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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ________ to ________
Commission file number 0-23349
DISPATCH MANAGEMENT SERVICES CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3967426
(State of Incorporation) (I.R.S. Employer Identification No.)
1981 Marcus Ave., Suite C131
Lake Success, New York 11042 11042
(Address of principal executive offices) (Zip Code)
(516) 326-9810
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of May 10, 1999, there were 11,921,404 shares of Common Stock outstanding.
DISPATCH MANAGEMENT SERVICES CORP.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999
Consolidated Statements of Operations for the Three Months ended March 31,
1998 and 1999
Consolidated Statements of Cash Flows for the Three Months ended March 31,
1998 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 6. Exhibits and Reports on Form 8-K.
Signatures
Exhibit Index
2
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
December 31, March 31,
1998 1999
------------ ---------
(Unaudited)
ASSETS
Cash and cash equivalents ................................... $ 3,012 $ 4,707
Accounts receivable, less allowances of $4,416 and $2,788 ... 36,416 34,924
Prepaid and other expenses .................................. 1,890 1,235
Income tax receivable ....................................... 2,784 2,442
--------- ---------
Total current assets .............................. 44,102 43,308
Property and equipment, net ................................. 8,851 8,354
Deferred financing costs, net ............................... 1,501 1,390
Intangible assets, primarily goodwill, net of amortization
of $3,186 and $4,457 ..................................... 154,923 156,712
Notes receivable ............................................ 9,002 6,546
Other assets ................................................ 1,031 861
Deferred income taxes ....................................... 291 291
--------- ---------
Total assets ...................................... $ 219,701 $ 217,462
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts ............................................. $ 2,944 $ 1,523
Current portion of long-term debt ........................... 900 2,400
Accounts payable ............................................ 5,758 5,658
Accrued liabilities ......................................... 13,356 13,914
Accrued payroll and related expenses ........................ 5,527 5,395
Income tax payable .......................................... 1,817 2,680
Capital lease obligations ................................... 886 759
Acquisition-related notes payable, current portion .......... 7,207 5,844
--------- ---------
Total current liabilities ......................... 38,395 38,173
Long-term debt .............................................. 70,600 72,250
Acquisition-related notes payable ........................... 5,337 4,053
Other long-term liabilities ................................. 5,996 5,242
--------- ---------
Total liabilities ................................. 120,328 119,718
--------- ---------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par 100,000,000 shares authorized;
11,817,634 and 11,921,404 shares issued and outstanding 118 119
Additional paid-in capital .................................. 117,686 117,992
Value of stock to be issued ................................. 3,197 2,890
Accumulated deficit ......................................... (21,523) (22,859)
Accumulated other comprehensive loss ........................ (105) (398)
--------- ---------
Total stockholders' equity ........................ 99,373 97,744
--------- ---------
Total liabilities and stockholders' equity ........ $ 219,701 $ 217,462
========= =========
The accompanying notes are an integral part of these financial statements.
3
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except for share amounts)
Three months ended
------------------
March 31
--------
1998 1999
------------ ------------
Net revenue ........................................... $ 24,316 $ 57,129
Cost of revenue ....................................... 15,029 35,414
------------ ------------
Gross profit ........................................ 9,287 21,715
Selling, general and administrative expenses .......... 7,530 18,796
Depreciation and amortization ......................... 706 1,946
------------ ------------
Income from operations .............................. 1,051 973
Interest expense ...................................... 228 1,868
Acquired in-process research and development .......... 700 --
Other expense (income) ................................ 82 (4)
------------ ------------
Income (loss) before income tax provision ............. 41 (891)
Income tax provision .................................. 73 445
------------ ------------
Loss before extraordinary item ...................... (32) (1,336)
Extraordinary loss on early extinguishment of debt .... (713) --
------------ ------------
Net loss ............................................ $ (745) $ (1,336)
============ ============
Loss per common share - basic and diluted
Loss before extraordinary item ...................... $ -- $ (0.11)
Extraordinary item .................................. (0.11) --
------------ ------------
Net loss .............................................. $ (0.11) $ (0.11)
============ ============
Weighted average shares outstanding (basic and diluted) 6,806,285 11,921,404
============ ============
The accompanying notes are an integral part of these financial statements.
