... (68) (90)
---- ----
$ 50 $ 69
==== ====
</TABLE>
F-204
<PAGE> 237
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
$29 as of November 30, 1997.
Rental expense charged to operations was approximately $28, $41 and $38 for
the years ended November 30, 1995, 1996 and 1997, respectively.
5. RELATED PARTY TRANSACTIONS
The Company has non-interest bearing advances, repayable upon demand, from
shareholders totaling $70 at November 30, 1996. These advances were paid in full
by the Company in October 1997.
F-205
<PAGE> 238
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 December 31, 1996
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended December 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.
As discussed in Note 1, on February 11, 1998, the Company sold its net
assets to dispatch Management Services Corp. The accompanying financial
statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Los Angeles, California
April 9, 1998
F-206
<PAGE> 239
PROFALL, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNT)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- $ 5
Accounts receivable....................................... 142 183
Prepaid and other current assets.......................... 3 25
----- -----
Total current assets.............................. 145 213
Property and equipment, net................................. 89 63
----- -----
$ 234 $ 276
===== =====
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 53 $ 20
Accrued compensation...................................... 46 54
Payables to affiliate..................................... 54 107
Notes payable............................................. 120 147
Advances from shareholders................................ 303 303
Advances from affiliate................................... 48 --
----- -----
Total current liabilities......................... 624 631
----- -----
Commitments (Note 5)
Shareholders' deficit:
Common stock; no par value; 1,000,000 shares authorized;
2,000 shares issued and outstanding.................... 10 10
Additional paid-in capital................................ 46 72
Accumulated deficit....................................... (446) (437)
----- -----
Total shareholders' deficit....................... (390) (355)
----- -----
$ 234 $ 276
===== =====
</TABLE>
See accompanying notes to financial statements.
F-207
<PAGE> 240
PROFALL, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
Net sales................................................... $ 993 $1,212 $1,636
Cost of sales............................................... 588 687 821
----- ------ ------
Gross margin.............................................. 405 525 815
Operating expenses.......................................... 215 271 283
General and administrative expenses......................... 361 298 504
Depreciation and amortization............................... 14 23 27
----- ------ ------
Operating loss.............................................. (185) (67) 1
----- ------ ------
Other (income) expense
Interest expense.......................................... 21 25 26
Other, net................................................ (42) (64) (34)
----- ------ ------
(Loss) income before provision for income taxes............. (164) (28) 9
Provision for income taxes.................................. -- -- --
----- ------ ------
Net (loss) income........................................... $(164) $ (28) $ 9
===== ====== ======
Unaudited pro forma information (Note 2):
(Loss) income before provision for income taxes........... $(164) $ (28) $ 9
Pro forma provision for income taxes...................... -- -- --
----- ------ ------
Pro forma net (loss) income................................. $(164) $ (28) $ 9
===== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-208
<PAGE> 241
PROFALL, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNT)
<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......................................... 9 9
Imputed interest on advances from shareholders..... 26 26
----- --- --- ----- -----
Balances at December 31, 1997...................... 2,000 $10 $72 $(437) $(355)
===== === === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-209
<PAGE> 242
PROFALL, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996 1997
----- ---- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $(164) $(28) $ 9
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 14 23 27
Imputed interest on advances from shareholders............ 21 25 26
Changes in assets and liabilities:
Accounts receivable.................................... (13) (57) (41)
Prepaid and other current assets....................... (5) 2 (22)
Accounts payable....................................... 15 15 (33)
Accrued compensation................................... 16 13 8
Payables to affiliate.................................. 22 28 53
----- ---- -----
Net cash provided by (used in) operating
activities....................................... (94) 21 27
----- ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (25) (40) (1)
----- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from shareholders.................................. 85 10 --
Advances from affiliate..................................... 28 20 --
Proceeds from notes payable................................. -- -- 150
Repayments to affiliate..................................... -- -- (48)
Repayments of notes payable................................. -- (12) (123)
----- ---- -----
Net cash provided by (used in) financing
activities....................................... 113 18 (21)
----- ---- -----
Net increase (decrease) in cash............................. (6) (1) 5
Cash at beginning of the period............................. 7 1 --
----- ---- -----
Cash at end of the period................................... $ 1 $ -- $ 5
===== ==== =====
</TABLE>
See accompanying notes to financial statements.
F-210
<PAGE> 243
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.
On February 12, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), sold significantly
all of the assets of the Company for cash and shares of DMS common stock
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
(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 year ended December 31, 1997, two customers accounted for $430 and $170
of net sales, respectively. Accounts receivable for these customers were $93 and
$7 at December 31, 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
F-211
<PAGE> 244
PROFALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income. At December 31, 1997, the net difference between the tax bases and the
reported amounts of the Company's assets and liabilities approximated $136.
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. The pro
forma financial information is presented for information purposes only and may
not be indicative of what the actual result of operations might have been if the
transaction described in Note 1 had been effective at the beginning of 1997.
3. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
Vehicles.................................................... $133 $134
Accumulated depreciation.................................... (44) (71)
---- ----
$ 89 $ 63
==== ====
</TABLE>
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
Note payable secured by a vehicle; payments, including
interest at 9% per annum, are due monthly through
November, 1998............................................ $ 16 $ 9
Non-interest bearing note payable to franchisor............. 104 3
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
December 31, 1997) payable monthly, guaranteed by the
shareholders of the Company............................... -- --
Demand note payable to bank, guaranteed by the shareholders
of the Company, with monthly payments, including interest
at 2.5% above the bank's base rate, as defined (totaling
11% per annum at December 31, 1997), repaid in full
February 1998............................................. -- 135
---- ----
$120 $147
==== ====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company previously operated under a franchise agreement with Express-It
Courier Systems, Inc. In connection with the transaction described in Note 7,
the franchise agreement was terminated subsequent to December 31, 1997.
Pursuant to the terms of the agreement, the franchisor provided 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
F-212
<PAGE> 245
PROFALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreement the Company paid $183, $143 and $103 in 1995, 1996 and 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 1997, respectively. Minimum rental payments at December
31, 1997 under noncancelable operating leases that have initial or remaining
lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 63
1999........................................................ 63
2000........................................................ 20
----
$146
====
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company has non-interest bearing advances from shareholders and an
affiliate at December 31, 1995 and 1996 and 1997 totaling $321, $351 and $303,
respectively. Interest has been imputed at prevailing market rates aggregating
$21, $25 and $26 for the years ended December 31, 1995 and 1996 and 1997,
respectively. These advances will be paid in conjunction with the transaction
described in Note 1.
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 $23 for the
years ended December 31, 1995 and 1996 and 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 $88 in 1995, 1996 and 1997,
respectively. Accounts receivable from such affiliate aggregated $3, $6 and $7
at December 31, 1995 and 1996 and 1997, respectively.
F-213
<PAGE> 246
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Expressit 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 Expressit Couriers, Inc. (the
Company) at December 31, 1996 and 1997, and the results of its operations and
its cash flows each of the three years in the period ended December 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.
As discussed in Note 1, on February 11, 1998, the Company sold its
outstanding stock to Dispatch Management Services Corp. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Bloomfield Hills, Michigan
March 27, 1998
F-214
<PAGE> 247
EXPRESSIT COURIERS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 1 $ --
Accounts receivable, net.................................. 94 148
Prepaid and other current assets.......................... 10 2
---- ----
Total current assets.............................. 105 150
Property and equipment, net................................. 111 46
Shareholder receivable...................................... 61 11
Security deposit............................................ 5 16
---- ----
$282 $223
==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit............................................ $ 61 $ 2
Accounts payable.......................................... 118 90
Accrued expenses.......................................... 30 30
Current maturities long-term debt......................... 45 12
---- ----
Total current liabilities......................... 254 134
Long-term debt.............................................. 11 --
---- ----
Total liabilities................................. 265 134
Commitments and contingencies (Note 10)
Stockholder's Equity
Common stock; no par value; 15,000 shares authorized; 1,000
issued and outstanding.................................... 1 1
Retained earnings........................................... 16 88
---- ----
Stockholder's Equity........................................ 17 89
---- ----
$282 $223
==== ====
</TABLE>
See accompanying notes to financial statements.
F-215
<PAGE> 248
EXPRESSIT COURIERS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $1,703 $1,343 $1,476
Cost of sales............................................... 1,135 897 952
------ ------ ------
Gross margin.............................................. 568 446 524
Operating expenses.......................................... 210 231 237
Sales and marketing expenses................................ 61 27 27
General and administrative expenses......................... 223 177 104
Depreciation and amortization............................... 41 44 59
------ ------ ------
Operating income (loss)..................................... 33 (33) 97
------ ------ ------
Other income (expense)
Interest expense.......................................... (12) (16) (9)
Other, net................................................ 15 (14) (16)
------ ------ ------
Net income (loss)........................................... $ 36 $ (63) $ 72
====== ====== ======
Unaudited pro forma information
Pro forma net income (loss) before provision for income
taxes.................................................. $ 36 $ (63) $ 72
Benefit (provision) for income taxes...................... (16) 24 (31)
------ ------ ------
Pro forma net income (loss) (see Note 2).................... $ 20 $ (39) $ 41
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-216
<PAGE> 249
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, 1995.............................. 1,000 $1 $ 79 $ 80
Net (loss)................................................ (63) (63)
----- -- ---- ----
Balance at December 31, 1996.............................. 1,000 1 16 17
Net income................................................ 72 72
----- -- ---- ----
Balance at December 31, 1997.............................. 1,000 $1 $ 88 $ 89
===== == ==== ====
</TABLE>
F-217
<PAGE> 250
EXPRESSIT COURIERS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 36 $(63) $ 72
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization............................. 41 44 59
(Gain)/loss on sale of property and equipment............. (15) 14 16
Changes in assets and liabilities
Accounts receivable.................................... 10 76 (54)
Prepaid and other assets............................... 9 3 (3)
Shareholder receivable................................. (26) (23) 50
Accounts payable....................................... 49 6 (28)
Accrued expenses....................................... (39) 8 --
---- ---- ----
Net cash provided by operating activities......... 65 65 112
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (84) (4) (6)
Purchase of franchise....................................... (20)
Proceeds from sale of property.............................. 27 5 16
---- ---- ----
Net cash provided by (used for) investing
activities...................................... (57) 1 (10)
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit.............................. (1) (6) (59)
Payments on long-term debt.................................. (54) (63) (44)
Proceeds from borrowings.................................... 43 2 --
---- ---- ----
Net cash used for financing activities............ (12) (67) (103)
---- ---- ----
Net decrease in cash........................................ (4) (1) (1)
Cash at beginning of the period............................. 6 2 1
---- ---- ----
Cash at end of the period................................... $ 2 $ 1 $ --
==== ==== ====
Cash paid for interest...................................... $ 12 $ 16 $ 9
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-218
<PAGE> 251
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 8.25% of the Company's gross receipts to
800-Courier, Inc. In 1997, the Company paid an initial franchise fee of $20.
