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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE OF 1934
For the fiscal year ended December 31, 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 000-23349
DISPATCH MANAGEMENT SERVICES CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3967426
(State of incorporation) (IRS Employer Identification No.)
1981 Marcus Avenue, Suite C131
Lake Success, New York 11042
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 326-9810
Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |X| No
The aggregate market value of the common equity held by non-affiliates of
the Registrant (assuming for these purposes, but without conceding, that all
executive officers and directors are "affiliates" of the Registrant) as of March
6, 2000 (based on the last reported sales price of the Registrant's Common
Stock, par value $0.01 per share, as reported on The American Stock Exchange on
such date) was approximately $24,629,465. As of March 6, 2000, 12,872,946 shares
of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of the Form 10-K has been incorporated by
reference from the Registrant's definitive Proxy Statement on Schedule 14-A to
be filed with the Commission.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS..........................................................
ITEM 2. PROPERTIES........................................................
ITEM 3. LEGAL PROCEEDINGS.................................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...........................................................
ITEM 6. SELECTED FINANCIAL DATA...........................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..............................................
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................
ITEM 11. EXECUTIVE COMPENSATION............................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..
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PART I
Item 1. Business
In connection with the closing of the initial public offering (the
"Offering") of the common stock, $.01 par value (the "Common Stock"), of the
Company in February 1998, the Company acquired, in separate combination
transactions (the "Combinations"), 38 urgent, on-demand, point-to-point courier
firms and one software firm which was subsequently liquidated during 1998 (each,
together with the software firm, a "Founding Company," and collectively, the
"Founding Companies"). Following the Offering, the Company acquired 28
additional companies and operates the acquired entities in integrated operating
centers in the United States, the United Kingdom, Australia and New Zealand.
Unless otherwise indicated or the context otherwise requires, references to the
"Company" and "DMS" herein mean Dispatch Management Services Corp., and its
subsidiaries, including the Founding Companies. The Company was incorporated
under the laws of the State of Delaware on September 8, 1997. The Company's
principal executive offices are located at 1981 Marcus Avenue, Lake Success, New
York 11042, and its telephone number at that address is (516) 326-9810.
General
The Company was formed to create one of the largest providers of urgent,
on-demand, point-to-point ("Point-to-Point") delivery services in the world. The
Company focuses on Point-to-Point delivery by foot, bicycle, motorcycle, car and
truck and operates in 22 of the largest metropolitan markets in the United
States as well as in the United Kingdom, Australia, and New Zealand. The Company
believes that it has the largest market share of Point-to-Point delivery service
companies operating in each of London, New York, San Francisco, Atlanta,
Washington, D.C. and Seattle. Although several large, national, publicly traded
companies are consolidating other segments of the delivery industry, the Company
believes that it is the only courier firm focused exclusively on the highly
fragmented Point-to-Point delivery industry. Prior to the consummation of the
Offering, the Company conducted no operations other than in connection with the
Offering and the Combinations and generated no revenues other than the receipt
of certain licensing fees.
Industry Overview
Industry research, which the Company believes to be reliable, estimates
that the same-day delivery industry is a $15 billion market in the United States
that is growing at a rate of more than 5% per annum. The on-demand,
Point-to-Point segment of the same-day delivery industry is characterized by
unscheduled deliveries, which are typically completed within two hours of the
request for service. The items transported can range in weight from 1 to 100
pounds, and include documents, spare-parts, medical products, and other items
that are not suitable for facsimile or electronic transmission, but for which
there is an immediate need. The Company believes that the business model
underlying the on-demand Point-to-Point delivery industry is fundamentally
different from those models defining the slower, scheduled or routed same-day
delivery industry. Critical success factors in the on-demand industry include
the degree of density achieved in a metropolitan market and courier
productivity, as distinct from asset utilization and schedule efficiency.
The on-demand industry in the United States and the United Kingdom
consists primarily of several thousand small, independent businesses serving
local markets and a small number of regional or national operators that
individually do not have a significant share of the on-demand delivery market.
The on-demand delivery markets in Australia and New Zealand tend to be dominated
by several large national and international participants that have integrated
on-demand, same-day and overnight delivery services. The Company believes that
the on-demand delivery market, particularly in the United States and United
Kingdom, offers substantial consolidation opportunities, as there are
significant operating and marketing benefits to large-scale professional service
providers. Relative to smaller operators in the industry, the Company believes
that national operators benefit from several competitive advantages including
national branding, the ability to service national accounts and centralized
administrative and management information systems.
The Company believes that on-demand delivery is the fastest growing
segment of the same-day delivery industry, and that the more urgent segments of
the same-day delivery industry are benefiting from several recent trends. For
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example, the trend towards "just-in-time" inventory management and the
outsourcing of non-core business functions have created opportunities for
third-party providers of delivery services. Developments in electronic commerce
("e-commerce"), both business-to-business and business-to-consumer, have
generally increased the pace of business and created an increased expectation
for the same-day transportation of items. E-commerce trends are also reshaping
the entire distribution industry, as consumers increasingly are being offered
new ways to purchase goods and services via the Internet, which, in turn, is
creating the need for the development of an "on-demand fulfillment model" (i.e.,
a network and infrastructure that enables the physical delivery of goods to
match the immediacy expectation created by the Internet). The Company believes
that these e-commerce trends will ultimately more than offset the decrease in
same-day delivery volumes caused by the use of the facsimile machine and
electronic mail, although to date, the beneficiaries of these e-commerce trends
have primarily been the large, well-capitalized overnight delivery concerns with
a national branded presence.
Business Strategy
During 1999, the Company determined to expand its focus to address the
emerging business opportunities brought about by the developments in e-commerce.
The Company intends to occupy the strategic space currently available to the
delivery provider that has a significant presence in the "last-mile" of same-day
ground delivery services, i.e. the final link in the provision of same-day
delivery services to a business or retail customer. Development of this strategy
will provide DMS the opportunity to redefine the same-day delivery business and
accelerate the development of the on-demand fulfillment model. The principal
components of the strategy include: i) increasing density (i.e. concentration of
deliveries within contiguous areas) and market share in key metropolitan
markets, ii) implementing a best-practice operational model in all key markets
to specifically address the inconsistent service levels typical of the industry
today, iii) creating a national and international same-day delivery brand and
time-guaranteed products, iv) investing in the recruitment and retention of
couriers, v) early adoption of proven technologies (such as two-way data and
web-based order-entry systems), and vi) forming joint-venture and marketing
relationships with e-commerce vendors and web-based intermediaries requiring
fulfillment solutions and alternative shipping options.
The Company believes that its operating methodology differentiates it from
both local market competitors and other large, same-day delivery service
providers who compete in the Point-to-Point delivery industry as only one part
of a broader same-day service model. The business practices comprising the
operating methodology (collectively, the "DMS Model") are designed to reduce
operating complexities inherent in the Point-to-Point delivery industry. Key
elements of the DMS Model include: (i) organizing the Company's courier
operations into three distinct functions relating to dispatch management, road
management and marketing management; (ii) utilizing software to manage order
entry and delivery completion, on-time performance and transaction processing;
(iii) empowering the courier fleet, rather than dispatchers, to determine the
optimal use of road resources ("Free Call Dispatch"); (iv) applying a consistent
pricing methodology to time-guaranteed products; (v) cross-training back-office
staff in the areas of call-capture, dispatch management, and customer resolution
activities, and (vi) incentivizing the Company's workforce in each of the three
operating functions to maximize efficiency and profitability.
The Company believes that the comprehensive application of the DMS Model
should generate certain competitive advantages, including the ability to provide
higher levels of customer service and the creation of distinct time-guaranteed
delivery products, whereby the customer is able to price-discriminate the level
of service required. During 1999, the Company continued to work on the execution
of the DMS Model. The United Kingdom division in particular, successfully
integrated three previously independent businesses during 1999, converted
diverse operating systems to a new platform, and built an entirely new
management team. The Company continues to refine the DMS Model based upon
operating experience, and during 1999 it introduced more flexibility to
accommodate certain idiosyncrasies identified in local markets. The Company
ultimately believes that the implementation of the DMS Model creates an
environment that facilitates increased personnel utilization and lower
transaction processing costs as a percentage of revenue, resulting in increased
profitability. In addition, the Company believes that the reduction of operating
complexity should allow for an increase in the number of transactions that the
Company is able to process with minimal incremental cost.
The Company's focus is on internal growth and the development of its
"on-demand fulfillment model". Future acquisitions will be considered to obtain
further density or to acquire key management talent in certain metropolitan
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markets provided that the Company is able to obtain the approval of its lenders
prior to consummating any acquisition. The Company believes that it will be able
to achieve operating efficiencies by effectively operating the DMS Model.
Although barriers to entry in the Point-to-Point delivery services market
traditionally have been low, the Company believes that the application of the
operating methodology will allow it to provide a higher level of customer
service than that traditionally available from its competitors, thereby
permitting the Company to charge premium prices for these services.
Services
The Company provides a comprehensive range of urgent courier services. In
providing urgent delivery services, the Company's messengers respond to
unscheduled customer requests for immediate pick-up and delivery of
time-sensitive packages. The Company offers a range of time-guaranteed products,
primarily one and two hour deliveries, although 15 minute and 30 minute
deliveries are available in certain downtown metropolitan areas. The yield per
delivery typically increases with the time-sensitivity of the delivery. The
current expectation is to offer time-guaranteed delivery products in all key
metropolitan markets within which the Company currently operates. The Company
also provides a variety of slower same-day scheduled and routed delivery
services in certain locations.
As part of the expanded focus on electronic commerce, the Company has
begun providing metropolitan-based distribution and fulfillment services for
e-commerce vendors and other web-based intermediaries. The current expectation
is for the Company to expand such services, and identify a national partner with
existing logistics and fulfillment capability. The Company would then jointly
market an on-demand fulfillment capability operating out of third-party
warehouses in certain downtown metropolitan locations.
Organization
The Company's operations are divided into three business units, U.S.A, the
United Kingdom, and Australasia (Australia and New Zealand). The U.S. business
is organized into four regions, having a total of 22 metropolitan operating
centers in 27 cities, managed with regional and national oversight as
appropriate. Metropolitan operating centers are responsible for courier
management, call-capture, dispatch, customer resolution, invoicing, and
collections.
The Company operates certain of its U.S. centers through compensation and
incentive arrangements with former owners of the acquired companies ("Brand
Managers"), known as "Brand Manager Agreements" which were negotiated at the
time the Company acquired the businesses. For the year ended December 31, 1999,
approximately $43.8 million, (or 20.0%) of the Company's revenues were generated
by centers operating under Brand Manager Agreements. Each Brand Manager is
responsible for maximizing the revenues and pre-tax profit margins of the
specific business of his or her previously owned company. During the first
quarter of 1999, the Company recognized that the existing Brand Manager
Agreements were inappropriate within the context of a large number of disparate
local operating centers undergoing a significant consolidation and integration
program. The Company attempted to renegotiate the Brand Manager Agreements to
clarify local accountabilities and provide for a new compensation and incentive
structure based on the pre-tax performance of an entire operating center. In
light of initial resistance to the conversion plan, the Company negotiated
settlements with certain former Brand Managers. Thereafter the Company decided
to manage the remaining Brand Manager business within the confines of the
original Brand Manager Agreements and discontinued the 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.
Managers of metropolitan centers are responsible for the pre-tax financial
performance of their respective centers, which includes an allocation of the
cost of the shared-services function located in Lake Success, New York,
corporate overhead, and interest expense. The Managing Directors of the United
Kingdom and Australasian businesses are responsible for the total financial
performance of their operations, including an allocation of corporate overhead
and interest expense.
Certain administrative functions are centralized in the New York
shared-services function, including human resources, management accounting for
the United States business unit, company-wide financial reporting, and cash and
treasury management for the entire corporation.
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Customers
The Company provided services to more than 40,000 customers during 1999,
including professional service organizations, large corporations, healthcare
institutions and retail and manufacturing firms. For the year-ended December 31,
1999, no one industry accounted for more than 10% of the Company's net revenue,
and no one customer accounted for more than 5% of the Company's net revenue.
Customers have not historically entered into contracts for the long-term supply
of Point-to-Point delivery services, although the Company anticipates that the
number of contractual accounts will increase with the increased emphasis upon
e-commerce, key accounts and national branding initiatives.
A significant number of the Company's customers are located outside of the
United States. For the year-ended December 31, 1999, approximately 35.2% and
7.8% of the Company's net revenues were generated from the United Kingdom and
Australasia, respectively.
Sales and Marketing
The Company intends to further develop its relationships with existing
clients and to increase market share by raising service levels in the on-demand
delivery market, and by providing enhanced services not currently provided to
customers, such as guaranteed, on-time delivery. The Company's strategic goal is
to become the largest or second largest provider of Point-to-Point delivery
services in each market within which it operates. The Company has also commenced
the development of a premium national and international same-day delivery
product under the "CitySprint"(TM) brand name. Simultaneous with the rollout of
the CitySprint(TM) brand name, the Company has begun utilizing the
1800DELIVER(TM) telephone number as an important element of the related national
marketing program.
The adoption of the CitySprint(TM) brand name and the utilization of the
1800DELIVER(TM) telephone number represent the Company's effort to develop a
consistent universal image required to leverage our market position and take
advantage of emerging e-commerce and national account opportunities. Over time,
the Company believes that the numerous existing brands in local markets will be
replaced by a single national brand.
Competition
The market for Point-to-Point delivery services is highly competitive and
has low barriers to entry. Many of the Company's competitors operate in only one
location and may have more experience and brand recognition than the Company in
the local market. In addition, several large, national, publicly traded
companies are consolidating segments of the delivery industry through the
acquisition of independent courier companies. Other companies in the industry
compete with the Company not only for the provision of services but also for
access to couriers and acquisition candidates. Some of these companies have
longer operating histories and greater financial resources than the Company. In
addition, other firms involved in segments other than Point-to-Point delivery
services may expand into the Point-to-Point market in order to provide their
customers with "one-stop" shopping of delivery and logistics services. Many of
these companies have greater financial resources and brand name recognition than
the Company. The Company believes that the principal competitive factors in the
Point-to-Point delivery industry are reliability, service flexibility and
pricing.
Technology
The Company recognizes the need to continue to invest in technology to; i)
differentiate its product offering from the competition, ii) build new seamless
interfaces with e-commerce customers to facilitate the development of an
on-demand fulfillment model, and iii) create an efficient and scalable
infrastructure to support the administrative and sales and marketing efforts at
the lowest possible cost.
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The Company presently employs two separate call-capture and dispatch
systems for its domestic and international businesses. The North American
business is primarily operating on the proprietary "KIWI"(TM) dispatch system,
which is supported internally. The United Kingdom and Australasian businesses
are licensing an Australian-developed dispatch system known as "TRANSPAC", where
support is out-sourced to a third-party vendor. Both systems capture and
dispatch deliveries in an industry-standard fashion and are partially integrated
into back-end financial and accounting systems.
Current technology investment programs are focused on the development of:
i) real-time proof-of-delivery capability utilizing two-way data systems, ii)
national web order-entry capability, and iii) the creation of a sales and
marketing database. Real-time proof of delivery and web order-entry systems are
currently on trial in two key metropolitan markets. The Company has an ongoing
investment program in the upgrading of financial systems, and their degree of
integration with front-end dispatch systems. Overall, the Company believes that
investment in such technologies will increase service standards and ultimately
raise barriers to entry in the same-day delivery industry.
Regulation and Safety
The Company's operations are subject to various state and local
regulations and, in many instances, require permits and licenses from state
authorities. In connection with the operation of certain motor vehicles and the
handling of hazardous materials, the Company is subject to regulation by the
United States Department of Transportation and the corresponding agencies in the
states in which such courier operations occur. The Company's relationship with
its employees is subject to regulations that relate to occupational safety,
hours of work, workers' compensation and other matters. To the extent the
Company holds licenses to operate two-way radios to communicate with couriers,
the Company is also regulated by the Federal Communications Commission.
