<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarter ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission file number 0-23349
DISPATCH MANAGEMENT SERVICES CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3967426
(State of Incorporation) (I.R.S. Employer Identification No.)
1981 Marcus Ave., Suite C131
Lake Success, New York 11042 11042
(Address of principal executive offices) (Zip Code)
(516) 326-9810
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of November 12, 1998, there were 11,817,624 shares of Common Stock
outstanding.
<PAGE> 2
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of December 31, 1997 (unaudited) and
September 30, 1998 (unaudited)
Consolidated Statements of Operations for the Three and Nine Months
ended September 30, 1997 (unaudited) and 1998 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1997 (unaudited) and 1998 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Signatures
Exhibit Index
2
<PAGE> 3
Item 1: Financial Statements
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 354 $ 4,284
Accounts receivable, net of allowance of $- and $1,580
for doubtful accounts 19 36,741
Prepaid expenses, other assets and deferred offering
Costs 6,618 3,475
------- ---------
Total current assets 6,991 44,500
Property and equipment, net 30 10,726
Goodwill, net 266 129,771
Other long-term assets 748 14,942
------- --------
Total assets $ 8,035 $199,939
------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term obligations $ 1,585 $ 82
Accounts payable 673 7,492
Accrued liabilities and other
current liabilities 5,061 11,470
------- ---------
Total current liabilities 7,319 19,044
Long-term obligations, net of current maturities -- 55,579
Other long-term liabilities -- 6,031
------- ---------
Total liabilities 7,319 80,654
------- ---------
Preferred stock, $.01 par, 10,000,000 shares
authorized
Series A: 181,446 and 0 shares issued and
Outstanding, respectively 2 --
Series B: 100 and 0 shares issued and
Outstanding, Respectively -- --
Common stock, $.01 par, 100,000,000 shares
Authorized, 846,923 and 11,817,624 shares
issued And outstanding, respectively 9 118
Additional paid-in capital 1,422 117,686
Cumulative translation adjustment -- 234
Retained earnings (accumulated deficit) (717) 1,247
------- ----------
Total stockholders' equity 716 119,285
------- ----------
Total liabilities and stockholders' equity $ 8,035 $ 199,939
------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 117 $ 56,367 $ 219 $ 131,735
Cost of revenues 101 34,500 195 80,493
--------- ------------ --------- -----------
Gross profit 16 21,867 24 51,242
Selling, general and administrative expenses 161 16,697 191 38,821
Depreciation and amortization 3 1,410 3 3,299
Other charges -- 1,822 -- 1,822
--------- ------------ --------- -----------
Operating income (loss) (148) 1,938 (170) 7,300
Other expenses:
Interest expense 42 1,024 42 1,689
Acquired in-process research and development -- -- -- 700
Other expense (income) (4) (119) (4) 19
--------- ------------ --------- -----------
Income (loss) before income tax provision (186) 1,033 (208) 4,892
and extraordinary item
Income tax provision -- 434 -- 2,134
--------- ------------ --------- -----------
Income (loss) before extraordinary item (186) 599 (208) 2,758
Extraordinary loss on early extinguishment of
debt (net of income tax benefit of $384) -- -- -- 713
--------- ------------ --------- -----------
Net income (loss) $ (186) $ 599 $ (208) $ 2,045
========= ============ ========= ===========
Income (loss) per common share - basic
Income (loss) before extraordinary item $ (0.22) $ 0.05 $ (0.25) $ 0.27
Extraordinary item -- -- -- (0.07)
--------- ------------ --------- -----------
Net income (loss) $ (0.22) $ 0.05 $ (0.25) $ 0.20
--------- ------------ --------- -----------
Income (loss) per common share - diluted
Income (loss) before extraordinary item $ (0.22) $ 0.05 $ (0.25) $ 0.27
Extraordinary item -- -- -- (0.07)
--------- ------------ --------- -----------
Net income (loss) $ (0.22) $ 0.05 $ (0.25) $ 0.20
--------- ------------ --------- -----------
Weighted average shares
Common shares outstanding 846,923 11,742,574 846,923 10,031,468
--------- ------------ --------- -----------
Adjusted common shares assuming dilution 846,923 12,012,380 846,923 10,240,769
--------- ------------ --------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (208) $ 2,045
Adjustments in reconcile net income (loss) to net
cash (used by) provided by operating activities:
Amortization and depreciation 3 3,299
Acquired in-process research and development -- 700
Early extinguishment of debt -- 713
Change in operating assets and liabilities (net of