4
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three months ended,
-------------------
March 31
--------
1998 1999
-------- --------
Cash flows from operating activities:
Net loss ..................................................................................... $ (745) $ (1,336)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
Depreciation .............................................................................. 404 687
Amortization of goodwill and other intangibles ............................................ 302 1,259
Amortization of deferred finance costs .................................................... -- 111
Acquired in-process research and development .............................................. 700 --
Extraordinary item ........................................................................ 713 --
Changes in operating assets and liabilities (net of assets acquired
and liabilities assumed in business combinations)
Accounts receivable ................................................................ (5,933) 2,489
Prepaid expenses and other current assets .......................................... 6,668 863
Accounts payable and accrued liabilities ........................................... (3,024) (1,280)
-------- --------
Net cash (used in) provided by operating activities ................................ (915) 2,793
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired .............................................. (62,692) (3,054)
Additions to property and equipment .......................................................... (1,180) (190)
-------- --------
Net cash used in investing activities .............................................. (63,872) (3,244)
Cash flows from financing activities:
Proceeds from initial public offering, net ................................................... 76,276
Proceeds from bank borrowings ................................................................ 3,150
Principal payments on long and short-term obligations ........................................ (8,110) (711)
-------- --------
Net cash provided by (used in) financing activities ................................ 68,166 2,439
Effect of exchange rate changes on cash and cash equivalents ................................... 61 (293)
-------- --------
Net increase in cash and cash equivalents ...................................................... 3,440 1,695
Cash and cash equivalents, beginning of period ................................................. 354 3,012
Cash and cash equivalents, end of period ....................................................... $ 3,794 $ 4,707
======== ========
The accompanying notes are an integral part of these financial statements.
5
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
In connection with the closing of the initial public offering (the
"Offering") of the common stock, $.01 par value (the "Common Stock"), of
Dispatch Management Services Corp. (the "Company" or "DMS") in February
1998, the Company acquired, in separate combination transactions (the
"Combinations"), 38 urgent, on-demand, point-to-point courier firms and one
software firm (each, together with the software firm, a "Founding Company,"
and collectively, the "Founding Companies").
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of the Company, the
Founding Companies and the other businesses acquired subsequent to the
Offering (the "Recent Acquisitions").
The interim financial statements have been prepared in accordance with the
instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of
Regulation S-X, and should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. Accordingly,
significant accounting policies and other disclosures normally provided
have been omitted since such items are disclosed therein. In the opinion of
management, the information contained herein reflects all adjustments
(consisting of only normal recurring items) considered necessary to make
the consolidated financial position, consolidated results of operations and
cash flows for the interim periods a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
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, liabilities, sales
and expenses. Actual results could differ from these estimates.
The Company's 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 from operations
and maintaining positive cash flow from operations.
During the first quarter of 1999, the Company notified its senior lenders
of an event of default in relation to certain financial covenants described
in the syndicated senior credit facility led by NationsBank, N.A. Following
this notification of default, the Company operated under a forbearance
agreement that deferred certain lender remedies pending a restructuring of
the senior credit facility. As described in Note 4, the Company entered
into a definitive Amended and Restated Credit Agreement with NationsBank
N.A. and a syndicate of senior lenders. The amended facility has a maturity
date of May 31, 2000, and provides for revised financial covenants and
other provisions. The Company intends to enter into negotiations with its
group of lenders during the second quarter of 1999 to extend the maturity
of the syndicated senior credit facility beyond May 31, 2000. There can be
no assurances that the Company will be successful in negotiating a maturity
date beyond May 31, 2000.
During the three months ended March 31, 1999, the senior management team
has established a number of strategic priorities designed to stabilize
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 front-end and back-end systems, as well as enhanced cost control
and reporting mechanisms.