The Company currently carries liability insurance, which the Company
believes is adequate. In addition, independent contractors are required to
maintain liability insurance of at least the minimum amounts required by state
law and to provide the Company with a certificate of insurance verifying that
they are in compliance.
Intellectual Property
The Company continually develops and refines the DMS Model and enhances
the existing proprietary technology. The Company primarily relies on a
combination of copyright and trade secret laws, confidentiality procedures and
contractual provisions to protect its intellectual property. The Company has
registered several trade and service marks, including: DMS Corp.(TM),
CitySprint(TM), 1800DELIVER(TM) and 1800COURIER(TM). The Company also owns
various related internet domain names, and the proprietary front-end dispatch
computer system known as "KIWI"(TM).
Employees and Independent Contractors
The Company currently has a work force of 6,064 people, including 4,728
couriers, 1,252 employees involved in operations and 84 people in management
positions. Of the couriers, 1,189 are employees and 3,539 are independent
contractors. The Company is not a party to any collective bargaining agreements.
The Company believes that its relationship with its employees and independent
contractors are good.
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Acquisitions
Commencing with the Offering in February 1998 and continuing through
December 31, 1998, the Company acquired the following urgent courier and
same-day delivery businesses (collectively the "Acquisitions"):
<TABLE>
<CAPTION>
ACQUIRED BUSINESS ACQUISITION DATE ACQUIRED BUSINESS ACQUISITION DATE
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
London, England Houston, TX
West One * February 11, 1998 A&W Couriers * February 11, 1998
Security Despatch * February 11, 1998 Houston Flash * February 11, 1998
Delta Air & Road Transport April 7, 1998 American Messenger August 17, 1998
Innovative Transportation Systems December 3, 1998
New York, NY
Earlybird Courier Service * February 11, 1998 Dallas, TX
Bullit Courier * February 11, 1998 Striders Courier * February 11, 1998
Zoom Courier * February 11, 1998 United Messenger * February 11, 1998
Able Motorized May 1, 1998 Courier Systems May 21, 1998
Express Delivery May 8, 1998 Deadline Delivery September 17, 1998
Champion Courier May 13, 1998
New Jersey ADR May 7, 1998
Atlantic Freight Systems * February 11, 1998
PT Express July 5, 1998 Minneapolis, MN
Flash Delivery Systems November 12, 1998 American Eagle Endeavors (MN) * February 11, 1998
Perth, Australia Seattle, WA
Courier Australia August 25, 1998 Fleetfoot Max * February 11, 1998
Jet City * February 11, 1998
San Francisco, CA
Aero Special Delivery Service * February 11, 1998 Boston, MA
Battery Point * February 11, 1998 1-800 Courier Boston * February 11, 1998
Studebaker * February 11, 1998 1-800 New Hampshire * February 11, 1998
Zap Courier * February 11, 1998 Time Courier * February 11, 1998
S-Car-Go * February 11, 1998
Bay Metro Express May 22, 1998 Detroit, MI
Express Messenger * February 11, 1998
Atlanta, GA G&G Courier November 5, 1998
MLQ Express * February 11, 1998
A Courier Atlanta * February 11, 1998 Phoenix, AZ
American Eagle Endeavors (AZ) * February 11, 1998
Denver, CO Metro Link May 8, 1998
Kangaroo Express * February 11, 1998
1-800 Denver * February 11, 1998 Portland, OR
Zoom Delivery June 30, 1998 1-800 Portland * February 11, 1998
Andy's Delivery May 22, 1998
Los Angeles, CA
National Messenger * February 11, 1998 Auckland/Wellington, New Zealand
1-800 Courier LAX * February 11, 1998 KiwiCorp * February 11, 1998
Speedy Messenger May 15, 1998 A.R.T. Courier August 7, 1998
South Coast Metro May 21, 1998
Direct Messenger June 30, 1998 Chicago, IL
Caliber Delivery September 4, 1998 Deadline Courier * February 11, 1998
Courier Dispatch December 1, 1998
Lightning Dispatch December 18, 1998 Nashville, TN
A Courier Tennessee * February 11, 1998
Washington, DC
Washington Express * February 11, 1998 Philadelphia, PA
AFS Courier * February 11, 1998 Time Cycle Courier * February 11, 1998
Rocket Courier * February 11, 1998
Advance Courier May 21, 1998 Charlotte, NC
Advantage Courier May 21, 1998 A Courier Charlotte * February 11, 1998
</TABLE>
* Reflects Founding Company acquisition
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The aggregate consideration paid by the Company for the above acquisitions
included: cash paid of approximately $119.5 million, 4,775,412 shares of common
stock, and $15.8 million in notes payable. See Liquidity and Capital Resources
discussion in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The consideration paid by the Company for the
Acquisitions was determined through arms-length negotiations among the Company
and the representatives of the owners of these acquired companies. The factors
considered by the parties in determining the purchase price included, among
other things, historical operating results, future prospects of the acquired
companies, and the ability to integrate the acquired business into an existing
DMS operations center.
Each of the Acquisitions has been accounted for using the purchase method
of accounting. Each acquisition has been included in the Company's consolidated
results of operations from the date of its respective acquisition.
Executive Management
H. Steve Swink has served as the Chairman and Chief Executive Officer
since December 14, 1998 and January 26, 1999, respectively. Mr. Swink has been a
Director of the Company since February 1998. Prior to be being appointed the
Chief Executive officer of the Company, Mr. Swink served as Executive Vice
President of UniCapital Corporation, a publicly traded leasing concern based in
Miami, Florida. Between August 1995 and June 1998, Mr. Swink served as President
of the Coffee and Beverage Division of U.S. Office Products Company. From 1977
to August 1995, Mr. Swink served in various executive officer capacities for
Coffee Butler Services, Inc., a coffee service business, most recently as
President.
Marko Bogoievski has served as the Chief Financial Officer of the Company
since November 1997. From April 1996 to November 1997, Mr. Bogoievski was the
Chief Financial Officer of Ansett New Zealand Limited, an airline and
transportation subsidiary of News Corporation, Inc. operating in New Zealand.
From September 1993 to April 1996, Mr. Bogoievski was a Finance Director of Lion
Nathan Limited, a publicly traded brewer operating in Australia, New Zealand and
China.
Bruce Morgan has served as the Managing Director of the United Kingdom
business since June 1999. From April 1987 to June 1999, Mr. Morgan was the
Managing Director and Founder of Courier Australia Pty Ltd., a $15.0 million
same-day transportation business acquired by the Company in August 1998. Mr.
Morgan has extensive prior experience in senior management roles with Emery
Worldwide and TNT, both multi-national express transportation companies.
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Item 2. Properties
The Company operates from 91 leased facilities, which total approximately
282,000 square feet. These facilities are principally used for operations,
general and administrative functions and training. In addition, several
facilities also contain storage and warehouse space for Company equipment as
well as for the strategic stockpiling of service repair items for certain
customers. The Company generally intends to continue to consolidate the
back-office operations and road operations into single DMS centers located
within each market. This is likely to result in the reduction of a number of
facilities operated by the Company.
The table below summarizes the location of the Company's existing
facilities.
Number of
Location Facilities
-------- ----------
United Kingdom........ 37
New York Metropolitan
Area.................. 9
San Francisco, CA..... 2
Atlanta, GA........... 2
Dallas, TX............ 1
Denver, CO............ 2
Los Angeles, CA....... 4
Seattle, WA........... 2
Detroit, MI........... 1
Washington, D.C....... 2
Boston, MA............ 1
Charlotte, NC......... 2
Chicago, IL........... 1
Hollis, NH............ 1
Houston, TX........... 1
Minneapolis, MN....... 1
Nashville, TN......... 1
Phoenix, AZ........... 1
Portland, OR.......... 2
Philadelphia, PA...... 1
San Antonio, TX....... 1
Austin, TX............ 1
West Orange, NJ....... 2
Clifton, NJ........... 1
Elizabeth, NJ......... 2
Australia............. 8
New Zealand........... 2
-----
Total................. 91
=====
The Company's corporate headquarters are located in Lake Success, New
York. The Company believes that its properties are generally well maintained, in
good condition and adequate for its present needs. Furthermore, the Company
believes that suitable additional or replacement space will be available when
required. The Company's facilities rental expense for the year ended December
31, 1999 was $3.7 million.
Item 3. Legal Proceedings
Following the acquisition of certain of the Founding Companies, the
Company terminated a relationship with an equipment vendor due to problems with
certain telecommunications and computer equipment. In July 1998, the Company was
served with a claim for unpaid 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 gain of $0.4 million versus previously established
reserves.
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The Company is also involved in several acquisition-related disputes
concerning the interpretation of certain acquisition contracts, including
non-compete agreements, and the transferability of unregistered stock issued in
connection with the acquisitions. The Company has accrued $5.6 million and $3.4
million as an estimate of the liability with respect to these cases at December
31, 1999 and 1998, respectively.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price Information
The Company's Common Stock began trading on The NASDAQ National Market
under the symbol "DMSC" on February 6, 1998. On September 2, 1999, the Company's
Common Stock began trading on The American Stock Exchange under the symbol
"RPD". The following table details the high and low sales prices for the Common
Stock as reported by The NASDAQ National Market and the American Stock Exchange
for the periods indicated:
High Low
---- ---
1998
First Quarter............. $ 17.500 $ 13.500
Second Quarter............ 28.000 15.875
Third Quarter............. 26.750 12.688
Fourth Quarter............ 14.875 3.000
1999
First Quarter............. $ 4.438 $ 1.500
Second Quarter............ 4.500 2.500
Third Quarter............. 3.594 1.938
Fourth Quarter............ 4.313 2.000
2000
First Quarter
(through March 6, 2000)... 2.938 1.625
On March 6, 2000 (i) the last sale price of the Common Stock as reported
on The American Stock Exchange was $2.0625 per share and (ii) there were 259
holders of record of the Common Stock.
The Company has never paid any cash dividends on its Common Stock, and the
Board of Directors currently intends to retain all earnings, if any, for use in
the Company's business for the foreseeable future. Any future payment of
dividends will depend upon the Company's results of operations, financial
condition, cash requirements, restrictions contained in credit and other
agreements and other factors deemed relevant by the Board of Directors.
Recent Sales of Unregistered Securities
On December 16, 1999, the Company issued 750,000 shares of its Common
Stock to a corporation controlled by Bruce Morgan in exchange for the
cancellation of $2,250,000 owed by the Company to the corporation in connection
with the Company's acquisition of Courier Australia Pty Ltd. The sale of the
shares was not registered under the Securities Act of 1933, as amended (the
"Act"). The Company relied upon the exemption from registration under the
11
<PAGE>
Act set forth in Section 4(2) thereof. Mr. Morgan manages the Company's
operations in the United Kingdom and therefore has access to information
regarding the Company and has agreed to restrictions on the resale of the
shares.
Item 6. Selected Financial Data
Set forth below is selected historical financial data with respect to the
years ended December 31, 1999 and 1998, all of which are derived from, and
qualified by reference, to, the audited consolidated financial statements
included herein and such data should be read in conjunction with those financial
statements and notes thereto.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
(Dollars in thousands, except share data)
<S> <C> <C>
Statement of Operations Data:
Net revenue.................................................. $ 219,863 $ 188,640
Cost of revenue.............................................. 134,360 119,927
------------- -------------
Gross profit................................................. 85,503 68,713
Operating expenses:
Selling, general and administrative expenses............... 66,992 68,096
Depreciation and amortization.............................. 21,469 5,783
Liquidation of Brookside Systems Limited................... - 4,070
Other charges.............................................. 1,663 4,893
------------- -------------
Income (loss) from operations................................ (4,621) (14,129)
Interest and other expense, net.............................. 8,895 3,546
------------- -------------
Loss before income tax provision (benefit)................... (13,516) (17,675)
Provision (benefit) for income taxes......................... 688 1,953
------------- -------------
Net loss before extraordinary item........................... $ (14,204) $ (19,628)
============= =============
Net loss per share before extraordinary item................. $ (1.18) $ (1.88)
============= =============
Weighted average shares used in computing
net loss per share........................................ 12,052,023 10,478,010
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit)................. $ (51) $ 5,707
Total assets.............................. 196,605 219,701
Long term debt, net of current maturities. 71,750 70,600
Stockholders' equity...................... 84,764 99,373
</TABLE>
Item 7. 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 below.
Introduction
The Company was formed in 1997 to create one of the largest providers of
urgent, on-demand, point-to-point ("Point-to-Point") delivery services in the
world. The Company focuses on Point-to-Point delivery by foot, bicycle,
motorcycle, car and truck and operates in 22 of the largest metropolitan markets
in the United States as well as in the United Kingdom, Australia, and New
Zealand. The Company believes that it has the largest market share of
Point-to-Point delivery service companies operating in each of London, New York,
San Francisco, Atlanta, Washington, D.C. and Seattle. Although several large,
national, publicly traded companies are consolidating other segments of the
delivery industry, the Company believes that it is the only courier firm focused
exclusively on the highly fragmented
12
<PAGE>
Point-to-Point delivery industry. The Company's consolidated net revenues for
the year ended December 31, 1999 was $219.9 million.
Basis For Presentation
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 significant revenues. Simultaneous with the Offering, the
Company acquired, in separate combination transactions, 38 urgent, on-demand,
Point-to-Point courier firms and one software company. The software company was
subsequently liquidated in 1998. Following the Offering, the Company acquired an
additional 28 companies in 1998. Each of these acquisitions has been accounted
for using the purchase method of accounting. Accordingly, the Company's results
of operations reflect the results of acquired operations from the date of
acquisition. As a result of these various acquisitions, the historical results
of the Company for the periods presented are not necessarily comparable.
Net Revenue. The Company primarily earns revenues from fees charged for
Point-to-Point delivery services with the remainder of revenues being derived
from facilities management and other scheduled and routed same-day delivery
services. Revenues consist primarily of charges to customers for individual
delivery services and weekly or monthly charges for other ongoing services.
Revenues are recognized when packages are delivered. The revenue per transaction
for a particular delivery service is dependent upon a number of factors,
including the time sensitivity of a particular delivery, special handling
requirements and local market conditions. A significant portion of the Company's
revenue is generated outside of the United States. For the year ended December
31, 1999, approximately 43.0% of total revenues were generated in the United
Kingdom, and Australasia.
Cost of Revenue. Cost of revenue consists of costs relating directly to
performance of services, including courier compensation, vehicle lease expenses,
radio and paging costs, and the cost of administering and managing the Company's
courier fleet. A significant majority of the Company's drivers own their own
vehicles. The Company believes that the Point-to-Point delivery business
generally offers higher gross margins than scheduled or routed deliveries, which
result from the premium pricing associated with time-sensitive deliveries. The
Company's couriers have historically been compensated based on a fixed
percentage of the revenue for a delivery. However, the Company is in the process
of realigning courier compensation to an effort-based standard. Management
believes that this structure maximizes courier fleet productivity and allows it
to better manage its pricing policies and gross margin. In either case, the
Company's courier costs are essentially variable in nature. To the extent that
the couriers are employees of the Company, associated employee benefit costs
such as payroll taxes and insurance are also included in cost of sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of three major components; (i) sales and
marketing, which includes expenses related to new business development, account
management and local brand marketing initiatives, including Brand Manager and
center manager compensation, sales commissions and advertising and other
promotional expenses (the Company anticipates the need for additional investment
in sales and marketing initiatives and the implementation and execution of
national brand strategies), (ii) general and administrative expenses, which
include salaries and benefits of management and administrative staff,
professional fees, training costs and expenses related to comprehensive
insurance programs, and (iii) other operating expenses, which relate primarily
to the cost of operating the DMS Centers which include costs associated with
call capture, dispatch management, customer service, billing, collections and
local supervisory personnel.
