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, 1999
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 3, 1999, there were 12,113,023 shares of Common Stock
outstanding.
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of December 31, 1998 and September
30, 1999
Consolidated Statements of Operations for the Three and Nine Months
ended September 30, 1998 and 1999
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1998 and 1999
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 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
Signatures
Exhibit Index
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents .......................... $ 3,012 $ 1,457
Accounts receivable, less allowances of $4,416
and $2,431 ....................................... 36,416 30,330
Prepaid and other current assets ................... 1,890 2,659
Income tax receivable .............................. 2,784 1,082
--------- ---------
Total current assets ..................... 44,102 35,528
Property and equipment, net ........................ 8,851 8,184
Deferred financing costs, net ...................... 1,501 520
Intangible assets, primarily goodwill, net of
amortization of $3,186 and $7,068 ................ 154,923 160,915
Notes receivable ................................... 9,002 1,698
Other assets ....................................... 1,322 1,160
--------- ---------
Total assets ............................. $ 219,701 $ 208,005
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts .................................... $ 2,944 $ 1,785
Current portion of long-term debt .................. 900 4,800
Accounts payable ................................... 5,758 5,542
Accrued liabilities ................................ 13,356 9,667
Accrued payroll and related expenses ............... 5,527 3,905
Income tax payable ................................. 1,817 1,316
Capital lease obligations .......................... 886 611
Acquisition-related notes payable, current
portion ............................................ 7,207 6,064
Other current liabilities .......................... -- 881
--------- ---------
Total current liabilities ................ 38,395 34,571
Long-term debt ..................................... 70,600 69,250
Acquisition-related notes payable .................. 5,337 2,935
Other long-term liabilities ........................ 5,996 3,475
--------- ---------
Total liabilities ........................ 120,328 110,231
--------- ---------
Commitments and contingencies - (see notes)
Stockholders' equity
Common stock, $.01 par value, 100,000,000
shares authorized; 11,817,634 and 12,113,023
shares issued and outstanding .................. 118 121
Additional paid-in capital ......................... 117,686 118,425
Value of stock to be issued ........................ 3,197 1,004
Accumulated deficit ................................ (21,523) (21,426)
Accumulated other comprehensive loss ............... (105) (350)
--------- ---------
Total stockholders' equity ............... 99,373 97,774
--------- ---------
Total liabilities and stockholders' equity $ 219,701 $ 208,005
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue .............................................. $ 56,367 $ 53,242 $ 131,735 $ 166,824
Cost of revenue .......................................... 34,500 32,185 80,493 101,702
------------ ------------ ------------ ------------
Gross profit ........................................... 21,867 21,057 51,242 65,122
Selling, general and administrative expenses ............. 16,697 15,809 38,821 51,951
Depreciation and amortization ............................ 1,410 2,001 3,299 6,116
Other charges (income) ................................... 1,703 (391) 1,841 (397)
------------ ------------ ------------ ------------
Income from operations ................................. 2,057 3,638 7,281 7,452
Interest expense ......................................... 1,024 1,677 1,689 5,261
Amortization and write-off of deferred financing costs ... -- 195 -- 1,380
Acquired in-process research and development ............. -- -- 700 --
------------ ------------ ------------ ------------
Income before income tax provision ....................... 1,033 1,766 4,892 811
Income tax provision ..................................... 434 184 2,134 714
------------ ------------ ------------ ------------
Income before extraordinary item ....................... 599 1,582 2,758 97
Extraordinary loss on early extinguishment of debt (net of
income tax benefit of $384) ............................ -- -- 713 --
------------ ------------ ------------ ------------
Net income ............................................. $ 599 $ 1,582 $ 2,045 $ 97
============ ============ ============ ============
Income per common share - basic
Income before extraordinary item ...................... $ 0.05 $ 0.13 $ 0.27 $ 0.01
Extraordinary loss .................................... -- -- (0.07) --
------------ ------------ ------------ ------------
Net income ............................................ $ 0.05 $ 0.13 $ 0.20 $ 0.01
------------ ------------ ------------ ------------
Income per common share - diluted
Income before extraordinary item ...................... $ 0.05 $ 0.13 $ 0.27 $ 0.01
Extraordinary loss .................................... -- -- (0.07) --
------------ ------------ ------------ ------------
Net income ............................................ $ 0.05 $ 0.13 $ 0.20 $ 0.01
------------ ------------ ------------ ------------
Weighted average shares
Common shares outstanding ............................. 11,742,574 12,113,023 10,031,468 11,983,935
------------ ------------ ------------ ------------
Adjusted common shares assuming dilution .............. 12,012,380 12,252,673 10,240,769 12,088,952
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 2,045 $ 97
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ....................................................... 1,509 2,145
Amortization of goodwill and other intangibles ..................... 1,790 3,971
Amortization and write-off of deferred financing costs ............. -- 1,380
Non-cash gain ...................................................... -- (391)
Acquired in-process research and development ....................... 700 --
Extraordinary item ................................................. 713 --
Changes in operating assets and liabilities (net of assets acquired
and liabilities assumed in business combinations):
Accounts receivable ............................................. (9,668) 6,086
Prepaid and other current assets ................................ (1,204) 432
Accounts payable and accrued liabilities ........................ 4,750 (6,946)
--------- ---------
Net cash provided by operating activities ....................... 635 6,774
--------- ---------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired ..................... (103,976) (7,469)
Additions to property and equipment ................................. (5,211) (1,478)
--------- ---------
Net cash used in investing activities .......................... (109,187) (8,947)
--------- ---------
Cash flows from financing activities:
Proceeds from initial public offering, net .......................... 76,276 --
Proceeds from bank borrowings ....................................... 55,579 3,150
Payments on bank borrowings ......................................... -- (600)
Deferred financing costs ............................................ (1,808) (399)
Principal payments on long and short-term obligations ............... (17,565) (1,288)
--------- ---------
Net cash provided by financing activities ................... 112,482 863
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ......... -- (245)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................. 3,930 (1,555)
Cash and cash equivalents, beginning of period ....................... 354 3,012
--------- ---------
Cash and cash equivalents, end of period ............................. $ 4,284 $ 1,457
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Financial Condition
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 which was subsequently liquidated (each, 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 the Quarterly Report on 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, 1998, as
amended by a Form 10-K/A filed on April 30, 1999. 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
(consisting of only normal recurring items) considered 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, 1999.