assets acquired and liabilities assumed in business
Combinations accounted for under the purchase method):
Accounts receivable 31 (9,668)
Prepaid expenses, deferred offering costs
and other current assets (3,113) (1,204)
Accounts payable and accrued liabilities 2,615 4,750
------ --------
Net cash (used in) provided by operating activities (672) 635
------ --------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired (321) (103,976)
Additions to equipment, net of disposals (33) (5,211)
------ --------
Net cash used in investing activities (354) (109,187)
------ --------
Cash flows from financing activities:
Proceeds from initial public offering, net of
underwriting discounts and other offering costs -- 76,276
Proceeds from issuance of common stock 865 --
Proceeds from long-term obligations 981 55,579
Principal payments on short-term obligations -- (17,565)
Finance costs -- (1,808)
------ --------
Net cash provided by financing activities 1,846 112,482
------ --------
Net increase in cash and cash equivalents 820 3,930
Cash and cash equivalents, beginning of period -- 354
------ --------
Cash and cash equivalents, end of period $ 820 $ 4,284
====== ========
</TABLE>
The company issued common stock and paid cash in connection with business
combinations accounted for under the purchase method of accounting during the
nine months ended September 30, 1998. The aggregate purchase price of the
acquired companies, including certain contingent consideration, subject to
earn-out provisions was allocated as follows:
<TABLE>
<S> <C>
Accounts receivable $ 27,054
Prepaid expenses and other assets 2,103
Property and equipment 6,994
Intangible assets 131,618
Other assets 12,913
Short-term debt (5,825)
Accounts payable (13,484)
Accrued liabilities (6,412)
Long-term debt (3,381)
Other long-term liabilities (6,031)
--------
Net assets acquired $145,549
--------
The acquisitions were funded as follows:
Common stock $ 40,014
Cash, net of cash acquired 103,976
Purchase price and acquisition costs payable 1,559
--------
$145,549
--------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. Organization and Basis of Presentation
In connection with the closing of the initial public offering (the
"Offering") of the common stock, $.01 par value (the "Common Stock"), of
Dispatch Management Services Corp. (the "Company" or "DMS") in February 1998,
the Company acquired, in separate combination transactions (the
"Combinations"), 38 urgent, on-demand, point-to-point courier firms and one
software firm (each, together with the software firm, a "Founding Company,"
and collectively, the "Founding Companies").
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of the Company, the
Founding Companies and the other businesses acquired subsequent to the
Offering (the "Recent Acquisitions").
The interim financial statements have been prepared in accordance with the
instructions to Quarterly Report Form 10-Q and Rule 10-01 of Regulation S-X,
and should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and Form S-4 as of May 29, 1998.
Accordingly, significant accounting policies and other disclosures normally
provided have been omitted since such items are disclosed therein. In the
opinion of management, the information contained herein reflects all
adjustments necessary to make the consolidated financial position,
consolidated results of operations and cash flows for the interim periods a
fair presentation. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
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, liabilities, sales and expenses.
Actual results could differ from these estimates.
2. Initial Public Offering
On February 6, 1998, DMS completed the Offering of 6,000,000 shares of
Common Stock at $13.25 per share. In March 1998, the Underwriters exercised
their over-allotment option to purchase an additional 900,000 shares of
Common Stock at the initial public offering price. The total proceeds from
the Offering of the 6,900,000 shares of Common Stock, net of underwriter
commissions and offering costs, was approximately $76,276.
The net proceeds were used primarily for the cash portion of the purchase
prices for the Founding Companies, for the early extinguishment of certain
note payable obligations of the Company which resulted in an extraordinary
loss of $713 net of income tax and for the repayment of certain indebtedness
of the Founding Companies.
Upon the closing of the Offering, the Company converted its outstanding
181,446 shares of Series A Preferred Stock into 299,225 shares of Common
Stock and the 100 shares of Series B Preferred Stock into 37,736 shares of
Common Stock.