Depreciation and Amortization. Depreciation expense primarily relates to
the depreciation of office, communication and computer equipment, and
transportation equipment. Amortization expense primarily relates to the
amortization of goodwill. The excess of the fair value of the consideration paid
for the acquisitions over the fair value of the net assets acquired was $164.9
million at December 31, 1999, and is recorded as goodwill. Goodwill is amortized
as a non-cash charge over a period ranging from 5 to 40 years. As a result of
the Company's evaluation of the carrying value of goodwill, management
determined that the goodwill associated with certain U.S. operating centers was
permanently impaired at December 31, 1999 and recorded a write-down of $13.2
million. Goodwill amortization and write-off was $18.5 million and $2.9 million
in 1999 and 1998, respectively.
13
<PAGE>
Consolidated Results of Operations
The following table sets forth certain items from the Company's consolidated
statement of operations, expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
(Dollars in thousands)
----------------------
<S> <C> <C> <C> <C>
Net revenue .................................. $ 219,863 100.0% $ 188,640 100.0%
Cost of revenue .............................. 134,360 61.1% 119,927 63.6%
--------- ---------
Gross profit ................................. 85,503 38.9% 68,713 36.4%
Operating expenses:
Selling, general and administrative expenses 66,992 30.5% 68,096 36.1%
Depreciation and amortization .............. 21,469 9.7% 5,783 3.1%
Liquidation of Brookside Systems Limited ... -- 0.0% 4,070 2.2%
Other charges .............................. 1,663 0.8% 4,893 2.6%
--------- ---------
Operating income (loss) ...................... (4,621) (2.1)% (14,129) (7.6%)
Interest and other expenses .................. 8,895 4.0% 3,546 1.9%
--------- ---------
Loss before income taxes ..................... (13,516) (6.1)% (17,675) (9.5%)
Provision for income taxes ................... 688 0.3% 1,953 1.0%
--------- ---------
Net loss before extraordinary item ...... $ (14,204) (6.4)% $ (19,628) (10.5%)
========= =========
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Net Revenue
Net revenue for the year ended December 31, 1999 increased $31.2 million,
or 16.6%, to $219.9 million from $188.6 million for the year ended December 31,
1998. This increase was primarily due to the inclusion of a full year of 1999
revenue generated by 28 urgent, on-demand, Point-to-Point courier firms that the
Company acquired at various dates following the Offering in February 1998.
Excluding the effect of the 28 acquired firms, net revenues from comparable
operating centers decreased $12.0 million, or 7.7%, primarily as a result of
accounts that were lost due to price increases or changes to other significant
terms of trade. Approximately $5.0 million of the comparable operating center
decrease was related to accounts transferred or lost as part of negotiated
settlements with former owners of acquired businesses. The Company's revenues
were predominantly earned from urgent delivery services performed throughout the
United States, the United Kingdom, and Australasia (dollars in thousands):
Year ended Year ended
December 31, 1999 December 31, 1998
United States $ 125,279 57.0 % $ 110,617 58.6 %
United Kingdom 77,486 35.2 71,430 37.9
Australasia 17,098 7.8 6,593 3.5
------- ----- ------- ------
Total $ 219,863 100.0 % $ 188,640 100.0 %
------- ----- ------- -----
Cost of Revenue
Cost of revenue for the year ended December 31, 1999 increased $14.4
million, or 12.0%, to $134.4 million from $119.9 million for the year ended
December 31, 1998. This increase was primarily due to the cost of revenue
generated by the 28 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
year ended December 31, 1999 decreased to 61.1%, from 63.6% for the year ended
December 31, 1998, primarily as a result of the improved mix towards delivering
higher-yielding, more time-sensitive packages. 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 year ended
December 31, 1999, cost of revenue
14
<PAGE>
percentages for the United States, United Kingdom and Australasia were 59.5%,
63.7%, and 61.3%, respectively, as compared to 62.2%, 65.9%, and 62.6%,
respectively, for the comparable 1998 year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December
31, 1999 decreased $1.1 million, or 1.6%, to $67.0 million from $68.1 million
for the year ended December 31, 1998. The decrease was primarily due to the
positive effect of continued post-acquisition integration activity and a major
cost-cutting program initiated in 1999, and to a lesser extent, the inclusion of
$4.9 million of bad debt and notes receivable allowances in 1998. Offsetting
this decrease is the additional selling, general and administrative expense
associated with the 28 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 year ended
December 31, 1999 decreased to 30.5%, from 36.1% for the year ended December 31,
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 year ended December 31,
1999, selling, general and administrative percentages for the United States,
United Kingdom, and Australasia were 32.4%, 27.4%, and 30.2%, respectively, as
compared to 43.4%, 26.1%, and 23.3%, respectively, for the comparable 1998
period.
Depreciation and Amortization
Depreciation and amortization expense increased $15.6 million, or 269.7%
to $21.4 million for the year ended December 31, 1999 from $5.8 million for the
year ended December 31, 1998. This increase was primarily due to the
amortization and write-off of goodwill in 1999, which included an impairment
write-down of $13.2 million.
Other Charges
Other charges for the year ended December 31, 1999 include $1.2 million
for costs associated with the finalization of certain claims and legal actions
against the Company, as well as $0.5 million related to costs associated with a
potential merger transaction that has since been terminated. Other charges in
1998 included the write-off of $1.5 million of professional fees associated with
planned acquisitions that failed to close.
Interest Expense and Deferred Financing Costs
Interest expense for the year ended December 31, 1999 was $8.9 million.
This represents an increase of $5.4 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 7.8% to 10.2%
during the year ended December 31, 1999, compared with 6.9% to 7.6% for the year
ended December 31, 1998. As a result of the Company entering into a credit
agreement in April 1999, the Company wrote-off $0.9 million of the fees
associated with the previous credit facility. The Company amortized an
additional $0.7 million of deferred financing fees during the year ended
December 31, 1999. Interest expense incurred on the senior bank debt during the
year ended December 31, 1999 amounted to $6.9 million.
Provision for Income Taxes
The Company's effective tax rate can vary depending on the financial
performance of the different geographic regions. The high effective tax rate for
the year ended December 31, 1999 is related to the profitability of the United
Kingdom subsidiary, which is not currently benefiting from significant
carryforward tax losses generated in the United States. In September 1999, the
Company finalized its 1998 income tax returns, which resulted in the reversal of
$0.2 million of previously recorded income tax reserves.
15
<PAGE>
YEAR ENDED DECEMBER 31, 1998
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 significant revenues. Therefore, comparisons to 1997 actual
results are not considered meaningful and no discussion of the results of
operations for the year ended December 31, 1997 has been included.
1998 Overview
The Company's operating results for 1998 were negatively impacted by
several individually significant items that primarily occurred in the fourth
quarter. The Company believes that these charges were non-recurring or related
to costs associated with the first year of operation. The individually
significant charges included the liquidation of a software development company
for $4.1 million (see Note 13 of the Company's consolidated financial
statements), severance and other charges including, costs of acquisitions not
completed and employee termination costs aggregating $4.9 million (see Note 14),
the recording of allowances for the uncollectability of accounts and notes
receivable of $4.9 million (see Note 12), costs related to the early
extinguishment of debt of $1.1 million, as well as additional first year
organizational costs.
Gross margins deteriorated during the year as courier fleets were combined
and additional couriers were maintained to protect service levels during the
conversion to the Company's road management practices and "Free-Call" allocation
methodology. The Company also experienced difficulties converting the front-end
technology of the acquired companies to the proprietary "KIWI(TM)" software
operating system, including delays in billing and other issues associated with
the scale of conversion activity.
In addition, the performance of the Company in 1998 was negatively
impacted by; i) a significant level of integration activity following the
acquisition of 67 companies throughout the United States, the United Kingdom,
Australia and New Zealand, ii) significant first year organization and
infrastructure development costs, primarily professional and consulting fees,
associated with the strategy of integrating the metropolitan operating centers
into a national and international network, iii) an aggressive technology
investment program that was abandoned in the fourth quarter of 1998 in order to
focus on more fundamental technology needs, and iv) the termination of certain
contracts assumed or entered into at the time of the Offering.
The Company also experienced significant changes in its senior management
team, with the termination of the Chief Operating Officer, Director of Business
Development, and the Director of Road Management in September 1998, and the
resignation of the Chairman and Chief Executive Officer in November 1998, and
January 1999, respectively.
Net Revenue
Net revenue for the year ended December 31, 1998 was $188.6 million. This
revenue was predominantly earned from Point-to-Point delivery services
throughout the United States, the United Kingdom, Australia and New Zealand. For
the year-ended December 31, 1998, net revenues generated in the United States,
the United Kingdom, Australia, and New Zealand were $110.6 million, $71.4
million, $4.8 million, and $1.8 million, respectively. Following certain
acquisitions, the Company re-priced or abandoned certain revenues which failed
to meet certain margin criteria, or were not pure Point-to-Point delivery
businesses.
Cost of Revenue
Cost of revenue for the year ended December 31, 1998 was $119.9 million,
or 63.6% of the Company's revenues. Cost of revenue percentages in the United
States, the United Kingdom, Australia and New Zealand vary considerably as a
result of different compensation structures, the proportion of owner-operated
vehicles, benefit plans, and the mix of business. For the year ended December
31, 1998, cost of revenue percentages for the United States, United Kingdom,
Australia and New Zealand were 62.2%, 65.9%, 62.8%, and 62.1%, respectively.
Cost of revenue percentages were negatively impacted during 1998 by significant
additional costs introduced during conversions to the Company's
16
<PAGE>
operating model, and the difficulty associated with the physical integration of
a number of previously independent courier fleets.
As at December 31, 1998, the majority of the Company's U.S. and
international operating centers had not implemented the creation of
time-sensitive, guaranteed delivery products. As such, the implementation of
these pricing and marketing initiatives under the DMS Model did not have a
significant impact on gross margins for 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December
31, 1998 were $68.1 million, or 36.1% of the Company's net revenues. Selling,
general and administrative percentages in the United States, the United Kingdom,
Australia and New Zealand vary considerably as a result of the degree of
physical integration, different compensation structures and the mix of business.
For the year ended December 31, 1998, selling, general and administrative
percentages for the United States, United Kingdom, Australia and New Zealand
were 43.4%, 26.1%, 25.1%, and 18.6%, respectively. Selling, general and
administrative percentages were negatively impacted during 1998 by higher local
operating costs introduced during conversions to the Company's operating model.
The Company converted over 90% of North American revenues to the proprietary
operating model during 1998.
The United States selling, general and administrative percentage also
includes certain non-recurring corporate charges, including establishment of
increased valuation reserves against receivables. During the fourth quarter, the
Company determined that an increased allowance against trade and notes
receivable of $4.9 million was necessary. The assessment of the realizable value
of trade and notes receivable was based on, among other things, actual receipts
since December 31, 1998, the value of any collateral held, and an assessment of
the underlying business prospects of the debtor and guarantor parties.
Selling, general and administrative expenses also reflect the cost of an
aggressive technology investment program that was abandoned in the fourth
quarter in order to focus on more fundamental technology needs, and expenditures
associated with the organization and formation of a public company.
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 1998
was $5.8 million, or 3.1% of revenues. Depreciation and amortization expense
includes depreciation on property, plant and equipment, and amortization of
goodwill and other intangibles. Depreciation and amortization expense for the
year ended December 31, 1998 were $2.6 million and $3.2 million, respectively.
Liquidation of Brookside Systems Limited ("Fleetway")
The Company recorded a charge of $4.1 million related to the liquidation
of Fleetway. Fleetway was a software development company that generated net
operating losses since its acquisition in February 1998. This charge includes
the write-off of $2.0 million of goodwill and capitalized software and
development costs associated with the acquisition of Fleetway. The remaining
balance of $2.1 million related to adjustments to the net realizable value of
certain assets, and the write-off of in-process research and development costs
that were recorded in the first quarter of 1998 in connection with the
acquisition.
Other Charges
The Company recorded charges of $4.9 million related to the termination of
former executives, transaction costs associated with acquisitions not completed,
and provision for the cost of settling certain acquisition-related obligations.
Severance and other charges included $1.2 million for severance, $1.0 million of
transaction costs associated with acquisitions not completed, and $2.7 million
of contract termination and other charges.
17
<PAGE>
Interest Expense
Interest expense for the year ended December 31, 1998 was $3.5 million.
Interest expense included interest on senior debt, acquired debt,
acquisition-related debt, and capital lease obligations, as well as bank charges
and the amortization of deferred finance charges relating to the Company's
senior credit facility. Substantially all of the Company's debt at December 31,
1998 was consolidated in the syndicated senior credit facility. Interest rates
on the senior credit facility ranged from 6.9% to 7.6% during the year ended
December 31, 1998.
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 December 31, 1999, the Company had $2.7 million in cash and cash
equivalents, $2.5 million of bank overdrafts, $73.8 million of senior bank debt,
and $8.7 million of short and long-term acquisition-related debt. Net cash
provided from operating activities for the year ended December 31, 1999 was
$14.5 million. Accounts receivable days sales outstanding improved by
approximately twelve days during 1999. Net cash used in investing and financing
activities were $14.1 million and $0.5 million, respectively, for the year ended
December 31, 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 $71.2 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 $48.3 million in cash, the issuance of 1,396,822
shares of common stock, and $11.2 million of notes payable. Subsequent to
December 31, 1998, the Company converted $2.4 million of the stock consideration
payable to cash consideration. The cash portion of the consideration for the
acquisitions consummated after the Offering was provided by borrowings under the
Company's credit facility.
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 items. The
Company finalized all additional consideration arrangements at December 31,
1999, and such amounts are included in the total consideration amounts noted
above.
Capital expenditures totaled $3.7 million in the year ended December 31,
1999, primarily for office and technology-related expenditures. Application of
the various DMS operating practices requires investment in existing operating
centers. Management presently anticipates that such additional capital
expenditures will total $7.0 million over the next two years, including $3.5
million of computer equipment, $2.5 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.
During the first quarter of 1999, the Company notified the lenders of an
event of default in relation to certain financial covenants. Following this
notification, the Company operated under a forebearance agreement that deferred
18
<PAGE>
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 with NationsBank N.A. and a syndicate of senior lenders (the
"Credit Agreement"). The Credit Agreement provided for a revolving loan
commitment of $78.4 million, which included a sub-limit of $3.8 million for
existing standby letters of credit. The revolving loan commitment is reduced by
the amount of monthly principal repayments. Pursuant to a commitment letter
providing for the amendment of the Credit Agreement received from the lenders on
March 7, 2000, all amounts drawn under the line of credit must be repaid on May
31, 2001, with minimum principal payments of $500,000 for January 2000, $150,000
per month for April 2000 through November 2000, and $300,000 per month from
December 2000 through May 2001.
Outstanding principal balances under the line of credit bear interest 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 pricing level at December 31, 1999 was LIBOR +
3.75% (30-Day LIBOR at December 31, 1999 was 5.82%). 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.
Other financial covenants include: (i) maintenance of a positive monthly
pre-tax income on a consolidated basis (adjusted for certain non-cash gains and
losses), (ii) a maximum total debt to EBITDA ratio, (iii) 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 35%, and (iv) a 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 credit 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 Credit Agreement, the Company wrote
off $0.9 million of deferred financing fees in 1999 related to the 1998 credit
facility.
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, and ii) complying
with the financial covenants described in the Credit Agreement as amended by the
commitment letter received from the lenders on March 7, 2000. Given the current
Credit Agreement restrictions, the Company is unlikely to pursue further
acquisition opportunities during the next twelve to eighteen months.
Impact of Recently Issued Accounting Pronouncements
The impact of recently issued accounting standards is discussed in Note 2
of the Notes to the financial statements.