On September 9, 1997, the Company entered into an agreement with
800-Courier, Inc., whereby effective December 24, 1997 the franchise agreement
between the Company and 800-Courier, Inc. was terminated. Franchise fees for the
years ended December 31, 1996 and 1997 approximated $28 and $94, respectively.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the Company for cash and shares of DMS common stock 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.
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-219
<PAGE> 252
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Approximately 52% of 1997 net sales were from three customers; at December
31, 1997 approximately 65% of accounts receivable 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 December 31, 1997, the
carrying amounts of the Company's net assets exceeds the tax bases by
approximately $37.
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.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Accounts receivable, trade.................................. $102 $148
Allowance for doubtful accounts............................. (8) --
---- ----
$ 94 $148
==== ====
</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
Year ended December 31, 1997................. $8 $6 $(14) $ --
</TABLE>
4. PREPAID AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Prepaid insurance........................................... $ 8 $ 2
Other....................................................... 2 --
--- ----
$10 $ 2
=== ====
</TABLE>
F-220
<PAGE> 253
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------
USEFUL LIFE 1996 1997
----------- ----- -----
<S> <C> <C> <C>
Radio equipment............................................. 5 years $ 66 $ 66
Office equipment............................................ 7 years 35 38
Vehicles.................................................... 5 years 121 67
Other....................................................... 39 years 6 3
----- -----
228 174
Accumulated depreciation and amortization................... (117) (128)
----- -----
$ 111 $ 46
===== =====
</TABLE>
6. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Payroll and payroll taxes................................... $23 $19
Other....................................................... 7 11
--- ---
Total accrued expenses............................ $30 $30
=== ===
</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 December 31, 1997).
Long-term debt comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Bank term loan.............................................. $11 $--
Notes payable............................................... 28 12
Capital lease obligations................................... 17 --
--- ---
Total............................................. 56 12
Less -- current portion..................................... 45 12
--- ---
Long-term debt.................................... $11 $--
=== ===
</TABLE>
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.
F-221
<PAGE> 254
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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........................................................ 23
2002 through 2004........................................... 50
----
$142
====
</TABLE>
License and ticket fees were approximately $25 for the year ended December
31, 1997 and $22 for the year ended December 31, 1996.
9. RELATED PARTY TRANSACTIONS
The Company leases office space from a realty trust where the shareholder
of the Company is the beneficiary. The lease was terminated as of December 31,
1997. Rent expenses related to this lease agreement approximated $12 in 1997 and
$13 in 1996.
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.
F-222
<PAGE> 255
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 December 31, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1997, and for the four month period ended December 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.
As discussed in Note 1, on February 11, 1998 the Company sold its
outstanding stock to Dispatch Management Services Corporation. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Seattle, Washington
April 10, 1998
F-223
<PAGE> 256
FLEETFOOT MAX, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AUGUST 31,
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 26 $ 40 $ 83
Accounts receivable, net.................................. 249 295 280
Prepaid assets............................................ 19 3 18
---- ---- ----
Total current assets.............................. 294 338 381
Property and equipment, net................................. 107 103 94
Deferred tax asset.......................................... 61 14 10
Investments................................................. -- 20 20
Deposits.................................................... 27 27 25
---- ---- ----
Total assets...................................... $489 $502 $530
==== ==== ====
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 7 $ 12 $ 21
Accrued expenses.......................................... 106 127 140
Notes payable............................................. 4 -- --
Current maturities long-term debt......................... 192 176 54
Current portion of capital lease obligation............... 13 6 6
---- ---- ----
Total current liabilities......................... 322 321 221
Long-term debt, net of current maturities................... 236 149 131
Capital lease obligation, net of current portion............ -- 22 20
---- ---- ----
Total liabilities................................. 558 492 372
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 at August 31, 1996 and 1997 and
1,044,000 shares issued and 256,857 outstanding at
December 31, 1997...................................... 50 50 52
Additional paid-in capital................................ 33 33 141
Retained earnings (accumulated deficit)................... (26) 53 91
---- ---- ----
57 136 284
Less: common stock in treasury at cost (787,143 shares)..... (126) (126) (126)
---- ---- ----
Total shareholders' equity........................ (69) 10 158
---- ---- ----
Total liabilities and shareholders' equity
(deficit)....................................... $489 $502 $530
==== ==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-224
<PAGE> 257
FLEETFOOT MAX, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, FOUR MONTHS ENDED
------------------------ DECEMBER 31,
1995 1996 1997 1997
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
Net sales............................................ $1,702 $2,042 $2,427 $901
Cost of sales........................................ 1,015 1,220 1,557 588
------ ------ ------ ----
Gross margin............................... 687 822 870 313
Operating expenses................................... 306 351 380 132
Sales and marketing.................................. 21 20 23 14
General and administrative........................... 259 257 279 94
Depreciation and amortization........................ 64 53 52 19
------ ------ ------ ----
Operating income........................... 37 141 136 54
Other (income) expense
Interest expense................................... 72 59 54 9
Other, net......................................... (11) (18) (44) (18)
------ ------ ------ ----
Income (loss) before provision (benefit)
for income taxes......................... (24) 100 126 63
Provision (benefit) income taxes..................... -- (61) 47 25
------ ------ ------ ----
Net income (loss).................................... $ (24) $ 161 $ 79 $ 38
====== ====== ====== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-225
<PAGE> 258
FLEETFOOT MAX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK CAPITAL EARNINGS TREASURY TOTAL
------------------ IN EXCESS (ACCUMULATED COMMON EQUITY
SHARES PAR VALUE OF PAR DEFICIT) STOCK (DEFICIT)
------ --------- --------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1994......................... 1,000 $50 $ 33 $(163) $(126) $(206)
Net loss................................ (24) (24)
----- --- ---- ----- ----- -----
Balances at August 31, 1995............. 1,000 50 33 (187) (126) (230)
Net income.............................. 161 161
----- --- ---- ----- ----- -----
Balances at August 31, 1996............. 1,000 50 33 (26) (126) (69)
Net income.............................. 79 79
----- --- ---- ----- ----- -----
Balances at August 31, 1997............. 1,000 50 33 53 (126) 10
Net income.............................. 38 38
Conversion of debentures................ 44 2 108 110
----- --- ---- ----- ----- -----
Balances at December 31, 1997........... 1,044 $52 $141 $ 91 $(126) $ 158
===== === ==== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-226
<PAGE> 259
FLEETFOOT MAX, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED AUGUST 31, ENDED
---------------------- DECEMBER 31,
1995 1996 1997 1997
----- ----- ------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(24) $161 $ 79 $ 38
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization............................. 64 53 52 19
(Gain) loss on sale of property and equipment............. (10) (1) 4 --
Changes in assets and liabilities:
Accounts receivable.................................... (61) (27) (46) 15
Prepaid assets......................................... -- (3) 16 (15)
Deposits............................................... (2) (6) -- 2
Accounts payable....................................... -- (6) 5 9
Accrued expenses....................................... 13 5 21 13
Deferred tax asset..................................... -- (61) 47 4
---- ---- ----- ----
Net cash provided by (used for) operating
activities...................................... (20) 115 178 85
---- ---- ----- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (6) (21) (24) (10)
Investments................................................. -- -- (20) --
Proceeds from sale of assets................................ 12 2 2 --
---- ---- ----- ----
Net cash provided by (used for) investing
activities...................................... 6 (19) (42) (10)
---- ---- ----- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable.................................. -- (7) (4) --
Repayment of long-term liabilities.......................... (47) (53) (103) (30)
Repayment of capital lease obligations...................... (2) (15) (15) (2)
---- ---- ----- ----
Net cash used for financing activities............ (49) (75) (122) (32)
---- ---- ----- ----
Net increase (decrease) in cash and equivalents............. (63) 21 14 43
Cash and equivalents at beginning of the period............. 68 5 26 40
---- ---- ----- ----
Cash and equivalents at end of the period................... $ 5 $ 26 $ 40 $ 83
==== ==== ===== ====
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Property and equipment acquired under capital lease......... $ 30 $ -- $ 30 $ --
Interest paid............................................... $ 72 $ 58 $ 51 $ 8
Conversion of Debentures.................................... $ -- $ -- $ -- $110
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-227
<PAGE> 260
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS 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.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Service Corporation ("DMS"), exchanged all of
the common stock of the Company for cash and shares of DMS common stock
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.
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-228
<PAGE> 261
FLEETFOOT MAX, 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 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 discussed in Note 1.