The Company has also recently executed a number of structural changes,
including the appointment of four new independent directors to the
Company's Board and the creation of a United States regional management
team designed to oversee and support the 22 metropolitan operating centers.
6
The Company believes that the cumulative impact of such initiatives and
actions will provide the Company with sufficient cash flow to continue as a
going concern for the next twelve months. The Company's ability to continue
as a going concern is dependent upon; i) achieving and maintaining cash
flow from operations sufficient to satisfy its current obligations, ii)
complying with the financial covenants described in the senior credit
facility, and iii) negotiating an extension of its senior credit facility
terms beyond its maturity date of May 31, 2000.
2. Initial Public Offering
On February 6, 1998, DMS completed the Offering of 6,000,000 shares of
Common Stock at $13.25 per share. In March 1998, the underwriters exercised
their over-allotment option to purchase an additional 900,000 shares of
Common Stock at the initial public offering price. The total proceeds from
the Offering of the 6,900,000 shares of Common Stock, net of underwriter
commissions and offering costs, was approximately $76,276.
The net proceeds were used primarily for the cash portion of the purchase
prices for the Founding Companies, for the early extinguishment of certain
note payable obligations of the Company which resulted in an extraordinary
loss of $713, and for the repayment of certain indebtedness of the Founding
Companies.
3. Business Combinations
On February 11, 1998, the Company acquired all of the outstanding common
stock and/or net assets of the Founding Companies simultaneously with the
closing of the Offering. The aggregate consideration for these acquisitions
included approximately $62.7 million in cash, the issuance of 3,378,590
shares of common stock, and $4.6 million of notes payable. The cash portion
of these acquisitions was funded through the proceeds of the Offering.
During the period following the Offering to December 31, 1998, the Company
acquired an additional 28 messenger or same-day courier companies in the
United States, the United Kingdom, Australia and New Zealand. The aggregate
consideration for these acquisitions included approximately $47.6 million
in cash, the issuance of 355,160 shares of common stock, $3.2 million in
value of stock to be issued, and approximately $7.9 million of notes
payable.
The acquisitions have been accounted for using the purchase method of
accounting. The consideration does not reflect certain additional
contingent consideration which may be issued pursuant to earn-out
arrangements included in the definitive agreements with the acquired
Companies.
During the three months ended March 31, 1999, goodwill associated with the
1998 acquisitions increased by $3,060, primarily due to contingent
consideration earned.
Acquisition Liabilities
In connection with completed acquisitions, the Company recorded liabilities
for employee severance and for operating lease payments (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 facility leases assumed by the Company. Amounts accrued
represent management's estimate of the cost to exit the facilities and
equipment leases.
The changes in the Acquisition Liabilities during the three month period
ended March 31, 1999 were as follows:
Severance Lease
Liability Liability Total
--------- --------- -----
Balance December 31, 1998 .............. $ 195 $ 666 $ 861
Additions ............................... 11 11
Utilization ............................. (11) (96) (107)
===== ===== =====
Balance March 31, 1999 .................. $ 184 $ 581 $ 765
===== ===== =====
7
Pro Forma Financial Information
The following unaudited condensed pro forma financial information of the
Company for the three-month period ended March 31, 1998 includes the
combined operations of the Company, and the 1998 Acquisitions as if the
Offering and the acquisitions had occurred on January 1, 1998.
Three months ended
March 31, 1998
------------------
Net revenue $51,751
Income before extraordinary item $ 423
Per share data:
Income before extraordinary item - basic $ 0.04
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' stockholders and managers to which they agreed
prospectively, incremental amortization of goodwill, reduction in royalty
payments made by certain Founding Companies in accordance with franchise
agreements that terminated as a result of the Combinations, income tax
adjustments, incremental interest expense associated with borrowings to
fund the acquisitions and the reduction in expense related to amounts
allocated to in-process research and development activities. This
summarized pro forma information may not be indicative of actual results if
the transactions had occurred on the dates indicated or of the results
which may be realized in the future.
