<PAGE> 1
PROSPECTUS SUPPLEMENT FILED PURSUANT TO RULE 424(B)(3)
TO PROSPECTUS DATED MAY 29, 1998 REGISTRATION NO. 333-53605
[COMPANY LOGO]
DISPATCH MANAGEMENT SERVICES CORP.
Dispatch Management Services Corp. (the "Company") has prepared this
Prospectus Supplement to update the Company's Prospectus dated May 29, 1998,
covering 1,500,000 shares of the Company's common stock, $.01 par value (the
"Common Stock"). This Prospectus Supplement provides the following information:
(i) the Company's consolidated balance sheets as of June 30, 1998 (unaudited)
and December 31, 1997 (unaudited), (ii) the Company's consolidated statements of
operations for the three and six months ended June 30, 1998 (unaudited) and 1997
(unaudited), (iii) the Company's consolidated statements of cash flows for the
six months ended June 30, 1998 (unaudited) and 1997 (unaudited), and (iv) the
Management's Discussion and Analysis of Financial Condition and Results of
Operations related thereto.
The date of this Prospectus Supplement is August 18, 1998.
<PAGE> 2
FINANCIAL STATEMENTS
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 354 $ 2,275
Accounts receivable, net of allowance of $ and
$1,001 for doubtful accounts.............................. 19 32,517
Prepaid expenses, other assets and deferred offering
costs..................................................... 6,618 4,533
------ --------
Total current assets................................... 6,991 39,325
Property, plant and equipment, net.......................... 30 8,509
Goodwill, net............................................... 266 103,946
Other long-term assets...................................... 748 18,692
------ --------
Total assets........................................... $8,035 $170,472
------ --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term obligations...................................... $1,585 $ 2,841
Accounts payable............................................ 673 5,154
Accrued liabilities and other current liabilities........... 5,061 14,909
------ --------
Total current liabilities.............................. 7,319 22,904
Long-term obligations, net of current maturities............ -- 28,318
Other long-term liabilities................................. -- 3,943
------ --------
Total liabilities...................................... 7,319 55,165
------ --------
Preferred stock, $.01 par, 10,000,000 shares authorized
Series A: 181,446 and 0 shares issued and outstanding,
respectively........................................... 2 --
Series B: 100 and 0 shares issued and outstanding,
respectively.......................................... -- --
Common stock, $.01 par, 100,000,000 shares authorized,
846,923 and 11,640,355 shares issued and outstanding,
respectively........................................... 9 116
Additional paid-in capital................................ 1,422 114,531
Cumulative translation adjustment......................... -- 12
Retained earnings (accumulated deficit)................... (717) 648
------ --------
Total stockholders' equity............................. 716 115,307
------ --------
Total liabilities and stockholders' equity............. $8,035 $170,472
------ --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 3
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1998 1997 1998
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Revenues.................................... $ 102 $ 51,053 $ 102 $ 75,369
Cost of revenues............................ 94 30,965 94 45,994
-------- ----------- -------- ----------
Gross profit.............................. 8 20,088 8 29,375
Selling, general and administrative
expenses.................................. 16 14,595 30 22,125
Depreciation and amortization............... -- 1,182 -- 1,888
-------- ----------- -------- ----------
Operating income (loss)................... (8) 4,311 (22) 5,362
Other expenses:
Interest expense.......................... -- 436 -- 664
Acquired in-process research and
development............................ -- -- -- 700
Other expense............................. -- 57 -- 139
-------- ----------- -------- ----------
Income (loss) before income tax provision
and extraordinary item.................... (8) 3,818 (22) 3,859
Income tax provision........................ -- 1,627 -- 1,700
-------- ----------- -------- ----------
Income (loss) before extraordinary item..... (8) 2,191 (22) 2,159
Extraordinary loss on early extinguishment
of debt (net of income tax benefit of
$384)..................................... -- -- -- 713
-------- ----------- -------- ----------
Net income (loss)........................... $ (8) $ 2,191 $ (22) $ 1,446
-------- ----------- -------- ----------
Income (loss) per common share -- basic
Income (loss) before extraordinary item... $ (0.01) $ 0.19 $ (0.03) $ 0.24
