UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarter ended September 30, 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 November 10, 2000, there were 12,630,464 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 September 30, 2000 and December
31, 1999
Consolidated Statements of Operations for the Three and Nine Months
ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 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 3. Defaults upon Senior Securities.
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>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 878 $ 2,715
Accounts receivable, less allowances of $1,701 and $1,968 ...... 22,466 29,052
Prepaid and other current assets ............................... 2,756 1,341
Income tax receivable .......................................... 78 640
--------- ---------
Total current assets ................................... 26,178 33,748
Property and equipment, net ...................................... 9,129 9,262
Deferred financing costs, net .................................... 230 433
Intangible assets, primarily goodwill, net ....................... 147,547 151,778
Other assets ..................................................... 812 1,384
--------- ---------
Total assets ........................................... $ 183,896 $ 196,605
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts ................................................ $ 2,880 $ 2,527
Current portion of long-term debt .............................. 73,350 2,000
Accounts payable ............................................... 5,864 5,781
Accrued liabilities ............................................ 9,068 11,994
Accrued payroll and related expenses ........................... 3,986 4,019
Income tax payable ............................................. 614 1,769
Acquisition-related notes payable, current portion ............. 3,724 5,709
--------- ---------
Total current liabilities .............................. 99,486 33,799
Long-term debt ................................................... -- 71,750
Acquisition-related notes payable ................................ 1,521 2,944
Other long-term liabilities ...................................... 4,719 3,348
--------- ---------
Total liabilities ...................................... 105,726 111,841
--------- ---------
Commitments and contingencies - (see notes)
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized;
12,630,464 and 12,872,946 shares outstanding ............ 127 129
Additional paid-in capital ................................... 119,834 120,692
Accumulated deficit .......................................... (40,099) (35,727)
Accumulated other comprehensive loss ......................... (1,534) (330)
Less common stock held in treasury ........................... (158) --
--------- ---------
Total stockholders' equity ......................... 78,170 84,764
--------- ---------
Total liabilities and stockholders' equity ......... $ 183,896 $ 196,605
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenue .................................................... $ 43,702 $ 53,242 $ 137,512 $ 166,824
Cost of revenue ................................................ 27,476 32,185 85,111 101,702
------------ ------------ ------------ ------------
Gross profit ................................................. 16,226 21,057 52,401 65,122
Selling, general and administrative expenses ................... 15,825 15,809 43,781 51,951
Depreciation and amortization .................................. 2,111 2,001 6,276 6,116
Other income .................................................. -- (391) -- (397)
------------ ------------ ------------ ------------
(Loss) income from operations ............................... (1,710) 3,638 2,344 7,452
Interest expense ............................................... 2,126 1,872 6,242 6,641
------------ ------------ ------------ ------------
(Loss) income before income tax provision ...................... (3,836) 1,766 (3,898) 811
Income tax provision ........................................... 249 184 474 714
------------ ------------ ------------ ------------
Net (loss) income ........................................... $ (4,085) $ 1,582 $ (4,372) $ 97
============ ============ ============ ============
Net income (loss) per basic common share .................... $ (0.32) $ 0.13 $ (0.35) $ 0.01
============ ============ ============ ============
Weighted average number of basic common shares outstanding .. 12,666,535 12,113,023 12,608,040 11,983,935
============ ============ ============ ============
Net income (loss) per diluted common share .................. $ (0.32) $ 0.13 $ (0.35) $ 0.01
============ ============ ============ ============
Weighted average number of diluted common shares outstanding . 12,666,535 12,252,673 12,608,040 12,088,952
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ........................................... $(4,372) $ 97
Adjustments to reconcile net (loss) income to net cash
provided by
Operating activities:
Depreciation ............................................. 2,592 2,145
Amortization of goodwill and other intangibles ........... 3,684 3,971
Provision for doubtful accounts .......................... 547 825
Amortization of deferred financing costs ................. 278 989
Changes in operating assets and liabilities:
Accounts receivable ............................... 5,957 5261
Prepaid and other current assets .................. (853) 432
Accounts payable and accrued liabilities .......... (3,911) (6,946)
Other assets 79 --
------- -------
Net cash provided by operating activities ......... 4,001 6,774
------- -------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired ............. -- (7,469)
Additions to property and equipment ......................... (2,458) (1,478)
------- -------
Net cash used in investing activities ............. (2,458) (8,947)
------- -------
Cash flows from financing activities:
Proceeds from bank borrowings ............................... 850 3,150
Payments on bank borrowings ................................. (1,250) (600)
Payments on acquisition-related debt ........................ (3,408) --
Financing costs ............................................. (75) (399)
Proceeds from (payments on) long and short-term obligations 1,238 (1,288)
Purchase of treasury stock .................................. (77) --
------- -------
Net cash (used in) provided by financing activities (2,722) 863
------- -------
Effect of exchange rate changes on cash and cash equivalents .. (658) (245)
------- -------
Net decrease in cash and cash equivalents ..................... (1,837) (1,555)
Cash and cash equivalents, beginning of period ................ 2,715 3,012
------- -------
Cash and cash equivalents, end of period ...................... $ 878 $ 1,457
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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. 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 acquisition of
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, obtaining positive cash flow from operations and renegotiating
and complying with the terms of its bank debt.
