UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarter ended March 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission file number 0-23349
DISPATCH MANAGEMENT SERVICES CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3967426
(State of Incorporation) (I.R.S. Employer Identification No.)
1981 Marcus Ave., Suite C131
Lake Success, New York 11042 11042
(Address of principal executive offices) (Zip Code)
(516) 326-9810
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of April 27, 2000, there were 12,228,630 shares of Common Stock outstanding.
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999
Consolidated Statements of Operations for the Three Months ended March 31,
2000 and 1999
Consolidated Statements of Cash Flows for the Three Months ended March 31,
2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
Signatures
Exhibit Index
2
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 1,286 $ 2,715
Accounts receivable, less allowances of $1,936 and $1,968.......... 28,462 29,052
Prepaid and other expenses......................................... 1,617 1,341
Income tax receivable.............................................. 471 640
--------- ---------
Total current assets....................................... 31,836 33,748
Property and equipment, net.......................................... 9,199 9,262
Deferred financing costs, net........................................ 305 433
Intangible assets, primarily goodwill, net........................... 150,645 151,778
Notes receivable..................................................... -- 492
Other assets......................................................... 704 716
Deferred income taxes................................................ 177 176
--------- ---------
Total assets............................................... $ 192,866 $ 196,605
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts.................................................... $ 3,592 $ 2,527
Current portion of long-term debt.................................. 2,400 2,000
Accounts payable................................................... 4,687 5,781
Accrued liabilities................................................ 10,330 11,994
Accrued payroll and related expenses............................... 4,211 4,019
Income tax payable................................................. 1,494 1,769
Acquisition-related notes payable, current portion................. 4,934 5,709
--------- ---------
Total current liabilities.................................. 31,648 33,799
Long-term debt....................................................... 71,700 71,750
Acquisition-related notes payable.................................... 2,139 2,944
Other long-term liabilities.......................................... 4,075 3,348
--------- ---------
Total liabilities.......................................... 109,562 111,841
--------- ---------
Commitments and contingencies - (see notes)
Stockholders' equity
Common stock, $.01 par value, 100,000,000 shares authorized;
12,192,427 and 12,872,946 shares issued and outstanding......... 122 129
Additional paid-in capital........................................... 118,949 120,692
Accumulated deficit.................................................. (35,147) (35,727)
Accumulated other comprehensive loss................................. (620) (330)
--------- ---------
Total stockholders' equity................................. 83,304 84,764
--------- ---------
Total liabilities and stockholders' equity................. $ 192,866 $ 196,605
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Net revenue .................................................... $ 48,763 $ 57,129
Cost of revenue ................................................ 29,991 35,414
----------- ------------
Gross profit ................................................. 18,772 21,715
Selling, general and administrative expenses ................... 13,912 18,796
Depreciation and amortization .................................. 2,042 1,946
----------- ------------
Income from operations ....................................... 2,818 973
Interest expense ............................................... 2,017 1,864
----------- ------------
Income (loss) before income tax provision ...................... 801 (891)
Income tax provision ........................................... 221 445
----------- ------------
Net income (loss) ............................................ $ 580 $ (1,336)
=========== ============
Net income (loss) per basic common share ..................... $ 0.05 $ (0.11)
Weighted average number of basic common shares outstanding ... 12,543,905 11,921,404
----------- ------------
Net income (loss) per diluted common share ................... $ 0.05 $ (0.11)
Weighted average number of diluted common shares outstanding . 12,559,822 11,921,404
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................... $ 580 $(1,336)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation .............................................. 859 687
Amortization of goodwill and other intangibles ............ 1,183 1,259
Provision for doubtful accounts ........................... 179 425
Amortization of deferred financing costs .................. 128 111
Changes in operating assets and liabilities:
Accounts receivable ................................. 411 2,064
Prepaid and other current assets .................... (107) 863
Accounts payable and accrued liabilities ............ (2,095) (1,280)
------- -------
Net cash provided by operating activities ........... 1,138 2,793
------- -------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired ............. -- (3,054)
Investments in other intangibles ............................ (38) --
Additions to property and equipment ......................... (796) (190)
------- -------
Net cash used in investing activities ............... (834) (3,244)
------- -------
Cash flows from financing activities:
Proceeds from bank borrowings ............................... 850 3,150
Payments on bank borrowings ................................. (500) --
Payments on acquisition-related debt ........................ (1,580) --
Payments on long and short-term obligations ................. (213) (711)
------- -------
Net cash (used in) provided by financing activities . (1,443) 2,439
------- -------
Effect of exchange rate changes on cash and cash equivalents .. (290) (293)
------- -------
Net (decrease) increase in cash and cash equivalents .......... (1,429) 1,695
Cash and cash equivalents, beginning of period ................ 2,715 3,012
------- -------
Cash and cash equivalents, end of period ...................... $ 1,286 $ 4,707
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Organization, Basis of Presentation and Financial Condition
Dispatch Management Services Corp. ("DMS") was incorporated on September 9,
1997. Dispatch Management Services LLC ("DMS LLC") was established in November
1996 to create an international 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. 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.