During the first quarter of 1999, the Company notified its senior lenders
of an event of default in relation to certain financial covenants
described in the syndicated senior credit facility led by NationsBank,
N.A. Following this notification of default, the Company operated under a
forbearance agreement that deferred certain lender remedies pending a
restructuring of the senior credit facility. In April 1999, the Company
entered into a definitive Amended and Restated Credit Agreement with
NationsBank N.A. and a syndicate of senior lenders. The amended facility
had a maturity date of May 31, 2000, and provided for revised financial
covenants and other provisions. Effective August 2, 1999, the maturity of
this facility was extended to October 15, 2000. There can be no assurances
that the Company will be successful in negotiating further maturity date
extensions beyond October 15, 2000.
During the nine months ended September 30, 1999, the senior management
team has established a number of strategic priorities designed to
strengthen operations, including i) an aggressive cost reduction program,
ii) a focus on receivables management and collection procedures, and iii)
implementation of a technology investment program designed to deliver
integrated operating systems, as well as enhanced cost control and
reporting mechanisms.
During the first nine months of 1999, the Company also executed a number
of structural changes, including the appointment of four new independent
directors to the Company's Board so that the Board now includes five
directors (effective September 15, 1999 Michael Fiorito, who is a Brand
Manager of the Company, resigned as a Director), and the creation of a
United States regional management team designed to oversee and support the
22 metropolitan operating centers.
The Company believes that the cumulative impact of such initiatives and
actions will provide the Company with sufficient cash flow to continue as
a going concern for the next twelve months. The Company's ability to
continue as a going concern is dependent upon i) achieving and maintaining
cash flow from operations sufficient to satisfy its current obligations,
ii) complying with the financial covenants described in the senior credit
facility, and iii) negotiating further extensions of its senior credit
facility terms beyond its maturity date of October 15, 2000.
2. Initial Public Offering
6
<PAGE>
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 $76.3 million.
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 $0.7 million, and for the repayment of certain indebtedness of the
Founding Companies.
3. Business Combinations
On February 11, 1998, the Company acquired all of the outstanding common
stock and/or net assets of the Founding Companies simultaneously with the
closing of the Offering. The aggregate consideration for these
acquisitions included $62.7 million in cash, the issuance of 3,378,590
shares of Common Stock, and $4.6 million of notes payable.
During the period following the Offering to December 31, 1998, the Company
acquired an additional 28 messenger or same-day courier companies in the
United States, the United Kingdom, Australia and New Zealand. The
aggregate consideration for these acquisitions included $47.6 million in
cash, the issuance of 355,160 shares of Common Stock, $3.2 million in
value of stock to be issued, and $7.9 million of notes payable.
The acquisitions have been accounted for using the purchase method of
accounting. The consideration does not reflect certain additional
contingent consideration which may be issued pursuant to earn-out
arrangements included in the definitive agreements with the acquired
companies.
During the third quarter of 1998, the Company wrote off $1.5 million of
legal and professional fees associated with planned acquisitions that
failed to close. Such amounts are included in "other charges (income)" on
the Statement of Operations. During the nine months ended September 30,
1999, goodwill associated with the 1998 acquisitions increased by $9.9
million, primarily due to contingent consideration earned.
Acquisition Liabilities
In connection with completed acquisitions, the Company recorded
liabilities for employee severance and for operating lease payments as a
result of exit plans formulated as of the respective acquisition dates
(the "Acquisition Liabilities"). The severance accrual relates to the
involuntary termination of administrative and middle management personnel
from the integration of the acquired operations. The operating lease
payment accrual relates to equipment and facilities leases assumed by the
Company. Amounts accrued represent management's estimate of the cost to
exit the equipment and facilities leases, including lease payments and
termination costs.
The changes in the Acquisition Liabilities during the nine month period
ended September 30, 1999 were as follows (dollars in thousands):
Severance Lease
Liability Liability Total
--------- --------- -------
Balance December 31, 1998 ............... $ 195 $ 666 $ 861
Additions ............................... -- 11 11
Utilization ............................. (36) (201) (237)
----- ----- -----
Balance September 30, 1999 .............. $ 159 $ 476 $ 635
===== ===== =====
Pro Forma Financial Information
7
<PAGE>
The following unaudited condensed pro forma financial information of the
Company for the nine-month period ended September 30, 1998 includes the
consolidated operations of the Company and the 1998 Acquisitions as if the
Offering and the acquisitions had occurred on January 1, 1998 (dollars in
thousands).
Nine months ended
September 30, 1998
------------------
Net revenue $177,272
Income before extraordinary item $ 2,187
Per share data:
Income before extraordinary item - basic and diluted $ 0.18
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' 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 date indicated or of the results
which may be realized in the future.