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, 1996.................................. $12 $12 $13
Year ended August 31, 1997.................................. 13 2 15
Period ended December 31, 1997.............................. 15 4 15
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
Equipment................................................. $ 162 $ 183 $ 151
Furniture and fixtures.................................... 12 5
Vehicles.................................................. 123 64 61
Leasehold improvements.................................... 54 63 64
----- ----- -----
351 315 276
Accumulated depreciation and amortization................. (244) (212) (182)
----- ----- -----
$ 107 $ 103 $ 94
===== ===== =====
</TABLE>
Depreciation expense for the years ended August 31, 1995, 1996, 1997, and
for the four months ending December 31, 1997 were approximately $64, $53, $52,
and $19, 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 and the four months ending December 31, 1997. The accumulated
amortization relating to these assets aggregated $18, $0 and $3, respectively,
at August 31, 1996, 1997, and December 31, 1997, respectively.
F-229
<PAGE> 262
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
AUGUST 31,
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Payroll and payroll taxes................................... $ 66 $ 85 $ 86
Deferred salaries........................................... 22 22 22
Business taxes payable...................................... 18 20 32
---- ---- ----
Total accrued expenses............................ $106 $127 $140
==== ==== ====
</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 December 31, 1997
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ ------- ---------
<S> <C> <C>
1998................................................... $10 $ 101
1999................................................... 10 66
2000................................................... 10 17
2001................................................... 3 --
--- ------
Total minimum lease payments................................ 33 $ 184
======
Amount representing interest................................ (7)
---
Present value of net minimum payments....................... 26
Current portion............................................. 6
---
$20
===
</TABLE>
Rental expense attributed to office space was approximately $45, $42 and
$43 for the years ended August 31, 1995, 1996 and 1997, and $18 for the period
ending December 31, 1997, respectively.
7. LONG-TERM DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31,
------------- DECEMBER 31,
1995 1996 1997
----- ----- ------------
<S> <C> <C> <C>
Government agency note.................................... $ 178 $ 143 $132
Convertible debentures with majority shareholder and other
related parties......................................... 150 115 --
Unsecured promissory note with majority shareholder....... 70 58 53
Other subordinated notes.................................. 30 9 --
----- ----- ----
428 325 185
Less: current portion..................................... (192) (176) (54)
----- ----- ----
$ 236 $ 149 $131
===== ===== ====
</TABLE>
F-230
<PAGE> 263
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS 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. The remaining balance of $5 was repaid in December 1997.
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. No
amounts remained outstanding at December 31, 1997.
Fixed and determinable maturities of long-term debt at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998........................................................ $ 54
1999........................................................ 60
2000........................................................ 67
2001........................................................ 4
----
$185
====
</TABLE>
8. INCOME TAXES
The provision for income taxes comprised the following:
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, PERIOD ENDED
------------------ DECEMBER 31,
1995 1996 1997 1997
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Current tax expense (benefit).......................... $ (9) $ 38 $45 $21
Deferred tax expense (benefit)......................... (1) (7) 2 4
Change in valuation allowance.......................... 10 (92) -- --
---- ---- --- ---
Provision for (benefit attributable to) income taxes... $ $(61) $47 $25
==== ==== === ===
</TABLE>
F-231
<PAGE> 264
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS 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,
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Net operating loss.......................................... $50 $ 5 $--
Depreciation and amortization............................... 4 1 2
A/R reserve and accrued liabilities......................... 7 8 8
--- --- ---
Net deferred tax asset...................................... $61 $14 $10
=== === ===
</TABLE>
A reconciliation between the income tax benefit (provision) at the U.S.
statutory rate and the recorded provisions is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, PERIOD ENDED
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
Income tax provision at the statutory rate.................. $ 34 $43 $22
Permanent differences between book and tax income........... 1 1 --
Reduction of valuation allowance............................ (92) -- 1
Other....................................................... (4) 3 $ 2
---- --- ---
$(61) $47 $25
==== === ===
</TABLE>
The change in the effective income tax rate varies from the Federal
statutory rate due to management's assessment of future profitability and the
related effect on the valuation allowance on deferred assets.
SFAS 109 requires that deferred tax assets be reduced by a valuation
allowance, if based on the weight of the available evidence, it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
Based on the evidence available at August 31, 1995, and the loss position
of the Company in 1995 and the previous two years, management determined the
need for a full valuation allowance against the net deferred tax asset at August
31, 1995.
During both 1996 and 1997 the Company reduced the full valuation allowance
to reflect the deferred tax assets utilized in those years to reduce current
income taxes and to recognize the deferred tax assets. The recognized deferred
tax asset is based upon expected utilization of net operating loss
carry-forwards and reversal of certain temporary differences.
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.
F-232
<PAGE> 265
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
F-233
<PAGE> 266
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 1997 and the results of its operations and its cash flows for each of
the three years in the period ended December 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.
As discussed in Note 1, on February 11, 1998 the Company sold its
outstanding stock to Dispatch Management Services Corporation. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Austin, Texas
April 16, 1998
F-234
<PAGE> 267
A&W COURIERS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNT)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $131 $170
Investments............................................... 21 18
Accounts receivable, less allowances for doubtful accounts
of $30................................................. 148 176
Prepaid and other current assets.......................... 29 28
---- ----
Total current assets.............................. 329 392
Property and equipment, net................................. 21 59
Other assets................................................ 10 2
---- ----
$360 $453
==== ====
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 36 $ 68
Accrued commissions -- related parties.................... 211 228
---- ----
Total current liabilities......................... 247 296
---- ----
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 96
---- ----
Total Stockholder's equity........................ 113 157
---- ----
$360 $453
==== ====
</TABLE>
See accompanying notes to financial statements.
F-235
<PAGE> 268
A&W COURIERS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $1,461 $1,560 $1,698
Cost of sales............................................... 893 940 1,020
------ ------ ------
Gross margin.............................................. 568 620 678
Selling, general and administrative expenses
Operating expenses........................................ 198 228 263
Sales and marketing....................................... 127 102 89
General expenses.......................................... 323 289 270
Depreciation.............................................. 11 10 10
------ ------ ------
659 629 632
------ ------ ------
Operating income (loss)................................... (91) (9) 46
Interest income........................................... 4 4 4
Other income (expense).................................... 15 (2) 3
------ ------ ------
Income (loss) before provision for income taxes............. (72) (7) 53
Income tax expense.......................................... 3 4 9
------ ------ ------
Net income (loss)................................. $ (75) $ (11) $ 44
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-236
<PAGE> 269
A&W COURIERS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNT)
<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.......................................... -- -- -- 44 44
-- -- --- ---- ----
Balance at December 31, 1997.......................... 3 $3 $58 $ 96 $157
== == === ==== ====
</TABLE>
See accompanying notes to financial statements.
F-237
<PAGE> 270
A&W COURIERS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(75) $(11) 44
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation.............................................. 11 10 10
Loss on disposal of equipment............................. -- 2
Unrealized (gain) loss on short-term investments.......... (2) -- 1
Changes in assets and liabilities:
Accounts receivable.................................... (24) (7) (28)
Prepaid and other current assets....................... -- -- 3
Other assets........................................... (4) (3) 9
Accounts payable....................................... (5) 2 15
Accrued expenses....................................... 52 41 34
---- ---- ----
Net cash provided by (used for) operating
activities...................................... (47) 34 88
---- ---- ----
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 39
Cash and equivalents at beginning of period................. 157 97 131
---- ---- ----
Cash and equivalents at end of period....................... $ 97 $131 $170
==== ==== ====
Supplemental disclosures of cash paid for income taxes...... $ -- $ 3 $ 4
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-238
<PAGE> 271
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.
SUBSEQUENT EVENT
On February 11, 1998, the Company and its Shareholders complete a
transaction with Dispatch Management Services Corp. ("DMS") whereby all of the
common stock of the Company was exchanged for cash and shares of DMS common
stock 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.
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 (losses) of $2, $0, and $1 for the years ended
December 31, 1995, 1996, and 1997, respectively, 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.
F-239
<PAGE> 272
A&W COURIERS, 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
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.
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.
3. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Prepaid expenses............................................ $28 $17
Other....................................................... 1 11
--- ---
$29 $28
=== ===
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
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-240
<PAGE> 273
A&W COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Accounts Payable............................................ $ 6 $21
Payroll and Payroll taxes................................... 16 22
Accrued commissions -- other................................ 11 18
Other....................................................... 3 7
--- ---
Total accounts payable and accrued expenses....... $36 $68
=== ===
</TABLE>
6. INCOME TAXES
The provision for income taxes is comprised of current Federal income tax
expense of $3, $4, and $9 for the years ended December 31, 1995, 1996, and 1997,
respectively.
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,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Taxes computed at federal statutory rate (15%).............. $(11) $(1) $8
Change in valuation allowance............................... 13 3 2
Other....................................................... 1 2 (1)
---- --- --
Provision for income taxes.................................. $ 3 $ 4 $9
==== === ==
Effective rate.............................................. 4% 57% 18%
==== === ==
</TABLE>
Temporary differences giving rise to the Company's deferred tax assets
comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets
Accounts receivable allowances............................ $ 5 $ 5
Accrued liabilities....................................... 36 40
Other..................................................... 3
--- ---
44 45
Deferred tax liabilities -- prepaid expenses................ (4) (3)
--- ---
40 42
Less valuation allowance.................................... (40) (42)
--- ---
$-- $--
=== ===
</TABLE>
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 the Company had $1 note receivable from shareholder.
At December 31, 1996 and 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.
F-241
<PAGE> 274
A&W COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $28
1999........................................................ 28
2000........................................................ 30
2001........................................................ 10
---
$96
===
</TABLE>
Rental expense charged to operations was approximately $24, $26, and $24
respectively, for the years ended December 31, 1995, 1996, and 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.
F-242
<PAGE> 275
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
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 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.
As discussed in Note 1, on February 11, 1998 the Company sold its net
assets to Dispatch Management Services Corp. The accompanying financial
statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Bloomfield Hills, Michigan
April 15, 1998
F-243
<PAGE> 276
EXPRESS ENTERPRISE, INC.