Extraordinary item........................ -- -- -- (0.08)
-------- ----------- -------- ----------
Net income (loss)......................... $ (0.01) $ 0.19 $ (0.03) $ 0.16
-------- ----------- -------- ----------
Income (loss) per common share -- diluted
Income (loss) before extraordinary item... $ (0.01) $ 0.19 $ (0.03) $ 0.23
Extraordinary item........................ -- -- -- (0.08)
-------- ----------- -------- ----------
Net income (loss)......................... $ (0.01) $ 0.19 $ (0.03) $ 0.15
-------- ----------- -------- ----------
Weighted average shares Common shares
outstanding............................... 846,923 11,545,545 846,923 9,175,915
-------- ----------- -------- ----------
Adjusted common shares assuming exercise
of stock options....................... 846,923 11,839,348 846,923 9,354,963
-------- ----------- -------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
<PAGE> 4
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1997 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (22) $ 1,446
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Amortization and depreciation.......................... -- 1,888
Acquired in-process research and development........... -- 700
Early extinguishment of debt........................... -- 713
Change in operating assets and liabilities (net of
assets acquired and liabilities assumed in business
combinations accounted for under the purchase method):
Accounts receivable.................................. (28) (5,799)
Prepaid expenses and other current assets............ (394) (2,347)
Accounts payable and accrued liabilities............. 364 2,457
----- --------
Net cash used by operating activities................ (80) (942)
----- --------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired........... -- (85,415)
Additions to equipment, net of disposals.................. -- (3,071)
----- --------
Net cash used in investing activities................ -- (88,486)
----- --------
Cash flows from financing activities:
Proceeds from initial public offering, net of underwriting
discounts and other offering costs..................... -- 76,276
Proceeds from issuance of common stock.................... 84 --
Proceeds from long-term obligations....................... -- 27,070
Principal payments on short-term obligations.............. -- (6,602)
Principal payments on long-term obligations............... -- (5,395)
----- --------
Net cash provided by financing activities............ 84 91,349
----- --------
Net increase in cash and cash equivalents................... 4 1,921
Cash and cash equivalents, beginning of period.............. -- 354
----- --------
Cash and cash equivalents, end of period.................... $ 4 $ 2,275
===== ========
</TABLE>
3
<PAGE> 5
The company issued common stock and cash in connection with business
combinations accounted for under the purchase method of accounting during the
six months ended June 30, 1998. The purchase price of the acquired companies at
the dates of the acquisitions was allocated as follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 26,686
Prepaid expenses and other assets........................... 2,491
Property and equipment...................................... 6,129
Intangible assets........................................... 105,964
Other assets................................................ 17,204
Short-term debt............................................. (3,097)
Accounts payable............................................ (11,650)
Accrued liabilities......................................... (9,662)
Long-term debt.............................................. (4,736)
Other long-term liabilities................................. (4,215)
--------
Net assets acquired....................................... $125,114
--------
The acquisitions were funded as follows:
Common stock.............................................. $ 36,857
Cash, net of cash acquired................................ 85,415
Purchase price and acquisition costs payable.............. 2,842
--------
$125,114
--------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
In connection with the closing of the initial public offering (the
"Offering") of the common stock, $.01 par value (the "Common Stock"), of
Dispatch Management Services Corp. (the "Company" or "DMS") in February 1998,
the Company acquired, in separate combination transactions (the "Combinations"),
38 urgent, on-demand, point-to-point courier firms and one software firm (each,
together with the software firm, a "Founding Company," and collectively, the
"Founding Companies").
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of the Company, the
Founding Companies and the other businesses acquired subsequent to the Offering
(the "Recent Acquisitions").