4. Senior Credit Facility
In February 1998, the Company obtained a $25.0 million revolving line of
credit from NationsBank, N.A. pursuant to a credit agreement. Outstanding
principal balances under this line incurred interest at increments between
1.50% and 2.50% over the LIBOR rate, depending on the Company's ratio of
Funded Debt to EBITDA (as defined in the credit agreement).
In May 1998, NationsBank provided the Company an additional $10.0 million
short-term line of credit facility in anticipation of closing a syndicated
credit facility. The short-term line of credit facility was
cross-defaulted and cross-collateralized with the revolving line of credit
and matured in June 1998.
In June 1998, the Company entered into a credit agreement with NationsBank
N.A. as underwriter of a new $60.0 million senior credit facility. In
August 1998, NationsBank led a syndication for a $105.0 million committed
line of credit with a group of senior lenders, including First Union
National Bank, BankBoston N.A., CIBC, Inc., and Fleet Bank N.A.
Subsequent to December 31, 1998, the Company notified the senior lenders
of an event of default in relation to certain financial covenants
described in the senior credit agreement. Following this notification of
default, the Company operated under a forbearance agreement that deferred
certain lender remedies pending a restructuring of the senior credit
facility. On April 8, 1999, the Company entered into a definitive Amended
and Restated Credit Agreement (the "Credit Agreement") with NationsBank
N.A. and a syndicate of senior lenders. The Credit Agreement provides a
revolving credit facility in an amount equal to the outstanding
indebtedness as of September 30, 1999 of $77.9 million, which includes a
sub-limit of $3.8 million for existing standby letters of credit. All
amounts drawn down under the line of credit must be repaid on October 15,
2000, with minimum principal payments of $0.3 million per quarter required
in 1999 and $1.5 million per quarter required in 2000.
Outstanding principal balances under the line of credit bear interest,
payable monthly, at increments between 1.75% and 4.00% over the LIBOR
rate, depending on the Company's ratio of Funded Debt to trailing quarter
annualized EBITDA (as defined in the Credit Agreement). The current
pricing level at September 30, 1999 is LIBOR + 3.75% (30-Day LIBOR at
September 30, 1999 was 5.4%).
8
<PAGE>
Borrowings under the line of credit are secured by a first lien on all of
the assets of the Company, including the shares of common stock of certain
of the Company's subsidiaries. The Company is required to maintain minimum
quarterly EBITDA targets through the maturity of the facility, provided
that for the last fiscal quarter of 1999 and for the fiscal quarters of
2000 the EBITDA targets are modified such that the Company can still meet
the financial covenant criteria by maintaining a Funded Debt to EBITDA
ratio at no more than 3.0x (as defined in the Credit Agreement).
Other financial covenants include: (i) maintenance of a monthly positive
pre-tax income on a consolidated basis after June 30, 1999 (adjusted for
certain non-cash gains and losses), (ii) maintenance of a collateral
coverage ratio whereby accounts receivable outstanding for less than 60
days as a proportion of the total outstanding under the revolving line of
credit cannot fall below levels ranging from 35% - 40%, and (iii) minimum
quarterly interest coverage ratio, defined as EBITDA as a ratio to cash
interest expense. The Credit Agreement prohibits (i) liens, pledges and
guarantees that can be granted by the Company, (ii) the declaration or
payment of cash dividends, and (iii) the sale of stock of the Company's
subsidiaries. The Credit Agreement also limits (i) the amount of
indebtedness that the Company can incur, (ii) the amount of finance lease
commitments, and (iii) certain capital expenditures. Material acquisitions
and disposals of certain operations require approval 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, and for the issuance of letters of
credit. The facility specifically allows for the payment of various
acquisition-related notes payable disclosed in the consolidated financial
statements related to the 1998 acquisitions.
In response to the Company's determination that it would not likely meet
the affirmative covenants related to the EBITDA target and collateral
coverage ratio for the quarter ended September 30, 1999, the syndicate of
senior lenders agreed to modify such covenants effective September 30,
1999. Affirmative covenant targets applicable for future fiscal quarters
remain unchanged.
The Company paid $1.5 million in financing fees during fiscal year 1998,
which were deferred and amortized over the term of the 1998 credit
facility. As a result of the Company entering into the Credit Agreement in
April 1999, the Company wrote-off $0.9 million of the fees associated with
the 1998 credit facility. The Company amortized an additional $0.5 million
of the deferred financing fees during the nine months ended September 30,
1999. Interest expense incurred on the senior bank debt during the nine
months ended September 30, 1999 amounted to $5.0 million.
5. Stockholders' Equity and Comprehensive Loss
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
loss 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.
