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 June 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 July 31, 2000, there were 12,711,118 shares of Common Stock outstanding.
DISPATCH MANAGEMENT SERVICES CORP.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999
Consolidated Statements of Operations for the Three and Six Months ended
June 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Six Months ended June 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 4. Submission of Matters to a Vote of Security Holders.
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)
June 30, December 31,
2000 1999
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 1,654 $ 2,715
Accounts receivable, less allowances of
$1,829 and $1,968 ............................ 24,698 29,052
Prepaid and other current assets ............... 2,345 1,341
Income tax receivable .......................... 115 640
--------- ---------
Total current assets ................... 28,812 33,748
Property and equipment, net ...................... 9,112 9,262
Deferred financing costs, net .................... 298 433
Intangible assets, primarily goodwill, net ....... 148,997 151,778
Notes receivable ................................. -- 492
Other assets ..................................... 662 716
Deferred income taxes ............................ 176 176
--------- ---------
Total assets ........................... $ 188,057 $ 196,605
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts ................................ $ 3,302 $ 2,527
Current portion of long-term debt .............. 2,850 2,000
Accounts payable ............................... 4,244 5,781
Accrued liabilities ............................ 6,028 11,994
Accrued payroll and related expenses ........... 5,560 4,019
Income tax payable ............................. 1,579 1,769
Acquisition-related notes payable, current
portion ...................................... 3,448 5,709
--------- ---------
Total current liabilities .............. 27,011 33,799
Long-term debt ................................... 70,800 71,750
Acquisition-related notes payable ................ 2,438 2,944
Other long-term liabilities ...................... 5,108 3,348
--------- ---------
Total liabilities ...................... 105,357 111,841
--------- ---------
Commitments and contingencies - (see notes)
Stockholders' equity
Common stock, $.01 par value, 100,000,000
shares authorized; 12,711,118 and
12,872,946 shares issued and outstanding ..... 127 129
Additional paid-in capital ....................... 119,834 120,692
Accumulated deficit .............................. (36,014) (35,727)
Accumulated other comprehensive loss ............. (1,247) (330)
--------- ---------
Total stockholders' equity ............. 82,700 84,764
--------- ---------
Total liabilities and stockholders'
equity ............................... $ 188,057 $ 196,605
========= =========
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 Six Months ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net revenue ....................... $ 45,046 $ 56,453 $ 93,809 $ 113,582
Cost of revenue ................... 27,643 34,102 57,635 69,517
----------- ----------- ----------- -----------
Gross profit .................... 17,403 22,351 36,174 44,065
Selling, general and administrative
expenses ........................ 14,044 17,348 27,957 36,142
Depreciation and amortization ..... 2,123 2,168 4,164 4,115
----------- ----------- ----------- -----------
Income from operations .......... 1,236 2,835 4,053 3,808
Interest expense .................. 2,099 2,899 4,115 4,763
----------- ----------- ----------- -----------
Loss before income tax provision .. (863) (64) (62) (955)
Income tax provision .............. 3 85 225 530
----------- ----------- ----------- -----------
Net loss ....................... $ (866) $ (149) $ (287) $ (1,485)
=========== =========== =========== ===========
Net loss per basic and diluted
common share ................. $ (0.07) $ (0.01) $ (0.02) $ (0.12)
=========== =========== =========== ===========
Weighted average number of basic
common shares outstanding ..... 12,613,681 11,917,100 12,578,793 11,919,252
=========== =========== =========== ===========
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)
Six months ended
June 30,
--------------------
2000 1999
---- ----
Cash flows from operating activities:
Net loss ............................................. $ (287) $(1,485)
Adjustments to reconcile net loss to
net cash provided by
Operating activities:
Depreciation ...................................... 1,702 1,500
Amortization of goodwill and other
intangibles ..................................... 2,462 2,615
Provision for doubtful accounts ................... 220 823
Amortization of deferred financing
costs ........................................... 210 1,185
Changes in operating assets and
liabilities:
Accounts receivable ........................ 4,134 5,316
Prepaid and other current
assets ................................... (478) 215
Accounts payable and accrued
liabilities .............................. (5,777) (5,235)
------- -------
Net cash provided by
operating activities ..................... 2,186 4,934
------- -------
Cash flows from investing activities:
Cash used in acquisitions, net of cash
acquired ........................................... -- (5,474)
Investments in other intangibles ..................... -- --
Additions to property and equipment .................. (1,553) (832)
------- -------
Net cash used in investing
activities ............................... (1,553) (6,306)
------- -------
Cash flows from financing activities:
Proceeds from bank borrowings ........................ 850 3,150
Payments on bank borrowings .......................... (950) (300)
Payments on acquisition-related debt ................. (2,767) --
Financing costs ...................................... (75) (399)
Proceeds from (payments on) long and
short-term obligations ............................. 1,793 (688)
------- -------
Net cash (used in)
provided by financing activities ..... (1,149) 1,763
------- -------
Effect of exchange rate changes on cash
and cash equivalents ................................. (545) (658)
------- -------
Net decrease in cash and cash equivalents .............. (1,061) (267)
Cash and cash equivalents, beginning of
period ............................................... 2,715 3,012
------- -------
Cash and cash equivalents, end of period ............... $ 1,654 $ 2,745
======= =======
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
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 Founding
Companies and the subsequent acquisitions referred to collectively as the
"Acquisitions").