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information, the
instructions to Quarterly Report Form 10-Q and Rule 10-01 of Regulation S-X, and
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. Accordingly, significant accounting policies
and other disclosures normally provided have been omitted since such items are
disclosed therein. In the opinion of management, the information contained
herein reflects all adjustments necessary to make the consolidated financial
position, consolidated results of operations and of cash flows for the interim
periods a fair presentation. The results of operations for the interim periods
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
2. INITIAL PUBLIC OFFERING
On February 6, 1998, DMS completed the Offering of 6,000,000 shares of
Common Stock at $13.25 per share. In March 1998, the Underwriters exercised
their over-allotment option to purchase an additional 900,000 shares of Common
Stock at the initial public offering price. The total proceeds from the Offering
of the 6,900,000 shares of Common Stock, net of underwriter commissions and
offering costs, was approximately $76,276.
The net proceeds were used primarily for the cash portion of the purchase
prices for the Founding Companies, for the early extinguishment of certain note
payable obligations of the Company which resulted in an extraordinary loss of
$713 net of income tax and for the repayment of certain indebtedness of the
Founding Companies.
Upon closing of the Offering, the Company converted the 181,446 shares of
Series A Preferred Stock into 299,225 shares of Common Stock and the 100 shares
of Series B Preferred Stock into 37,736 shares of Common Stock.
3. BUSINESS COMBINATIONS
Founding Companies
On February 11, 1998, the Company acquired all of the outstanding common
stock and/or assets of the Founding Companies simultaneously with the closing of
the Offering. The acquisitions have been accounted for using the purchase method
of accounting. The aggregate consideration paid by the Company to acquire the
Founding Companies was $45,988 in cash, excluding $15,869, which is subject to
earn-out provisions, and 3,359,659 shares of Common Stock. The consideration
does not reflect contingent consideration which may be issued pursuant to earn
out arrangements included in the definitive agreements for the Founding
Companies. Contingent consideration, if earned, will be recorded in a manner
consistent with the consideration paid at closing for each respective Founding
Company.
5
<PAGE> 7
In connection with the acquisition of the Founding Companies, the Company
recorded liabilities for employee severance and for future operating lease
payments (the "Acquisition Liabilities"). The severance accrual relates to the
involuntary termination of approximately 85 administrative and middle management
personnel from the integration of the acquired operations. Seven of the
employees were terminated prior to June 30, 1998, and management believes the
remaining employees will be terminated by December 31, 1998. The operating lease
payment accrual relates to equipment and facility leases assumed by the Company.
The Company has either vacated the facilities or stopped using the equipment, or
expects to do so by mid-1999. Amounts accrued represent management's estimate of
the cost to exit the facilities and equipment leases.
The Acquisition Liabilities and activity during the three month period
ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
----------------------
SEVERANCE LEASE
LIABILITY LIABILITY
--------- ---------
<S> <C> <C>
Balance established in purchase accounting............... $1,013 $2,620
Severance payments....................................... (138)
Lease payments........................................... (89)
------ ------
Balance at June 30, 1998................................. $ 875 $2,531
====== ======
</TABLE>
Goodwill was increased by $3,633 during the three months ended June 30,
1998 as a result of recording the Acquisition Liabilities. Goodwill was reduced
by approximately $3,000 during the three months ended June 30, 1998 as a result
of revisions to the estimated value of net assets acquired.
Recent Acquisitions
On April 7, 1998, the Company acquired Delta Air & Road Transport, Plc.
("Delta"), a London-based delivery services firm with 1997 revenues of
approximately $33,400, for a total cash purchase price of approximately $22,300,
exclusive of a $3,000 earn out. The acquisition has been accounted for using the
purchase method of accounting. The excess purchase price over the fair value of
the net assets acquired of approximately $20,633 is being amortized over a
forty-year period.
During the three months ended June 30, 1998, the Company acquired numerous
other delivery service firms (referred to jointly with Delta as "Recent
Acquisition") for aggregate consideration of approximately $4,609 in cash,
177,881 shares of Common Stock and $1,000 payable over a two year period. One of
these acquisitions has been accounted for as a pooling of interests; however,
comparative financial statements of earlier periods have not been restated due
to the immateriality of the acquisition. The remaining acquisitions have been
accounted for using the purchase method of accounting.
The Company is in the process of analyzing its facilities, staffing and
other requirements associated with the Recent Acquisitions, and expects to
adjust the related purchase accounting during the third quarter of 1998.