9
<PAGE>
Changes in stockholders' equity and comprehensive loss during the nine
months ended September 30, 1999 were as follows (dollars in thousands):
Stockholders' Comprehensive
Equity Loss
------------- -------------
Stockholders' equity at December 31, 1998 $ 99,373
Comprehensive loss:
Net income 97 $ 97
Common stock 3
Additional paid-in capital 739
Value of stock to be issued (2,193)
Foreign currency translation adjustment (245) (245)
-------- --------
Total (1,599) $ (148)
-------- --------
Stockholders' equity balance at September 30, 1999 $ 97,774
========
6. Earnings (loss) per Share
The following table sets forth the calculation of basic and diluted
earnings (loss) per share (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Income before extraordinary item $ 599 $ 1,582 $ 2,758 $ 97
Extraordinary item-loss on early
extinguishment of debt, net of income taxes -- -- 713 --
-------- -------- -------- --------
Net income $ 599 $ 1,582 $ 2,045 $ 97
======== ======== ======== ========
Weighted average shares outstanding 11,743 12,113 10,031 11,984
======== ======== ======== ========
Income before extraordinary item $ 0.05 $ 0.13 $ 0.27 $ 0.01
Extraordinary item-loss on early
extinguishment of debt, net of income taxes -- -- (0.07) --
-------- -------- -------- --------
Net income per share $ 0.05 $ 0.13 $ 0.20 $ 0.01
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Income before extraordinary item $ 599 $ 1,582 $ 2,758 $ 97
Extraordinary item-loss on early
extinguishment of debt, net of income taxes -- -- 713 --
-------- -------- -------- --------
Net income $ 599 $ 1,582 $ 2,045 $ 97
======== ======== ======== ========
Weighted average shares outstanding 11,743 12,113 10,031 11,984
Potential common shares from stock options 214 140 191 105
Shares subject to earnout provisions 55 -- 19 --
-------- -------- -------- --------
Total weighted average shares outstanding 12,012 12,253 10,241 12,089
======== ======== ======== ========
Income before extraordinary item $ 0.05 $ 0.13 $ 0.27 $ 0.01
Extraordinary item-loss on early
extinguishment of debt, net of income taxes -- -- (0.07) --
-------- -------- -------- --------
Net income per share $ 0.05 $ 0.13 $ 0.20 $ 0.01
======== ======== ======== ========
</TABLE>
7. Taxation
The Company's effective tax rate can vary dependent on the financial
performance of the different geographic regions. The Company has incurred
income tax expense in the United Kingdom and Australasian divisions, which
are not currently benefiting from significant carryforward tax losses
generated in the United States.
8. Litigation
10
<PAGE>
Following the acquisition of certain of the Founding Companies, the
Company terminated a relationship with an equipment vendor due to repeated
and substantial problems with certain telecommunications and computer
equipment. In July 1998, the Company was served with a claim for unpaid
monthly fees due under the full term of each respective service agreement.
On September 1, 1999, the Company settled all outstanding claims with the
equipment vendor for $1.0 million plus interest payable over 12 months,
resulting in a non-cash gain of $0.4 million versus previously established
provisions.
The Company is also involved in several acquisition-related disputes
concerning acquisition contract interpretation, non-compete enforcement,
and status of unregistered stock issued in connection with the Offering.
The Company has accrued $3.4 million as an estimate of the liability with
respect to these cases at September 30, 1999.
The Company also becomes involved in various legal matters from time to
time, which it considers to be in the ordinary course of business. While
the Company is not currently able to determine the potential liability, if
any, related to such matters, the Company believes that none of the
matters, individually or in the aggregate, will have a material adverse
effect on its financial position, results of operations or liquidity.
9. Segment Information
The Company's reportable segments are based on geographic area. The
Company evaluates the performance of its geographic areas based on
operating profit (loss) excluding interest expense, other income and
expense, the effects of non-recurring items, and income tax expense. The
following is a summary of local operations by geographic region for the
nine months ended September 30, 1999 (dollars in thousands):
Nine months ended United United
September 30, 1999 States Kingdom Australasia Total
------------------ -------- ------- ----------- --------
Net revenue $ 96,461 57,690 12,673 $166,824
Operating income $ 2,624 4,125 703 $ 7,452
Identifiable assets $ 26,233 17,288 3,569 $ 47,043
Capital expenditures $ 458 838 182 $ 1,478
Depreciation $ 1,446 603 95 $ 2,145
Nine months ended United United
September 30, 1998 States Kingdom Australasia Total
------------------ -------- ------- ----------- --------
Net revenue $ 79,106 50,503 2,126 $131,735
Operating income $ 3,068 3,990 223 $ 7,281
Identifiable assets $ 43,049 24,376 2,742 $ 70,167
Capital expenditures $ 4,085 1,076 50 $ 5,211
Depreciation $ 635 842 32 $ 1,509
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Company's consolidated financial statements, including the
notes thereto, and the other financial information appearing elsewhere in this
report. Statements regarding future economic performance, management's plans and
objectives, and any statements concerning its assumptions related to the
foregoing contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute forward-looking statements.
Certain factors which may cause actual results to vary materially from these
forward-looking statements accompany such statements or are listed in "Factors
Affecting the Company's Prospects" set forth in the Company's annual report on
Form-10K for the fiscal year ended December 31, 1998, as amended by a Form-10K/A
filed on April 30, 1999.
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 22 of the largest metropolitan markets in the United States as well as the
United Kingdom, Australia and New Zealand.
Prior to the Initial Public Offering (the "Offering") on February 6, 1998, the
Company conducted no operations other than in connection with the Offering and
generated no revenues other than the receipt of licensing fees. Simultaneous
with the Offering, the Company acquired, in separate combination transactions,
38 urgent, on-demand, point-to-point courier firms and one software company,
which was subsequently liquidated in 1998.
Results of Operations
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Costs of revenue 61.2 60.5 61.1 61.0
----- ----- ----- -----
Gross profit 38.8 39.5 38.9 39.0
Selling, general and
administrative expenses 29.6 29.7 29.5 31.1
Depreciation and amortization 2.5 3.8 2.5 3.7
Other charges (income) 3.2 (0.7) 1.4 (0.2)
----- ----- ----- -----
Operating income 3.4 6.8 5.6 4.5
Interest expense 1.8 3.2 1.3 3.2
Amortization and write-off of deferred financing costs -- 0.3 -- 0.8
Acquired in-process research and development -- -- 0.5 --
Other expense (income) (0.2) -- -- --
----- ----- ----- -----
Income before income taxes
and extraordinary item 1.8 3.3 3.7 0.5
Provision for income taxes 0.8 0.3 1.6 0.4
----- ----- ----- -----
Income before extraordinary item 1.0 3.0 2.1 0.1
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
12
<PAGE>
Net Revenue
Net revenue for the three months ended September 30, 1999 decreased $3.1
million, or 5.5%, to $53.2 million from $56.4 million for the three months ended
September 30, 1998. This decrease was primarily due to the continued
restructuring of certain non-core businesses related to the acquisition of 27
urgent, on-demand, point-to-point courier firms that the Company acquired at
various dates following the Company's initial public offering in February 1998.