GROUND OPERATIONS
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 13 $ --
Accounts receivable, net.................................. 90 163
Other current assets...................................... -- 1
---- ----
Total current assets.............................. 103 164
Property and equipment, net................................. 61 34
Deposits.................................................... 14 12
Amount receivable from an affiliate......................... 131 110
---- ----
$309 $320
==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Book overdraft............................................ $ -- $ 22
Accounts payable.......................................... 44 55
Accrued expenses.......................................... 80 96
Current maturities of long-term debt and capital lease
obligations............................................ 46 31
---- ----
Total current liabilities......................... 170 204
Long-term debt, net of current portion...................... 60 26
Capital lease obligation, net of current portion............ 24 6
---- ----
Total liabilities................................. 254 236
---- ----
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 83
---- ----
55 84
---- ----
$309 $320
==== ====
</TABLE>
See accompanying notes to financial statements.
F-244
<PAGE> 277
EXPRESS ENTERPRISE, INC.
GROUND OPERATIONS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................ $1,344 $1,612 $1,981
Cost of sales............................................ 812 986 1,222
------ ------ ------
Gross margin........................................... 532 626 759
------ ------ ------
Operating expenses....................................... 202 246 305
Sales and marketing...................................... 30 16 10
General and administrative expenses...................... 235 277 365
Depreciation............................................. 53 47 36
------ ------ ------
520 586 716
------ ------ ------
Operating income......................................... 12 40 43
Other expense
Interest expense....................................... 16 16 14
------ ------ ------
Net (loss) income........................................ $ (4) $ 24 $ 29
====== ====== ======
Unaudited pro forma information
Pro forma net income before provision for income tax..... $ (4) $ 24 $ 29
Provision for income taxes............................... 8 10
------ ------ ------
Pro forma net (loss) income.............................. $ (4) $ 16 $ 19
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-245
<PAGE> 278
EXPRESS ENTERPRISE, INC.
GROUND OPERATIONS
STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<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 income................................................ (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................................................ 29 29
----- -- --- ---
Balance at December 31, 1997................................ 1,000 $1 $83 $84
===== == === ===
</TABLE>
See accompanying notes to financial statements.
F-246
<PAGE> 279
EXPRESS ENTERPRISE, INC.
GROUND OPERATIONS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income........................................... $ (4) $ 24 $ 29
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation.............................................. 53 47 36
Changes in assets and liabilities:
Accounts receivable.................................... (14) (16) (73)
Other assets........................................... (12) 10 1
Accounts payable and overdraft......................... 37 (11) 33
Accrued expenses....................................... 63 17 16
Amount receivable from affiliate....................... (61) (30) 21
---- ---- ----
Net cash provided by operating activities......... 62 41 63
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment...................................... (32) (7) (21)
Proceeds from sale of equipment............................. (3) -- 12
---- ---- ----
Net cash used for investing activities............ (35) (7) (9)
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term loans............................... 32 50
Repayment of long-term loans................................ (56) (60) (48)
Repayment of capital lease obligation....................... (4) (11) (19)
---- ---- ----
Net cash used for financing activities............ (28) (21) (67)
---- ---- ----
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 $ 14
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-247
<PAGE> 280
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.
On February 11, 1998, the Company and its shareholders completed a
transaction with Dispatch Management Service Corp. ("DMS") whereby certain net
assets of the Company was exchanged for cash and shares of DMS common stock
concurrent with the consummation of the initial public offering of the common
stock of DMS.
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
F-248
<PAGE> 281
EXPRESS ENTERPRISE, INC.
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 1997,
the tax basis of the Company's net assets and liabilities exceed the financial
reporting bases by approximately $12 and $25, respectively.
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
Year ended December 31, 1997........................... $10 $-- $-- $10
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
Current assets
Leasehold Improvement..................................... $ 3 $ 9
Furniture and equipment................................... 65 78
Vehicles.................................................. 69 25
Equipment under capital lease............................. 58 58
----- -----
195 170
Accumulated depreciation and amortization................... (134) (136)
----- -----
$ 61 $ 34
===== =====
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996, and 1997
were approximately $53, $47, and $36, respectively. As of December 31, 1996 and
1997, vehicles amounting to approximately $65 and equipment under capital leases
of approximately $58 are secured as a collateral for long-term debt and capital
lease obligations of the Company.
F-249
<PAGE> 282
EXPRESS ENTERPRISE, INC.
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Payroll and payroll taxes................................... $75 $82
Accrued vacation............................................ 2 14
Other....................................................... 3 --
--- ---
Total accrued expenses............................ $80 $96
=== ===
</TABLE>
6. OPERATING LEASES
The Company leases all of its employees, including the officers of the
Company. The expenses related to the employees, including fringe benefits and
payroll taxes, for the years ended December 31, 1995, 1996, and 1997 were
approximately $389, $528, and $551, respectively.
The Company leases various vehicles and equipment under operating lease
agreements. Rent expense related to these leases for the years ended December
31, 1995, 1996, and 1997 was $38, $84, and $87, respectively.
The Company leases its facility under an operating lease. The agreement
provides for minimum lease payments and additional rentals based upon common
area expenses. Rent expense related to the lease for the years ended December
31, 1995, 1996, and 1997 was $67, $67 and $25, respectively.
The Company entered into a lease agreement during March 1997 to rent
additional office space under a noncancellable operating lease. Rent expense
related to the office space was $4 for the year ended December 31, 1997.
Minimum lease payments for the fiscal years ending December 31:
<TABLE>
<S> <C>
1998........................................................ $26
1999........................................................ 26
2000........................................................ 2
---
$54
===
</TABLE>
7. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Installment note due in monthly installments of $814, which
includes interest at 10%, expiring February 2001.......... $38 $33
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 3
Installment note due in monthly installments of $411, which
includes interest at 9.5%, expiring April 1998............ 7 3
</TABLE>
F-250
<PAGE> 283
EXPRESS ENTERPRISE, INC.
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
7. LONG-TERM DEBT (CONTINUED)
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........ 12
Installment note due in monthly installments of $309, which
includes interest at 7.4%, expiring April 1997............ 1
--- ---
Total long-term debt.............................. 88 39
Less -- current portion of long-term debt................... 28 13
=== ===
$60 $26
=== ===
</TABLE>
The following is a summary of principal maturities of long-term debt as of
December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $13
1999........................................................ 7
2000........................................................ 8
2001........................................................ 9
2002........................................................ 2
---
$39
===
</TABLE>
Interest expense on the long-term debt for the period ended December 31,
1995, 1996, and 1997 was $14, $16, and $16, respectively.
F-251
<PAGE> 284
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,
------------
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
Capital lease obligation, due in monthly installments of
$313, payable through May 1999............................ 10 5
Capital lease obligation due in monthly installments of
$697, payable through September 1998...................... 15 7
Capital lease obligation due in monthly installments of
$837, payable through April 1999.......................... 24 15
--- ---
Total minimum lease payments................................ 52 27
Amount representing interest................................ 10 3
--- ---
Present value of net minimum lease payment.................. 42 24
Less current maturities..................................... 18 18
--- ---
$24 $ 6
=== ===
</TABLE>
The following is a summary of future minimum lease payments due under
capital lease arrangements as of December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $18
1999........................................................ 6
---
$24
===
</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, 1996, and 1997 were
approximately $27, $104, and $142, respectively. At December 31, 1996 and 1997,
the Company had a receivable from the air division of the Company of $131 and
$89, 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
such direct expenses. For the year ended December 31, 1997, sales to Logistics
customers were approximately $29 for the Company. Direct expenses for Logistics
for the year ended December 31, 1997 was approximately $8. The Company also
incurs common overhead costs on behalf of Logistics. At December 31, 1997, the
Company had a receivable from Logistics of $21. This receivable is a receivable
on demand and does not accrue interest.
F-252
<PAGE> 285
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.
F-253
<PAGE> 286
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
New York, New York
December 5, 1997
F-254
<PAGE> 287
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 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-255
<PAGE> 288
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
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
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-256
<PAGE> 289
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
STATEMENTS OF CASH FLOWS
<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
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
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-257
<PAGE> 290
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.
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.
F-258
<PAGE> 291
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-259
<PAGE> 292
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Deadline Express, Inc.
We have audited the accompanying balance sheet of Deadline Express, Inc.
(the "Company") as of December 31, 1997 and the related statements of operations
and accumulated deficit and cash flows for the period from August 29, 1997 to
December 31, 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 audit 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 audit provides 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 Deadline Express, Inc. at
December 31, 1997 and the results of its operations and its cash flows for the
period from August 29, 1997 to December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
April 24, 1998
F-260
<PAGE> 293
DEADLINE EXPRESS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 170
Accounts receivable....................................... 115,687
Prepaid expenses and other current assets................. 6,074
--------
Total current assets.............................. 121,931
Property and equipment, at cost
Computer equipment........................................ 19,523
Furniture and fixtures.................................... 6,372
Leasehold improvements.................................... 251
--------
26,146
Accumulated depreciation.................................... (610)
--------
Property and equipment, at net book value................... 25,537
Deposits.................................................... 3,000
Deferred tax asset.......................................... 10,000
Goodwill, net of accumulated amortization of $2,351......... 491,282
--------
$651,750
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 18,598
Management services (Note 2).............................. 21,362
--------
Total current liabilities......................... 39,960
Promissory note payable (Note 1).......................... 170,000
Stockholders' equity:
Common stock, $0.01 par value, 15,000 shares authorized,
9,100 shares issued and outstanding....................... 91
Additional paid in capital.................................. 459,909
Accumulated deficit......................................... (18,210)
--------
Net stockholders' equity.................................... 441,790
--------
$651,750
========
</TABLE>
See accompanying notes.