4. Senior Credit Facility
In February 1998, the Company obtained a $25 million revolving line of
credit from NationsBank, N.A. pursuant to a credit agreement. Outstanding
principal balances under this line incurred interest at increments between
2.50% and 1.50% 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 million
short-term line of credit facility in anticipation of closing a syndicated
credit facility. The short term line of credit facility was cross-defaulted
and cross-collateralized with the revolving line of credit and matured in
June 1998.
In June, 1998, the Company entered into a credit agreement with NationsBank
N.A. as underwriter of a new $60 million senior credit facility. In August,
1998, Nations Bank led a syndication for a $105 million committed line of
credit with a group of senior lenders, including First Union National Bank,
BankBoston N.A., CIBC, Inc., and Fleet Bank N.A.
Subsequent to December 31, 1998, the Company notified the senior lenders of
an event of default in relation to certain financial covenants described in
the senior credit agreement. Following this notification of default, the
Company operated under a forbearance agreement that deferred certain lender
remedies pending a restructuring of the senior credit facility. On April 8,
1999, the Company entered into a definitive Amended and Restated Credit
Agreement (the "Credit Agreement") with NationsBank N.A. and a syndicate of
senior lenders. The Credit Agreement provides a revolving credit facility
equal to the current outstanding indebtedness, or $78.5 million, which
includes a sub-limit of $3.8 million for existing standby letters of
credit. All amounts drawn down under the line of credit must be repaid on
May 31, 2000, with minimum principal payments of $900 and $1,500 required
in 1999 and the first quarter of 2000, respectively. Outstanding principal
balances under the line of credit bear interest, payable monthly, at
increments between 1.75% and 4.00% over the LIBOR rate, depending on the
Company's ratio of Funded Debt to trailing quarter annualized EBITDA (as
defined in the Credit Agreement). The initial pricing level between April
8, 1999 and June 30, 1999 will be at LIBOR + 4.00% (30 Day LIBOR at March
31, 1999 was 5.0%).
8
Borrowings under the line of credit are secured by a first lien on all of
the business assets of the Company, including the shares of common stock of
certain of the Company's subsidiaries. The Company is required to maintain
minimum absolute quarterly EBITDA targets through the maturity of the
facility, provided that for the last fiscal quarter of 1999, and the first
fiscal quarter of 2000, the absolute EBITDA targets are modified such that
the Company can still meet the financial covenant criteria by maintaining a
Funded Debt to EBITDA ratio at no more than 3.0x (as defined in the Credit
Agreement).
Other financial covenants include: (i) maintenance of a monthly pre-tax
income on a consolidated basis after June 30, 1999 (adjusted for certain
non-cash gains and losses), (ii) maintenance of a collateral coverage ratio
whereby accounts receivable less than 60 days as a proportion of the total
outstanding under the revolving line of credit cannot fall below levels
ranging from 35% - 40%, and (iii) minimum quarterly interest coverage
ratios, defined as EBITDA as a ratio to cash interest expense. The Credit
Agreement also limits or prohibits (i) the amount of indebtedness the
Company can incur, (ii) the amount of equipment the Company can lease,
(iii) the liens, pledges and guarantees that can be granted by the Company,
(iv) the amount of cash dividends that can be declared by the Company, (v)
certain capital expenditures, and (vi) the sale of stock of the Company's
subsidiaries. Material acquisitions and disposals of certain operations
require approval by the lender. The Credit Agreement contains customary
representations and warranties, covenants, defaults and conditions. The
line of credit is intended to be used for short-term working capital, and
for the issuance of letters of credit. The facility specifically allows for
the payment of various acquisition-related notes payable disclosed in the
consolidated financial statements related to 1998 acquisitions.