3. Business Combinations
Founding Companies
On February 11, 1998, the Company acquired all of the outstanding common
stock and/or assets of the Founding Companies simultaneously with the
closing of the Offering. The acquisitions have been accounted for using the
purchase method of accounting. The aggregate consideration paid by the
Company to acquire the Founding Companies was $45,988 in cash, excluding
$15,869, which is subject to earn-out provisions, and 3,359,659 shares of
Common Stock. The consideration does not reflect contingent consideration
which may be issued pursuant to earn out arrangements included in the
definitive agreements with the Founding Companies.
6
<PAGE> 7
Recent Acquisitions
On April 7, 1998, the Company acquired Delta Air & Road Transport, Plc.
("Delta"), a London-based delivery services firm with 1997 revenues of
approximately $33,400, for a total cash purchase price of approximately
$22,300, exclusive of a $3,000 earn out. The acquisition has been accounted
for using the purchase method of accounting. The excess purchase price over
the fair value of the net assets acquired of approximately $20,633 is being
amortized over a forty-year period.
During the nine months ended September 30, 1998, the Company acquired
twenty-one other delivery service firms (referred to jointly with Delta as
"Recent Acquisitions") for aggregate consideration of approximately $8,492
in cash, 355,150 shares of Common Stock and $1,000 payable over a two year
period. One of these acquisitions has been accounted for as a pooling of
interests; however, comparative financial statements of earlier periods have
not been restated due to the immateriality of the acquisition. The remaining
acquisitions have been accounted for using the purchase method of
accounting. Acquisitions recorded during the three months ended September
30, 1998 resulted in additional goodwill of $6,437.
During the three months ended September 30, 1998, goodwill associated with
the Founding Company acquisitions and the Recent Acquisitions was increased
by $19,400, primarily due to contingent consideration of $7,300, and to
revisions to the recorded estimated value of net assets acquired.
Acquisition Liabilities
In connection with the acquisitions of the Founding Companies and the Recent
Acquisitions, the Company recorded liabilities for employee severance and
for future operating lease payments (the "Acquisition Liabilities"). The
severance accrual relates to the involuntary termination of approximately 85
administrative and middle management personnel from the integration of the
acquired operations. Seven of the employees were terminated prior to
September 30, 1998, and management believes the remaining employees will be
terminated by December 31, 1998. The operating lease payment accrual relates
to equipment and facility leases assumed by the Company. The Company has
either vacated the facilities or stopped using the equipment, or expects to
do so by mid-1999. Amounts accrued represent management's estimate of the
cost to exit the facilities and equipment leases.
The changes in the Acquisition Liabilities during the three month period
ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
----------------------
SEVERANCE LEASE
LIABILITY LIABILITY
--------- ---------
<S> <C> <C>
Balance at June 30, 1998 $ 875 $2,531
Additional accrual - Recent
Acquisitions 840
Utilization (66) (117)
------ ---------
Balance at September 30, 1998 $ 809 $ 3,254
====== =========
</TABLE>
The Company continues to analyze its facilities, staffing and other
requirements associated with the Recent Acquisitions, and expects to further
adjust the related purchase accounting during the fourth quarter of 1998.
Pro Forma Financial Information
The following unaudited condensed pro forma financial information of the
Company for the nine-month periods ended September 30, 1997 and 1998
includes the combined operations of the Company, the Founding Companies
and the Recent Acquisitions as if the Offering and the acquisitions had
occurred on January 1, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT
PER SHARE DATA
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1997 1998
------------ --------
<S> <C> <C>
Revenues $163,722 $175,852
Income before extraordinary item $ 2,760 $ 4,338
Net income $ 2,760 $ 3,625
Per share data:
Income before extraordinary item $ 0.23 $ 0.36
Net income $ 0.23 $ 0.30
</TABLE>
7
<PAGE> 8
The unaudited condensed pro forma financial information includes adjustments
to the Company's historical results of operations which provide for
reductions in salaries, bonuses and benefits payable or provided to the
acquired companies' stockholders and managers to which they agreed
prospectively, incremental amortization of goodwill, reduction in royalty
payments made by certain Founding Companies in accordance with franchise
agreements that terminated as a result of the Combinations, income tax
adjustments, incremental interest expense associated with borrowings to fund
the acquisitions and the reduction in expense related to amounts allocated
to in-process research and development activities. This summarized pro forma
information may not be indicative of actual results if the transactions had
occurred on the dates indicated or of the results which may be realized in
the future.