Excluding the effect of the 27 acquired firms, net revenues from comparable
operating centers decreased $4.0 million, or 9.1%. The Company's revenues were
predominantly earned from urgent delivery services performed throughout the
United States, the United Kingdom, and Australasia, (dollars in thousands):
Three months ended Three months ended
September 30, 1998 September 30, 1999
------------------ ------------------
United States $32,762 58.1% $30,704 57.7%
United Kingdom 21,995 39.0 18,469 34.6
Australasia 1,610 2.9 4,069 7.7
------- ----- ------- -----
Total $56,367 100.0% $53,242 100.0%
Following certain acquisitions, the Company re-priced or ceased providing
certain services which failed to meet required margin criteria, or were not pure
urgent, point-to-point delivery services. There can be no assurance that any
such initiatives in the future will not have a material adverse effect on the
Company's business, financial condition or results of operations.
Cost of Revenue
Cost of revenue for the three months ended September 30, 1999 decreased $2.3
million, or 6.7%, to $32.2 million from $34.5 million for the three months ended
September 30, 1998. This decrease was primarily due to the decrease in net
revenue noted above, and to a lesser extent the benefits associated with the
continued physical integration of a number of previously independent courier
fleets. As of September 30, 1999, the Company still had components of a courier
fleet integration program remaining to execute. This program is expected to be
substantially completed during the balance of 1999. Expressed as a percentage of
net revenue, cost of revenue for the three months ended September 30, 1999
decreased to 60.5%, from 61.2% for the three months ended September 30, 1998.
Cost of revenue percentages in the United States, the United Kingdom, and
Australasia vary considerably as a result of different compensation structures,
the proportion of owner-operated vehicles, the type of benefit plans, and the
mix of business. For the three months ended September 30, 1999, cost of revenue
percentages for the United States, United Kingdom and Australasia were 58.1%,
64.4%, and 60.1%, respectively, as compared to 58.4%, 65.4%, and 61.7%,
respectively, for the comparable 1998 period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 1999 decreased $0.9 million, or 5.3%, to $15.8 million from $16.7
million for the three months ended September 30, 1998. This decrease was
primarily due to lower overall revenues experienced during the quarter.
Expressed as a percentage of net revenue, selling, general and administrative
costs for the three months ended September 30, 1999 increased to 29.7%, from
29.6% for the three months ended September 30, 1998. Selling, general and
administrative percentages in the United States (including corporate), the
United Kingdom, and Australasia vary considerably as a result of the degree of
physical integration, different compensation structures and the mix of business.
For the three months ended September 30, 1999, selling, general and
administrative expense percentages for the United States, United Kingdom, and
Australasia were 30.2%, 28.3%, and 32.6%, respectively, as compared to 32.1%,
26.1%, and 27.4%, respectively, for the comparable 1998 period.
Other Charges (Income)
13
<PAGE>
Other charges (income) in 1998 included the write-off of $1.5 million of
professional fees associated with planned acquisitions that failed to close.
Other charges (income) for the three months ended September 30, 1999 included a
gain of $0.4 million related to the reversal of provisions associated with the
settlement of an outstanding legal action against the Company.
Interest Expense and Deferred Financing Costs
Interest expense for the three months ended September 30, 1999 was $1.7 million,
or 3.2% of the Company's net revenues. This represents an increase of $0.7
million over the same period in 1998. The increase was primarily due to higher
average principal balances outstanding. Interest expense included interest on
senior debt, acquired debt, acquisition-related debt, and capital lease
obligations, as well as bank charges. Interest rates on the senior credit
facility ranged from 9.2% to 9.4% during the three months ended September 30,
1999, compared with 7.1% to 7.3% for the three months ended September 30, 1998.
As a result of the Company entering into the Amended and Restated Credit
Agreement (the "Credit Agreement") in April 1999, the Company wrote off $0.9
million of the fees associated with the preceding credit facility during the
second quarter of 1999. The Company amortized an additional $0.2 million of the
deferred financing fees during the three months ended September 30, 1999.
Interest expense incurred on the senior bank debt during the three months ended
September 30, 1999 amounted to $1.6 million.