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.
The interim financial statements have been prepared in accordance with the
instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation
S-X, and should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 1999. Accordingly, significant accounting
policies and other disclosures normally provided have been omitted since such
items are disclosed therein. In the opinion of management, the information
contained herein reflects all adjustments (consisting of only normal recurring
items) considered necessary to present fairly the consolidated financial
position, consolidated results of operations and cash flows for the interim
periods. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
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.
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
through March 31, 2000 will provide the Company with sufficient cash flow to
continue as a going concern. 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.
6
<PAGE>
2. Business Combinations
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.
3. Long-Term Debt
Prior to April 8, 1999, the Company had a $105,000 revolving line of credit with
NationsBank N.A. and a group of senior lenders. Outstanding principal balances
under this line of credit incurred interest at increments between 1.50% and
2.50% above the LIBOR rate, depending on the Company's ratio of funded debt to
EBITDA (as defined in the credit agreement).
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 the Second Amendment to the Credit
Agreement dated March 30, 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 March 31, 2000 was LIBOR + 3.75%
(30-Day LIBOR at March 31, 2000 was 6.13%). 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, 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 Acquisitions.
4. Stockholders' Equity and Comprehensive Loss
The Company utilizes the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 requires the reporting and display of comprehensive loss and its components
in the financial statements. SFAS No. 130 also requires the Company to classify
items of other comprehensive income or loss by their nature in financial
statements.
Changes in stockholders' equity and comprehensive income (loss) during the three
months ended March 31, 2000 and 1999 were as follows (dollars in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
Stockholders' Comprehensive Stockholders' Comprehensive
Equity Income Equity Loss
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Stockholders' equity at beginning of period $ 84,764 $ 99,373
Comprehensive income (loss):
Net income (loss) 580 $ 580 (1,336) $ (1,336)
Common stock - cancelled stock (7)
Additional paid-in capital - cancelled stock (1,743)
Foreign currency translation adjustment (290) (290) (293) (293)
--------- ------- --------- --------
Total (1,460) $ 290 (1,629) $ (1,629)
--------- ------- --------- --------
Stockholders' equity at end of period $ 83,304 $ 97,744
========= =========
</TABLE>
During the quarter ended March 31, 2000, the Company cancelled 777,940 shares of
common stock previously held in escrow pending resolution of certain loan and
earn-out arrangements.
5. Taxation
The Company's effective tax rate can vary depending on the financial performance
of the different geographic operating regions. The Company has incurred income
tax expense in the United Kingdom and Australasian divisions, which are not
currently benefiting from significant carryforward tax losses generated in the
United States.
6. Legal Proceedings
The Company is 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 $4,900 and $5,600 as an estimate
of the liability with respect to these cases at March 31, 2000 and December 31,
1999, 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.