The following unaudited pro forma financial information of the Company for
the six month periods ended June 30, 1997 and 1998 include the combined
operations of the Company, the Founding Companies and the Recent Acquisitions as
if the Offering and the acquisitions had occurred on January 1, 1997 and 1998,
respectively.
6
<PAGE> 8
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT
PER SHARE DATA
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1998
---------- -----------
<S> <C> <C>
Revenues............................................... $95,549 $105,729
Income before extraordinary item....................... $ 1,723 $ 3,451
Net income............................................. $ 1,723 $ 2,738
Per share data:
Income before extraordinary item..................... $ 0.15 $ 0.29
Net income........................................... $ 0.15 $ 0.23
</TABLE>
The unaudited pro forma financial information includes adjustments to the
Company's historical results of operations which provide for reductions in
salaries, bonuses and benefits payable or provided to the acquired companies'
stockholders and managers to which they agreed prospectively, incremental
amortization of goodwill, reduction in royalty payments made by certain Founding
Companies in accordance with franchise agreements that terminated as a result of
the Combinations, income tax adjustments, incremental interest expense
associated with borrowings to fund the acquisitions and the reduction in expense
related to amounts allocated to in-process research and development activities.
This summarized pro forma information may not be indicative of actual results if
the transactions had occurred on the dates indicated or of the results which may
be realized in the future.
4. DEBT
On June 11, 1998, the Company entered into a $60,000 senior credit facility
with a group of lenders with NationsBank, N.A. as administrative agent. The
facility consists of a revolving line of credit and a letter of credit facility.
The facility was expanded to $105,000 effective August 12, 1998. The facility is
secured by substantially all the assets of the Company and contains restrictive
covenants including restrictions on dividends and certain financial measurement
requirements.
The revolving line of credit bears interest determined by reference to the
administrative agent's base rate or the LIBOR rate, plus marginal rates based on
performance measurements. The weighted average interest rate on the outstanding
facility was 7.15% at June 30, 1998. Interest payments are due at intervals
ranging between one and three months and the maturity date of the facility is
May 21, 2001.
$27,070 of the line of credit was outstanding at June 30, 1998, and
approximately $38,000 was outstanding at August 13, 1998. Commitment fees on the
unused portion of the facility range from .25% to .375% per annum based on
performance measurements. The Company had $4,900 of letters of credit
outstanding at June 30, 1998.
5. STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 requires the reporting and display of comprehensive income and its
components in the financial statements.
SFAS No. 130 also requires the Company to classify items of other
comprehensive income or loss by their nature in financial statements.
7
<PAGE> 9
Changes in stockholders' equity and comprehensive income during the six
months ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS' COMPREHENSIVE
EQUITY INCOME
------------- -------------
<S> <C> <C>
Stockholders' equity at December 31, 1997................. $ 716
Issuance of Common Stock in connection with public
offering, net of offering costs and underwriter
discounts............................................... 76,276
Issuance of Common Stock in connection with
acquisitions............................................ 36,857
Comprehensive loss
Net income.............................................. 1,446 $1,446
Foreign currency translation adjustment................. 12 12
------
Total................................................... $1,458
-------- ------
Shareholders equity balance at June 30, 1998.............. $115,307
--------
</TABLE>
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
introduces a management approach model for segment reporting. This approach is
based on the way that the chief operating decision maker organizes segments
within a company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure,management structure or in any other manner in which management
disaggregates a company. SFAS 131 is effective for fiscal years beginning after
December 15, 1997 and does not need to be applied to interim statements in the
initial year of application. The Company intends to adopt this standard when
required and is in the process of determining the effect of SFAS 131 on the
Company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. When used herein, the words "anticipate",
"believe" , "estimate", "intend", "may", "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in the Company's Registration Statement
on Form S-4 as filed on May 29, 1998, as well as those discussed under the
heading "Factors Affecting the Company's Business". The Company does not
undertake any obligation to revise these forward-looking statements to reflect
any future events or circumstances.
Introduction
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto
appearing elsewhere herein. All dollar amounts are expressed in thousands,
except for per share data.