The Company paid $1,664 in financing fees during 1998, which have been
deferred and are being amortized over the term of the Credit Agreement. The
Company amortized $111 of the deferred finance fees during the three months
ended March 31, 1999. Interest expense incurred on the senior bank debt
during the three months ended March 31, 1999 amounted to $670.
5. Stockholders' Equity and Comprehensive Loss
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires the reporting and display of comprehensive
loss and its components in the financial statements.
SFAS No. 130 also requires the Company to classify items of other
comprehensive income or loss by their nature in financial statements.
Changes in stockholders' equity and comprehensive loss during the three
months ended March 31, 1999 were as follows:
Stockholders' Comprehensive
Equity Loss
------------- -------------
Stockholders' equity at December 31, 1998 $ 99,373
Comprehensive loss:
Net loss (1,336) $ (1,336)
Foreign currency translation adjustment (293) (293)
-------- --------
Total (1,629) $ (1,629)
-------- --------
Stockholders' equity balance at March 31, 1999 $ 97,744
========
7. Loss per Share
The following table sets forth the calculation of basic and diluted loss
per share (in thousands, except per share amounts):
9
Three months ended
March 31,
---------
1998 1999
------------ ------------
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item $ (32) $ (1,336)
Extraordinary loss on early
extinguishment of debt (713)
------------ ------------
Net loss $ (745) $ (1,336)
============ ============
Weighted average shares outstanding (basic
and diluted) 6,806,285 11,921,404
============ ============
Loss before extraordinary item $ (0.00) $ (0.11)
Extraordinary loss on early
Extinguishment of debt (0.11)
------------ ------------
Net loss per share $ (0.11) $ (0.11)
============ ============
8. Recent 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, 1999 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.
9. Litigation
Following the acquisition of certain of the Founding Companies, the Company
terminated a relationship with an equipment vendor due to repeated and
substantial problems with certain telecommunications and computer
equipment. In July 1997, the Company was served with a claim for unpaid
monthly fees due under the full term of each respective service agreement.
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 approximately $5.2 million as an estimate of the
liability with respect to these cases at March 31, 1999.
The Company also becomes involved in various legal matters from time to
time, which it considers to be in the ordinary course of business. While
the Company is not currently able to determine the potential liability, if
any, related to such matters, the Company believes, after consulting with
legal counsel, 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.
10. Segment Information
The Company's reportable segments are based on geographic area. The Company
evaluates the performance of its geographic areas based on operating profit
(loss) excluding interest expense, other income and expense, the effects of
non-recurring items, and income tax expense. The following is a summary of
local operations by geographic region for the three months ended March 31,
1999:
10
Three months ended United
March 31, 1999 North America Kingdom Australasia Total
-------------- ------------- ------- ----------- -----
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
Three months ended United
March 31, 1999 North America Kingdom Australasia Total
-------------- ------------- ------- ----------- -----
Net Revenue $16,109 7,995 212 $24,316
Operating income $ 245 774 32 $ 1,051
Identifiable assets $42,150 12,717 275 $55,142
Capital expenditures $ 921 249 10 $ 1,180
Depreciation $ 301 95 8 $ 404
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".
11
Introduction
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto
appearing elsewhere herein. All dollar amounts are expressed in thousands,
except for per share data.
Overview
The Company was formed in 1997 to create one of the largest providers of
point-to-point delivery services in the world. The Company focuses on
point-to-point delivery by foot, bicycle, motorcycle, car and truck and operates
in 22 of the largest metropolitan markets in the United States as well as the
United Kingdom, Australia and New Zealand.
Management does not believe that a period-to-period comparison of the results of
operations of the Company whose consolidated financial statements are included
elsewhere in this report would be meaningful. Prior to the Initial Public
Offering on February 11, 1998, the Company conducted no operations other than in
connection with the Offering and the Combinations and generated no revenues
other than the receipt of licensing fees. Simultaneous with the Offering, the
Company acquired, in separate combination transactions, 38 urgent, on-demand,
point-to-point courier firms and one software company.