F-261
<PAGE> 294
DEADLINE EXPRESS, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 29,
1997 TO
DECEMBER 31,
1997
------------
<S> <C>
Revenue from courier services............................... $209,784
--------
Management services (Note 2)................................ 159,177
Selling, general and administrative expenses................ 94,290
--------
253,467
--------
Operating loss.............................................. (43,683)
Interest expense............................................ (3,400)
Other income (Note 3)....................................... 18,873
--------
Net loss before income taxes................................ (28,210)
Income tax benefit.......................................... 10,000
--------
Net loss (accumulated deficit).............................. $(18,210)
========
</TABLE>
See accompanying notes.
F-262
<PAGE> 295
DEADLINE EXPRESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 29,
1997 TO
DECEMBER 31,
1997
------------
<S> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(18,210)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of goodwill.................................. 2,351
Deferred tax asset........................................ (10,000)
Depreciation.............................................. 610
Changes in operating assets and liabilities net of effect
of acquisition of RJK Enterprises, Inc. (Note 1):
Accounts receivable.................................... 16,335
Prepaid expenses and other current assets.............. (6,074)
Accounts payable and accrued expenses.................. (9,554)
Management services.................................... (31,213)
--------
Net cash used in operating activities....................... (55,755)
INVESTING ACTIVITIES
Fixed assets purchased...................................... (19,775)
Purchase of substantially all of the assets of RJK
Enterprises, Inc., net of cash acquired (Note 1):......... (384,300)
--------
Net cash used in investing activities....................... (404,075)
FINANCING ACTIVITIES
Issuance of common stock.................................... 91
Capital contributions....................................... 459,909
--------
Net cash provided by financing activities................... 460,000
--------
Net increase in cash and cash equivalents................... 170
Cash and cash equivalents at beginning of period............ --
--------
Cash and cash equivalents at end of period.................. $ 170
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 3,400
========
</TABLE>
See accompanying notes.
F-263
<PAGE> 296
DEADLINE EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Deadline Express, Inc., formerly Deadline Acquisition Corp., (the
"Company") was incorporated on August 29, 1997 in the State of Illinois. The
Company operates as a courier service covering the Chicago area. Effective
October 28, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of RJK Enterprises, Inc. "d.b.a. Deadline Express."
The acquisition is being accounted for as a purchase. The assets acquired and
liabilities assumed were as follows:
<TABLE>
<S> <C>
ASSETS:
Cash...................................................... $ 5,700
Accounts receivable....................................... 132,022
Furniture and fixtures.................................... 6,372
Deposits.................................................. 3,000
--------
$147,094
========
LIABILITIES:
Accounts payable and accrued expenses..................... $ 28,152
Management services....................................... 52,575
--------
80,727
--------
Net assets acquired............................... $ 66,367
========
</TABLE>
The purchase price comprised of the following:
<TABLE>
<S> <C>
Cash........................................................ $390,000
Promissory note............................................. 170,000
--------
Total purchase price.............................. $560,000
========
</TABLE>
The excess of the purchase price over the net assets acquired, $493,633,
has been accounted for as goodwill.
The promissory note is payable on March 31, 1999 and bears interest at 12%
per annum.
Pro forma results of operations for the year ended December 31, 1997
assuming the above acquisition occurred on January 1, 1997 is as follows:
<TABLE>
<S> <C>
Revenue from courier services............................... $1,264,922
----------
Management services......................................... 894,122
Selling, general and administrative expenses................ 508,879
----------
1,403,001
----------
Operating loss.............................................. (138,079)
Interest expense............................................ (3,400)
Other income................................................ 98,700
----------
Net loss.......................................... $ (42,779)
==========
</TABLE>
Summary of Significant Accounting Policies
GOODWILL
Goodwill is being amortized on the straight-line method over thirty five
years.
F-264
<PAGE> 297
DEADLINE EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DEPRECIATION
Depreciation of property and equipment is provided for on the straight line
method over the estimated useful lives of the assets (three years).
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 accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". At
December 31, 1997, the Company had net operating loss carryforwards for income
tax purposes of approximately $28,000 that will expire in 2002. The deferred tax
asset related to such net operating loss carryforwards amounted to approximately
$10,000 at December 31, 1997.
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.
2. 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.
3. COMMITMENTS AND CONTINGENCIES
Lease Commitments and Other Income
Office space is leased under an operating lease expiring on August 31,
1998. Rent expense for the two months ended December 31, 1997 amounted to
approximately $5,378 (see Note 4).
Other income primarily represents rental income from the sub-leasing of a
portion of the office space on a month-to-month basis.
4. SUBSEQUENT EVENT
In February, 1998, the Company and its stockholders completed a transaction
with Dispatch Management Services Corp. ("DMS") pursuant to a definitive
agreement and exchanged all of the common stock of the Company for the shares of
DMS common stock concurrent with the consummation of the initial public offering
of the common stock of DMS.
F-265
<PAGE> 298
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, 1996 and 1997 and December 31, 1997, and the
related statement of operation of cash flows for the years ended March 31, 1996
and 1997 and the nine months ended December 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 December 31,
1997, and the results of the Company's operations and its cash flows for the
nine months ended December 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 the years in the ended March
31, 1996 and 1997 and the nine months ended December 31, 1997 and the
determination of shareholders equity and financial position also expressed in
pounds sterling at March 31, 1996 and 1997 and at December 31, 1997. Note 21 to
the financial statements summarizes this effect for the years ended March 31,
1997 and 1996 and as at March 31, 1997 and 1996.
As discussed in Note 1, on February 11, 1998 the Company sold its
outstanding stock to Dispatch Management Services Corporation. The accompanying
financial statements do not reflect the effects of any purchase adjustments.
/s/ PRICE WATERHOUSE
Price Waterhouse
London, England
April 27, 1998
F-266
<PAGE> 299
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
BALANCE SHEETS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
--------- ----- ------------
<S> <C> <C> <C>
FIXED ASSETS
Intangible assets........................................... L 169 L 251 L 306
Tangible assets............................................. 34 38 42
----- ----- -----
203 289 348
CURRENT ASSETS
Debtors due within one year................................. 117 88 87
Creditors: amounts falling due within one year.............. (327) (457) (380)
----- ----- -----
NET CURRENT LIABILITIES..................................... (210) (369) (293)
----- ----- -----
TOTAL ASSETS LESS CURRENT LIABILITIES............. (7) (80) 55
----- ----- -----
Creditors: amounts falling due after more than one year..... (25) (17) (10)
----- ----- -----
NET (LIABILITIES)/ASSETS.................................... (32) (97) 45
===== ===== =====
SHARE CAPITAL EQUITY........................................ -- -- 200
Profit and loss account..................................... (32) (97) (155)
----- ----- -----
SHAREHOLDERS' FUNDS......................................... L (32) L (97) L 45
===== ===== =====
</TABLE>
See accompanying notes to the financial statements.
F-267
<PAGE> 300
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
STATEMENTS OF OPERATIONS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
-------------------- DECEMBER 31,
1996 1997 1997
--------- ------- ------------
<S> <C> <C> <C>
TURNOVER................................................... L 643 L 655 L 587
Cost of sales.............................................. (348) (349) (252)
----- ----- -----
GROSS PROFIT............................................... 295 306 335
Administrative expenses.................................... (286) (357) (377)
----- ----- -----
OPERATING PROFIT/(LOSS).................................... 9 (51) (42)
Interest payable and similar charges....................... (6) (14) (16)
----- ----- -----
PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION....... 3 (65) (58)
Taxation on profits from ordinary activities............... -- -- --
PROFIT/(LOSS) ON ORDINARY ACTIVITIES AFTER TAXATION........ 3 (65) (58)
----- ----- -----
Dividends.................................................. -- -- --
RETAINED PROFIT FOR THE FINANCIAL YEAR..................... L 3 L (65) L (58)
===== ===== =====
</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-268
<PAGE> 301
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
STATEMENTS OF CASH FLOWS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
------------------ DECEMBER 31,
1996 1997 1997
---------- ----- ------------
<S> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES................... L 53 L 155 L (33)
Returns on investments and servicing of finance............. (6) (14) (16)
Capital expenditure......................................... (111) (146) (139)
----- ----- -----
Cash inflow before use of liquid resources and financing.... (64) (5) (188)
Net financing cashflows..................................... 32 (7) 195
----- ----- -----
INCREASE/(DECREASE) IN CASH IN THE YEAR..................... L (32) L (12) L 7
===== ===== =====
</TABLE>
See accompanying notes to the financial statements.
F-269
<PAGE> 302
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS
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.
On February 11, 1998, the Company's stockholders, pursuant to a definitive
agreement with Dispatch Management Services Corp. ("DMS"), exchanged all of the
common stock of the company for cash and shares of DMS common stock, concurrent
with the consummation of the initial public offering of the common stock of DMS.
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
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.
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-270
<PAGE> 303
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
2. OPERATING PROFIT/(LOSS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Operating profit/(loss) for the year was arrived at after
charging:
Depreciation of tangible fixed assets....................... L 12 L 15 L 13
Research and development:
Amortisation of development expenditure................... 39 46 65
Operating lease rentals of:
Plant and machinery....................................... 18 22 20
Land and buildings........................................ 15 29 28
Hire of plant and machinery................................. 5 4 3
Auditors' remuneration...................................... 2 2 2
Directors' remuneration..................................... 137 137 94
Loss on sale of fixed assets................................ 2
---- ---- ----
L228 L255 L227
==== ==== ====
</TABLE>
3. EMPLOYEES
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Staff costs (excluding amounts paid to directors) amounted
to:
Wages and salaries.......................................... L195 L250 L210
Social security costs....................................... 18 22 47
Pension costs............................................... 10 11 9
---- ---- ----
L223 L283 L266
==== ==== ====
</TABLE>
4. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Bank loans and overdrafts................................... L 6 L 14 L 16
==== ==== ====
</TABLE>
All loans and overdrafts are wholly repayable within five years.