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.
2. Long-term Debt
6
<PAGE>
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. In addition, the Company is required by the terms of the
Second Amendment to the Credit Agreement to complete a merger or
acquisition or a private or public placement of debt or equity, the total
value of which exceeds $15,000, by December 31, 2000 (the "Capital Event
Requirement"). On July 26, 2000, the senior lenders agreed to extend the
expiration date of the Credit Agreement to August 31, 2001. As of
September 30, 2000 the Company was in default of the repayment terms of
principal and interest and the financial covenants described in the Second
Amendment to the Credit Agreement. The Company expect to enter into a
Forbearance Agreement (the "Forbearance Agreement") with the senior
lenders. The Forbearance Agreement has a termination date of November 30,
2000, which may be extended by the senior lenders. Accordingly, all
amounts due the senior lenders have been reflected as current liabilities
on the consolidated balance sheet at September 30, 2000. The Forbearance
Agreement requires, among other things, that the Company engage a
consultant to assist the Company in improving its operations and financial
performance. In accordance with the Forbearance Agreement, the Company has
engaged the services of Zolfo Cooper, LLC ("Zolfo") a nationally
recognized business advisory consultant. Zolfo will be paid on an hourly
basis and has the ability to earn a bonus upon the successful completion
of its assignment. The Company is presently in the process of
renegotiating the terms of the Credit Agreement with the senior lenders.
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 September 30, 2000
was LIBOR + 3.75% (30-Day LIBOR at September 30, 2000 was 6.62%).
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 of no more
than 4.25:1, (iii) maintenance of a collateral coverage ratio of no less
than 35%, and (iv) a minimum quarterly interest coverage ratio of no less
then 2.25:1, 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.
3. 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
nine months ended September 30, 2000 and 1999 were as follows:
7
<PAGE>
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
---------------------------- ----------------------------
Stockholders' Comprehensive Stockholders' Comprehensive
Equity Loss Equity Loss
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Stockholders' equity at beginning of period ................... $ 84,764 $ 99,373
Comprehensive income (loss):
Net income (loss) ........................................ (4,372) $(4,372) 97 $ 97
Common stock/additional paid-in capital:
Issuances ................................................ 171 3
Issuances for payment of acquisition debt ................ 913
Cancelled stock .......................................... (1,944) (1,454)
Foreign currency translation adjustment ....................... (1,204) (1,204) (245) (245)
Purchase of treasury stock .................................... (158)
-------- ------- -------- -------
Total .................................................... (2,222) $(5,576) (1,599) $ (148)
-------- ------- -------- -------
Stockholders' equity at end of period ...................... $ 78,170 $ 97,774
======== ========
</TABLE>
During the nine months ended September 30, 2000, the Company cancelled
777,940 shares of common stock previously held in escrow pending
resolution of certain loan and earn-out arrangements. Also during the nine
months ended September 30, 2000, the Company purchased 80,654 shares of
its common stock issued in connection with acquisitions.
4. 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.
5. Legal Proceedings
The Company is involved in several acquisition-related disputes concerning
the interpretation of certain acquisition contracts, including non-compete
agreements and the earn-out provisions. The Company has accrued $3,400 and
$5,600 as an estimate of the liability with respect to these cases at
September 30, 2000 and December 31, 1999, respectively. One of those cases
with a brand manager group was recently settled. No one of these disputes
involves a claim for damages in excess of $1,700.