Year 2000
The Year 2000 issue, which is common to most corporations, concerns the
inability of certain information systems, primarily computer software programs,
to properly recognize and process date sensitive information related to the year
2000 and beyond. The Company developed plans to address the possible exposures
of its existing systems to the Year 2000 issue. Key financial, management
information and operational systems, including equipment with embedded
microprocessors, were inventoried and assessed, and necessary systems
modifications or replacements were made. All necessary changes to critical
systems were completed during 1999. The Company experienced no problems in
connection with the introduction of calendar year 2000 transactions to its
operating, financial and other systems, nor has it experienced difficulties from
the effect, if any, of the Year 2000 issue on its customers and suppliers.
External
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expenditure to address Year 2000 compliance amounted to $0.3 million. The
Company will continue to monitor its operations.
Factors Affecting the Company's Prospects
In addition to other information in this report, the following factors
should be considered carefully in evaluating the Company and its business. This
report contains forward-looking statements, which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this report.
Risks Relating to Conversion to the CitySprint(TM) 1800DELIVER(TM) Brand.
The Company has begun converting its operating centers towards an international
identity, referred to as CitySprint(TM) 1800DELIVER(TM). The conversion process
includes, among other things, i) eliminating the existing local brands, ii)
converting to the 1800DELIVER(TM) telephone number, iii) providing courier and
back-office personnel with new uniforms and equipment, iv) executing a local
trade marketing and communications program immediately prior to the conversion
and during a transition period, and v) replacing existing livery on vehicles and
revenue producing equipment with new consistent CitySprint(TM) 1800DELIVER(TM)
imagery. The conversion to the new brand identity may confuse and, therefore,
adversely affect the Company's existing relationships. In addition, successful
conversion to the CitySprint(TM) brand will require the efforts and support of
all of the Company's employees and Brand Managers. There can be no assurance
that the conversion to the new brand identity will not have a negative effect on
the Company's revenues or operating profitability. The inability of the Company
to successfully implement each of the key elements relating to the conversion
would have a material adverse effect on the Company's business, financial
condition, cash flow or results of operations.
Issues Relating to the Brand Manager Structure. The Company has had and
may continue to have difficulty enforcing the terms and conditions of its
agreements with Brand Managers who manage some of the Company's operating
centers. 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 recognized that
the existing Brand Manager Agreements were inappropriate within the context of a
large number of disparate local operating centers undergoing a significant
consolidation and integration program. The Company attempted to renegotiate the
Brand Manager Agreements to clarify local accountabilities and provide for a new
compensation and incentive structure based on the pre-tax performance of an
entire operating center. In light of initial resistance to the conversion plan,
the Company negotiated settlements with certain former Brand Managers.
Thereafter the Company decided to manage the remaining Brand Manager business
within the confines of the original Brand Manager Agreements and discontinued
the 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. There can be no assurance
that the Company will be able to properly manage the Brand Manager operating
centers 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, cash flow or results of
operations.
Risks of Tax Authorities Classifying Independent Contractors as Employees.
A significant number of the couriers utilized by the Company are independent
contractors. From time to time, federal and state taxing authorities have sought
to assert that couriers in the Point-to-Point delivery industry are employees,
rather than independent contractors. The Company does not pay or withhold any
federal or state employment tax with respect to or on behalf of independent
contractors. The Company believes that the independent contractors utilized by
the Company are not employees of the Company under existing interpretations of
federal and state laws. However, there can be no assurance that federal and
state authorities will not challenge this position, or that other laws or
regulations, including tax laws, or interpretations thereof, will not change. If
the IRS successfully asserts that such persons or others classified by the
Company as independent contractors are in fact employees of the Company, the
Company would be required to pay withholding taxes and administer added employee
benefits. In addition, the Company could become responsible for certain past and
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future employment taxes. If the Company is required to pay back-up withholding
taxes with respect to amounts previously paid to such persons, it may be
required to pay penalties or be subject to other liability as a result of
incorrectly classifying such couriers. If the couriers are deemed to be
employees, rather than independent contractors, then the Company may be required
to increase their gross compensation since they will be subject to state or
federal tax withholdings. Any of the foregoing circumstances could increase the
Company's operating costs and could have a material adverse effect on the
Company's business, financial condition, cash flow or results of operations.
Dependence on Technology. The Company's business is dependent upon a
number of different information and telecommunication technologies to manage a
high volume of inbound and outbound calls and process transactions accurately
and on a timely basis. The Company is also required to develop and implement new
technologies to take advantage of emerging business opportunities such as
e-commerce. Any impairment of the Company's ability to process transactions on
an accurate and timely basis, or successfully implement new technologies could
result in the loss of customers and diminish the reputation of the Company.
There can be no assurance that the Company will be able to continue to
design, develop and refine its computer systems and software on a cost efficient
basis, whether due to the loss of employees or otherwise. Any of the foregoing
would have a material adverse effect on the Company's business, financial
condition, cash flow or results of operations. In addition, the Company utilizes
computer hardware and operating systems designed and manufactured by Apple
Computer, Inc. ("Apple"). Any material changes in computer and operating
platform technology designed and manufactured by Apple which is incompatible
with the Company's current computer systems, or the discontinuance of Apple
computer hardware or support services, would have a material adverse effect on
the Company's business, financial condition, cash flow or results of operations.
If the Company decides to change its hardware and operating systems to a
different operating platform technology, there can be no assurance that the
Company will be able to successfully make such a change or that such new
hardware and operating systems will be as effective as the existing hardware and
operating system.
Reliance on Key Personnel. The Company's success is largely dependent on
the efforts and relationships of the executive officers, senior managers of the
acquired companies, Brand Managers and center managers. Furthermore, the Company
will likely be dependent on the senior management of any businesses acquired in
the future, particularly the selling shareholders and sales representatives who
have on-going relationships with customers. The loss of the services of any of
these individuals could have a material adverse effect on the Company's
business, financial condition, cash flow or results of operations. There can be
no assurance that such individuals will continue in their present capacities for
any particular period of time. The Company does not intend to obtain key man
life insurance covering any of its executive officers or other members of senior
management. In addition, the Company's future success and plans for growth also
depend on the Company's ability to attract, train and retain skilled personnel
in all areas of its business.
Dependence on Availability of Qualified Courier Personnel. The Company is
dependent upon its ability to attract and retain, as employees or through
independent contractor or other arrangements, qualified courier personnel who
possess the skills and experience necessary to meet the needs of its operations.
The Company competes in markets in which unemployment is relatively low and the
competition for couriers and other employees is intense. The Company must
continually evaluate and upgrade its pool of available couriers to keep pace
with demands for delivery services. There can be no assurance that qualified
courier personnel will continue to be available in sufficient numbers and on
terms acceptable to the Company. The inability to attract and retain qualified
courier personnel would have a material adverse impact on the Company's
business, financial condition, cash flow or results of operations.
Need for Additional Financing. If the Company has insufficient cash
resources to fund capital expenditure programs, develop sales and marketing
initiatives, or pursue acquisitions, its growth would be limited unless it is
able to obtain additional capital through debt or equity financing. There can be
no assurance that the Company will be able to obtain such financing if and when
it is needed or that, if available, such financing could be obtained on terms
the Company deems acceptable. The inability to obtain such financing could have
a resulting material adverse effect on the Company's business, financial
condition, cash flow or results of operations.
Competition. The market for Point-to-Point delivery services is highly
competitive and has low barriers to entry. Many of the Company's competitors
operate in only one location and may have more experience and brand recognition
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than the Company in such local market. In addition, several large, national,
publicly traded companies are in the process of consolidating the Point-to-Point
delivery industry through the acquisition of independent Point-to-Point courier
companies. Other companies in the industry compete with the Company not only for
the provision of services but also for acquisition candidates. Some of these
companies have longer operating histories and greater financial resources than
the Company. In addition, other firms involved in segments other than
Point-to-Point delivery services may expand into this market in order to provide
their customers with "one-stop" shopping of delivery and logistics services.
Many of such companies have greater financial resources and brand name
recognition than the Company. The Company's implementation of the CitySprint(TM)
brand may adversely affect its competitive position until the new brand becomes
established. There can be no assurance that any of the foregoing would not have
a material adverse effect on the Company's business, financial condition, cash
flow or results of operations.
Interest Expense. The Company had significant variable interest rate debt
outstanding at December 31, 1999 and will continue to have a significant amount
of variable interest rate debt. The Company has not currently entered into any
hedging transactions with respect to its interest rate exposure, although it may
do so in the future. There can be no assurance that fluctuations in interest
rates will not have a material adverse impact on the Company's business,
financial condition or results of operations.
Foreign Exchange. Approximately 43.0% of the Company's consolidated
revenue for the year ended December 31, 1999 was derived from operations
conducted in the United Kingdom, Australia and New Zealand. Exchange rate
fluctuations between the U.S. dollar and the British pound, Australian dollar,
and New Zealand dollar, result in fluctuations in the amounts relating to the
foreign currencies reported in the Company's consolidated financial statements
due to repatriation of earnings from the foreign subsidiary to the United States
or translation of the earnings of the foreign subsidiary operations into U.S.
dollars for financial reporting purposes. The Company has not entered into any
hedging transactions with respect to its foreign currency exposure, but it may
do so in the future. There can be no assurance that fluctuations in foreign
currency exchange rates will not have a material adverse impact on the Company's
business, financial condition, cash flow or results of operations.
Risks of IRS Challenge of Reimbursement Policies. Several of the acquired
companies in the past have reimbursed certain automobile expenses of their
drivers who are employees and own their vehicles. Aero Delivery and two other
Founding Companies, which collectively represent approximately 5.3% of the
Company's 1999 consolidated revenues, previously had a reimbursement policy that
was not based on actual mileage. In connection with an audit of Aero Delivery,
the IRS challenged this type policy and the treatment of such payments as
reimbursed expenses, and asserted that the reimbursements constitute additional
compensation to the couriers on which the Company should withhold certain taxes.
There can be no assurance that the IRS will not be able to successfully
challenge this type of policy if any other acquired company has practiced this
particular policy in the past. In addition, there can be no assurance that any
IRS challenge would not have a material adverse impact on the Company's
business, financial condition, cash flow or results of operations for which the
Company will not be adequately covered by indemnification from the Founding
Companies.
Risks Relating to Conversion to the DMS Model. The process of converting
an existing Point-to-Point courier operation to the DMS Model involves the
implementation of the Free Call Dispatch system as well as the integration of
new software systems, pricing structures, billing methods, personnel utilization
practices and data standardization. Changes in the pricing structures and
billing methods could result in the loss of customers. The process of conversion
in a particular market may involve unforeseen difficulties, including delays in
the consolidation of facilities, complications and expenses in implementing the
new operating software system, or the loss of customers or key operating
personnel, any of which can cause substantial delays to the conversion process
in such particular market and may have a material adverse effect on the
Company's business, financial condition, cash flow or results of operations.
Additionally, the timing of any acquisitions of additional Point-to-Point
courier firms and their respective conversions to the DMS Model may have a
significant impact on the Company's business, financial condition, cash flow or
results of operations, particularly in quarters immediately following such
acquisitions.
Factors Affecting Internal Growth. The Company expects to expand its
existing business while continuing to integrate its prior acquisitions. There
can be no assurance that the Company's management and financial reporting
systems, procedures and controls will be adequate to support the Company's
operations as they expand. Any future
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growth also will impose significant added responsibilities on members of senior
management, including the need to identify, recruit and integrate additional
management and employees. There can be no assurance that such additional
management and employees will be identified and retained by the Company. To the
extent that the Company is unable to manage its growth efficiently and
effectively, or is unable to attract and retain additional qualified personnel,
the Company's business, financial condition, cash flow or results of operations
could be materially adversely effected.
In addition, certain of the acquired companies have been unable to hire
and retain as many couriers or operating and sales personnel as necessary to
meet the increasing demands of these businesses. Factors affecting the ability
of each of these acquired companies to experience continued internal growth
includes, but are not limited to, the continued relationships with existing
customers, the ability to expand the customer base, the ability to recruit and
retain qualified couriers, operating and sales personnel, and the ability to
cross-sell services between the acquired companies.
Risk of Loss of Customers Due to Increased Prices. The implementation of
the DMS Model is intended to enable the Company to offer a higher level of
customer service than its competitors. The prices that the Company may charge
for such services could be greater than the prices currently being charged to
customers for services they are currently receiving. There can be no assurance
that customers will not decline to purchase the services to be offered by the
Company, thereby adversely affecting the Company's business, financial
condition, cash flow or results of operations.
Limitations on Access to Radio Channels. The Company relies to a
significant extent on the use of two-way radio channels to communicate with its
courier fleet. Such radio channels are made available, on a limited basis, by
local government authorities and the Federal Communications Commission.
Accordingly, providers of the transmission networks for the radio channels may
have the ability to restrict, or substantially increase the costs with respect
to, the Company's use or access to the radio channels. The Company may, at its
own expense, be required to incur substantial costs to obtain, build or maintain
its own transmission networks in the event that third-party owners of the
current transmission networks restrict or otherwise obstruct the Company's
access to radio channels. Any increases in the costs of radio transmission,
obstruction of current radio channel service or need for the Company to build
its own transmission networks could severely inhibit the Company's ability to
deliver Point-to-Point delivery services and have a material adverse effect on
the Company's business, financial condition, cash flow or results of operations.
Claims Exposure. The Company is exposed to claims for personal injury,
death and property damage as a result of automobile, bicycle and other accidents
involving its employees and independent contractors. The Company may also be
subject to claims resulting from the non-delivery or delayed delivery of
packages, many of which claims could be significant because of the unique or
time-sensitive nature of the deliveries. The Company carries liability insurance
and independent contractors are required to maintain the minimum amounts of
liability insurance required by state law. However, there can be no assurance
that claims will not exceed the amount of coverage. In addition, the Company's
visibility and financial strength as a public company may create additional
claims exposure. If the Company were to experience a material increase in the
frequency or severity of accidents, liability claims, workers' compensation
claims or unfavorable resolution of claims, the Company's insurance costs could
significantly increase and operating results and cash flow could be negatively
affected. In addition, future claims against the Company or one of the acquired
companies could negatively affect the Company's reputation and could have a
correspondingly material adverse effect on the Company's business, financial
condition, cash flow or results of operations.
In addition, a substantial portion of the Company's business involves the
handling of documents containing confidential and other sensitive information.
There can be no assurance that unauthorized disclosure will not result in
liability to the Company. It is possible that such liabilities could have a
material adverse effect on the Company's business, financial conditions, cash
flow or results of operations.
Risks Associated with the Point-to-Point Delivery Industry; General
Economic Conditions. The Company's revenues and earnings are especially
sensitive to events that affect the delivery services industry, including
extreme weather conditions, economic factors affecting the Company's significant
customers, increases in fuel prices and shortages of or disputes with labor, any
of which could result in the Company's inability to service its clients
effectively or the inability of the Company to profitably manage its operations.
In addition, demand for the Company's services may be negatively impacted by
downturns in the level of general economic activity and employment in the United
States, United Kingdom, Australia or New Zealand. The development and increased
popularity of facsimile machines
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and electronic mail via the Internet has recently reduced the demand for certain
types of Point-to-Point delivery services, including those offered by the
Company. As a result, Point-to-Point courier firms are increasingly dependent
upon delivery requests for items that are unable to be delivered via alternative
methods. There can be no assurance that these and other industry-wide
developments will not have a material adverse effect on the Company's business,
financial condition, cash flow or results of operations.