5. TAXATION ON PROFITS FROM ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
UK corporation tax.......................................... L -- L -- L --
==== ==== ====
</TABLE>
F-271
<PAGE> 304
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, 1996........................................... L302
Additions................................................... 128
----
At March 31, 1997........................................... 430
Additions................................................... 120
----
At December 31, 1997........................................ L550
====
PROVISIONS FOR DIMINUTION IN VALUE
At March 31, 1996........................................... L133
Charge for year............................................. 46
----
At March 31, 1997........................................... 179
Charge for year............................................. 65
----
At December 31, 1997........................................ L244
====
NET BOOK VALUE
At March 31, 1997........................................... L251
====
At December 31, 1997........................................ L306
====
</TABLE>
7. TANGIBLE ASSETS
<TABLE>
<CAPTION>
FIXTURES, FITTINGS
AND EQUIPMENT
------------------
L000'S
<S> <C>
COSTS
At March 31, 1996........................................... L 70
Additions................................................... 19
----
At March 31, 1997........................................... 89
Additions................................................... 20
----
Disposals................................................... (3)
At December 31, 1997........................................ L106
====
DEPRECIATION
At March 31, 1996........................................... L 36
Charge for year............................................. 15
----
At March 31, 1997........................................... 51
Charge for year............................................. 13
----
At December 31, 1997........................................ L 64
====
NET BOOK VALUE
At March 31, 1997........................................... L 38
====
At December 31, 1997........................................ L 42
====
</TABLE>
F-272
<PAGE> 305
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, AS AT
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Trade debtors............................................... L101 L76 L60
Other debtors............................................... 16 12 27
---- --- ---
L117 L88 L87
==== === ===
</TABLE>
9. CREDITORS:
Amounts falling due within one year:
<TABLE>
<CAPTION>
AS AT
MARCH 31, AS AT
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Bank loans and overdrafts................................... L 67 L 80 L 75
Trade creditors............................................. 94 86 68
Other taxation and social security.......................... 36 104 7
Other creditors............................................. 130 187 230
---- ---- ----
L327 L457 L380
==== ==== ====
</TABLE>
The company meets its day to day working capital requirements through an
overdraft facility which is repayable on demand.
10. CREDITORS:
Amounts falling due after more than one year:
<TABLE>
<CAPTION>
AS AT
MARCH 31, AS AT
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Bank loans
Balance repayable within five years......................... L32 L24 L19
Included in current liabilities............................. (7) (7) (9)
--- --- ---
L25 L17 L10
=== === ===
</TABLE>
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 L9k (March1997: L11).
F-273
<PAGE> 306
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
12. SHARE CAPITAL
<TABLE>
<CAPTION>
AS AT
MARCH 31, AS AT
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
AUTHORIZED
100 Ordinary shares of L1 each.............................. L100 L100 L100
==== ==== ====
ALLOTTED, CALLED UP AND FULLY PAID
2 Ordinary shares of L1 each................................ -- -- --
---- ---- ----
Capital injection........................................... L -- L -- L200
---- ---- ----
Total............................................. -- -- L200
==== ==== ====
</TABLE>
13. PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
AS AT
MARCH 31, AS AT
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Accumulated losses at 1 April............................... L(35) L(32) L (97)
Retained profit/(loss) for the year......................... 3 (65) (58)
---- ---- -----
Accumulated losses at 31 March.............................. L(32) L(97) L(155)
==== ==== =====
</TABLE>
14. RECONCILIATION OF SHAREHOLDERS FUNDS
<TABLE>
<CAPTION>
AS AT
MARCH 31, AS AT
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Profit/(loss) for the financial year........................ L 3 L(65) L(58)
Funding provided by DMS..................................... -- -- 200
Shareholders' funds at the beginning of the year............ (35) (32) (97)
---- ---- ----
Shareholders' funds at the end of the year.................. L(32) L(97) L 45
==== ==== ====
</TABLE>
15. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
AS AT
MARCH 31, AS AT
----------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Operating profit/(loss)..................................... L 9 L(51) L(42)
Depreciation charges........................................ 12 15 13
Amortization charges........................................ 39 46 65
(Increase)/decrease in debtors.............................. (62) 29 1
Loss on sale of fixed assets................................ 2
(Decrease)/increase in creditors............................ 55 117 (72)
---- ---- ----
Net cash inflow from operating activities................... L 53 L156 L(33)
==== ==== ====
</TABLE>
F-274
<PAGE> 307
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>
AS AT
MARCH 31, AS AT
------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
L000'S L000'S L000'S
<S> <C> <C> <C>
Returns on investments and servicing of finance
Interest paid............................................... L (6) L (14) L (16)
----- ----- -----
Net cash outflow from returns on investments and servicing
of finance................................................ L (6) L (14) L (16)
===== ===== =====
Capital expenditure and financial investment
Purchase of tangible fixed assets........................... L (26) L (19) L (20)
Sale of fixed assets........................................ -- 1
Development costs........................................... (85) (128) (120)
----- ----- -----
Net cash outflow for capital expenditure and financial
investment................................................ L(111) L(147) L(139)
===== ===== =====
Financing
Debt due beyond a year...................................... L 32 L -- L --
Capital injection........................................... L -- L -- L 200
Repayment of amounts borrowed............................... -- (7) (5)
----- ----- -----
Net cash inflow from financing.............................. L 32 L (7) L 195
===== ===== =====
</TABLE>
17. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
AT MARCH 31, AT MARCH 31, AT DECEMBER 31,
1996 CASHFLOW 1997 CASHFLOW 1997
------------ -------- ------------ -------- ---------------
<S> <C> <C> <C> <C> <C>
Overdrafts............................. L60 L13 L73 L (7) L66
Bank debt due within 1 year............ 7 -- 7 2 9
Debt due after 1 year.................. 25 (8) 17 (7) 10
--- --- --- ---- ---
L92 L 5 L97 L(12) L85
=== === === ==== ===
</TABLE>
18. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
AS AT NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
(Decrease)/increase in cash in the year..................... L(32) L(12) L 7
Cash inflow from (increase)/decrease in debt in the year.... (32) 7 5
---- ---- ----
(Increase)/decrease in net debt during the year............. (64) (5) 12
Net debt at beginning of year............................... (28) (92) (97)
---- ---- ----
Net debt at the end of year................................. L(92) L(97) L(85)
==== ==== ====
</TABLE>
F-275
<PAGE> 308
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 NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Plant and machinery:
Within one year............................................. L 9 L10 L10
Between two and five years.................................. 17 17 17
--- --- ---
L26 L27 L27
=== === ===
Land and buildings:
Within one year............................................. L-- L-- L--
Between two and five years.................................. 29 29 28
--- --- ---
L29 L29 L28
=== === ===
</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>
AS AT
MARCH 31, AS AT
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Directors loan.............................................. L53 L60 L23
</TABLE>
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>
AS AT NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Wages costs rebilled to FSSL................................ L37 L42 L --
Hardware and car leasing costs rebilled to FSSL............. 25 73 50
Expenses rebilled from FSSL to Brookside.................... 7 19 30
--- --- ----
Amount payable/(receivable from) to FSSL at year end........ L-- L11 L(20)
=== === ====
</TABLE>
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.
F-276
<PAGE> 309
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
20. RELATED PARTY TRANSACTION (CONTINUED)
<TABLE>
<CAPTION>
AS AT NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Commissions paid to Fleetway Systems........................ L108 L118 L59
Costs recharged to Fleetway Systems......................... 4 10
---- ---- ---
Amounts payable to Fleetway Systems at the year end......... L 10 L -- 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 of 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-277
<PAGE> 310
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,
------------
1996 1997
---- ----
<S> <C> <C>
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.
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,
--------------
1996 1997
----- -----
<S> <C> <C>
Net cash inflow from operating activities................... L 47 L 142
Net cash used in investing activities....................... (111) (147)
Net cash provided by financing activities................... 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...... (92) (97)
----- -----
Cash/(overdraft) under UK GAAP at end of year............... L (92) L (97)
===== =====
</TABLE>
F-278
<PAGE> 311
ANNEX A
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with forward-looking statements. The Company intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined under the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of the Company. The
Company undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, the Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results
over time.
The Company provides the following risk factor disclosure in connection
with its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include the following:
Risks Relating to Conversion to the DMS Model. None of the Founding
Companies has utilized every aspect of the DMS Model. 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 have substantial authority with respect to the continuing operation of
the Founding Companies. 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.
Absence of Combined Operating History; Risks of Integration. The Company
was founded in September 1997, and prior to the consummation of the Offering in
February 1998 conducted no operations other than in connection with the Offering
and the Combinations, and generated no revenues other than receipt of licensing
fees relating to the software company previously acquired by the Company.
Although the Company has acquired the Founding Companies, the Company and the
Founding Companies operate as separate, independent businesses. There can be no
assurance that the Company or any Founding Company will be profitable in the
future.
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
A-1
<PAGE> 312
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 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. 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.
Risks of Tax Authorities Classifying Independent Contractors as
Employees. A significant number of the couriers utilized by the Company are
independent contractors. From time to time, federal and state taxing authorities
have sought to assert that couriers in the Point-to-Point delivery industry are
employees, rather than independent contractors. Tax authorities recently have
made such an assertion against A Courier, 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. 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. Any of the foregoing
circumstances could increase the Company's operating costs and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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.
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 acquired in the future either will be beneficial to the
successful implementation of the Company's overall strategy or will ultimately
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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.
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.