4. Debt
On June 11, 1998, the Company entered into a $60,000 senior credit facility
with a group of lenders with NationsBank, N.A. as administrative agent. The
facility consists of a revolving line of credit and a letter of credit
facility. The facility was expanded to $105,000 effective August 12, 1998.
The facility is secured by substantially all of the assets of the Company
and contains restrictive covenants including restrictions on dividends.
The revolving line of credit bears interest determined by reference to the
administrative agent's base rate or the LIBOR rate, plus marginal rates
based on performance measurements. The weighted average interest rate on the
outstanding facility was 7.18% at September 30, 1998. Interest payments are
due at intervals ranging between one and three months and the maturity date
of the facility is May 21, 2001.
$54,000 of the line of credit was outstanding at September 30, 1998, and
approximately $58,500 was outstanding at November 11, 1998. Commitment fees
on the unused portion of the facility range from .25% to .375% per annum
based on performance measurements. The Company had $4,832 of letters of
credit outstanding at September 30, 1998.
5. Stockholders' Equity and Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires the reporting and display of comprehensive
income and its components in the financial statements.
SFAS No. 130 also requires the Company to classify items of other
comprehensive income or loss by their nature in financial statements.
Changes in stockholders' equity and comprehensive income during the nine
months ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS' COMPREHENSIVE
EQUITY INCOME
------------- -------------
<S> <C> <C>
Stockholders' equity at December 31, 1997 $ 716
Issuance of Common Stock in connection
with public offering, net of offering costs
and underwriter discounts 76,276
Issuance of Common Stock in connection
with acquisitions 40,014
Comprehensive income
Net income 2,045 $2,045
Foreign currency translation adjustment 234 234
-------- --------
Total $2,279 $ 2,279
-------- --------
Shareholders equity balance at September 30, 1998 $119,285
========
</TABLE>
8
<PAGE> 9
6. Earnings per Share
The following table sets forth the calculation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
----- -------- ----- ------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $(186) $ 599 $(208) $2,758
Extraordinary item-loss on early
Extinguishment of debt, net of income taxes -- -- -- 713
----- -------- ----- ------
Net income (loss) $(186) $ 599 $(208) $2,045
===== ======== ===== ======
Weighted average shares outstanding 847 11,743 847 10,031
===== ======== ===== ======
Income (loss) before extraordinary item $(.22) $ .05 $(.25) $ .27
Extraordinary item-loss on early
Extinguishment of debt, net of income taxes -- -- -- (.07)
----- -------- ----- ------
Net income (loss) per share $(.22) $ .05 $(.25) $ .20
===== ======== ===== ======
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $(186) $ 599 $(208) $2,758
Extraordinary item-loss on early
extinguishment of debt, net of income taxes -- -- -- 713
----- -------- ----- ------
Net income (loss) $(186) $ 599 $(208) $2,045
===== ======== ===== ======
Weighted average shares outstanding 847 11,743 847 10,031
Potential common shares from stock options -- 214 -- 191
Shares subject to earnout provisions -- 55 -- 19
----- -------- ----- ------
Total weighted average shares outstanding 847 12,012 10,241
===== ======== ===== ======
Income (loss) before extraordinary item $(.22) $ .05 $(.25) $ .27
Extraordinary item-loss on early
extinguishment of debt, net of income taxes -- -- -- (.07)
----- -------- ----- ------
Net income (loss) per share $(.22) $ .05 $(.25) $ .20
===== ======== ===== ======
</TABLE>
7. New Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS
131 introduces a management approach model for segment reporting. This
approach is based on the way that the chief operating decision maker
organizes segments within a company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure or in any other
manner in which management disaggregates a company. SFAS 131 is effective for
fiscal years beginning after December 15, 1997 and does not need to be
applied to interim statements in the initial year of application. The Company
intends to adopt this standard when required and is in the process of
determining the effect of SFAS 131 on the Company's financial statements.