7. 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 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended United
March 31, 2000 United States Kingdom Australasia Total
-------------- ------------- ------- ----------- -----
<S> <C> <C> <C> <C>
Net revenue $ 27,510 17,033 4,220 $ 48,763
Operating income $ 1,536 953 329 $ 2,818
Identifiable assets $ 29,055 9,849 3,317 $ 42,221
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Capital expenditures $ 279 498 19 $ 796
Depreciation $ 477 315 67 $ 859
</TABLE>
<TABLE>
<CAPTION>
Three months ended United
March 31, 2000 United States Kingdom Australasia Total
-------------- ------------- ------- ----------- -----
<S> <C> <C> <C> <C>
Net revenue $ 33,110 19,912 4,107 $ 57,129
Operating (loss) income $ (888) 1,640 221 $ 973
Identifiable assets $ 36,643 21,370 2,737 $ 60,750
Capital expenditures $ 72 79 39 $ 190
Depreciation $ 478 186 23 $ 687
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Company's consolidated financial statements, including the
notes thereto, and the other financial information appearing elsewhere in this
report. Statements regarding future economic performance, management's plans and
objectives, and any statements concerning its assumptions related to the
foregoing contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute forward-looking statements.
Certain factors which may cause actual results to vary materially from these
forward-looking statements accompany such statements or are listed in "Factors
Affecting the Company's Prospects" set forth in the Company's annual report on
Form-10K for the year ended December 31, 1999.
Overview
The Company was formed in 1997 to create one of the largest providers of
point-to-point delivery services in the world. The Company focuses on
point-to-point delivery by foot, bicycle, motorcycle, car and truck and operates
in 22 of the largest metropolitan markets in the United States as well as the
United Kingdom, Australia and New Zealand.
Results of Operations
Three months ended
March 31,
2000 1999
---- ----
Net revenue 100.0% 100.0%
Costs of revenue 61.5 62.0
----- -----
Gross profit 38.5 38.0
Selling, general and
administrative expenses 28.5 32.9
Depreciation and amortization 4.2 3.4
----- -----
Operating income 5.8 1.7
Interest expense 4.1 3.3
----- -----
Income (loss) before income taxes 1.6 (1.6)
Provision for income taxes 0.5 0.8
----- -----
Net income (loss) 1.1 (2.4)
===== =====
9
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
Net Revenue
Net revenue for the three months ended March 31, 2000 decreased $8.4 million, or
14.6%, to $48.8 million from $57.1 million for the three months ended March 31,
1999. This decrease was primarily due to the continued realignment of certain
non-core businesses related to the acquisition of 28 urgent, on-demand,
point-to-point courier firms that the Company acquired at various dates
following the Company's initial public offering in February 1998. The Company's
revenues were predominantly earned from urgent delivery services performed
throughout the United States, the United Kingdom, and Australasia, (dollars in
thousands):
Three months ended Three months ended
March 31, 2000 March 31, 1999
-------------- --------------
United States $ 27,510 56.4% $ 33,110 58.0%
United Kingdom 17,033 34.9 19,912 34.8
Australasia 4,220 8.7 4,107 7.2
---------- ----- ---------- -----
Total $ 48,763 100.0% $ 57,129 100.0%
Following certain acquisitions, the Company re-priced or ceased providing
certain services which failed to meet required margin criteria, or were not pure
urgent, point-to-point delivery services. There can be no assurance that any
such initiatives in the future will not have a material adverse effect on the
Company's business, financial condition or results of operations.
Cost of Revenue
Cost of revenue for the three months ended March 31, 2000 decreased $5.4
million, or 15.3%, to $30.0 million from $35.4 million for the three months
ended March 31, 1999. This decrease was primarily due to the decrease in net
revenue noted above, and to a lesser extent the benefits associated with the
continued physical integration of a number of previously independent courier
fleets. Expressed as a percentage of net revenue, cost of revenue for the three
months ended March 31, 2000 decreased to 61.5%, from 62.0% for the three months
ended March 31, 1999. Cost of revenue percentages in the United States, the
United Kingdom, and Australasia vary considerably as a result of different
compensation structures, the proportion of owner-operated vehicles, the type of
benefit plans, and the mix of business. For the three months ended March 31,
2000, cost of revenue percentages for the United States, United Kingdom and
Australasia were 61.2%, 61.8%, and 61.9%, respectively, as compared to 60.8%,
63.8%, and 62.9%, respectively, for the comparable 1999 period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March
31, 2000 decreased $4.9 million, or 26.0%, to $13.9 million from $18.8 million
for the three months ended March 31, 1999. This decrease was primarily due to
the benefits of headcount reduction and cost containment initiatives that were
executed throughout 1999. Expressed as a percentage of net revenue, selling,
general and administrative costs for the three months ended March 31, 2000
decreased to 28.5%, from 32.9% for the three months ended March 31, 1999.