Risks of IRS Challenge of Reimbursement Policies. Several of the Founding
Companies in the past have reimbursed certain automobile expenses of their
drivers who are employees and own their vehicles. Aero Delivery and two other
Founding Companies, which collectively represent approximately [11.9%] of the
Company's 1997 pro forma combined revenues, previously had a reimbursement
policy that was not based on actual mileage. In connection with an audit of Aero
Delivery, the IRS challenged this type policy and the treatment of such payments
as reimbursed expenses, and asserted that the reimbursements constitute
additional compensation to the couriers on which the company should withhold
certain taxes. There can be no assurance that the IRS will not be able to
successfully challenge this type 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.
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. The Company took these potential payments into
consideration in negotiating Aero Delivery's purchase price. The Company has
also agreed with Aero Delivery that in the event 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
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and seek reimbursement from the former owner. Any payments made by the Company
relating to the IRS assessments will reduce its cash resources.
Risk of Inability to Terminate Unsatisfactory Brand Managers in a Timely
Fashion. The Company operates certain of the Brands acquired in the
Combinations through Brand Manager Agreements with Brand Managers. Each Brand
Manager is 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 Due to Increased Prices. 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
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
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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 year ended December 31,
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. Substantially all 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, all 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 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.
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
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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.
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. 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.
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 27.4%, 26.3% and 10.72%,
respectively, of pro forma combined revenues for the year ended December 31,
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 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.
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.
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Regulatory Compliance. As a public company, the Company is 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 26.3% of the Company's combined pro forma
revenues for the year ended December 31, 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 Company's business, financial condition or
results of operations.
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 Management. The Company's directors and executive officers
beneficially own approximately 12% of the Company's outstanding Common Stock. 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 stockholders. 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 stockholders to participate in a transaction in which they might
otherwise receive a premium for their shares.
Dividend Policy. 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.
YEAR 2000 ISSUES
The approaching year 2000 could result in challenges related to the
Company's computer software, accounting records and relationships with
customers. Based on the Company's review of its business and operating systems,
the Company does not expect to incur material costs with respect to remediating
year 2000 problems, if any, however, there can be no assurance that such
problems will not be encountered in the future or that the costs incurred to
resolve such problems will not be material.
The foregoing list of risk factors is not exhaustive.
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EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
DISPATCH MANAGEMENT SERVICES CORP.
I, the undersigned, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, do hereby certify as follows:
FIRST: The name of the corporation is Dispatch Management Services Corp.
(the "Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, Wilmington, County of New Castle, Delaware 19805.
The name of its registered agent at such address is The Corporation Service
Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 110,000,000 shares of stock, of
which 10,000,000 shares, designated as preferred stock, shall have a par value
of One Cent ($.01) per share (the "Preferred Stock"), and 100,000,000 shares,
designated as common stock, shall have a par value of One Cent ($.01) per share
(the "Common Stock").
A statement of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, in respect of each class of stock of the
Corporation is as follows:
Preferred Stock. The Preferred Stock may be issued from time to time by the
Board of Directors as shares of one or more classes or series. Subject to the
provisions of this Certificate of Incorporation and the limitations prescribed
by law, the Board of Directors is expressly authorized by adopting resolutions
to issue the shares, fix the number of shares and 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 (and whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), a redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
class or series of the Preferred Stock, without any further action or vote by
the stockholders.
Common Stock. 1. Dividends. Subject to the preferred rights of the holders of
shares of any class or series of Preferred Stock as provided by the Board of
Directors with respect to any such class
<PAGE> 2
or series of Preferred Stock, the holders of the Common Stock shall be entitled
to receive, as and when declared by the Board of Directors out of the funds of
the Corporation legally available therefor, such dividends (payable in cash,
stock or otherwise) as the Board of Directors may from time to time determine,
payable to stockholders of record on such dates, not exceeding 60 days preceding
the dividend payment dates, as shall be fixed for such purpose by the Board of
Directors in advance of payment of each particular dividend.
2. Liquidation. In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, after the distribution or
payment to the holders of shares of any class or series of Preferred Stock as
provided by the Board of Directors with respect to any such class or series of
Preferred Stock, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among and paid to the holders
of Common Stock ratably in proportion to the number of shares of Common Stock
held by them.
3. Voting Rights. Except as otherwise required by law, each holder of
shares of Common Stock shall be entitled to one vote for each share of Common
Stock standing in such holder's name on the books of the Corporation.
FIFTH: The name and mailing address of the incorporator is as follows:
J. Steven Patterson
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1333 New Hampshire Avenue, N.W.
Suite 400
Washington, D.C. 20036
SIXTH: 1. Board of Directors. The Directors shall be classified with
respect to the time for which they shall severally hold office into three
classes as nearly equal in number as possible. The Class I Directors shall be
elected to hold office for an initial term expiring at the 1998 annual meeting
of stockholders, the Class II Directors shall be elected to hold office for an
initial term expiring at the 1999 annual meeting of stockholders and the Class
III Directors shall be elected to hold office for an initial term expiring at
the 2000 annual meeting of stockholders, with the members of each class of
directors to hold office until their successors have been duly elected and
qualified. At each annual meeting of stockholders, the successors to the class
of directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election and until their successors have been duly
elected and qualified. At each annual meeting of stockholders at which a quorum
is present, the persons receiving a plurality of the votes
2
<PAGE> 3
cast shall be directors. No director or class of directors may be removed from
office by a vote of the stockholders at any time except for cause. Election of
directors need not be by written ballot unless the Bylaws of the Corporation so
provide.
2. Vacancies. Any vacancy on the Board of Directors resulting from death,
retirement, resignation, disqualification or removal from office or other cause,
as well as any vacancy resulting from an increase in the number of directors
which occurs between annual meetings of the stockholders at which directors are
elected, shall be filled only by a majority vote of the remaining directors then
in office, though less than a quorum, except that those vacancies resulting from
removal from office by a vote of the stockholders may be filled by a vote of the
stockholders at the same meeting at which such removal occurs. The directors
chosen to fill vacancies shall hold office for a term expiring at the end of the
next annual meeting of stockholders at which the term of the class to which they
have been elected expires. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of any incumbent director.
Notwithstanding the foregoing, whenever the holders of one or more classes
or series of Preferred Stock shall have the right, voting separately as a class
or series, to elect directors, the election, term of office, filling of
vacancies, removal and other features of such directorships shall be governed by
the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to this ARTICLE SIXTH applicable thereto, and each director so elected
shall not be subject to the provisions of this ARTICLE SIXTH unless otherwise
provided therein.
3. Power to Make, Alter and Repeal Bylaws. In furtherance and not in
limitation of the powers conferred by statute, the Board of Directors is
expressly authorized to make, alter and repeal the Bylaws of the Corporation.
4. Amendment and Repeal of Article Six. Notwithstanding any provision of
this Certificate of Incorporation and of the Bylaws, and notwithstanding the
fact that a lesser percentage may be specified by Delaware law, unless such
action has been approved by a majority vote of the full Board of Directors, the
affirmative vote of 66 2/3 percent of the Corporation's shareholders entitled to
vote thereon, voting together as a single class, shall be required to amend or
repeal any provisions of this ARTICLE SIXTH or to adopt any provision
inconsistent with this ARTICLE SIXTH. In the event such action has been
previously approved by a majority vote of the full Board of Directors, the
affirmative vote of a majority of the outstanding stock entitled to vote thereon
shall be sufficient to amend or repeal any provision of this ARTICLE SIXTH or
adopt any provision inconsistent with this ARTICLE SIXTH.
3
<PAGE> 4
SEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute.
EIGHTH: 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 Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal benefit.
NINTH: The Corporation 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 Corporation 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
Corporation may, in its discretion, indemnify other persons from time in time on
terms and conditions deemed appropriate by the Corporation's Board of Directors.
4
<PAGE> 5
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Incorporation on behalf of the Corporation and does verify and affirm, under
penalty of perjury, that this Certificate of Incorporation is the act and deed
of the Corporation and that the facts stated herein are true as of this 5th day
of September, 1997.
Dispatch Management Services Corp.
By: /s/ J. Steven Patterson
---------------------------------
J. Steven Patterson, Incorporator
FOR CERTIFICATE OF AMENDMENT:
IN WITNESS WHEREOF, I hereunto sign my name and affirm that the
statements made herein are true under the penalties of perjury, this 26th day
of November, 1997.
/s/ Linda M. Jenkinson
-----------------------------------
Linda M. Jenkinson
Chief Executive Officer
<PAGE> 1
EXHIBIT 4.1
<TABLE>
<S> <C> <C>
NUMBER [DMS CORP. LOGO] SHARES
[DMS ] DISPATCH MANAGEMENT SERVICES CORP. [ ]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 254927 10 6
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY-PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
DISPATCH MANAGEMENT SERVICES CORP.
(the "Corporation") transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are subject to all of the terms
and conditions contained in the Certificate of Incorporation and all amendments thereto. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ /s/
Chairman of the Board of Directors Treasurer
[SEAL]
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NY)
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
</TABLE>
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________ Custodian ___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act __________________
in common (State)
</TABLE>
Additional abbreviations may also be used through not in the above list
For Value Received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ___________________________________________
Attorney to transfer the said stock on the books of the within named Company
with full power of substitution in the premises.
Dated____________________________
Signature:
_______________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.6
[EarlyBird Letterhead]
September 12, 1997
Ms. Linda Jenkinson
Chief Executive Officer
DMS Corp.
65 West 36th Street
New York, NY 10018
Dear Ms. Jenkinson:
This letter confirms our agreement that in connection with the acquisition
of EarlyBird Courier Service, LLC by DMS Corp. and the contemplated Initial
Public Offering of common stock $.01 par value per share in DMS Corp., or the
entity utilized for the public offering you shall cause all shareholders under
the control of DMS Corp. (e.g., the Class A members and others) to vote for my
election to the Board of Directors of the public company.
We agree that you will cause DMS Corp.'s attorneys to prepare, and have
the other shareholders as discussed above execute, a formal Voting Trust
Agreement reflecting our understanding no later than the closing in escrow as
defined in the Asset Purchase Agreement. This Voting Trust Agreement is of the
essence of our transaction.