8. Subsequent Events
Subsequent to September 30, 1998, the Company acquired three businesses with
aggregate annual revenues of approximately $16,650, for a total purchase
price of $12,500 consisting of $6,600 in cash and $5,900 of interest bearing
notes to be paid over a 2 year period. These acquisitions will be accounted
for under the purchase method of accounting.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. When used herein, the words "anticipate",
"believe" , "estimate", "intend", "may", "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in the Company's Registration Statement
on Form S-4 as filed on May 29, 1998, as well as those discussed under the
heading "Factors Affecting the Company's Business". The Company does not
undertake any obligation to revise these forward-looking statements to reflect
any future events or circumstances.
Introduction
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto
appearing elsewhere herein. All dollar amounts are expressed in thousands,
except for per share data.
9
<PAGE> 10
Overview
The Company was formed in 1997 to create one of the largest providers of
point-to-point delivery services in the world. The Company focuses on
point-to-point delivery by foot, bicycle, motorcycle, car and truck and operates
in 18 of the largest metropolitan markets in the United States as well as in
London, U.K. and Wellington, New Zealand. The Company conducted no significant
operations until the closing of the Offering and the Combinations on February
11, 1998.
Results of Operations - The Company
The Company conducted no significant operations from its inception through the
Offering and the Combinations. For accounting purposes and the presentation of
the actual financial results herein, February 11, 1998 has been used as the
effective date of the Combinations. The Company incurred various legal,
accounting and printing costs in connection with the Offering and the
Combinations, which were funded by the proceeds from the Offering.
Revenues for the three and nine months ended September 30, 1998, were $56,367
and $131,735, respectively, and gross profit for the three and nine months was
$21,867 and $51,242, respectively. Operating income was $1,938 and $7,300 for
the three and nine months ended September 30, 1998. Operating income for the
three and nine months ended September 30, 1998 includes other charges of $1,822,
which consist of $1,000 for severance of three officers of the Company, and
$822 for costs of unsuccessful acquisitions and projects.
Net income was $599 for the three-month period and net income before
extraordinary item was $2,758 for the nine-month period. Net income before
extraordinary items for the nine-month period includes a $700 one-time, non-cash
charge of acquired in-process research and development. The net income of $2,045
for the nine month period includes an extraordinary loss of $713 net of income
taxes related to the early extinguishment of certain notes payable obligations.
For a discussion of pro forma operations for the nine months ended September 30,
1998 and 1997, see the Results of Operations - Pro Forma.
Liquidity and Capital Resources - The Company
As of September 30, 1998, the Company had working capital of approximately
$25,456 and cash of approximately $4,284. The Company repaid at the closing of
the Offering substantially all of the Founding Companies' debt obligations
except to the extent such obligations related to capitalized lease obligations
and certain debt obligations of Bridge Wharf Investments Limited (d/b/a/ West
One).
On June 11, 1998, the Company entered into a $60,000 senior credit facility with
a group of lenders with NationsBank, N.A. as administrative agent. The facility
consists of a revolving line of credit and a letter of credit facility. The
facility was expanded to $105,000 effective August 12, 1998. The facility is
secured by substantially all of the assets of the Company and contains
restrictive covenants including restrictions on dividends.
The revolving line of credit bears interest determined by reference to the
administrative agent's base rate or the LIBOR rate, plus marginal rates based on
performance measurements. The weighted average interest rate on the outstanding
facility was 7.18% at September 30, 1998. Interest payments are due at intervals
ranging between one month and three months and the maturity date of the facility
is May 21, 2001.
$54,000 of the line of credit was outstanding at September 30, 1998. Commitment
fees on the unused portion of the facility range from .2% to .375% per annum
based on performance measurements. The Company has $4,832 of letters of credit
outstanding at September 30, 1998.