Effect of Potential Fluctuations in Quarterly Operating Results. The
Company may experience significant quarter to quarter fluctuations in its
results of operations. Quarterly results of operations may fluctuate as a result
of a variety of factors including, but not limited to, the demand for the
Company's services, the timing and introduction of new services or service
enhancements by the Company or its competitors, the market acceptance of new
services, the timing of the integration of acquired companies and their
conversion to the DMS Model, competitive conditions in the industry and general
economic and weather conditions. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful or indicative of the results that the Company may achieve in any
subsequent quarter or full year. Such quarterly fluctuations may result in
volatility in the market price of the common stock of the Company, and it is
possible that in future quarters the Company's results of operations could be
below the expectations of the public market. Such an event could have a material
adverse effect on the market price of the common stock of the Company.
Risks Relating to the Company's Future Acquisition Strategy. Although the
Company's focus is on internal growth, one of the Company's additional growth
strategies has been to increase its revenues and profitability and expand the
markets it serves through the selective acquisition of additional Point-to-Point
courier businesses. Under the Credit Agreement, the Company is severely
restricted from making additional acquisitions. The Company does not therefore
anticipate consummating new acquisitions in the next twelve to eighteen months.
Several large, national publicly traded companies are consolidating the delivery
industry through the acquisition of independent Point-to-Point courier
companies. As a result, competition for acquisition candidates is intense and
there can be no assurance that the Company will be able to compete effectively
for acquisition candidates on terms deemed acceptable to the Company when it is
able to again make acquisitions. If it can make acquisitions, there can be no
assurance that the Company will be able to successfully convert newly-acquired
businesses to the DMS Model and integrate such businesses into the Company
without substantial costs, delays or other operational or financial problems. In
addition, there can be no assurance that companies acquired in the future either
will be beneficial to the successful implementation of the Company's overall
strategy or will ultimately produce returns that justify the investment therein,
or that the Company will be successful in achieving meaningful economies of
scale through the acquisitions thereof. Further, acquisitions involve a number
of special risks, including possible adverse effects on the Company's operating
results and the timing of those results, diversion of management's attention,
dependence on retention, hiring and training of key personnel, risks associated
with unanticipated problems or legal liabilities, and the realization of
intangible assets, some or all of which could have a material adverse effect on
the Company's business, financial condition, cash flow or results of operations,
particularly in the fiscal quarters immediately following the consummation of
such transactions. Customer dissatisfaction or performance problems at a single
acquired company could also have an adverse effect on the reputation of the
Company. In addition, there can be no assurance that the Founding Companies or
other Point-to-Point courier companies acquired in the future will achieve the
anticipated levels of revenues and earnings. To the extent that the Company is
unable to acquire additional Point-to-Point courier firms or integrate acquired
businesses successfully, the Company's ability to expand its operations and
increase its revenues would be reduced.
Absence of Combined Operating History; Risks of Integration. The Company
was founded in September 1997, and prior to the consummation of the Offering in
February 1998 conducted no significant operations other than in connection with
the Offering and the Acquisitions. In accordance with the DMS Model,
acquisitions made by the Company were integrated into existing operating
centers, although they can also operate as separate, independent businesses.
There can be no assurance that the Company or any of the acquisitions will be
profitable in the future.
The process of integrating acquired businesses often involves unforeseen
difficulties and may require a disproportionate amount of the Company's
financial and other resources, including management time. The Company has
experienced delays, complications and unanticipated expenses in implementing,
integrating and operating such systems. The success of the Company will depend,
in part, on the extent to which the Company is able to institute and centralize
accounting and other administrative functions such as billing, collections and
cash management, implement
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financial controls, eliminate the unnecessary duplication of other functions and
otherwise integrate the Founding Companies, and such additional businesses the
Company may acquire in the future, into a cohesive, efficient enterprise. There
can be no assurance that the Company's senior management group will be able to
successfully integrate, profitably manage or achieve anticipated cost savings
from the combined operations of the Founding Companies or implement the
Company's business, internal and acquisition growth strategies. The inability of
the Company to successfully integrate any of the acquired companies would have a
material adverse effect on the Company's business, financial condition, cash
flow or results of operations.
Reliance on Key Markets. A significant portion of the Company's revenues
and profitability are attributable to services rendered in the metropolitan New
York City/New Jersey and London markets. Revenues from the New York City/New
Jersey and London markets accounted for approximately 24.9% and 35.2%,
respectively, of consolidated revenues for the year ended December 31, 1999.
Therefore, the Company's results of operations are significantly affected by
fluctuations in the general economic and business cycles in these markets. The
Company's reliance on these individual markets makes it susceptible to risks
that it would not otherwise be exposed to if it operated in a more
geographically diverse market. The Company believes that it will be susceptible
to geographic concentration risks for the foreseeable future.
Risk of Business Interruptions and Dependence on Single Facilities in a
Market. The Company believes that its future results of operations will be
dependent in large part on its ability to provide prompt and efficient service
to its customers. Upon conversion of the Company to the DMS Model, the Company's
operations typically will be performed at a single DMS operating center for each
respective metropolitan market it services and, therefore, the operation of such
DMS centers is dependent on continuous computer, electrical and telephone
service. As a result, any disruption of the Company's day-to-day operations
could have a material adverse effect on the Company's business, financial
condition, cash flow or results of operations.
Permits and Licensing. The Company's operations are subject to various
state, local and federal regulations that, in many instances, require permits
and licenses. Additionally, some of the Company's operations may involve the
delivery of items subject to more stringent regulation, including hazardous
materials, requiring the Company to obtain additional permits. The failure of
the Company to maintain required permits and licenses, or to comply with
applicable regulations, could result in substantial fines or revocation of the
Company's permits and licenses which could have a material adverse effect on the
Company's business, financial condition, cash flow or results of operations.
Furthermore, delays in obtaining approvals for the transfer or grant of permits
or licenses, or failure to obtain such approvals could delay or impede the
Company's acquisition program.
American Stock Exchange Listing. The Company's common stock is currently
traded on The American Stock Exchange. The American Stock Exchange imposes
certain requirements for continued listing, including the maintenance of a
minimum bid price, number of market makers, market capitalization, and free
float. There can be no assurance that the Company will continue to maintain the
American Stock Exchange standards, or that the inability to maintain continued
American Stock Exchange listing will not have a material adverse impact on the
Company's business, financial condition, cash flow or results of operations or
equity valuation.
Regulatory Compliance. As a public company, the Company is subject to
continuing compliance with federal securities laws and may also be subject to
increased scrutiny with respect to laws applicable to all businesses, such as
employment, safety and environmental regulations. Certain of the Company's
management have limited experience in managing a public company. There can be no
assurance that management will be able to effectively and timely implement
programs and policies that adequately respond to such legal and regulatory
compliance requirements.
Dividend Policy. The Company anticipates that for the foreseeable future,
its earnings will be retained for the operation and expansion of its business
and that it will not pay cash dividends. In addition, the Company's Credit
Agreement precludes the payment of cash dividends without the lenders' consent.
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Item 7a. Quantitative and Qualitative Disclosures 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 facility, but may do so in the future. A one percent
change in interest rates on variable rate debt would increase annual interest
expense by $0.8 million based upon the amount of the Company's variable rate
debt outstanding at December 31, 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.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with the Report. See
Item 14 of Part IV.
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure
On July 29, 1999, Deloitte & Touche LLP was appointed as independent
auditors for the Company, replacing PricewaterhouseCoopers LLP. The decision to
change accountants was approved by the Company's Board of Directors. The Company
had no disagreements with PricewaterhouseCoopers LLP in the year ended December
31, 1998. The Company filed a Form 8-K reporting the change in independent
accountants.
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PART III
Item 10. Directors and Executive Officers
a) Identification of Directors
Information with respect to the members of the Board of Directors of the
Company is set forth under the captions "Nominees for Election as Directors for
a Term of Three Years" and "Directors Continuing in Office" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A, which
information is incorporated herein by reference.
b) Identification of Executive Officers
Information with respect to the Executive Officers of the Company is set
forth under the caption "Executive Management" contained in Part I, Item 1. of
this report, which information is incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in
the Company's definitive proxy statement to be filed in connection with the 2000
Annual Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement to
be filed in connection with the 2000 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement to be filed in
connection with the 2000 Annual Meeting of Stockholders is incorporated herein
by reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules
The financial statements and reports of independent accountants identified
in the following index and incorporated by reference into this report from the
indicated pages are filed as a part of this report.
1. Financial Statements
The following financial statements and reports of independent accountants
are included herein:
Independent Auditors' Report F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and
December 31, 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998, and the period from
inception (November 12, 1996) through December 31, 1997 F-4
Consolidated Statements of Comprehensive Loss for the
years ended December 31, 1999 and 1998, and the period
from inception (November 12, 1996) through December 31, 1997 F-5
Consolidated Statements of Stockholders' Equity for the
period from inception (November 12, 1996) through
December 31, 1999 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1999 and 1998, and the period from
inception (November 12, 1996) through December 31, 1997 F-6
Notes to the Consolidated Financial Statements F-7
2. Financial Statement Schedules
Schedule II - Valuation of qualifying accounts and reserves S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission which are not
included with this additional financial data have been omitted because they are
not applicable or the required information is shown in the Consolidated
Financial Statements and Notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of
Dispatch Management Services Corp.
We have audited the accompanying consolidated balance sheet of Dispatch
Management Services Corp. and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, comprehensive loss, stockholders'
equity, and cash flows for the year then ended. Our audit also included the 1999
financial statement schedule listed at Item 14(a)2. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1999 consolidated financial statements present fairly, in
all material respects, the financial position of Dispatch Management Services
Corp. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such 1999
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 25, 2000
(March 7, 2000 as to Note 7)
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Dispatch Management Services Corp.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) 1. and 2. on page 28 present fairly, in all material
respects, the financial position of Dispatch Management Services Corp. and its
subsidiaries at December 31, 1998, and the results of their operations and cash
flows for the year ended December 31, 1998 and for the period November 12, 1996
(inception) through December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 31, 1999, except as to Note 7
which is as of April 8, 1999
F-2
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 2,715 $ 3,012
Accounts receivable, less allowances of $1,968 and $4,416 29,052 36,416
Prepaid and other expenses ............................... 1,341 1,890
Income tax receivable .................................... 640 2,784
--------- ---------
Total current assets ............................. 33,748 44,102
Property and equipment, net ................................ 9,262 8,851
Deferred financing costs, net .............................. 433 1,501
Intangible assets, primarily goodwill, net ................. 151,778 154,923
Notes receivable ........................................... 492 9,002
Other assets ............................................... 716 1,031
Deferred income taxes ...................................... 176 291
--------- ---------
Total assets ..................................... $ 196,605 $ 219,701
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts .......................................... $ 2,527 $ 2,944
Current portion of long-term debt ........................ 2,000 900
Accounts payable ......................................... 5,781 5,758
Accrued liabilities ...................................... 11,994 14,242
Accrued payroll and related expenses ..................... 4,019 5,527
Income tax payable ....................................... 1,769 1,817
Acquisition-related notes payable, current portion ....... 5,709 7,207
--------- ---------
Total current liabilities ........................ 33,799 38,395
Long-term debt ............................................. 71,750 70,600
Acquisition-related notes payable .......................... 2,944 5,337
Other long-term liabilities ................................ 3,348 5,996
--------- ---------
Total liabilities ................................ 111,841 120,328
--------- ---------
Commitments and contingencies - (see notes)
Stockholders' equity:
Common stock, $.01 par 100,000,000 shares authorized;
12,872,946 and 11,817,634 shares issued and outstanding 129 118
Additional paid-in capital ................................. 120,692 117,686
Value of stock to be issued ................................ -- 3,197
Accumulated deficit ........................................ (35,727) (21,523)
Accumulated other comprehensive loss ....................... (330) (105)
--------- ---------
Total stockholders' equity ....................... 84,764 99,373
--------- ---------
Total liabilities and stockholders' equity ....... $ 196,605 $ 219,701
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
Period from inception
Year Ended December 31, (November 12, 1996) to
1999 1998 December 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Net revenue .............................. $ 219,863 $ 188,640 $ 313
Cost of revenue .......................... 134,360 119,927 195
------------ ------------ ------------
Gross profit ........................... 85,503 68,713 118
Selling, general and administrative
expenses ............................... 66,992 68,096 1,128
Depreciation and amortization ............ 21,469 5,783 15
Liquidation of Brookside Systems Limited . -- 4,070 --
Other charges ............................ 1,663 4,893 --
------------ ------------ ------------
Loss from operations ................... (4,621) (14,129) (1,025)
Interest expense ......................... 8,895 3,505 105
Other expense (income) ................... -- 41 (7)
------------ ------------ ------------
Loss before income tax provision
(benefit) .............................. (13,516) (17,675) (1,123)
Income tax provision (benefit) ........... 688 1,953 (413)
------------ ------------ ------------
Loss before extraordinary item ......... (14,204) (19,628) (710)
Extraordinary loss on early
extinguishment of debt ................. -- 1,097 --
------------ ------------ ------------
Net loss ............................... $ (14,204) $ (20,725) $ (710)
============ ============ ============
Loss per common share - basic and diluted:
Loss before extraordinary item ......... $ (1.18) $ (1.88) $ (0.84)
Extraordinary item ..................... -- (0.10) --
------------ ------------ ------------
Net loss ............................... $ (1.18) $ (1.98) $ (0.84)
============ ============ ============
Weighted average shares outstanding ...... 12,052,023 10,478,010 846,823
============ ============ ============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period from inception
Year Ended December 31, (November 12, 1996) to
1999 1998 December 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Net loss ............................. $(14,204) $(20,725) $ (710)
Other comprehensive loss:
Foreign currency translation
adjustments .......................... (225) (105) --
-------- -------- --------
Comprehensive loss ................... $(14,429) $(20,830) (710)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
Number of Shares
-----------------------------------------
Series A Series B
Common Preferred Preferred Common Preferred
Stock Stock Stock Stock Stock
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Initial capitalization of
Company .................... 846,923 -- -- $ 9 $ --
Issuance of Series A
Preferred stock ............ -- 151,366 -- -- 2
Issuance of Series A
Preferred stock in
connection with note payable -- 30,080 -- -- --
Issuance of Series B
Preferred stock in
connection with acquisition -- -- 100 -- --
Net loss .....................
----------- ----------- ----------- ----------- -----------
December 31, 1997 ............ 846,923 181,446 100 9 2
Shares issued in the
Initial Public Offering .... 6,900,000 -- -- 69 --
Exchange of preferred stock
for common stock ........... 336,961 (181,446) (100) 2 (2)
Shares issued in connection
with acquisitions .......... 3,733,750 -- -- 38 --
Value of stock to be issued .. -- -- -- -- --
Cumulative translation
adjustment ................. -- -- -- -- --
Net loss .....................