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.
6. 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:
8
<PAGE>
<TABLE>
<CAPTION>
Nine months ended United
September 30, 2000 United States Kingdom Australasia Total
------------------ ------------- ------- ----------- -----
<S> <C> <C> <C> <C>
Net revenue $ 77,722 $ 47,632 $ 12,158 $137,512
Operating income/(loss) (91) 1,445 990 2,344
Identifiable assets 24,974 7,909 3,466 36,349
Capital expenditures 775 1,581 130 2,486
Depreciation 1,398 1,006 187 2,591
<CAPTION>
Nine months ended United
September 30, 1999 United States Kingdom Australasia Total
------------------ ------------- ------- ----------- -----
<S> <C> <C> <C> <C>
Net revenue $ 96,461 $ 57,690 $ 12,673 $166,824
Operating income 2,624 4,125 703 7,452
Identifiable assets 26,233 17,288 3,569 47,043
Capital expenditures 458 838 182 1,478
Depreciation 1,446 603 95 2,145
</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 management's assumptions related to
the foregoing contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute forward-looking
statements. Forward-lookin statements may be identified by the use of term such
as "may," "will," "should," "expect," "instead," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," "continues," or the negative of
these or other terminology. 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 and
in the Company's annual report on Form-10K for the year ended December 31, 1999.
Except for the per share data, all dollars are in thousands.
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.
9
<PAGE>
Results of operations
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 62.9 60.5 61.9 61.0
----- ----- ----- -----
Gross profit 37.1 39.5 38.1 39.0
Selling, general and
Administrative expenses 36.2 29.0 31.8 30.9
Depreciation and amortization 4.8 3.8 4.6 3.7
----- ----- ----- -----
Operating income (3.9) 6.8 1.7 3.4
Interest expense 4.8 3.2 4.6 3.2
Amortization and write-off of deferred
financing costs 0.0 0.3 0.0 0.8
----- ----- ----- -----
Loss before income taxes (8.7) 3.3 (2.9) 0.5
Provision for income taxes 0.6 0.3 0.3 0.4
----- ----- ----- -----
Net loss (9.3) 3.0 (3.2) 0.1
==== ==== ==== ====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net Revenue
Net revenue for the three months ended September 30, 2000 decreased by $9,500,
or 17.9%, to $43,700 from $53,200 million for the three months ended September
30, 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 in connection with or at
various dates following the Company's initial public offering in February 1998.
The Company's revenue was predominantly earned from urgent delivery services
performed throughout the United States, the United Kingdom, and Australasia
(dollars in thousands):
Three months ended Three months ended
September 30, 2000 September 30, 1999
------------------ ------------------
United States $24,124 55.2 % $30,704 57.7 %
United Kingdom 15,661 35.8 18,469 34.6
Australasia 3,917 9.0 4,069 7.7
------- ----- ------- -----
Total $43,702 100.0 % $53,242 100.0 %
======= ===== ======= =====
Since the completion of certain acquisitions, the Company has re-priced or
ceased providing certain services which failed to meet required margin criteria,
or were not pure urgent, point-to-point delivery services. Additionally, some
customers were transferred or lost as part of negotiated settlements with former
owners of acquired businesses. 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. Foreign
exchange fluctuations reduced the United Kingdoms and Australasia revenue
compared to revenue for the comparable period by 4.26%, or $673, and 7.95%, or
$340, respectively.