Provision for Income Taxes
The effective tax rate for the three months ended September 30, 1999 was 10.4%,
versus an effective tax rate of 42.0% for the three months ended September 30,
1998. The Company's effective tax rate can vary dependent on the financial
performance of the different geographic regions. The low effective tax rate for
the three months ended September 30, 1999 is a direct result of lower
profitability in the United Kingdom and the utilization of carryforward losses
in the United States. In September 1999, the Company finalized 1998 income tax
returns which resulted in the reversal of $0.2 million of previously recorded
income tax reserves.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
Net Revenue
Net revenue for the nine months ended September 30, 1999 increased $35.1
million, or 26.6%, to $166.8 million from $131.7 million for the nine months
ended September 30, 1998. This increase was primarily due to volumes generated
by 27 urgent, on-demand, point-to-point courier firms that the Company acquired
at various dates following the Company's initial public offering in February
1998. Excluding the effect of the 27 acquired firms, net revenues from
comparable operating centers decreased $3.2 million, or 2.6%. The Company's
revenues were predominantly earned from urgent delivery services performed
throughout the United States, the United Kingdom, and Australasia, (dollars in
thousands):
Nine months ended Nine months ended
September 30, 1998 September 30, 1999
United States $ 79,106 60.0% $ 96,460 57.8%
United Kingdom 50,503 38.3 57,690 34.6
Australasia 2,126 1.7 12,674 7.6
-------- ----- -------- -----
Total $131,735 100.0% $166,824 100.0%
14
<PAGE>
Cost of Revenue
Cost of revenue for the nine months ended September 30, 1999 increased $21.2
million, or 26.3%, to $101.7 million from $80.5 million for the nine months
ended September 30, 1998. This increase was primarily due to the cost of
revenues generated by the 27 urgent, on-demand, point-to-point courier firms
that the Company acquired at various dates after February 1998, offset partially
by the effect of revenue lost as a result of the restructuring of certain
non-core businesses. Expressed as a percentage of net revenue, cost of revenue
for the nine months ended September 30, 1999 decreased to 61.0%, from 61.1% for
the nine months ended September 30, 1998. Cost of revenue percentages in the
United States, the United Kingdom, and Australasia vary considerably as a result
of different compensation structures, the proportion of owner-operated vehicles,
the type of benefit plans, and the mix of business. For the nine months ended
September 30, 1999, cost of revenue percentages for the United States, United
Kingdom and Australasia were 59.4%, 63.4%, and 61.7%, respectively, as compared
to 58.6%, 65.1%, and 61.2%, respectively, for the comparable 1998 period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September
30, 1999 increased $13.1 million, or 33.8%, to $51.9 million from $38.8 million
for the nine months ended September 30, 1998. This increase was primarily due to
the selling, general and administrative expenses of the 27 urgent, on-demand,
point-to-point courier firms that the Company acquired at various dates after
February 1998. Expressed as a percentage of net revenue, selling, general and
administrative costs for the nine months ended September 30, 1999 increased to
31.1%, from 29.5% for the nine months ended September 30, 1998. Selling, general
and administrative expense percentages in the United States (including
corporate), the United Kingdom, and Australasia vary considerably as a result of
the degree of physical integration, different compensation structures and the
mix of business. For the nine months ended September 30, 1999, selling, general
and administrative percentages for the United States, United Kingdom, and
Australasia were 33.1%, 28.0%, and 31.1%, respectively, as compared to 32.6%,
24.7%, and 26.8%, respectively, for the comparable 1998 period.
Other Charges (Income)
Other charges (income) in 1998 included the write-off of $1.5 million of
professional fees associated with planned acquisitions that failed to close.
Other charges (income) for the nine months ended September 30, 1999 included a
gain of $0.4 million related to the reversal of provisions associated with the
settlement of an outstanding legal action against the Company.
Interest Expense and Deferred Financing Costs
Interest expense for the nine months ended September 30, 1999 was $5.3 million,
or 3.2% of the Company's net revenues. This represents an increase of $3.6
million over the same period in 1998. The increase was primarily due to higher
average principal balances outstanding. Interest expense included interest on
senior debt, acquired debt, acquisition-related debt, and capital lease
obligations, as well as bank charges. Interest rates on the senior credit
facility ranged from 6.9% to 9.4% during the nine months ended September 30,
1999, compared with 6.2% to 7.3% for the nine months ended September 30, 1998.
As a result of the Company entering into the Credit Agreement in April 1999, the
Company wrote off $0.9 million of the fees associated with the preceding credit
facility. The Company amortized an additional $0.5 million of the deferred
financing fees during the nine months ended September 30, 1999. Interest expense
incurred on the senior bank debt during the nine months ended September 30, 1999
amounted to $5.0 million.
Provision for Income Taxes
The effective tax rate for the nine months ended September 30, 1999 was 88.0%
versus an effective tax rate of 43.6% for the nine months ended September 30,
1998. The Company's effective tax rate can vary dependent on the financial
performance of the different geographic regions. The high effective tax rate for
the nine months ended September 30, 1999 is related to the profitability of the
United Kingdom division, which is not currently benefiting from significant
carryforward tax losses incurred in the United States. In September 1999, the
Company finalized 1998 income tax
15
<PAGE>
returns which resulted in the reversal of $0.2 million of previously recorded
income tax reserves.
Liquidity and Capital Resources
The Company is a holding company that conducts all of its operations through its
wholly-owned subsidiaries. Accordingly, the Company's principal sources of
liquidity are the cash flow of its subsidiaries, and cash available, if any,
from its credit facility.
At September 30, 1999, the Company had $1.5 million in cash and cash
equivalents, $1.8 million of bank overdrafts, $74.0 million of senior bank debt,
and $9.0 million of short and long-term acquisition-related debt. Net cash
provided from operating activities for the nine months ended September 30, 1999
was $6.8 million. Net cash used in investing activities and provided by
financing activities was $8.9 million and $0.9 million, respectively, for the
nine months ended September 30, 1999.
On February 11, 1998, the Company acquired all of the outstanding common stock
and/or net assets of the Founding Companies simultaneously with the closing of
the Offering. The aggregate consideration for these acquisitions included
approximately $62.7 million in cash, the issuance of 3,378,590 shares of common
stock, and $4.6 million of notes payable. The cash portion of these acquisitions
was funded through the proceeds of the Offering.