The Company anticipates that its current cash on hand, cash flow from operations
and additional financing available under the existing line of credit will be
sufficient to meet the Company's liquidity requirements for its operations. The
Company is currently, and intends to continue, pursuing additional acquisitions,
which are expected to be funded through a combination of cash and the issuance
of the Company's shares of Common Stock. To the extent that the Company elects
to pursue acquisitions involving the payment of significant amounts of cash (to
fund the purchase price of such acquisitions and the repayment of assumed
indebtedness) and the existing line of credit is inadequate, the Company is
likely to require additional sources of financing (debt or equity financing) to
fund such non-operating cash needs.
10
<PAGE> 11
Management expects the Company's capital expenditures, consisting primarily of
communications equipment and improvements to related technology, to increase as
its operations continue to expand. However, the amount of these capital
expenditures is expected to remain relatively minor compared to the cash
requirements related to the Company's acquisition program. The Company does not
have significant capital expenditure requirements to replace or expand the
number of vehicles used in its operations because substantially all of its
drivers are owner-operators who provide their own vehicles.
Results of Operations - Pro Forma
The following unaudited pro forma statements of operations of the Company for
the nine-month periods ended September 30, 1997 and 1998 include the combined
operations of the Company, the Founding Companies and the Recent Acquisitions as
if the Offering, the Combinations and the Recent Acquisitions had occurred on
January 1, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------- PERCENT
1997 1998 CHANGE
------------ ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues $ 163,722 $ 175,852 7.4%
Costs of revenues 102,220 108,163 5.8
------- --------- -------
Gross profit 61,502 67,689 10.1
Selling, general and
administrative 48,704 50,547 3.8
Depreciation and amortization 4,706 4,499 (4.4)
Other charges -- 1,822 100.0
------- --------- -------
Operating income 8,092 10,821 33.7
Interest and other expense, net 2,676 2,776 3.7
------- --------- -------
Income before income taxes and
extraordinary item 5,416 8,045 48.5
Provision for income taxes 2,656 3,707 39.6
------- --------- -------
Income before extraordinary item $ 2,760 $ 4,338 57.2%
======= ========= =======
Income per share before
Extraordinary item - diluted $ 0.23 $ 0.36
======== =========
</TABLE>
The unaudited pro forma statements of operations include adjustments to the
Company's historical results of operations which provide for (1) reductions in
salaries, bonuses and benefits payable or provided to stockholders and managers
of the Founding Companies and the Recent Acquisitions to which they agreed
prospectively; (2) amortization of goodwill as a result of the Combinations to
be recorded over a period of 5 to 40 years; (3) reduction in royalty payments
made by certain Founding Companies in accordance with franchise agreements that
terminated as a result of the combinations; (4) income tax adjustments as
follows: (a) incremental provision for federal and state income taxes assuming
all entities were subject to federal and state income taxes, (b) federal and
state income taxes relating to the other statement of operations adjustments and
(c) incremental provision for income taxes due to non-deductible goodwill; (5)
an adjustment to interest expense assuming that the Company's debt at September
30, 1998, which includes debt related to the Recent Acquisitions, was
outstanding, in its entirety, for all periods presented using the Company's
current cost of financing; and (6) the reduction in expense related to amounts
allocated to in-process research and development activities. For both periods
presented, the number of shares used in computing income per share before
extraordinary item - diluted includes 11,817,624 outstanding common shares at
September 30, 1998, 190,798 incremental shares for potential common shares from
stock options using the treasury stock method and 18,503 shares subject to
earn-out provisions.
This summarized pro forma information may not be indicative of actual results if
the transactions had occurred on the dates indicated or of the results which may
be realized in the future. The pro forma results do not reflect the expected
benefits and cost reductions anticipated by the Company.
Pro forma revenues increased by approximately $12,130. This increase was
primarily attributable to the addition of significant new accounts or service
contracts at several of the Founding Companies, and the expansion of delivery
services or the purchase of additional customer lists.
Pro forma cost of revenues increased approximately $5,943. This increase was
generally consistent with the respective increases in revenues. As a percentage
of pro forma revenues, cost of revenues decreased from 62.4% for the nine months
ended September 30, 1997, to 61.5% for the nine months ended September 30, 1998,
primarily as a result of consolidation of administrative activities and
improvements in productivity of the overall North American courier fleet.