Cost of Revenue
Cost of revenue for the three months ended September 30, 2000 decreased by
$4,700, or 14.6%, to $27,500 from $32,200 for the three months ended September
30, 1999. This decrease was primarily due to the decrease in net revenue noted
above. Expressed as a percentage of net revenue, cost of revenue for the three
months ended September 30, 2000
10
<PAGE>
increased to 62.9%, from 60.5% for the three months ended September 30, 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 September 30, 2000, cost of revenue
percentages for the United States, United Kingdom and Australasia were 63.2%,
62.7%, and 61.8%, respectively, as compared to 58.1%, 64.4%, and 60.1%,
respectively, for the comparable 1999 period. The increased cost of revenue
percentage in the United States of 5.1% was mainly attributed to an increase in
courier-related insurance premiums and the Company's inability to reduce the
fixed cost component of cost of revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2000 remained flat at $15,800 compared to the three months ended
September 30, 1999. Expressed as a percentage of net revenue, selling, general
and administrative costs for the three months ended September 30, 2000 increased
to 36.2%, from 29.0% for the three months ended September 30, 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 September 30, 2000, selling, general
and administrative expense percentages for the United States, United Kingdom,
and Australasia were 39.0%, 33.8%, and 29.0%, respectively, as compared to
30.2%, 28.3%, and 32.6%, respectively, for the comparable 1999 period. During
the three months ended September 30, 2000, the United States operation incurred
expenses of $700, or 3% of net revenue, related to the resignation of the Chief
Executive Officer, a brand manager's performance bonus adjustment due to a
recent settlement, and consulting fees related to the default and ongoing
renegotiations of the senior credit facility.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended September 30,
2000 was $2,100, or 4.8% of revenue, an increase of $100 as compared to the
three months ended September 30, 1999. Depreciation and 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 September 30, 2000 was $2,100, or 4.8% of the Company's
net revenue. This represents an increase of $300 from the same period in 1999.
Interest expense included interest on senior debt, acquired debt,
acquisition-related debt, and capital lease obligations, as well as bank
charges. The interest rate on the senior credit facility was 10.4% during the
three months ended September 30, 2000, compared with 9.2% to 9.4% for the three
months ended September 30, 1999. The Company amortized $100 of deferred
financing fees during the three months ended September 30, 2000. Interest
expense incurred on the senior bank debt during the three months ended September
30, 2000 amounted to $2,000.
Provision for Income Taxes
The Company's effective tax rate can vary dependent on the financial performance
of the different geographic regions. The low effective tax rate for the three
months ended September 30, 2000 is a direct result of lower profitability in the
United Kingdom and the utilization of carryforward losses in the United States.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Net Revenue
Net revenue for the nine months ended September 30, 2000 decreased by $29,300,
or 17.6%, to $137,500 from $166,800 for the nine months ended September 30,
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 in connection with or at
various dates following the Company's initial public offering in February 1998.
The
11
<PAGE>
Company's revenue was predominantly earned from urgent delivery services
performed throughout the United States, the United Kingdom, and Australasia
(dollars in thousands):
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
United States $ 77,722 56.6 % $ 96,460 57.8 %
United Kingdom 47,632 34.6 57,690 34.6
Australasia 12,158 8.8 12,674 7.6
-------- ----- -------- -----
Total $137,512 100.0 % $166,824 100.0 %
======== ===== ======== =====
Since the completion of certain acquisitions, the Company has re-priced or
ceased providing certain services which failed to meet required margin criteria,
or were not pure urgent, point-to-point delivery services. Additionally, some
customers were transferred or lost as part of negotiated settlements with former
owners of acquired businesses. 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. Foreign
exchange fluctuations reduced the United Kingdom and Australasia revenue
compared to revenue for the comparable period by 4.26%, or $2,119, and 7.95%, or
$1,007, respectively.
Cost of Revenue
Cost of revenue for the nine months ended September 30, 2000 decreased by
$16,600, or 16.3%, to $85,100 from $101,700 for the nine months ended September
30, 1999. This decrease was primarily due to the decrease in net revenue noted
above. Expressed as a percentage of net revenue, cost of revenue for the nine
months ended September 30, 2000 increased to 61.9%, from 61.0% for the nine
months ended September 30, 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 nine months ended
September 30, 2000, cost of revenue percentages for the United States, United
Kingdom and Australasia were 61.8%, 62.3%, and 61.2%, respectively, as compared
to 59.4%, 63.4%, and 61.7%, respectively, for the comparable 1999 period. The
increased cost of revenue percentage in the United States of 2.4% was mainly
attributed to an increase in courier-related insurance premiums and the
Company's inability to reduce the fixed cost component of cost of revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September
30, 2000 decreased by $8,200, or 15.7%, to $43,800 from $52,000 for the nine
months ended September 30, 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 nine months ended September 30, 2000 increased to
31.8%, from 30.9% for the nine months ended September 30, 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 nine months ended September 30, 2000, selling, general and
administrative expense percentages for the United States, United Kingdom, and
Australasia were 39.0%, 33.8%, and 29.0%, respectively, as compared to 33.1%,
28.0%, and 31.1%, respectively, for the comparable 1999 period. During the nine
months ended September 30, 2000 the United States operation expensed $700, or 1%
of net revenue, related to the resignation of the Chief Executive Officer, a
brand managers performance bonus adjustment due to the recent settlement and
consulting fees related to the default and ongoing renegotiation of the senior
credit facility.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended September 30,
2000 was $6,300, or 4.6% of revenue,
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an increase of $200 as compared to the nine months ended September 30, 1999.