Very truly yours,
/s/ Michael Fiorito
-------------------
Michael Fiorito
President
Accepted & Agreed to:
DMS Corp.
By: /s/ Linda Jenkinson
--------------------
Linda Jenkinson, CEO
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries of Dispatch Management Services Corp.
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
- ---------- ----------------------
<S> <C>
Dispatch Management Services New York Corp. New York
Road Management Services of New York City, Inc. Delaware
Dispatch Management Services Acquisition Corp. Delaware
Road Management Services of Phoenix, Inc. Delaware
Road Management Services of Washington, D.C., Inc. Delaware
Road Management Services of Atlanta, Inc. Delaware
Road Management Services of Detroit, Inc. Delaware
Road Management Services of Houston, Inc. Delaware
Road Management Services of Boston, Inc. Delaware
Road Management Services of Chicago, Inc. Delaware
Road Management Services of Dallas, Inc. Delaware
Road Management Services of Philadelphia, Inc. Delaware
Road Management Services of Seattle, Inc. Delaware
Road Management Services of Denver, Inc. Delaware
Road Management Services of Portland, Inc. Delaware
Road Management Services of New Hampshire, Inc. Delaware
Road Management Services of Minneapolis, Inc. Delaware
Road Management Services of Charlotte, Inc. Delaware
Road Management Services of Nashville, Inc. Delaware
Dispatch Management Services San Francisco Corp. Delaware
Road Management Services of San Francisco, Inc. Delaware
Road Management Services of Los Angeles, Inc. Delaware
Road Management Services Corporation Delaware
Statetip Limited England and Wales
Balmerino Holding Limited New Zealand
Road Management Services of New Jersey, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Annual Report on Form 10-K of Dispatch
Management Services Corp. filed with the Securities and Exchange Commission for
the year ended December 31, 1997 of our reports as of the dates and the related
financial statements of the companies listed below which appear in such Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
PRICE WATERHOUSE LLP OFFICE
COMPANY DATE CITY, STATE
------- ---- ---------------------------
<S> <C> <C>
Dispatch Management Services
Corp. May 1, 1998 Bloomfield Hills, Michigan
Atlantic Freight Systems, Inc. April 21, 1998 Philadelphia, Pennsylvania
Aero Special Delivery Service,
Inc. April 22, 1998 Sacramento, California
Gregory W. Austin (dba Battery
Point Messenger and Alpha
Express) April 27, 1998 Sacramento, California
Washington Express Services,
Inc. November 7, 1997 Bloomfield Hills, Michigan
except for Note 15
as to which the
date is February 11, 1998
MLQ Express, Inc. March 28, 1998 Atlanta, Georgia
American Eagle Endeavors, Inc. April 8, 1998 Bloomfield Hills, Michigan
A & W Couriers, Inc. April 16, 1998 Austin, Texas
Fleetfoot Max, Inc. April 10, 1998 Seattle, Washington
Expressit Couriers, Inc. March 27, 1998 Bloomfield Hills, Michigan
Express Enterprise, Inc. --
Ground Operations April 15, 1998 Bloomfield Hills, Michigan
Bullit Courier Services, Inc. May 1, 1997 Stamford, Connecticut
Profall, Inc. April 9, 1998 Los Angeles, California
Kangaroo Express March 31, 1998 Denver, Colorado
National Messenger, Inc. April 7, 1998 Los Angeles, California
S-Car-Go Courier, Inc. April 27, 1998 Sacramento, California
Transpeed Courier Services,
Inc. April 3, 1998 Denver, Colorado
A Courier, Inc. and Affiliates March 27, 1998 Atlanta, Georgia
Zoom Messenger Service Inc. April 7, 1998 Philadelphia, Pennsylvania
Christopher D. Neal (dba Zap
Courier and Crosstown
Messenger) April 27, 1998 Sacramento, California
Michael S. Studebaker (dba
Studebaker Messenger
Service) April 27, 1998 Sacramento, California
</TABLE>
PRICE WATERHOUSE LLP
May 4, 1998
<PAGE> 2
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Annual Report on Form 10-K of Dispatch
Management Services Corp. filed with the Securities and Exchange Commission for
the year ended December 31, 1997 of our reports as of the dates and the related
financial statements of the companies listed below which appear in such Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
COMPANY DATE
- ------- ----
<S> <C>
Brookside Systems and Programming Limited................... April 27, 1998
Bridge Wharf Investments Limited............................ December 12, 1997
Security Dispatch Limited (excluding the mail room services
operations)............................................... April 27, 1998
</TABLE>
PRICE WATERHOUSE
London, England
May 4, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the use of our report dated April 29, 1998, with respect to
the combined financial statements of Earlybird Courier Service, LLC, Total
Management Support Services LLC and their Affiliates included in the Annual
Report (Form 10-K) for the year ended December 31, 1997 of Dispatch Management
Services Corp.
ERNST & YOUNG LLP
New York, New York
May 1, 1998
<PAGE> 2
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the use of our report dated April 24, 1998, with respect to
the financial statements of Deadline Express, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1997 of Dispatch Management Services
Corp.
ERNST & YOUNG LLP
New York, New York
May 1, 1998
<PAGE> 3
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the use of our report dated August 20, 1997, with respect to
the financial statements of RJK Enterprises Inc. (d.b.a. Deadline Express)
included in the Annual Report (Form 10-K) for the year ended December 31, 1997
of Dispatch Management Services Corp.
ERNST & YOUNG LLP
New York, New York
May 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF DISPATCH MANAGEMENT
SERVICES CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED
COMBINED PRO FORMA FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,536
<SECURITIES> 0
<RECEIVABLES> 21,268
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,879
<PP&E> 4,330
<DEPRECIATION> 0
<TOTAL-ASSETS> 136,685
<CURRENT-LIABILITIES> 24,454
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 136,685
<SALES> 151,604
<TOTAL-REVENUES> 151,604
<CGS> 94,141
<TOTAL-COSTS> 52,544
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 4,828
<INCOME-TAX> 2,181
<INCOME-CONTINUING> 2,647
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,647
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with forward-looking statements. The Company intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined under the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of the Company. The
Company undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, the Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results
over time.
The Company provides the following risk factor disclosure in connection
with its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include the following:
Risks Relating to Conversion to the DMS Model. None of the Founding
Companies has utilized every aspect of the DMS Model. 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 have substantial authority with respect to the continuing operation of
the Founding Companies. 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.
Absence of Combined Operating History; Risks of Integration. The Company
was founded in September 1997, and prior to the consummation of the Offering in
February 1998 conducted no operations other than in connection with the Offering
and the Combinations, and generated no revenues other than receipt of licensing
fees relating to the software company previously acquired by the Company.
Although the Company has acquired the Founding Companies, the Company and the
Founding Companies operate as separate, independent businesses. There can be no
assurance that the Company or any Founding Company will be profitable in the
future.
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
<PAGE> 2
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 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. 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.
Risks of Tax Authorities Classifying Independent Contractors as
Employees. A significant number of the couriers utilized by the Company are
independent contractors. From time to time, federal and state taxing authorities
have sought to assert that couriers in the Point-to-Point delivery industry are
employees, rather than independent contractors. Tax authorities recently have
made such an assertion against A Courier, 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. 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. Any of the foregoing
circumstances could increase the Company's operating costs and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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.
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 acquired in the future either will be beneficial to the
successful implementation of the Company's overall strategy or will ultimately
<PAGE> 3
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.
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.
Risks of IRS Challenge of Reimbursement Policies. Several of the Founding
Companies in the past have reimbursed certain automobile expenses of their
drivers who are employees and own their vehicles. Aero Delivery and two other
Founding Companies, which collectively represent approximately [11.9%] of the
Company's 1997 pro forma combined revenues, previously had a reimbursement
policy that was not based on actual mileage. In connection with an audit of Aero
Delivery, the IRS challenged this type policy and the treatment of such payments
as reimbursed expenses, and asserted that the reimbursements constitute
additional compensation to the couriers on which the company should withhold
certain taxes. There can be no assurance that the IRS will not be able to
successfully challenge this type 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.
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. The Company took these potential payments into
consideration in negotiating Aero Delivery's purchase price. The Company has
also agreed with Aero Delivery that in the event 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
<PAGE> 4
and seek reimbursement from the former owner. Any payments made by the Company
relating to the IRS assessments will reduce its cash resources.
Risk of Inability to Terminate Unsatisfactory Brand Managers in a Timely
Fashion. The Company operates certain of the Brands acquired in the
Combinations through Brand Manager Agreements with Brand Managers. Each Brand
Manager is 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 Due to Increased Prices. 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
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
<PAGE> 5
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 year ended December 31,
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. Substantially all 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, all 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 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.
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
<PAGE> 6
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.
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. 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.
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 27.4%, 26.3% and 10.72%,
respectively, of pro forma combined revenues for the year ended December 31,
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 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.
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.
<PAGE> 7
Regulatory Compliance. As a public company, the Company is 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 26.3% of the Company's combined pro forma
revenues for the year ended December 31, 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 Company's business, financial condition or
results of operations.
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 Management. The Company's directors and executive officers
beneficially own approximately 12% of the Company's outstanding Common Stock. 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 stockholders. 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 stockholders to participate in a transaction in which they might
otherwise receive a premium for their shares.
Dividend Policy. 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.
YEAR 2000 ISSUES
The approaching year 2000 could result in challenges related to the
Company's computer software, accounting records and relationships with
customers. Based on the Company's review of its business and operating systems,
the Company does not expect to incur material costs with respect to remediating
year 2000 problems, if any, however, there can be no assurance that such
problems will not be encountered in the future or that the costs incurred to
resolve such problems will not be material.
The foregoing list of risk factors is not exhaustive.