----------- ----------- ----------- ----------- -----------
December 31, 1998 ............ 11,817,634 -- -- 118 --
Shares issued in connection
with acquisitions .......... 1,055,312 -- -- 11 --
Value of stock to be issued .. -- -- -- -- --
Cumulative translation
adjustment ................. -- -- -- -- --
Net loss ..................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
December 31, 1999 ............ 12,872,946 -- -- $ 129 $ --
=========== =========== =========== =========== ===========
<CAPTION>
Additional Cumulative
Paid-In Accumulated Translation
Capital Deficit Adjustment Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Initial capitalization of
Company .................... $ -- $ (7) $ -- $ 2
Issuance of Series A
Preferred stock ............ 880 -- -- 882
Issuance of Series A
Preferred stock in
connection with note payable 167 -- -- 167
Issuance of Series B
Preferred stock in
connection with acquisition 375 -- -- 375
Net loss ..................... (710) (710)
----------- ----------- ----------- -----------
December 31, 1997 ............ 1,422 (717) -- 716
Shares issued in the
Initial Public Offering .... 76,207 -- -- 76,276
Exchange of preferred stock
for common stock ........... -- -- --
Shares issued in connection
with acquisitions .......... 40,057 (81) -- 40,014
Value of stock to be issued .. 3,197 -- -- 3,197
Cumulative translation
adjustment ................. -- -- (105) (105)
Net loss ..................... (20,725) -- (20,725)
----------- ----------- ----------- -----------
December 31, 1998 ............ 120,883 (21,523) (105) 99,373
Shares issued in connection
with acquisitions .......... 3,006 -- -- 3,017
Value of stock to be issued .. (3,197) -- -- (3,197)
Cumulative translation
adjustment ................. -- -- (225) (225)
Net loss ..................... -- (14,204) -- (14,204)
----------- ----------- ----------- -----------
December 31, 1999 ............ $ 120,692 $ (35,727) $ (330) $ 84,764
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period from inception
Year Ended December 31, (November 12, 1996) to
1999 1998 December 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .............................................................. $ (14,204) $ (20,725) $ (710)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Depreciation ....................................................... 3,014 2,609 3
Amortization and write-down of goodwill and other
intangibles ...................................................... 18,455 3,174 12
Provision for doubtful accounts receivable ......................... 1,069 2,876 --
Deferred taxes ..................................................... 115 122 (413)
Amortization and write-off of deferred financing costs ............. 1,575 175 --
Accreted interest expense .......................................... -- -- 58
Liquidation of Brookside Systems Limited ........................... -- 4,070 --
Other non-cash (gains) charges ..................................... (391) 4,893 --
Extraordinary item ................................................. -- 1,097 --
Changes in operating assets and liabilities (net of
assets acquired and liabilities assumed in business combinations)
Accounts receivable ......................................... 6,295 (11,677) 19
Prepaid expenses and other current assets ................... 2,645 (2,984) 39
Accounts payable and accrued liabilities .................... (4,042) 6,446 5,734
--------- --------- ---------
Net cash provided by (used in) operating activities ......... 14,531 (9,924) 4,742
--------- --------- ---------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired ....................... (9,078) (110,347) (321)
Investment in other intangibles ....................................... (1,608) (979) --
Additions to property and equipment ................................... (3,686) (4,628) (33)
Proceeds from sales of property and equipment ......................... 261 -- --
--------- --------- ---------
Net cash used in investing activities ....................... (14,111) (115,954) (354)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from initial public offering, net ............................ -- 76,276 --
Deferred offering costs ............................................... -- -- (6,600)
Proceeds from issuance of stock ....................................... -- -- 885
Proceeds from bank borrowings ......................................... 3,150 70,600 --
Principal payments on bank borrowings ................................. (900) -- --
Proceeds from short-term obligations .................................. -- 1,676 --
Principal payments on long and short-term obligations ................. (2,235) (18,422) --
Proceeds from notes payable ........................................... -- -- 1,681
Financing costs ....................................................... (507) (1,489) --
--------- --------- ---------
Net cash (used in) provided by financing activities ...... (492) 128,641 (4,034)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents ............ (225) (105) --
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents .................... (297) 2,658 354
Cash and cash equivalents, beginning of period .......................... 3,012 354 --
--------- --------- ---------
Cash and cash equivalents, end of period ................................ $ 2,715 $ 3,012 $ 354
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except for share amounts)
NOTE 1 BUSINESS AND ORGANIZATION
Dispatch Management Services Corp. ("DMS") was incorporated on September
9, 1997. Dispatch Management Services LLC ("DMS LLC") was established in
November 1996 to create a nationwide network of same-day, on-demand delivery
services and was merged into DMS effective September 9, 1997. The owners of DMS
LLC received shares of common and preferred stock of DMS in exchange for their
ownership interest in DMS LLC in connection with the merger, as described
further in Note 10. The merger was consummated to facilitate the initial public
offering (the "Offering") of securities that occurred on February 6, 1998 and
was accounted for at historical cost as both entities were commonly controlled.
In order to create an international network of same-day, on-demand
delivery services, DMS entered into definitive agreements to acquire both U.S.
and foreign companies (the "Founding Companies") and concurrently completed the
Offering and acquisition of the Founding Companies on February 11, 1998, as
further described in Note 5. Subsequent to the acquisition of the Founding
Companies, DMS acquired an additional 28 same-day courier or messenger firms in
1998 as part of its strategic growth strategy (the Founding Companies and the
subsequent acquisitions referred to collectively as the "Acquisitions").
DMS did not conduct any significant operations through the Offering date,
other than activities primarily related to the Offering and the Acquisitions.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of DMS and its
subsidiary companies (collectively the "Company"), all of which are
wholly-owned. All significant intercompany profits, transactions and balances
are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods
presented. Actual results may differ from such estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Revenue Recognition
Revenues are recognized when packages are delivered to the final destination.
Cash Equivalents
F-7
<PAGE>
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is provided using the straight-line method over
the estimated useful lives of the related assets for financial reporting
purposes and principally on accelerated methods for tax purposes. Leasehold
improvements are amortized over the shorter of their respective lease terms or
estimated useful lives. The lives used in computing depreciation, based on the
Company's estimate of service life by class of property and equipment, are as
follows:
Leasehold improvements 2-7 years
Furniture, fixtures and equipment 5-7 years
Vehicles 3-5 years
Computer equipment 3-5 years
Software 3 years
Assets under capital lease and related amortization are included in property and
equipment and accumulated depreciation.
Financing Costs
During the years ended December 31, 1999 and 1998, the Company incurred
$507 and $1,489, respectively, of costs in connection with debt financings (see
Note 7). These costs are being amortized over the terms of the respective
financings. The amounts of amortization and the write-off of previous deferred
financing costs were $1,575 in 1999, and $175 in 1998.
Long-Lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS")
No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of ". The Company reviews the recoverability of its
long-lived assets when events or changes in circumstances occur that indicate
that the carrying value of the asset may not be recoverable. Evaluation of
possible impairment is based on the Company's ability to recover the asset from
the expected future cash flows (undiscounted and without interest charges) of
the related operations. If the expected undiscounted cash flows are less than
the carrying value of such asset, an impairment loss would be recognized for the
difference between estimated fair value and carrying value. This assessment of
impairment requires management to make estimates of expected future cash flows.
It is at least reasonably possible that future events or circumstances could
cause these estimates to change.
Accounting for Intangible Assets
Goodwill, which represents acquisition costs in excess of the fair value
of the net assets of businesses acquired, is being amortized over periods from 5
to 40 years using the straight line method. As a result of the Company's
evaluation of the carrying value of goodwill, management determined that the
goodwill associated with certain U.S. operating centers was permanently impaired
at December 31, 1999 and recorded a write-down of $13,192. Amortization and
write-off of goodwill amounted to $18,145, $2,934 and $12 for 1999, 1998 and
1997, respectively. Accumulated amortization of goodwill was $8,369, and $2,946
at December 31, 1999, and 1998, respectively.
Other intangible assets are comprised primarily of trademarks and
non-compete agreements with selling shareholders of businesses acquired totaling
$2,544. Trademarks are being amortized over 30 years, and the non-compete
agreements are being amortized over the agreement period. Accumulated
amortization was $550, and $240 at December 31, 1999, and 1998, respectively.
F-8
<PAGE>
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable, accrued expenses and current portion of notes payable and
long-term debt approximates fair value due to the short maturity of these
instruments. The estimated fair value of long-term debt and other long-term
liabilities approximates its carrying value as the interest rates on outstanding
debt are at rates which approximate market rates for debt with similar terms and
average maturities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables are not collateralized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
Income Taxes
The provision for income taxes, income taxes payable and deferred income
taxes are determined in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes". Accordingly, deferred tax
assets and liabilities are recognized at the applicable income tax rates based
upon future tax consequences of temporary differences between the tax basis and
financial reporting basis of the assets and liabilities. Valuation allowances
are established when necessary to reduce deferred tax assets to amounts expected
to be realized.
Foreign Currency Translation
The assets and liabilities of non-U.S. subsidiaries are translated into
U.S. dollars at year-end exchange rates. Income and expense items are translated
at average exchange rates during the year. Accumulated translation adjustments
are shown as a separate component of stockholders' equity.
Stock-based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", allows entities
to choose between a fair value based method of accounting for employee stock
options or similar equity instruments and the intrinsic, value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") and related interpretations.
Entities electing to remain with the accounting in APB No. 25 must make pro
forma disclosures of net income and net earnings per share as if the fair value
method of accounting had been applied. The Company has elected to account for
its stock options using APB No. 25 and make the required disclosures as if the
fair value based method of accounting, as required by SFAS No. 123, had been
applied to the Company's stock option grants.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock that then shared in the earnings
of the Company. In 1999 and 1998, options to purchase 1,470,502 and 913,909
shares, respectively, of common stock were not included in the calculation of
weighted average shares for diluted EPS because their effect was antidilutive.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000 and defines a derivative and establishes common
accounting principles for all types of derivative financial instruments. The
Company is currently evaluating the impact if any, of SFAS No.133.
F-9
<PAGE>
NOTE 3 BASIS OF PRESENTATION AND FINANCIAL CONDITION
The Company's consolidated financial statements have been prepared on the
basis that it will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The ability to continue as a going concern is dependent, among
other things, upon the Company achieving profitable results and obtaining
positive cash flow from operations.
The Company's operating results for 1998 were negatively impacted by
several individually significant items that primarily occurred in the fourth
quarter. The Company believes these charges were non-recurring or related to
costs associated with the first year of operation. See Notes 13 and 14. The
performance of the Company in 1998 was negatively impacted by; i) a significant
level of integration activity following the Acquisitions, ii) significant first
year organization and infrastructure development costs, primarily professional
and consulting fees, associated with the strategy of integrating the
metropolitan operating centers into a national and international network, iii)
an aggressive technology investment program that was abandoned in the fourth
quarter in order to focus on more fundamental technology needs, iv) a
deterioration in gross margins, and v) the termination of certain contracts
assumed or entered into at the time of the Offering.
The Company also experienced significant changes in its senior management
team, with the terminations of the Chief Operating Officer, Director of Business
Development, and the Director of Road Management in September 1998, and the
resignations of the Chairman and Chief Executive Officer in November 1998, and
January 1999, respectively.
During the year ended December 31, 1999, the senior management team
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. Despite these initiatives, the
performance of several U.S operating centers failed to improve as they were
subject to significant local management changes, or the Company became involved
in arbitration or legal action with former owners of acquired businesses. During
the fourth quarter of 1999, the Company re-evaluated the long-term prospects for
the centers involved, and determined that a write-down of $13,192 to recognize
the permanent impairment of goodwill was warranted.
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, and ii) complying with
the financial covenants described in the senior credit facility.
NOTE 4 INITIAL PUBLIC OFFERING
On February 6, 1998, the Company 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 $76,300.
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
$1,100, and for the repayment of certain indebtedness of the Founding Companies.
NOTE 5 BUSINESS COMBINATIONS
F-10
<PAGE>
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 $71,200 in cash, the issuance of 3,378,590 shares of common stock, and
$4,600 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 $48,300 in cash, the issuance of
1,396,822 shares of common stock, and $11,200 of notes payable.
Each of the Acquisitions has been accounted for using the purchase method
of accounting. Accordingly, the Company's results of operations reflect the
results of the Acquisitions from the date of acquisition.
In connection with certain of the Acquisitions, the Company agreed to pay
the sellers additional consideration if the acquired operations met certain
performance goals related to their earnings, as defined in the respective
acquisition agreements. The Company finalized all additional consideration
arrangements as of December 31, 1999 and such amounts are included in the total
consideration amounts noted above. During the year ended December 31, 1999,
goodwill associated with the Acquisitions increased by $15,300, primarily due to
contingent consideration earned.
In connection with certain acquisitions, DMS extended loans to the sellers
in amounts equal to the potential maximum earn-out or "Additional
Consideration". The loans are non-recourse, bear interest at a rate of 7.0% per
annum and are collateralized by a portion of the shares issued at closing, and
the available earn-out. The notes mature as of the date the Additional
Consideration is due. At December 31, 1999 and 1998, the balance of notes
receivable was $492 and $9,002, respectively.
Acquisition Liabilities:
In connection with the 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, net of recoverable amounts.
The changes in the Acquisition Liabilities during the years ended December
31, 1999 and 1998 were as follows:
Severance Lease
Liability Liability Total
--------- --------- -----
Balance January 1, 1998 ........ $ -- $ -- $ --
Reserve established in 1998 .... 501 1,313 1,814
Utilized in 1998 ............... (306) (647) (953)
------- ------- -------
Balance December 31, 1998 ...... 195 666 861
Utilized in 1999 ............... (195) (319) (514)
------- ------- -------
Balance December 31, 1999 ...... $ -- $ 347 $ 347
======= ======= =======
Pro Forma Financial Information:
The following unaudited condensed pro forma financial information of the
Company for the years ended December 31, 1998 and 1997 includes the consolidated
results of operations of the Company as if the Offering and the Acquisitions had
occurred on January 1, 1998 and 1997:
F-11
<PAGE>
Year Ended
December 31,
1998 1997
--------- ---------
(Unaudited)
Net revenue $ 252,280 $ 245,155
Operating (loss) income (9,032) 9,863
(Loss) income before extraordinary item (15,959) 2,695
Net (loss) income per share before extraordinary item $ (1.35) $ 0.23
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 dates indicated or of the results which may be
realized in the future.
NOTE 6 PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
1999 1998
------- -------
Computer equipment and software $ 8,037 $ 6,348
Vehicles 2,012 2,262
Furniture, fixtures and equipment 3,023 1,686
Leasehold improvements 1,649 1,167
------- -------
14,721 11,463
Less: Accumulated depreciation and amortization 5,459 2,612
------- -------
Property and equipment, net $ 9,262 $ 8,851
======= =======
Depreciation expense was $3,014, $2,609 and $3 for 1999, 1998 and 1997,
respectively.
NOTE 7 LONG-TERM DEBT
In February 1998, the Company obtained a $25,000 revolving line of credit
from NationsBank, N.A. ("NationsBank"). 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 $10,000
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 $60,000 senior credit facility. In August 1998,
NationsBank led a syndication for a $105,000 committed line of credit with a
group of senior lenders.
During the first quarter of 1999, the Company notified the lenders of an
event of default in relation to certain financial covenants. Following this
notification, the Company operated under a forebearance agreement that deferred
F-12
<PAGE>
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 with NationsBank N.A. and a syndicate of senior lenders (the
"Credit Agreement"). The Credit Agreement provided for a revolving loan
commitment of $78,400, which included a sub-limit of $3,800 for existing standby
letters of credit. The revolving loan commitment is reduced by the amount of
monthly principal repayments. Pursuant to a commitment letter received from the
lenders on March 7, 2000, all amounts drawn under the line of credit must be
repaid on May 31, 2001, with minimum principal payments of $500 for January
2000, $150 per month for April 2000 through November 2000, and $300 per month
from December 2000 through May 2001.
Outstanding principal balances under the line of credit bear interest 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 pricing level at December 31, 1999 was LIBOR +
3.75% (30-Day LIBOR at December 31, 1999 was 5.82%). 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.
Other financial covenants include: (i) maintenance of a positive monthly
pre-tax income on a consolidated basis (adjusted for certain non-cash gains and
losses), (ii) a maximum total debt to EBITDA ratio, (iii) 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 35%, and (iv) a 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 credit 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 Credit Agreement, the Company wrote
off $850 of deferred financing fees in 1999 related to the 1998 credit facility.
NOTE 8 EXTRAORDINARY ITEM
During July 1997 the Company entered into a $1,000 secured debt agreement
with DMS Equity Investors Limited ("Partnership"), an unrelated party. This note
accrued interest at the rate of 10% and matured February 11, 1998. Proceeds from
the Offering were used to retire the note, including accrued interest.