Overview
The Company was formed in 1997 to create one of the largest providers of
point-to-point delivery services in the world. The Company focuses on
point-to-point delivery by foot, bicycle, motorcycle, car and truck and operates
in 18 of the largest metropolitan markets in the United States as well as in
London, U.K. and Wellington, New Zealand. The Company conducted no significant
operations until the closing of the Offering and the Combinations on February
11, 1998.
8
<PAGE> 10
Results of Operations -- The Company
The Company conducted no significant operations from its inception through
the Offering and the Combinations. For accounting purposes and the presentation
of the actual financial results herein, February 11, 1998 has been used as the
effective date of the Combinations. The Company incurred various legal,
accounting and printing costs in connection with the Offering and the
Combinations, which were funded by the proceeds from the Offering.
Revenues for the three and six months ended June 30, 1998, were $51,053 and
$75,369, respectively, and gross profit for the three and six months was $20,088
and $29,375, respectively. Operating income was $4,311 and $5,362 for the three
and six months ended June 30, 1998. Net income was $2,191 for the three month
period and net income before extraordinary item was $2,159 for the six month
period. Net income before extraordinary items for the six month period includes
a $700 one-time, non-cash charge of acquired in-process research and
development. The net income of $1,446 for the six month period includes an
extraordinary loss of $713 net of income taxes related to the early
extinguishment of certain notes payable obligations. For a discussion of pro
forma operations for the six months ended June 30, 1998 and 1997, see the
Results of Operations -- Pro Forma.
Liquidity and Capital Resources -- The Company
As of June 30, 1998, the Company had working capital of approximately
$16,421 and cash of approximately $2,275. The Company paid off at the closing of
the Offering substantially all of the Founding Companies' debt obligations
except to the extent such obligations related to capitalized lease obligations
and certain debt obligations of Bridge Wharf Investments Limited (d/b/a/ West
One).
On June 11, 1998, the Company entered into a $60,000 senior credit facility
with a group of lenders with NationsBank, N.A. as administrative agent. The
facility consists of a revolving line of credit and a letter of credit facility.
The facility was expanded to $105,000 effective August 12, 1998. The facility is
secured by substantially all the assets of the Company and contains restrictive
covenants including restrictions on dividends and certain performance
measurement requirements.
The revolving line of credit bears interest determined by reference to the
administrative agent's base rate or the LIBOR rate, plus marginal rates based on
performance measurements. The weighted average interest rate on the outstanding
facility was 7.15% at June 30, 1998. Interest payments are due at intervals
ranging between one month and three months and the maturity date of the facility
is May 21, 2001.
$27,070 of the line of credit was outstanding at June 30, 1998. Commitment
fees on the unused portion of the facility range from .25% to .375% per annum
based on performance measurements. The Company has $4,900 of letters of credit
outstanding at June 30, 1998.
The Company anticipates that its current cash on hand, cash flow from
operations and additional financing available under the existing line of credit
will be sufficient to meet the Company's liquidity requirements for its
operations. The Company is currently, and intends to continue, pursuing
additional acquisitions, which are expected to be funded through a combination
of cash and the issuance of the Company's shares of Common Stock. To the extent
that the Company elects to pursue acquisitions involving the payment of
significant amounts of cash (to fund the purchase price of such acquisitions and
the repayment of assumed indebtedness) and the existing line of credit is
inadequate, the Company is likely to require additional sources of financing
(debt or equity financing) to fund such non-operating cash needs.
Management expects the Company's capital expenditures, consisting primarily
of communications equipment and improvements to related technology, to increase
as its operations continue to expand. However, the amount of these capital
expenditures is expected to remain relatively minor compared to the cash
requirements related to the Company's acquisition program. The Company does not
have significant capital expenditure requirements to replace or expand the
number of vehicles used in its operations because substantially all of its
drivers are owner-operators who provide their own vehicles.