Pro forma year-to-date selling, general and administrative expenses increased
approximately $1,843. This increase primarily related to
11
<PAGE> 12
costs incurred related to the additional infrastructure required to support the
acquisition of new accounts. As a percentage of pro forma revenues, sales,
general and administrative expenses decreased from 29.7% for the nine months
ended September 30, 1997, to 28.7% for the nine months ended September 30, 1998,
primarily as a result of rationalization of facilities in several key operating
centers.
Other charges increased from zero to $1,822. The charges consist of $1,000 for
severance of three officers of the Company and $822 for costs of unsuccessful
acquisitions and projects.
Pro forma year-to-date depreciation and amortization expense decreased by $207.
The decrease was primarily attributable to certain property and equipment
previously utilized by the Founding Companies, which were not acquired by the
Company, including the facility owned by Bridge Wharf Investments Limited (d/b/a
West One).
Pro forma consolidated operating income increased $2,729 as a result of the
factors discussed above.
Pro forma year-to-date interest and other expense increased $100 as a result of
changes in other income and expense items. Pro forma interest expense remained
relatively constant between the periods.
Impact of Year 2000
The Year 2000 issue refers to the impact on information technology and
non-information technology systems, including codes embedded in chips and other
hardware devices, of date-related issues including the identification of a year
by two digits and not four so that a date using "00" would be recognized as the
year "1900" rather than "2000." This date-related problem could result in system
failures, miscalculations or errors causing disruptions of operations or other
business problems, including, among others, a temporary inability to process
transactions, send invoices or engage in normal business activities.
The Company is in the process of identifying operating and software issues to
address Year 2000 readiness in its internal systems and with its customers and
suppliers. The Company expects to address its most critical internal systems
first, including the Company's proprietary capture and dispatch system
("Kiwi"), and targets to have them Year 2000 compliant by September 1, 1999.
The Company intends to address all major categories of information technology
and non-information technology systems in use by the Company, including
customer service, dispatch and finance.
The Company plans to use both internal and external resources to reprogram and
test the software for Year 2000 modifications. Cost of this and all other
efforts to achieve Year 2000 compliance is estimated to be less than $1,000. To
date, the Company's expenses associated with its Year 2000 program have been
limited to internal costs. The Company has not separately tracked such internal
costs, which were primarily associated with payroll costs. The Company expects
future costs to be funded by internally generated funds.
The Company has begun to communicate with its major customers, suppliers and
financial institutions to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
The feedback from some of the Company's major suppliers and customers contacted
has confirmed that they anticipate being Year 2000 compliant on or before
December 31, 1999.
The Company currently expects that the Year 2000 issue will not pose significant
operational problems. However, delays in the implementation of the new systems,
a failure to fully identify all of the Year 2000 dependencies in the Company's
systems and in the systems of its suppliers, customers and financial
institutions, or a failure of such third parties to adequately address their
respective Year 2000 issues could have a material adverse effect on the
Company's business, financial condition and results of operations. Therefore,
the Company expects to develop contingency plans for continuing operations in
the event such problems arise. However, there can be no assurance that such
contingency plans will be sufficient to handle all of the problems which may
arise.
Recently Issued Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
introduces a management approach model for segment reporting. This approach is
based on the way that the chief operating decision maker organizes segments
within a company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure or management structure or on any other manner in which management
disaggregates a company. SFAS 131 is effective for fiscal years beginning after
December 15, 1997 and does not need to be applied to interim statements in the
initial year of application. The Company intends to adopt this standard when
required and is in the process of determining the effect of SFAS 131 on the
Company's financial statements.
Factors Affecting the Company's Business
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
12
<PAGE> 13
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. The Company's point-to-point
delivery services business is subject to seasonal influences. The Company's
revenues and profitability in its business have generally been lower in the
summer months. As the Company's mix of businesses evolves through future
acquisitions, these seasonal fluctuations may change. In addition, quarterly
results have been and in the future may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
the timing and costs of converting acquired companies to the DMS model, general
economic conditions, and the retroactive restatement of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
CONVERSION TO THE DMS MODEL. The Company is converting the existing
operations of acquired companies to the DMS Model to the
extent feasible. The process of converting an existing point-to-point courier
operation to the DMS Model involves the implementation of the Free Call
Dispatch system as well as the integration of new software systems, pricing
structures, billing methods, personnel utilization practices and data
standardization. Changes in the pricing structures and billing methods could
result in the loss of customers. The process of conversion in a particular
market may involve unforeseen difficulties, including delays in the
consolidation of facilities, complications and expenses in implementing the new
operating software system, or the loss of customers or key operating personnel,
any of which can cause substantial delays to the conversion process in such
market and may have a material adverse effect on the Company's business,
financial condition or results of operations.