Results of Operations
Three months ended Three months ended
March 31, 1998 March 31, 1999
------------------ ------------------
Net revenue $ 24,316 100.0% $ 57,129 100.0%
Costs of revenue 15,029 61.8 35,414 62.0
-------- ----- -------- -----
Gross profit 9,287 38.2 21,715 38.0
Selling, general and
Administrative 7,530 31.0 18,796 32.9
Depreciation and amortization 706 2.9 1,946 3.4
-------- ----- -------- -----
Operating income 1,051 4.3 973 1.7
Interest and other expense, net 310 1.2 1,864 3.3
Acquired in-process research and development 700 2.9
-------- ----- -------- -----
Income (loss) before income taxes and
and extraordinary item 41 0.2 (891) (1.6)
Provision for income taxes 73 0.3 445 0.8
-------- ----- -------- -----
Loss before extraordinary item $ (32) (0.1) $ (1,336) (2.4)
======== ===== ======== =====
Net Revenue
Net revenue for the quarter-ended March 31, 1999 was $57.1 million. These
revenues were predominantly earned from Point-to-Point delivery services
throughout the United States, the United Kingdom, Australia and New Zealand. For
the quarter-ended March 31, 1999, net revenues generated in the United States,
the United Kingdom, and Australasia were $33.1 million, $19.9 million, and $4.1
million, respectively. Following certain acquisitions, the Company re-priced or
ceased providing certain services which failed to meet required margin criteria,
or were not pure 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 quarter-ended March 31, 1999 was $35.4 million, or 62.0%
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.
12
For the quarter-ended March 31, 1999, cost of revenue percentages for the United
States, United Kingdom and Australasia were 60.8%, 63.8%, and 62.9%,
respectively. Cost of revenue percentages were positively impacted during the
first quarter by the benefits associated with the continued physical integration
of a number of previously independent courier fleets. As at March 31, 1999, the
Company still had a comprehensive courier fleet integration program remaining to
execute. This program is expected to be substantially completed during 1999.
Selling, General and Administrative Costs
Selling, general and administrative costs for the quarter-ended March 31, 1999
were $18.8 million, or 32.9% 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
quarter-ended March 31, 1999, selling, general and administrative percentages
for the United States, United Kingdom, and Australasia were 37.0%, 26.7%, and
29.8%, respectively. Selling, general and administrative percentages were
positively impacted during the first quarter by an aggressive cost-cutting and
overhead reduction program that commenced in February 1999.
Combined 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, 1999, the Company had $4.7 million in cash and cash equivalents,
$74.7 million of senior bank debt, and $9.9 million of short and long-term
acquisition-related debt. Net cash provided from operating activities for the
quarter ended March 31, 1999 was $2.8 million. Net cash used in investing
activities and provided by financing activities was $3.2 million and $2.4
million, respectively for the quarter ended March 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 $62.7 million in cash, the issuance of 3,378,590 shares of common
stock, and $4.6 million of notes payable. The cash portion of these acquisitions
was funded through the proceeds of the Offering.
During the period following the Offering to December 31, 1998, the Company
acquired an additional 28 messenger or same-day courier companies in the United
States, the United Kingdom, Australia and New Zealand. The aggregate
consideration for these acquisitions included approximately $47.6 million in
cash, the issuance of 355,160 shares of common stock, $3.2 million in value of
stock to be issued, and approximately $7.9 million of notes payable. The cash
portion of the consideration for the acquisitions consummated after the Offering
was provided by borrowings under the Company's credit facility.
In addition, in connection with certain acquisitions, the Company agreed to pay
the sellers additional consideration if the acquired operations meet certain
performance goals related to their earnings before interest, taxes, depreciation
and amortization, as adjusted for certain other financial related matters. The
estimated maximum amount of additional consideration payable, if all performance
goals are met, is approximately $10.2 million, of which $3.5 million is payable
in cash and $6.7 million is payable in shares of the Company's common stock.
These payments of additional consideration are to be made on specified dates
through December 31, 2000. Management intends to fund the cash portion of this
additional consideration with internally generated cash flow.