Depreciation and 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 nine months ended September 30, 2000 was $6,200, or 4.6% of the Company's
net revenue. This represents a decrease of $400 from the same period in 1999.
The 1999 interest and deferred financing costs include a write-off of $900 of
fees associated with the senior credit facility. 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 10.4% during the nine months ended September 30,
2000, compared with 6.9% to 9.4% for the nine months ended September 30, 1999.
The Company amortized $200 of deferred financing fees during the nine months
ended September 30, 2000. Interest expense incurred on the senior bank debt
during the nine months ended June 30, 2000 amounted to $6,600.
Provision for Income Taxes
The Company's effective tax rate can vary dependent on the financial performance
of the different geographic regions. The effective tax rate for the nine months
ended September 30, 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
As of September 30, 2000 the Company was in default of the repayment terms of
principal and interest and the financial covenants described in the Second
Amendment to the Credit Agreement. See the Senior Credit Facility section.
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 senior credit facility.
At September 30, 2000, the Company had $900 in cash and cash equivalents, $2,900
of bank overdrafts, $73,300 of senior bank debt, and $5,200 of short and
long-term acquisition-related debt. Net cash provided from operating activities
for the nine months ended September 30, 2000 was $4,000. Accounts receivable
days sales outstanding decreased by 7 days to 49 days, during the nine months
ended September 30, 2000. Net cash used in investing and financing activities
was $2,400 and $2,800, respectively, for the nine months ended September 30,
2000. Capital expenditures totaled $2,500 in the nine months ended September 30,
2000, primarily for office and technology-related expenditures. Management
presently anticipates that such additional capital expenditures will total
$4,000 over the next two years, including $2,500 of computer equipment, $1,000
of communications equipment, and $500 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 $78,400, 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. In addition, the Company is required by the
terms of the Second Amendment to the Credit Agreement to complete a merger or
acquisition or a private or public placement of debt or equity, the total value
of which exceeds $15,000 by December 31, 2000 (the "Capital Event Requirement").
On July 26, 2000 the senior lenders extended the expiration date of the Credit
Agreement to August 31, 2001. As of September 30, 2000 the Company was in
default of the repayment terms of principal and interest and the financial
covenants described in the Second Amendment to the Credit Agreement. The Company
expects to enter into a
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Forbearance Agreement (the "Forbearance Agreement") with the senior lenders. The
Forbearance Agreement has a termination date of November 30, 2000, which may be
extended by the senior lenders. Accordingly, all amounts due the senior lenders
have been reflected as current liabilities on the consolidated balance sheet at
September 30, 2000. The Forbearance Agreement requires, among other things, that
the Company engage a consultant to assist the Company in improving its
operations and financial performance. In accordance with the Forbearance
Agreement, the Company has engaged the services of Zolfo Cooper, LLC ("Zolfo") a
nationally recognized business advisory consultant. Zolfo will be paid on an
hourly basis and has the ability to earn a bonus upon the successful completion
of its assignment. The Company is presently in the process of renegotiating the
terms of the Credit Agreement with the senior lenders.