9
<PAGE> 11
Results of Operations -- Pro Forma
The following unaudited pro forma statements of operations of the Company
for the six month periods ended June 30, 1998 and 1997 include the combined
operations of the Company, the Founding Companies and the Recent Acquisitions as
if the Offering, the Combinations and the Recent Acquisitions had occurred on
January 1, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------- PERCENT
1997 1998 CHANGE
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................................... $95,549 $105,729 10.7%
Costs of revenues........................................... 59,344 64,392 8.5
------- -------- -----
Gross profit.............................................. 36,205 41,337 14.2
Selling, general and administrative......................... 29,235 31,417 7.5
Depreciation and amortization............................... 2,895 2,753 (4.9)
------- -------- -----
Operating income.......................................... 4,075 7,167 75.9
Interest and other expense, net............................. 855 1,161 35.8
------- -------- -----
Income before income taxes and extraordinary item........... 3,220 6,006 86.5
Provision for income taxes.................................. 1,497 2,555 70.7
------- -------- -----
Income before extraordinary item............................ $ 1,723 $ 3,451 100.3%
======= ======== =====
Income per share before Extraordinary item -- diluted....... $ .15 $ .29
======= ========
</TABLE>
The unaudited pro forma statements of operations include adjustments to the
Company's historical results of operations which provide for (1) reductions in
salaries, bonuses and benefits payable or provided to stockholders and managers
of the Founding Companies and the Recent Acquisitions to which they agreed
prospectively; (2) amortization of goodwill as a result of the Combinations to
be recorded over a period of 5 to 40 years; (3) reduction in royalty payments
made by certain Founding Companies in accordance with franchise agreements that
terminated as a result of the combinations; (4) income tax adjustments as
follows: (a) incremental provision for federal and state income taxes assuming
all entities were subject to federal and state income taxes, (b) federal and
state income taxes relating to the other statement of operations adjustments and
(c) incremental provision for income taxes due to non-deductible goodwill; (5)
incremental interest expense associated with borrowings to fund the
acquisitions; and (6) the reduction in expense related to amounts allocated to
in-process research and development activities. The number of shares used in
computing income per share before extraordinary item -- diluted includes the
weighted average outstanding common shares at June 30, 1998 (11,545,545 shares)
and 293,303 incremental shares for potential common shares from stock options
using the treasury stock method.
This summarized pro forma information may not be indicative of actual
results if the transactions had occurred on the dates indicated or of the
results which may be realized in the future. The pro forma results do not
reflect the expected benefits and cost reductions anticipated by the Company,
future corporate costs, or interest income on Offering proceeds.
Pro forma revenues increased by approximately $10,180. This increase was
primarily attributable to the addition of significant new accounts or service
contracts at several of the Founding Companies, and the expansion of delivery
services or the purchase of additional customer lists.
Pro forma cost of revenues increased approximately $5,048. This increase
was generally consistent with the respective increases in revenues. As a
percentage of pro forma revenues, cost of revenues decreased from 62.1% for the
six months ended June 30, 1997, to 60.9% for the six months ended June 30, 1998,
primarily as a result of consolidation of administrative activities and
improvements in productivity of the overall North American courier fleet.
10
<PAGE> 12
Pro forma year-to-date selling, general and administrative expenses
increased approximately $2,182. This increase primarily related to costs
incurred related to the additional infrastructure required to support the
acquisition of new accounts. As a percentage of pro forma revenues, sales,
general and administrative expenses decreased from 30.6% for the six months
ended June 30, 1997, to 29.7% for the six months ended June 30, 1998, primarily
as a result of rationalization of facilities in several key operating centers.
Pro forma year-to-date depreciation and amortization expense decreased by
$142. The decrease was primarily attributable to certain property and equipment
previously utilized by the Founding Companies, which were not acquired by the
Company, including the facility owned by Bridge Wharf Investments Limited (d/b/a
West One).
Pro forma consolidated operating income increased $3,092 as a result of the
factors discussed above.
Pro forma year-to-date interest and other expense increased $306 as a
result of changes in other income and expense items. Pro forma interest expense
remained relatively constant between the periods.