Capital expenditures totaled approximately $0.2 million in the three months
ended March 31, 1999, primarily for office and computer equipment. The Company
expects to make capital expenditures of approximately $1.0 million during 1999
to upgrade certain components of its management and financial reporting systems
and to install an internal computer intranet network and communications system
integrating the metropolitan operating centers. In addition, application of the
DMS Model requires investment in local operating centers. Management presently
anticipates that such additional capital expenditures will total approximately
$4.3 million over the next two years, including approximately $1.8 million of
computer equipment, $1.3 million of communications equipment, and $1.2 million
of leasehold improvements.
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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 million senior credit facility. In August 1998,
Nations Bank led a syndication for a $105 million committed line of credit with
a group of senior lenders, including First Union National Bank, BankBoston N.A.,
CIBC, Inc., and Fleet Bank N.A.
fubsequent to December 31, 1998, the Company notified the senior lenders of an
event of default in relation to certain financial covenants described in the
senior credit agreement. Following this notification of default, the Company
operated under a forebearance agreement that deferred certain lender remedies
pending a restructuring of the senior credit facility. As described in Note 4,
the Company entered into a definitive Amended and Restated Credit Agreement (the
"Credit Agreement") with NationsBank N.A. and a syndicate of senior lenders. The
Credit Agreement provides a revolving credit facility equal to the current
outstanding indebtedness at March 31, 1999, or $78.5 million, which includes a
sub-limit of $3.8 million for existing standby letters of credit. All amounts
drawn down under the line of credit must be repaid on May 31, 2000, although
minimum principal payments of $900 and $1,500 are required in 1999 and the first
quarter of 2000, respectively. The Company intends to enter into negotiations
with the group of lenders during the second quarter of 1999 to extend the
maturity of the syndicated senior credit facility beyond May 31, 2000. There can
be no assurances that the Company will be successful in negotiating a maturity
date beyond May 31, 2000.
Outstanding principal balances under the line of credit bear interest, payable
monthly, at increments between 1.75% and 4.00% over the LIBOR rate, depending on
the Company's ratio of Funded Debt to trailing quarter annualized EBITDA (as
defined in the Credit Agreement). The initial pricing level between April 8,
1999 and June 30, 1999 will be at LIBOR + 4.00% (30 Day LIBOR at March 31, 1999
was 5.0%).
Borrowings under the line of credit are collateralized by a first lien on all of
the business assets of Company, including the shares of common stock of certain
of the Company's subsidiaries. The Company is required to maintain minimum
absolute quarterly EBITDA targets through the maturity of the facility, provided
that for the last fiscal quarter of 1999, and the first fiscal quarter of 2000,
the absolute EBITDA targets are modified such that the Company can still meet
the financial covenant criteria by maintaining a Funded Debt to EBITDA ratio at
no more than 3.0x (as defined in the Credit Agreement).
Other financial covenants include: (i) maintenance of monthly pre-tax income on
a consolidated basis after June 30, 1999 (adjusted for certain non-cash gains
and losses), (ii) maintenance of a collateral coverage ratio whereby accounts
receivable less than 60 days as a proportion of the total outstanding under the
revolving line of credit cannot fall below levels ranging from 35% - 40%, and
(iii) minimum quarterly interest coverage ratios, defined as EBITDA as a ratio
to cash interest expense. The Credit Agreement also limits or prohibits (i) the
amount of indebtedness the Company can incur, (ii) the amount of equipment the
Company can lease, (iii) the liens, pledges and guarantees that can be granted
by the Company, (iv) the amount of cash dividends that can be declared by the
Company, (v) certain capital expenditures, and (vi) the sale of stock of the
Company's subsidiaries. Acquisitions and disposals of certain operations require
approval by the lender. The Credit Agreement contains customary representations
and warranties, covenants, defaults and conditions. The line of credit is
intended to be used for short-term working capital, and for the issuance of
letters of credit. The facility specifically allows for the payment of various
acquisition-related notes payable disclosed in the consolidated financial
statements related to 1998 acquisitions.