In conjunction with entering into the debt agreement, the Company entered
into separate agreements with the members of the Partnership. Under the terms of
the investment agreements, the members of the Partnership purchased 28,580
shares of the common stock of DMS LLC which represented 1.4% of the then
outstanding shares for $.10 per share. The members of the Partnership also had
certain anti-dilution rights, which entitled them to continue to own 1.4% of the
common stock of the Company calculated on a fully diluted basis after giving
effect of the Offering. In accordance with Accounting Principles Board Opinion
No. 14 ("ABP No.14") "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants", the portion of the note proceeds which is allocable to the
investment agreements is considered paid-in-capital. Accordingly, based on the
discounted stock price, additional paid-in-capital of $167 has been recognized
and a related amount of interest expense was recognized through the original
maturity date of the note .
During December 1997 and January 1998, the Company entered into several
unsecured subordinated debt agreements in the amount of $1,088 with related
parties, to provide temporary financing prior to the Offering. The notes accrued
interest at 14% and required the Company to pay a commitment fee in an amount
equal to the face value of the note on the Offering date. Proceeds from the
Offering were used to retire these notes including accrued interest.
F-13
<PAGE>
In conjunction with the retirement of these notes, the Company recorded a
non-cash extraordinary charge of $1,097 in 1998 related to the write-off of
deferred financing costs.
NOTE 9 INCOME TAXES
The income (loss) before income taxes consisted of the following:
Period from inception
Year Ended December 31, (November 12, 1996) to
1999 1998 December 31, 1997
---- ---- -----------------
Foreign $ 2,113 $ 4,082 $ --
United States (15,629) (22,854) (1,123)
-------- -------- --------
$(13,516) $(18,772) $ (1,123)
======== ======== ========
The provision (benefit) for income taxes consisted of the following:
Period from inception
Year Ended December 31, (November 12, 1996) to
1999 1998 December 31, 1997
---- ---- -----------------
Current:
Federal $ -- $ -- $ --
State and local 132 430 --
Foreign 441 1,488 --
-------- -------- --------
573 1,918 --
Deferred:
Federal -- 413 (393)
State and local -- -- (20)
Foreign 115 (378) --
-------- -------- --------
115 35 (413)
-------- -------- --------
Income tax expense (benefit) $ 688 $ 1,953 $ (413)
======== ======== ========
Differences between financial accounting principles and tax regulations
cause differences between the bases of certain assets and liabilities for
financial reporting purposes and tax purposes. The tax effects of these
differences, to the extent they are temporary, are recorded as deferred tax
assets and liabilities under SFAS No. 109 and consisted of the following
components:
December 31,
1999 1998
-------- --------
Deferred tax assets:
Operating losses $ 8,870 $ 8,301
Bad debt allowance 536 1,893
Items not currently deductible 2,091 1,340
Foreign tax credit 626 1,110
Other 181 296
-------- --------
Deferred tax asset 12,304 12,940
Deferred tax liabilities:
Amortization of intangibles (6,078) (3,504)
-------- --------
6,226 9,436
Valuation allowance (6,050) (9,145)
-------- --------
Net deferred tax asset $ 176 $ 291
======== ========
F-14
<PAGE>
The Company has established a valuation allowance in accordance with the
provisions of SFAS No. 109. The valuation allowance primarily relates to
operating losses not currently deductible and foreign tax credits. The decrease
in the valuation allowance in 1999 is primarily due to additional amortization
of intangibles for tax purposes in excess of amortization recorded for financial
statement purposes. The Company will review the adequacy of the valuation
allowance in future years and recognize only those benefits as the reassessment
indicates that it is more likely than not that the benefits will be realized.
Net deferred tax assets at December 31, 1999 and 1998 relate to foreign taxes.
The Company has a net operating loss carryforward of approximately $23,500
expiring in 2014. This carryforward is available to offset future United States
federal taxable income.
The U.S. income tax benefit at the statutory tax rate is reconciled below
to the overall U.S. and foreign tax expense (benefit):
<TABLE>
<CAPTION>
Period from inception
Year Ended December 31, (November 12, 1996) to
1999 1998 December 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Tax at U.S. Federal income tax rate $(4,798) $(6,382) $ (393)
Add (deduct) the effect of:
State taxes, net of Federal
income tax benefit 87 284 (110)
Impact of foreign tax rates and credits 328 832 --
Goodwill and other items, net 943 398 --
Valuation allowances of prior
year deferred tax asset -- 413 --
Loss not currently deductible 4,128 6,408 90
------- ------- -------
Income tax expense (benefit) $ 688 $ 1,953 $ (413)
======= ======= =======
</TABLE>
NOTE 10 STOCKHOLDERS' EQUITY
Under the terms of the merger agreement of DMS LLC into the Company, a
total of 2,000,000 shares of Class A common stock of DMS LLC were exchanged for
10 shares of common stock of the Company; and each share of Class B common stock
of DMS LLC was exchanged for 1 share of Series A preferred stock of the Company.
Upon closing of the Offering, the Company converted its outstanding 181,446
shares of Series A Preferred Stock into 299,225 shares of common stock and the
100 shares of Series B Preferred Stock into 37,736 shares of common stock.
In December 1998, the Board of Directors of the Company approved a Rights
Agreement, which is designed to protect stockholders should the Company become
the target of coercive and unfair takeover tactics. Pursuant to the Rights
Agreement, on December 14, 1998 the Board of Directors declared a dividend of
one preferred stock purchase right for each outstanding share of common stock.
Each share of the Company's common stock trades with a Preferred Stock Purchase
Right which entitles the common stockholders to purchase one one-hundredth of a
share of Series C Junior Participating Preferred Stock at a purchase price of
$93 per share. Each Preferred share fraction is equivalent in voting and
dividend rights to one share of common stock. The Rights will become exercisable
for Preferred shares and trade separately from the common stock only if a person
or group acquires 15% or more of the Company's outstanding common stock after
December 28, 1998. The Preferred Share rights expire on December 28, 2008.
NOTE 11 STOCK OPTION PLAN
Effective November, 1997, the Company's stockholders approved the
Company's 1997 Stock Incentive Plan (the "Plan"). The maximum number of shares
that may be made the subject of options and awards under the Plan is 2,000,000.
As at December 31, 1999, there were 1,470,502 options granted to employees and
non-employee directors
F-15
<PAGE>
outstanding under then Plan. Options to acquire 753,652 shares are immediately
exercisable at prices ranging from $2.00 to $13.25. An additional 716,850
options will vest and become exercisable at the rate of 20% and 50% per year,
respectively, at prices ranging from $2.00 to $13.25. All options expire ten
years from the date of the grant.
December 31,
1999 1998
----------- -----------
Number of shares under option:
Outstanding at beginning of year 571,891 --
Granted 1,174,500 913,909
Exercised -- --
Canceled (275,889) (342,018)
----------- -----------
Outstanding at end of year 1,470,502 571,891
Weighted average exercise price:
Granted $ 2.35 $ 12.96
Exercised -- --
Canceled $ 12.81 $ 13.25
Outstanding at end of year $ 4.70 $ 13.38
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Granted Options Exercisable
--------------- -------------------
Weighted Average
Number Remaining Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (in years) Exercise price Exercisable Exercise price
--------------- ----------- --------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00 733,000 9.15 $ 2.00 441,125 $ 2.00
$2.0625 - $3.00 361,500 9.82 $ 2.83 78,625 $ 2.86
$3.3125 - $5.50 62,000 9.04 $ 4.22 9,900 $ 4.46
$13.25 314,002 8.11 $13.25 224,002 $13.25
--------- ---- ------ ------- ------
$2.00 - $13.25 1,470,502 8.62 $ 4.70 753,652 $ 5.47
========= ==== ====== ======= ======
</TABLE>
The Company has adopted the disclosure provisions of SFAS No. 123. The
Company's net loss and net loss per common share would have been the following
pro forma amounts under the method prescribed by SFAS 123.
Year Ended December 31,
1999 1998
---------- ----------
Net loss:
As reported $ (14,204) $ (20,725)
Pro forma $ (15,951) $ (23,093)
Basic and diluted net loss per share:
As reported $ (1.18) $ (1.98)
Pro forma $ (1.32) $ (2.20)
The estimated fair value of options granted was $1,747 and $2,368 for the
year ended December 31, 1999 and 1998, respectively. The fair value of each
grant is estimated using the Black-Scholes option-pricing model. The principal
assumptions used were:
F-16
<PAGE>
Year Ended December 31,
1999 1998
---- ----
Expected risk-free interest rate 5.27% 5.59%
Expected dividend yield 0% 0%
Expected volatility factor 50% 50%
Expected weighted average life 5.2 years 6.2 years
NOTE 12 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Included in selling, general and administrative expenses for the years
ended December 31, 1999 and 1998 are bad debt and notes receivable allowances of
$1,069 and $4,933, respectively.
NOTE 13 LIQUIDATION OF BROOKSIDE SYSTEMS LIMITED
During the year ended December 31, 1998, the Company recorded a charge of
$4,070 related to the liquidation of Brookside Systems Limited (dba "Fleetway").
Fleetway was a software development company that generated net operating losses
since its acquisition in February 1998. This charge includes the write-off of
$2,000 of goodwill and capitalized software and development costs associated
with the acquisition of Fleetway. The remaining balance of $2,070 related to
adjustments to the net realizable value of certain assets, and the write-off of
in-process research and development costs that were recorded in 1998 in
connection with the acquisition.
NOTE 14 OTHER CHARGES
Other charges for the year ended December 31, 1999 include $1,200 for
costs associated with the finalization of certain claims and legal actions
against the Company, as well as $500 related to costs associated with a
potential merger transaction that has since been terminated.
During the year ended December 31, 1998, the Company recorded charges of
$4,900 related to the termination of former executives, transaction costs
associated with acquisitions not completed, and provision for the cost of
settling certain acquisition-related obligations. The severance and other
charges included $1,200 for severance; $1,000 of transaction costs associated
with acquisitions not completed, and $2,700 of contract termination and other
charges.
NOTE 15 SEGMENT INFORMATION
The Company operates in one reportable segment; on-demand delivery
services. The Company evaluates the performance of its geographic regions based
on operating income (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 1999 and 1998:
<TABLE>
<CAPTION>
United States United Kingdom Australasia Eliminations Total
------------- -------------- ----------- ------------ -----
<S> <C> <C> <C> <C>
1999
Net revenue $ 125,279 77,486 17,098 $ 219,863
Operating (loss) income $ (11,475) 5,771 1,083 $ (4,621)
</TABLE>
F-17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Identifiable assets $ 31,058 18,264 3,328 (7,824) $ 44,826
Capital expenditures $ 701 2,588 397 $ 3,686
Depreciation $ 1,925 807 282 $ 3,014
<CAPTION>
United States United Kingdom Australasia Eliminations Total
------------- -------------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C
1998
Net revenue $ 110,617 71,430 6,593 $ 188,640
Operating (loss) income $ (18,559) 3,640 790 $ (14,129)
Identifiable assets $ 54,791 21,082 3,007 (14,102) $ 64,778
Capital expenditures $ 2,599 1,113 916 $ 4,628
Depreciation $ 1,415 1,162 32 $ 2,609
</TABLE>
NOTE 16 RELATED PARTY TRANSACTIONS
In 1998, the Company paid $792 of acquisition-related cash commissions to
two firms controlled by a then-member of the Company's Board of Directors. The
commissions on the acquisitions of Zoom Messenger Service New York, Able
Motorized, PT Express, and Flash Delivery Systems were earned in accordance with
an incentive structure negotiated at the time of the Offering. The arrangement
calls for, among other things, the two firms to fund certain due-diligence and
legal costs associated with prospective acquisitions. The Board of Directors
exercises final authority and approval over the execution of any acquisition.
NOTE 17 COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and properties under non-cancelable
operating lease agreements, which expire at various dates. At December 31, 1999,
minimum annual lease payments for such leases are as follows:
2000 $ 4,039
2001 3,135
2002 2,392
2003 1,275
2004 892
Thereafter 920
-------
$12,653
=======
Rent expense amounted to $3,700 and $5,668 for the years ended December
31, 1999 and 1998, respectively.
Litigation
F-18
<PAGE>
Following the acquisition of certain of the Founding Companies, the
Company terminated a relationship with an equipment vendor due to problems with
certain telecommunications and computer equipment. In July 1998, the Company was
served with a claim for unpaid 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 $1,000 plus interest payable over 12
months, resulting in a gain of $391 versus previously established reserves.
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 $5,600 and $3,400 as an estimate of the liability with respect to
these cases at December 31, 1999 and 1998, respectively.
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.
NOTE 18 SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of non-cash transactions:
Year Ended December 31,
1999 1998
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 7,258 $ 2,497
Cash paid during the year for income taxes $ 863 $ 3,231
Business acquisitions:
Cash paid for business acquisitions $ 9,078 $ 112,503
--------- ---------
Less: Cash acquired -- (2,156)
--------- ---------
Cash paid for business acquisitions, net 9,078 110,347
Issuance of common stock for business acquisitions -- 43,292
Notes payable 3,152 12,544
--------- ---------
Fair value of net assets acquired, net of cash $ 12,230 $ 166,183
========= =========
NOTE 19 EMPLOYEE 401(k) SAVINGS PLAN
The Company has a tax-deferred employee 401(k) savings plan covering
certain domestic employees. Contributions by the Company are made at the
Company's discretion. No contributions have been made by the Company under this
plan.
NOTE 20 FOURTH QUARTER ADJUSTMENTS
The Company's operating results for 1999 and 1998 were negatively impacted
by several individually significant items that primarily occurred in the fourth
quarter.
As a result of the Company's evaluation of the carrying value of goodwill,
management determined that the goodwill associated with certain U.S. operating
centers was permanently impaired at December 31, 1999 and recorded a write-down
of $13,192. The goodwill write-down followed the re-evaluation of the long-term
prospects of certain U.S. operating centers and reflected lower performance
expectations resulting from the long-term effects of arbitration or
F-19
<PAGE>
legal action with former owners of certain acquired businesses. For the quarter
ended December 31, 1999, the Company also recorded charges (as "Other Charges")
totaling $1,600 for costs associated with the finalization of certain claims and
legal actions against the Company, as well as $500 related to costs associated
with a potential merger transaction that was terminated in December 1999.
The individually significant charges in the fourth quarter of 1998 include
the liquidation of a software development company for $4,100 (see Note 13),
severance and other charges including, costs of acquisitions not completed and
employee termination costs aggregating $4,900 (see Note 14), the recording of
allowances for the uncollectability of accounts and notes receivable of $4,900
(see Note 12), as well as additional first year organizational costs.
F-20
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------
Additions,
charges to Balance at
Balance at costs and Accounts December 31,
January 1, 1999 expenses written-off Other (2) 1999
--------------- -------- ----------- --------- ----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 4,416 1,069 (3,517) -- $ 1,968
Notes receivable reserve $ 2,057 -- (589) -- $ 1,468
Valuation allowance for deferred
income tax asset $ 9,145 -- -- (3,095) $ 6,050
<CAPTION>
Year Ended December 31, 1998
----------------------------
Additions,
charges to Balance at
Balance at costs and Accounts December 31,
January 1, 1998 expenses written-off Other (1) 1998
--------------- -------- ----------- --------- ----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ -- 2,876 (508) 2,048 $ 4,416
Notes receivable reserve $ -- 2,057 -- -- $ 2,057
Valuation allowance for deferred
income tax asset $ -- 9,145 -- -- $ 9,145
</TABLE>
(1) Represents amounts established at the date of acquisition of acquired
businesses.
(2) Represents decrease in valuation allowance required in respect to the
decrease in the gross deferred tax asset.
S-1
<PAGE>
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Report as filed with the Securities and Exchange Commission and those
incorporated by reference to other filings:
Exhibit
Number Description
- ------ -----------
2.1 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Early Bird Courier
Service, LLC and Total Management, LLC and Michael Fiorito.