INTERNATIONAL OPERATIONS. A significant portion of the Company's revenues are
generated in the United Kingdom. For the three-month period ended September 30,
1998, revenues in the United Kingdom accounted for approximately 42% of total
consolidated revenues. The conversion rate between the British Pound Sterling
and the U.S. dollar during 1998 has been approximately the same as during the
comparable period in 1997, although there can be no assurance that fluctuations
in such currency exchange rate will not in the future have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company intends to continue to focus significant attention and resources on
international expansion in the future and expects foreign sales to continue to
represent a significant portion of the Company's total sales. In addition to
currency exchange rates, the Company's operations in foreign markets are subject
to a number of inherent risks, including new and different legal, regulatory and
competitive requirements, difficulties in staffing and managing foreign
operations, risks specific to different business lines that the Company may
enter into, and other factors.
ACQUISITIONS. The Company depends upon organic growth and acquisitions to
increase its earnings. There can be no assurance that the Company will complete
acquisitions in a manner that coincides with the end of its fiscal quarters.
The failure to complete acquisitions on a timely basis has had and can have
in the future a material adverse effect on the Company's quarterly results.
Likewise, delays in implementing planned integration strategies and activities
also could adversely affect the Company's quarterly earnings.
In addition, there can be no assurance that acquisitions will be available to
the Company on favorable terms. When the Company is unable to use the Company's
Common Stock as consideration in acquisitions, for example, because it believes
that the market price of the Common Stock is too low or because the owners of
potential acquisition targets conclude that the market price of the Company's
Common Stock is too volatile, the Company must use cash to make such
acquisitions. This might adversely affect the pace of the Company's acquisition
program and the impact of acquisitions on the Company's quarterly results. In
addition, the consolidation of the domestic courier industry has reduced the
number of larger companies available for sale, which could lead to higher
prices being paid for the acquisition of the remaining domestic, independent
companies. The failure to acquire additional businesses or to acquire such
businesses on favorable terms in accordance with the Company's growth strategy
could have a material adverse impact on growth.
There can be no assurance that companies that have been acquired, or that may be
acquired in the future, will achieve sales and profitability levels that justify
the investment therein. Acquisitions may involve a number of special risks that
could have a material adverse effect on the Company's operations and financial
performance, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets.
COMPETITION. The Company operates in a highly competitive environment. In the
markets in which it operates, the Company generally competes with a large number
of smaller, independent companies, many of which are well-established in their
markets. Several of its large competitors operate in many of its geographic
markets, and other competitors may choose to enter the Company's geographic and
product markets in the future. No assurances can be given that competition will
not have an adverse effect on the Company's business.
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Item 3: Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISPATCH MANAGEMENT SERVICES CORP.
Date: November 16, 1998 By: /s/ Marko Bogoievski
---------------------------
Marko Bogoievski
Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
Exhibit
Number Description
27.1 Financial data schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,284
<SECURITIES> 0
<RECEIVABLES> 36,741
<ALLOWANCES> (1,580)
<INVENTORY> 0
<CURRENT-ASSETS> 44,500
<PP&E> 10,726
<DEPRECIATION> 0
<TOTAL-ASSETS> 199,939
<CURRENT-LIABILITIES> 19,044
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 119,167
<TOTAL-LIABILITY-AND-EQUITY> 119,285
<SALES> 56,367
<TOTAL-REVENUES> 56,367
<CGS> 34,500
<TOTAL-COSTS> 34,500
<OTHER-EXPENSES> 19,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024
<INCOME-PRETAX> 1,033
<INCOME-TAX> 434
<INCOME-CONTINUING> 599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 599
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