During the period following the Offering to December 31, 1998, the Company
acquired an additional 28 messenger or same-day courier companies in the United
States, the United Kingdom, and Australasia. The aggregate consideration for
these acquisitions included approximately $47.6 million in cash, the issuance of
355,160 shares of common stock, $3.2 million in value of stock to be issued, and
approximately $7.9 million of notes payable. Subsequent to December 31, 1998,
the Company converted $2.4 million of the stock consideration payable to cash
consideration payable. The cash portion of the consideration for the
acquisitions consummated after the Offering was provided by borrowings under the
Company's credit facility.
In addition, in connection with certain acquisitions, the Company agreed to pay
the sellers additional consideration if the acquired operations meet certain
performance goals related to their earnings before interest, taxes, depreciation
and amortization, as adjusted for certain other financial related matters. The
estimated maximum amount of additional consideration payable, if all of the
performance goals are met, is approximately $9.0 million, of which $3.2 million
is payable in cash and $5.8 million is payable in shares of the Company's common
stock. These payments of additional consideration are to be made on specified
dates through December 31, 2000. Management intends to fund the cash portion of
this additional consideration with internally generated cash flow.
Capital expenditures totaled $1.5 million in the nine months ended September 30,
1999, primarily for office and technology-related expenditures. The Company
expects to make additional capital expenditures of $0.5 million during the
balance of 1999 to upgrade certain components of its management and financial
reporting systems and to install an internal computer intranet network and
communications system integrating the metropolitan operating centers. In
addition, application of DMS operating practices requires investment in existing
operating centers. Management presently anticipates that such additional capital
expenditures will total $5.0 million over the next two years, including $2.5
million of computer equipment, $1.5 million of communications equipment, and
$1.0 million of leasehold improvements. However, no assurance can be made with
respect to the actual timing and amount of such expenditures.
Senior Credit Facility
In June 1998, the Company entered into a credit agreement with NationsBank N.A.
as underwriter of a new $60.0 million senior credit facility. In August 1998,
NationsBank led a syndication for a $105.0 million committed line of credit with
a group of senior lenders, including First Union National Bank, BankBoston N.A.,
CIBC, Inc., and Fleet Bank N.A.
Subsequent to December 31, 1998, the Company notified the senior lenders of an
event of default in relation to certain financial covenants described in the
senior credit agreement. Following this notification of default, the Company
16
<PAGE>
operated under a forebearance agreement that deferred certain lender remedies
pending a restructuring of the senior credit facility. On April 8, 1999, the
Company entered into a Credit Agreement with NationsBank N.A. and a syndicate of
senior lenders. The Credit Agreement provides a revolving credit facility in an
amount equal to the outstanding indebtedness as of September 30, 1999 of $77.9
million, which includes a sub-limit of $3.8 million for existing standby letters
of credit. All amounts drawn down under the line of credit must be repaid on
October 15, 2000, with minimum principal payments of $0.3 million per quarter
required in 1999 and $1.5 million per quarter required in 2000.
Outstanding principal balances under the line of credit bear interest, payable
monthly, at increments between 1.75% and 4.00% over the LIBOR rate, depending on
the Company's ratio of Funded Debt to trailing quarter annualized EBITDA (as
defined in the Credit Agreement). The current pricing level at September 30,
1999 is LIBOR + 3.75% (30-Day LIBOR at September 30, 1999 was 5.4%).
Borrowings under the line of credit are collateralized by a first lien on all of
the assets of the Company, including the shares of common stock of certain of
the Company's subsidiaries. The Company is required to maintain minimum absolute
quarterly EBITDA targets through the maturity of the facility, provided that for
the last fiscal quarter of 1999 and for the fiscal quarters of 2000 the absolute
EBITDA targets are modified such that the Company can still meet the financial
covenant criteria by maintaining a Funded Debt to EBITDA ratio at no more than
3.0x (as defined in the Credit Agreement).
Other financial covenants include: (i) maintenance of a positive monthly pre-tax
income on a consolidated basis after June 30, 1999 (adjusted for certain
non-cash gains and losses), (ii) maintenance of a collateral coverage ratio
whereby accounts receivable outstanding for less than 60 days as a proportion of
the total outstanding under the revolving line of credit cannot fall below
levels ranging from 35% - 40%, and (iii) minimum quarterly interest coverage
ratio, defined as EBITDA as a ratio to cash interest expense. The Credit
Agreement prohibits (i) liens, pledges and guarantees that can be granted by the
Company, (ii) the declaration or payment of cash dividends, and (iii) the sale
of stock of the Company's subsidiaries. The Credit Agreement also limits (i) the
amount of indebtedness that the Company can incur, (ii) the amount of finance
lease commitments, and (iii) certain capital expenditures. Material acquisitions
and disposals of certain operations require approval 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, and for the issuance of letters of credit. The facility specifically
allows for the payment of various acquisition-related notes payable disclosed in
the consolidated financial statements related to the 1998 acquisitions.
Pursuant to the establishment of the April 8, 1999 Credit Agreement, the Company
wrote off $0.9 million of deferred financing fees related to the $60.0 million
credit facility dated June 11, 1998, in the second quarter of 1999.
In response to the Company's determination that it would not likely meet the
affirmative covenants related to the EBITDA target and collateral coverage ratio
for the quarter ended September 30, 1999, the syndicate of senior lenders agreed
to modify such covenants effective September 30, 1999. Affirmative covenant
targets applicable for future fiscal quarters remain unchanged.