Recently Issued Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
introduces a management approach model for segment reporting. This approach is
based on the way that the chief operating decision maker organizes segments
within a company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure or management structure or in any other manner in which management
disaggregates a company. SFAS 131 is effective for fiscal years beginning after
December 15, 1997 and does not need to be applied to interim statements in the
initial year of application. The Company intends to adopt this standard when
required and is in the process of determining the effect of SFAS 131 on the
Company's financial statements.
Factors Affecting the Company's Business
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
Fluctuations in Quarterly Results of Operations. The Company's
point-to-point delivery services business is subject to seasonal influences. The
Company's revenues and profitability in its business have generally been lower
in the summer months. As the Company's mix of businesses evolves through future
acquisitions, these seasonal fluctuations may change. In addition, quarterly
results also may be materially affected by the timing of acquisitions, the
timing and magnitude of costs related to such acquisitions, general economic
conditions, and the retroactive restatement of the Company's consolidated
financial statements for acquisitions accounted for under the
pooling-of-interests method. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
Conversion to the DMS Model. The Company intends to convert the existing
operations of additional acquired target companies to the DMS Model to the
extent feasible. The process of converting an existing point-to-point courier
operation to the DMS Model involves the implementation of the Free Call Dispatch
system as well as the integration of new software systems, pricing structures,
billing methods, personnel utilization practices and data standardization.
Changes in the pricing structures and billing methods could result in the loss
of customers. The process of conversion in a particular market may involve
unforeseen difficulties, including delays in the consolidation of facilities,
complications and expenses in implementing the new operating software system, or
the loss of customers or key operating personnel, any of which can cause
substantial delays to the conversion process in such market and may have a
material adverse effect on the Company's business, financial condition or
results of operations.
International Operations. A significant portion of the Company's revenues
are generated in the United Kingdom. For the three month period ended June 30,
1998, revenues in the United Kingdom accounted for approximately 40% of total
consolidated revenues. The conversion rate between the British Pound Sterling
and
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the U.S. dollar during 1998 has been approximately the same as the comparable
periods in 1997, although there can be no assurance that fluctuations in such
currency exchange rate will not in the future have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company intends to continue to focus significant attention and
resources on international expansion in the future and expects foreign sales to
continue to represent a significant portion of the Company's total sales. In
addition to currency exchange rates, the Company's operations in foreign markets
are subject to a number of inherent risks, including new and different legal,
regulatory and competitive requirements, difficulties in staffing and managing
foreign operations, risks specific to different business lines that the Company
may enter into, and other factors.
Acquisitions. The Company depends upon organic growth and acquisition to
increase its earnings. There can be no assurance that the Company will complete
acquisitions in a manner that coincides with the end of its fiscal quarters. The
failure to complete acquisitions on a timely basis could have a material adverse
effect on the Company's quarterly results. Likewise, delays in implementing
planned integration strategies and activities also could adversely affect the
Company's quarterly earnings.
In addition, there can be no assurance that acquisitions will be available
to the Company on favorable terms. If the Company is unable to use the Company's
Common Stock as consideration in acquisitions, for example, because it believes
that the market price of the Common Stock is too low or because the owners of
potential acquisition targets conclude that the market price of the Company's
Common Stock is too volatile, the Company would need to use cash to make such
acquisitions. This might adversely affect the pace of the Company's acquisition
program and the impact of acquisitions on the Company's quarterly results. In
addition, the consolidation of the domestic courier industry has reduced the
number of larger companies available for sale, which could lead to higher prices
being paid for the acquisition of the remaining domestic, independent companies.
The failure to acquire additional businesses or to acquire such businesses on
favorable terms in accordance with the Company's growth strategy could have a
material adverse impact on growth.
There can be no assurance that companies that have been acquired, or that
may be acquired in the future, will achieve sales and profitability levels that
justify the investment therein. Acquisitions may involve a number of special
risks that could have a material adverse effect on the Company's operations and
financial performance, including adverse short-term effects on the Company's
reported operating results; diversion of management's attention; difficulties
with the retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets.
Competition. The Company operates in a highly competitive environment. In
the markets in which it operates, the Company generally competes with a large
number of smaller, independent companies, many of which are well-established in
their markets. Several of its large competitors 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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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.