Pursuant to the Credit Agreement, the Company expects to write-off approximately
$850,000 of deferred financing fees related to the previous Credit Facility
dated June 11, 1998, in the second quarter of 1999.
The Company believes that cash flow from operations will be sufficient to fund
the Company's operations and the revised 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 it's current obligations, ii) complying
with the financial covenants described in the senior credit facility, and iii)
negotiating an extension of the senior credit facility beyond it's maturity date
of May 31, 2000. Given the current senior credit facility restrictions, the
Company is unlikely to pursue further acquisition opportunities during the next
12 to 18 months.
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Impact of Year 2000
The Year 2000 issue refers to the impact on information technology and
non-information technology systems, including codes embedded in chips and other
hardware devices, of date-related issues including the identification of a year
by two digits and not four so that a date using "00" would be recognized as the
year "1900" rather than "2000". This date related problem could result in system
failures, miscalculations or errors causing disruptions of operations or other
business problems, including, among others, a temporary inability to process
transactions, send invoices or engage in normal business activities.
The Company has identified operating and software issues to address Year 2000
readiness in its internal systems and with its customers and suppliers. The
Company is addressing its most critical internal systems first, including the
Company's proprietary capture and dispatch system ("KIWI"), and targets to have
them Year 2000 compliant by September 1, 1999. The Company is also addressing
all major categories of information technology and non-information technology
systems in use by the Company, including customer service, dispatch and finance.
The Company plans to use both internal and external resources to reprogram and
test the software for Year 2000 modifications. The cost of this and all other
efforts to achieve Year 2000 compliance is estimated to be less than $1.0
million. To date, the Company's expenses have been mostly limited to internal
costs. External expenditure for Year 2000 compliance in the quarter ended March
31, 1999 was $100. The Company has not separately tracked internal costs, which
were primarily associated with payroll costs. The Company expects future costs
to be funded by internally generated funds. The Company has begun to communicate
with its major customers, suppliers and financial institutions to determine the
extent to which the Company is vulnerable to those third parties' failure to
remedy their own Year 2000 issues. The feedback from some of the Company's major
suppliers and customers contacted confirmed that they anticipate being Year 2000
compliant on or before December 31, 1999.
The Company currently expects that the Year 2000 issue will not pose significant
operational problems. However, delays in the implementation of the new systems,
a failure to identify all of the Year 2000 dependencies in the Company's systems
and in the systems of its suppliers, customers and financial institutions, or a
failure of such third parties to adequately address their respective Year 2000
issues could have a material adverse effect on the Company's business, financial
condition and results of operations. Therefore, the Company expects to develop
contingency plans, as the testing and implementation phases near completion, for
continuing operations in the event such problems arise. However, there can be no
assurance that such contingency plans will be sufficient to handle all of the
problems, which may arise.
Recently Issued 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, 1999 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.
Inflation
The Company does not believe that inflation has had a material effect on the
Company's results of operations nor does it believe it will do so in the
foreseeable future.
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 timing of the
integration of the acquired companies and their conversion to the DMS Model, 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, competitive conditions in the industry and general economic
conditions. As a result, the Company believes that
15
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.
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, 1998 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.
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 interest expense
by $747 based upon the variable rate debt outstanding at March 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Following the acquisition of certain of the Founding Companies, the Company
terminated a relationship with an equipment vendor due to repeated and
substantial problems with certain telecommunications and computer equipment. In
July 1997, the Company was served with a claim for unpaid monthly fees due under
the full term of each respective service agreement.
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 approximately $5.2 million as an estimate of the
liability with respect to these cases at March 31, 1999.
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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, after consulting with legal counsel, 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 6. Exhibits and Reports on Form 8-K
None.
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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: May 12, 1999 By: /s/ Marko Bogoievski
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Marko Bogoievski
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
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27.1 Financial data schedule