(1)
2.2 -- Agreement, dated as of September 15, 1997, by and among
Dispatch Management Services Corp., Aero Special Delivery
Service, Inc. and Jeanne Sparks. (1)
2.3 -- Agreement, dated as of September 30, 1997, by and among
Dispatch Management Services Corp., Bullit Courier Services,
Inc. and Theo Nicholoudis. (1)
2.4 -- Agreement, dated as of September 16, 1997, by and among
Dispatch Management Services Corp., Security Business
Services, Ltd., James Brett Greenbury, Kelly Donovan, Scawton
Limited, Lyon-Burwell Limited, Arazan Limited and Foreign &
Colonial Enterprise Trust plc. (1)
2.5 -- Agreement, dated as of September 11, 1997, by and among
Dispatch Management Services Corp., American Eagle Endeavors,
Inc., Barry Anderson, Cheryl O'Toole and Lawrence O'Toole. (1)
2.6 -- Agreement, dated as of October 31, 1997, by and among
Dispatch Management Services Corp., Atlantic Freight Systems,
Inc., Thomas A. Bartley and Perry Barbaruolo. (2)
2.7 -- Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Express It Couriers, Inc.
and James M. Shaughnessy. (1)
2.8 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Washington Express
Services, Inc., Gilbert D. Carpel, Michael D. Holder, Michael
K. Miller and Peter Butler. (1)
2.9 -- Agreement, dated as of September 26, 1997, by and among
Dispatch Management Services Corp., MLQ Express, Inc. and John
W. Wilcox, Jr. (1)
28
<PAGE>
2.10 -- Agreement, dated as of September 19, 1997, by and among
Dispatch Management Services Corp., Time Couriers, LLC, Tom
Cromwell, William Krupman, Michael Stone, Peter Begley, Thomas
Hagerty, Kimberly Cilley, Christopher Hart, and DMS Subsidiary
Number. (1)
2.12 -- Agreement, dated as of September 14, 1997, by and among
Dispatch Management Services Corp., Kangaroo Express of
Colorado Springs, Inc. and Doris Orner. (1)
2.13 -- Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., National Messenger, Inc.,
Robert D. Swineford and Steven B. Swineford. (1)
2.14 -- Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Fleetfoot Max, Inc., Gary
Brose, The King Company, KPM, Helen King, Robert Lewis, Jim
Brose, Barbara Lawrence, Robert L. King, John Sangster, Patsy
Sangster, PB Securities for the benefit of Robert L. King, PB
Securities for the benefit of Helen King, Gordon Lawrence, Pat
Lawrence, Melissa Lawrence, K. Lawrence and Creative
Consulting Corp. (1)
2.15 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Profall, Inc., Thomas
Westfall, Alyson Westfall, David Prosser, and Adrienne Prosser
(1)
2.16 -- Agreement, dated as of September 11, 1997, by and among
Dispatch Management Services Corp., Express Enterprises, Inc.,
Paul J. Alberts and Donald E. Stoelt. (1)
2.17 -- Agreement, dated as of October 23, 1997, by and among
Dispatch Management Services Corp., A & W Couriers, Inc. and
Joan Levy. (1)
2.18 -- Agreement, dated as of October 10, 1997, by and among
Dispatch Management Services Corp., Express It, Inc., and Dave
Clancy. (1)
2.19 -- Agreement, dated as of September 18, 1997, by and among
Dispatch Management Services Corp., Deadline Acquisition
Corp., Edward V. Blanchard, Jr., Melba Anne Hill and Scott T.
Milakovich. (1)
2.20 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Kiwicorp Limited, Lynette
Williams and Tom Finlay. (1)
2.21 -- Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Transpeed Courier
Services, Inc., Richard A. Folkman, Stacey J. Folkman, Trey
Lewis and Evelyn R. Folkman. (1)
2.22 -- Agreement, dated as of September 15, 1997, by and among
Dispatch Management Services Corp., Clover Supply, Inc., and
John J. Walker. (1)
2.23 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., S Car Go Courier, Inc. and
Michael Cowles. (1)
2.24 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Christian Delivery & Chair
Service, Inc., and Leo J. Gould. (1)
2.25 -- Agreement, dated as of October 9, 1997, by and among
Dispatch Management Services Corp., Striders Courier, Inc.,
Tammy K. Patterson and Merlene Y. Flores. (1)
2.26 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp. and Gregory Austin, trading
as Battery Point Messengers. (1)
2.27 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Christopher Grealish, Inc.
and Christopher Grealish. (1)
2.28 -- Agreement, dated as of September 17, 1997, by and among
Dispatch Management Services Corp., United Messengers, Inc.
and Marla Kennedy. (1)
2.29 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., and Christopher Neal. (1)
2.30 -- Agreement, dated as of October 4, 1997, by and among
Dispatch Management Services Corp., TimeCycle Couriers, Inc.,
Eric D. Nordberg and Jeffrey Appeltans. (1)
2.31 -- Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Rocket Courier Services,
Inc., Sean Leonce, Grace Leonce and Samer Hassan. (1)
2.32 -- Agreement, dated as of September 14, 1997, by and among
Dispatch Management Services Corp. and Michael Studebaker. (1)
2.33 -- Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Delivery Incorporated and
Gary Brose. (1)
2.34 -- Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., AFS Courier Systems, Inc.
and Frank L. Mullins. (1)
2.35 -- Share Purchase Agreement, dated as of August 20, 1997, by
and among Dispatch Management Services LLC, Alice Rebecca
Clark, Roy Clark, Trustees of the Roy Clark (Life Interest)
Settlement 1997, Trustees of the Alice Rebecca Clark
(Discretionary) Settlement 1997, Matthew Clark, Simon Clark
and Brookside Systems and Programming Limited. (1)
2.36 -- Agreement, dated as of October 6, 1997, by and among
Dispatch Management Services Corp., Bridge Wharf Investments
Limited and Riverbank Limited. (1)
2.37 -- Brand Manager Agreement, dated as of September 14, 1997,
between Dispatch Management Services Corp. and Barry Anderson
(Minneapolis). (1)
2.38 -- Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp. and Frank L.
Mullins. (1)
2.39 -- Brand Manager Agreement, dated as of September 25, 1997,
between Dispatch Management Services Corp. and Leo J. Gould
and Jodi Gould. (1)
2.40 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and John J. Walker. (1)
2.41 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Dave Clancy. (1)
2.42 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp.
29
<PAGE>
and Allen Orner. (1)
2.43 -- Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp. and Kiwicorp
Limited. (1)
2.44 -- Brand Manager Agreement, dated as of October 9, 1997,
between Dispatch Management Services Corp. and Tammy K.
Patterson and Merlene Y. Flores. (1)
2.45 -- Brand Manager Agreement, dated as of October 8, 1997,
between Dispatch Management Services Corp. and Tom Cromwell
and Peter Begley. (1)
2.46 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Jeff Appeltans and Eric D.
Nordberg. (1)
2.47 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Marla Kennedy. (1)
2.48 -- Brand Manager Agreement, dated as of September 10, 1997,
between Dispatch Management Services Corp. and James Michael
Shaughnessy. (1)
2.49 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Barry Anderson (Phoenix). (1)
2.50 -- Brand Manager Agreement, undated, between Dispatch
Management Services Corp. and Joan Levy. (1)
2.51 -- Brand Manager Agreement, dated as of September 21, 1997,
between Dispatch Management Services Corp. and Christopher
Neal. (1)
2.53 -- Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp. and Dispatch
Management Services Corp. of the National Capital Area, Inc.
(1)
2.54 -- Brand Manager Agreement, dated as of September 15, 1997,
between Dispatch Management Services Corp. and The Delivery
Company Limited. (1)
2.55 -- Brand Manager Agreement, dated as of October 1, 1997,
between Dispatch Management Services Corp. and Creative
Consulting Corp. (2)
2.56 -- Brand Manager Agreement, dated as of October 1, 1997,
between Dispatch Management Services Corp. and Creative
Consulting Corp. (2)
2.57 -- Brand Manager Agreement, dated November 1, 1997, between
Dispatch Management Services Corp. and Atlantic Transportation
Consultants, Inc. (3)
2.58 -- Agreement, dated as of October 31, 1997, among Dispatch
Management Services Corp., Pacific Freight Systems, Inc.,
Thomas A. Bartley and Perry Barbaruolo. (2)
2.59 -- Agreement, dated December 2, 1997, among Dispatch
Management Services Corp., and Munther Hamoudi. (2)
2.60 -- Agreement, dated November 21, 1997, among Dispatch
Management Services Corp., Zoom Messenger Service, Inc. and
Frank Nizzare. (2)
2.61 -- Agreement, dated as of November 26, 1997, among Dispatch
Management Services Corp., A Courier of the Carolinas, LLC, A
Courier, Inc., and Tesseract Limited Partnership. (3)
2.62 -- Agreement, dated as of November 20, 1997, among Dispatch
Management Services Corp., Express Air Management, Inc.,
Robert G. Driskell, Arthur J. Morris, Randolph H. Schneider
and DMS Subsidiary Number. (3)
2.63 -- Agreement, dated as of December 19, 1997, among Dispatch
Management Services Corp., A Courier of Tennessee, LLC, A
Courier, Inc., Scott Evatt, and Timothy E. French. (3)
2.64 -- Agreement, dated as of November 20, 1997, among Dispatch
Management Services Corp., A Courier, Inc., Robert G.
Driskell, Arthur J. Morris and Randy H. Schneider. (3)
2.65 -- Brand Manager Agreement, dated November 12, 1997, between
Dispatch Management Services Corp. and Detroit Dispatch
Management Services, Inc. (3)
2.66 -- Brand Manager Agreement, undated between Dispatch
Management Services Corp. and Michael R. Cowles. (3)
2.67 -- Brand Manager Agreement, dated September 19, 1997, between
Dispatch Management Services Corp. and Michael Studebaker. (3)
2.68 -- Brand Manager Agreement, dated September 15, 1997, between
Dispatch Management Services Corp. and Scott T. Milakovich.
(3)
2.69 -- Brand Manager Agreement, dated November 13, 1997, between
Dispatch Management Services Corp. and Frank Nizzare. (3)
2.70 -- Brand Manager Agreement, dated November 26, 1997, between
Dispatch Management Services Corp. and Columbine Management
Services, LLC. (3)
2.71 -- Brand Manager Agreement, dated November 20, 1997, between
Dispatch Management Services Corp. and Muiran, Inc. (3)
2.72 -- Brand Manager Agreement, dated September 30, 1997, between
Dispatch Management Services Corp. and Gregory W. Austin. (3)
2.73 -- Brand Manager Agreement, dated September 21, 1997, between
Dispatch Management Services Corp. and Christopher Neal. (3)
2.74 -- Agreement between the Registrant and Delta Air & Road
Transport PLC. (5)
3.1 -- Certificate of Incorporation, as amended (Certificate of
Incorporation filed with the Delaware Secretary of State on
September 5, 1997 and subsequently amended by Certificate of
Amendment of Certificate of Incorporation filed with the
Delaware Secretary of State on November 26, 1997). (6)
3.1.1 -- Certificate of Designations, Preferences, Related Rights,
Qualifications, Limitations and Restrictions of Series C
Junior participating preferred Shares. (7)
3.2 -- Amended and Restated Bylaws. (7)
4.0 -- Rights Agreement, dated as of December 14, 1998, between
Dispatch Management Services Corp. and American Stock Transfer
& Trust Company, as Rights Agent. (7)
30
<PAGE>
10.1 -- Form of Officer and Director Indemnification Agreement. (2)
10.2 -- Form of Employment Agreement dated February 5, 1998 between
the Company and each of Ms. Jenkinson and Messrs. Holder,
Bogoievski, Stewart and Gardner. (3)
10.3 -- Non-Competition Agreement, dated February 2, 1998, by and
between Dispatch Management Services Corp. and Gregory Kidd.
(4)
10.4 -- Form of 1997 Stock Incentive Plan, as amended. (8)
10.5 -- Form of Financing and Security Agreement by and among
Dispatch Management Services Corp., Dispatch Management
Services San Francisco Corp., Dispatch Management Services New
York Corp., Dispatch Management Services Acquisition Corp.,
Road Management Services Corporation, Balmerino Holdings
Limited, Statetip Limited and Nationsbank, N.A. (4)
10.6 -- Letter Agreement between Michael Fiorito and the Company.
(6)
21.1 -- Subsidiaries of Dispatch Management Services Corp.
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
27.0 -- Financial Data Schedule.
99.0 -- Amended and Restated Credit Agreement among Dispatch
Management Services Corp. as Borrower, and the Material
Subsidiaries of the Borrower as guarantors, and the lenders
identified herein, and NationsBank N.A., as Administrative
Agent dated as of April 8, 1999. (9)
- ----------
(1) Incorporated by reference to the exhibit of like number to Registrants'
Registration Statement on Form S-1, File No. 333-39971, filed with the
Commission on November 10, 1997.
(2) Incorporated by reference to the exhibit of like number to Amendment No. 1
to the Registrants' Registration Statement on Form S-1, File No.
333-39971, filed with the Commission on December 24, 1997.
(3) Incorporated by reference to the exhibit of like number to Amendment No. 2
to the Registrants' Registration Statement on Form S-1, File No.
333-39971, filed with the Commission on January 13, 1997.
(4) Incorporated by reference to the exhibit of like number to Amendment No. 3
to the Registrants' Registration Statement on Form S-1, File No.
333-39971, filed with the Commission on February 3, 1997.
(5) Incorporated by reference to Exhibit 2 to the Registrant's Current Report
on Form 8-K dated April 7,1998, File No. 000-23349.
(6) Incorporated by reference to the exhibit of like number of the
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
(7) Incorporated by reference to the exhibit of like number of the
Registrant's Current Report on Form 8-K dated December 14,1998, File No.
000-23349.
(8) Incorporated by reference to exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1998, File No.
001-15073.
(9) Incorporated by reference to the exhibit of like number of the
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 000-23349.
4. Reports on Form 8-K
None.
31
<PAGE>
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 7th day of
March, 2000.
DISPATCH MANAGEMENT SERVICES CORP.
(Registrant)
By: /s/ H. STEVE SWINK
------------------
H. Steve Swink
Chairman of the Board, Chief
Executive and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 7, 2000.
Signature Title
--------- -----
/s/ H. STEVE SWINK Chief Executive Officer and Director
----------------------
H. Steve Swink
/s/ MARKO BOGOIEVSKI Chief Financial Officer (Principal Financial
---------------------- Officer and Principal Accounting Officer)
Marko Bogoievski
/s/ EDWARD R. ALLEN Director
----------------------
Edward R. Allen
/s/ D. KEITH COBB Director
----------------------
D. Keith Cobb
/s/ THOMAS J. SAPORITO Director
----------------------
Thomas Saporito
/s/ ANNE T. SMYTH Director
----------------------
Anne T. Smyth
32
EXHIBIT 21.1
List of Subsidiaries of Dispatch Management Services Corp. as of December
31, 1999.
Subsidiary State/Country of Incorporation
- ---------- ------------------------------
Dispatch Management Services New York Corp. New York
Dispatch Management Services Acquisition Corp. Delaware
Dispatch Management Services San Francisco Corp. Delaware
DMS (Europe) Limited England and Wales
Dispatch Management Services Australia Pty Ltd Australia
Balmerino Holding Limited New Zealand
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
333-53605 of Dispatch Management Services Corp. on Form S-8 of our report dated
February 25, 2000 (March 7, 2000 as to Note 7), appearing in the Annual Report
on Form 10-K of Dispatch Management Services Corp. for the year ended December
31, 1999.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
March 7, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-53605) of Dispatch Management Services Corp. of
our report dated March 31, 1999, except as to Note 7 which is as of April 8,
1999 relating to the financial statements and financial statement schedule which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 6, 2000
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