Selling, general and administrative percentages in the United States (including
corporate), the United Kingdom, and Australasia vary considerably as a result of
the degree of physical integration, different compensation structures and the
mix of business. For the three months ended March 31, 2000, selling, general and
administrative expense percentages for the United States, United Kingdom, and
Australasia were 27.5%, 30.2%, and 28.5%, respectively, as compared to 37.0%,
26.7%, and 29.8%, respectively, for the comparable 1999 period.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2000
was $2.0 million, or 4.2% of revenues, an increase of $0.1 million as compared
to the three months ended March 31, 1999. Depreciation and
10
<PAGE>
amortization expense includes depreciation on property, plant and equipment, and
amortization of goodwill and other intangibles.
Interest Expense and Deferred Financing Costs
Interest expense, including the amortization of deferred financing costs, for
the three months ended March 31, 2000 was $2.0 million, or 3.9% of the Company's
net revenues. This represents an increase of $0.2 million over the same period
in 1999. The increase was primarily due to higher interest rates. Interest
expense included interest on senior debt, acquired debt, acquisition-related
debt, and capital lease obligations, as well as bank charges. Interest rates on
the senior credit facility ranged from 9.8% to 10.0% during the three months
ended March 31, 2000, compared with 9.2% to 9.4% for the three months ended
March 31, 1999. The Company amortized $0.1 million of deferred financing fees
during the three months ended March 31, 2000. Interest expense incurred on the
senior bank debt during the three months ended March 31, 2000 amounted to $1.8
million.
Provision for Income Taxes
The effective tax rate for the three months ended March 31, 2000 was 27.6%. The
Company's effective tax rate can vary dependent on the financial performance of
the different geographic regions. The low effective tax rate for the three
months ended March 31, 2000 is a direct result of lower profitability in the
United Kingdom and the utilization of carryforward losses in the United States.
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 March 31, 2000, the Company had $1.3 million in cash and cash equivalents,
$3.6 million of bank overdrafts, $74.1 million of senior bank debt, and $7.1
million of short and long-term acquisition-related debt. Net cash provided from
operating activities for the three months ended March 31, 2000 was $1.1 million.
Accounts receivable days sales outstanding increased by 3.5 days during the
quarter ended March 31, 2000, primarily as a result of seasonal collection
patterns. Net cash used in investing and financing activities were $0.8 million
and $1.4 million, respectively, for the three months ended March 31, 2000.
Capital expenditures totaled $0.8 million in the three months ended March 31,
2000, 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
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 the Second Amendment to
the Credit Agreement dated March 30, 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.
11
<PAGE>
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 March 31, 2000 was LIBOR + 3.75%
(30-Day LIBOR at March 31, 2000 was 6.13%). 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, 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 Acquisitions.
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. 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 Second Amendment to the
Credit Agreement dated March 30, 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 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. The
Company will continue to monitor its operations.
FACTORS AFFECTING THE COMPANY'S PROSPECTS
In addition to other information in this report, certain risk factors should be
considered carefully in evaluating the Company and its business. 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 in the Annual Report for the year ended December 31, 1999 filed on Form
10-K and elsewhere in this report.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risk, i.e. the risk of loss arising from
adverse changes in interest rates and foreign currency exchange rates.
12
<PAGE>
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 March 31, 2000.
Foreign Exchange Exposure
Significant portions of the Company's operations are conducted in Australia, New
Zealand and the United Kingdom. Exchange rate fluctuations between the US
dollar/Australian dollar, US dollar/New Zealand dollar and US dollar/pound
sterling result in fluctuations in the amounts relating to the Australian, New
Zealand, and United Kingdom operations reported in the Company's consolidated
financial statements.
The Company has not entered into hedging transactions with respect to its
foreign currency exposure, but may do so in the future.
PART II. OTHER INFORMATION
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISPATCH MANAGEMENT SERVICES CORP.
Date: April 27, 2000 By: /s/ Marko Bogoievski
---------------------------------
Marko Bogoievski
Chief Financial Officer
14
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