The Company believes that cash flow from operations will be sufficient to fund
the Company's operations and the acquisition-related notes payable repayment
schedule for the next twelve months. The Company's ability to continue as a
going concern is dependent upon, i) achieving and maintaining cash flow from
operations sufficient to satisfy its current obligations, ii) complying with the
financial covenants described in the Credit Agreement, and iii) negotiating
further extensions of the Credit Agreement beyond its maturity date of October
15, 2000. Given the current Credit Agreement restrictions, the Company is
unlikely to pursue further acquisition opportunities during the next 12 to 18
months.
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".
17
<PAGE>
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 has identified operating and software issues to address Year 2000
readiness in its internal systems and with its customers and suppliers. The
Company has substantially addressed its most critical internal systems,
including the Company's proprietary capture and dispatch system ("KIWI"), and
targets to have them Year 2000 compliant by November 30, 1999. The Company has
also substantially addressed all major categories of information technology and
non-information technology systems in use by the Company, including customer
service, dispatch and finance.
The Company has used both internal and external resources to reprogram and test
the KIWI software for Year 2000 modifications. The cost of this and all other
efforts to achieve Year 2000 compliance is estimated to be $1.2 million. To
date, the Company's expenses have been mostly limited to internal costs. The
amount of external expenditures for Year 2000 compliance for the nine months
ended September 30, 1999 was $1.0 million. The Company has not separately
tracked internal costs, which were primarily associated with payroll costs. The
Company expects any future costs to be funded by internally generated funds. The
Company has communicated with most of 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
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 Year 2000
compliant systems, a failure to 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 has developed contingency plans with respect to possible problems it
has already identified, and expects to continue to develop contingency plans, as
the testing and implementation phases near completion so that it can continue
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.
FACTORS AFFECTING THE COMPANY'S PROSPECTS
In addition to other information in this report, certain risk factors should be
considered carefully in evaluating the Company and its business. The following
supplements the risk factors set forth in the Annual Report on Form 10-K for the
year ended December 31, 1998, as amended by a Form-10K/A filed on April 30,
1999. The Company may have difficulty enforcing the terms and conditions of its
agreements with certain persons who manage some of the Company's operating
centers ("Brand Managers"). Brand Managers manage the business of the companies
they owned prior to each of such company's purchase by the Company under
compensation and incentive agreements, known as "Brand Manager Agreements". Each
Brand Manager is responsible for maximizing the revenues and profit margins of
the business of his or her previously owned company. The Brand Manager Agreement
provides that the Company can terminate the Agreement under certain limited
conditions based on performance. During the first quarter of 1999, the Company
attempted to convert a number of the Brand Manager Agreements into center
manager contracts, which would have provided for a new compensation and
incentive structure based on the pre-tax performance of an entire operating
center. The Company has discontinued this initiative. While a majority of the
Brand Managers now manage consolidated centers and not just the business of
their previously owned companies, the original Brand Manager Agreements remain
in place. The Company is presently attempting to renegotiate the Brand Manager
Agreements to more closely reflect the current goals and strategic objectives of
the Company and the integration of the various acquisitions into consolidated
operating centers since the initial public offering in February 1998. There can
be no assurance that the Company will be able to renegotiate the Brand Manager
Agreements, or terminate in a timely manner any Brand Manager who is not
performing as required, or negotiate appropriate levels of compensation for
Brand Managers. The Company's failure to resolve these issues could have a
material adverse impact on the Company's business, financial condition and
results of operations.
18
<PAGE>
Item 3: Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risk, i.e. the risk of loss arising from
adverse changes in interest rates and foreign currency exchange rates.
Interest Rate Exposure
The Company has not entered into interest rate protection agreements on
borrowings under its Credit Agreement, but may do so in the future. A one
percent change in interest rates on variable rate debt would increase interest
expense by $0.7 million per annum based upon the amount of the Company's
variable rate debt outstanding at September 30, 1999.
Foreign Exchange Exposure
Significant portions of the Company's operations are conducted in Australia, New
Zealand and the United Kingdom. Exchange rate fluctuations between the US
dollar/Australian dollar, US dollar/New Zealand dollar and US dollar/pound
sterling result in fluctuations in the amounts relating to the Australian, New
Zealand, and United Kingdom operations reported in the Company's consolidated
financial statements.
The Company has not entered into hedging transactions with respect to its
foreign currency exposure, but may do so in the future.
PART II. OTHER INFORMATION
Item 5. Other Information
Effective September 2, 1999, the Company's shares of Common Stock were listed on
the American Stock Exchange ("AMEX") and are no longer listed on the Nasdaq
National Market System ("NASDAQ").
Item 6. Exhibits and Reports on Form 8-K
On July 29, 1999, the Company filed a Form 8-K reporting a change in independent
accountants.
19
<PAGE>
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 3, 1999 By: /s/ Marko Bogoievski
-----------------------------
Marko Bogoievski
Chief Financial Officer
20
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
27.1 Financial data schedule
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,457
<SECURITIES> 0
<RECEIVABLES> 32,761
<ALLOWANCES> 2,431
<INVENTORY> 0
<CURRENT-ASSETS> 35,528
<PP&E> 13,251
<DEPRECIATION> 5,067
<TOTAL-ASSETS> 208,005
<CURRENT-LIABILITIES> 34,571
<BONDS> 0
0
0
<COMMON> 121
<OTHER-SE> 97,653
<TOTAL-LIABILITY-AND-EQUITY> 208,005
<SALES> 166,824
<TOTAL-REVENUES> 166,824
<CGS> 101,702
<TOTAL-COSTS> 58,068
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,261
<INCOME-PRETAX> 811
<INCOME-TAX> 714
<INCOME-CONTINUING> 97
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