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 September 30, 2000 was LIBOR +
3.75% (30-Day LIBOR at September 30, 2000 was 6.62%). 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 of no more than 4.25:1, (iii)
maintenance of a collateral coverage ratio of no less than 35%, and (iv) a
minimum quarterly interest coverage ratio of no less than 2.25:1, 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 Credit Agreement has been extended to expire on August 31, 2001. Should the
Company not be in a position to repay the debt upon maturity, it would look to
renegotiate or refinance the debt, but any such refinancing would likely be on
less favorable terms. In the event that the Company is unable to renegotiate or
refinance the Credit Agreement or the Company does not comply with any of the
covenants of the Credit Agreement, such as the Capital Event Requirement, the
bank would have the right to call the loan as defined the Credit Agreement,
subject to the provisions in the Forbearance Agreement. 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)
renegotiating and complying with the terms of its senior credit facility. Given
the current Credit Agreement restrictions, the Company is unlikely to pursue
further acquisition opportunities during the next twelve to eighteen months.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for the fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. The Company
believes the adoption of this pronouncement will have no material impact on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000 the SEC issued SAB 101B to defer the effective date on
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 31, 1999. The Company is required to adapt
SAB 101 by December 31, 2000. The Company does not expect the adoption of SAB
101 to have a material effect on our financial position or results of
operations.
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Factors Affecting the Company's Prospects
The prospects of the Company may be affected by the matters set forth in the
annual report for the year ended December 31, 1999 filed on Form 10-K and the
matters discussed below.
Factors Related to Our Financial Condition. DMS is highly leveraged. This
substantial indebtedness severely limits cash flow available for our operations
and has adversely affected our ability to service debt or obtain additional
financing if necessary. As of September 30, 2000, DMS had $75,865 outstanding
under its credit agreement. The credit agreement requires repayment of all
outstanding indebtedness on August 31, 2001 and the payment each month of $150
through November 2000 and $300 thereafter and through May 2001. The credit
agreement contains various financial covenants and requires DMS to complete a
merger or acquisition or a private or public placement of debt or equity, the
total value of which exceeds $15,000, by December 31, 2000. DMS was in default
of the repayment terms of principal and interest and the financial covenants on
September 30, 2000 and expects to enter into a Forbearance Agreement which
expires as of November 30, 2000. The Forbearance Agreement can be extended by
the senior lenders. The default, if not waived by our lenders, could result in
the acceleration of our outstanding debt and cause our debt to become
immediately due and payable. If such acceleration occurs, DMS would not be able
to repay its debt and may not be able to borrow sufficient additional funds to
refinance such debt. DMS's ability to obtain in the future any necessary waivers
of compliance with the financial or other covenants cannot be assured. DMS's
ability to refinance its outstanding indebtedness under the credit agreement
will be dependent upon its ability to achieve and maintain cash flow from
operations sufficient to satisfy its obligations. No assurance can be given that
DMS will be able to refinance the indebtedness.
Factors Related to the Consolidation of the Industry. DMS operates in a highly
competitive industry with low barriers to entry. It competes with both small
companies that operate in only one location and may have more experience and
brand recognition that the Company has as well as several large, national
companies that are in the process of consolidating the industry through the
acquisition of independent point-to-point courier companies. In response to
industry and market changes, including industry consolidation, and in
recognition of the terms of its Credit Agreement, DMS considers, from time to
time, additional strategies to enhance stockholder value. These include among
others, strategic alliances and joint ventures; purchase, sales or merger
transactions with other large companies; a recapitalization of DMS; and other
similar transactions. In considering any of these strategies, DMS evaluates the
consequences of such strategies. There can be no assurance that any one of these
strategies will be undertaken, or that, if undertaken, any such strategy will be
completed successfully.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risk, i.e. the risk of loss arising from
adverse changes in interest rates and foreign currency exchange rates.
Interest Rate Exposure
The Company has not entered into interest rate protection agreements on
borrowings under its credit 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 $800 based upon the amount of the Company's variable rate debt
outstanding at September 30, 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.
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PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
The Company is in default of the repayment terms of principal and interest and
the financial covenants described in the Second Amendment to the Credit
Agreement. As of November 14, 2000 the aggregate amount of the principal and
interest arrearage was $1,585.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Resignation Agreement for H. Steven Swink, dated September 22, 2000
10.2 Severance Agreement for Marko Bogoievski dated May 1, 2000
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISPATCH MANAGEMENT SERVICES CORP.
Date: November 14, 2000 By: /s/ Douglas A. Roth
--------------------
Douglas A. Roth
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
------
10.1 Resignation Agreement for H. Steven Swink, dated September 22, 2000
10.2 Severance Agreement for Marko Bogoievski dated May 1, 2000
27.1 Financial Data Schedule