DMS did not conduct any significant operations through the Offering date,
other than activities primarily related to the Offering and the
Acquisitions.
The interim financial statements have been prepared in accordance with the
instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of
Regulation S-X, and should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
Accordingly, significant accounting policies and other disclosures
normally provided have been omitted since such items are disclosed
therein. In the opinion of management, the information contained herein
reflects all adjustments (consisting of only normal recurring items)
considered necessary to present fairly the consolidated financial
position, consolidated results of operations and cash flows for the
interim periods. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
The Company's consolidated financial statements have been prepared on the
basis that it will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The ability to continue as a going concern is
dependent, among other things, upon the Company achieving profitable
results and obtaining positive cash flow from operations.
During the year ended December 31, 1999, the senior management team
established a number of strategic priorities designed to strengthen
operations, including i) an aggressive cost reduction program, ii) a focus
on receivables management and collection procedures, and iii)
implementation of a technology investment program designed to deliver
integrated operating systems, as well as enhanced cost control and
reporting mechanisms. Despite these initiatives, the performance of
several U.S operating centers failed to improve as they were subject to
significant local management changes, or the Company became involved in
arbitration or legal action with former owners of acquired businesses.
During the fourth quarter of 1999, the Company re-evaluated the long-term
prospects for the centers involved, and determined that a write-down of
$13,192 to recognize the permanent impairment of goodwill was warranted.
The Company believes that the cumulative impact of such initiatives and
actions through June 30, 2000 will provide the Company with sufficient
cash flow to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon i) achieving and maintaining
cash flow from operations sufficient to satisfy its current obligations,
and ii) complying with the financial covenants described in the senior
credit facility.
2. Business Combinations
6
In connection with certain of the Acquisitions, the Company agreed to pay
the sellers additional consideration if the acquired operations met
certain performance goals related to their earnings, as defined in the
respective acquisition agreements. The Company finalized all additional
consideration arrangements as of December 31, 1999, except those in
dispute.
3. Long-term Debt
On April 8, 1999, the Company entered into a definitive Amended and
Restated Credit Agreement with NationsBank N.A. and a syndicate of senior
lenders (the "Credit Agreement"). The Credit Agreement provided for a
revolving loan commitment of $78.4 million, which included a sub-limit of
$3.8 million for existing standby letters of credit. The revolving loan
commitment is reduced by the amount of monthly principal repayments.
Pursuant to the Second Amendment to the Credit Agreement dated March 30,
2000, all amounts drawn under the line of credit must be repaid on May 31,
2001, with minimum principal payments of $500,000 for January 2000,
$150,000 per month for April 2000 through November 2000, and $300,000 per
month from December 2000 through May 2001. 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 $15.0 million, by December 31,
2000 (the "Capital Event Requirement"). As of June 30, 2000 the Company
was in default of certain financial covenants described in the Credit
Agreement. On July 26, 2000, the senior lenders agreed to waive the
covenants in default for May and June 2000 and extended the expiration
date of the Credit Agreement to August 31, 2001.
Outstanding principal balances under the line of credit bear interest at
increments between 1.75% and 4.00% over the LIBOR rate, depending on the
Company's ratio of Funded Debt to trailing quarter annualized EBITDA (as
defined in the Credit Agreement). The pricing level at June 30, 2000 was
LIBOR + 3.75% (30-Day LIBOR at June 30, 2000 was 6.68%). Borrowings under
the line of credit are collateralized by a first lien on all of the assets
of the Company, including the shares of common stock of certain of the
Company's subsidiaries.
Other financial covenants include: (i) maintenance of a positive monthly
pre-tax income on a consolidated basis (adjusted for certain non-cash
gains and losses), (ii) a maximum total debt to EBITDA ratio, (iii)
maintenance of a collateral coverage ratio, and (iv) a minimum quarterly
interest coverage ratio, defined as EBITDA as a ratio to cash interest
expense. The Credit Agreement prohibits (i) liens, pledges and guarantees
that can be granted by the Company, (ii) the declaration or payment of
cash dividends, and (iii) the sale of stock of the Company's subsidiaries.
The Credit Agreement also limits (i) the amount of indebtedness that the
Company can incur, (ii) the amount of finance lease commitments, and (iii)
certain capital expenditures. Material acquisitions and disposals of
certain operations require approval by the lender. The Credit Agreement
contains customary representations and warranties, covenants, defaults and
conditions. The line of credit is intended to be used for short-term
working capital, and for the issuance of letters of credit. The credit
facility specifically allows for the payment of various
acquisition-related notes payable disclosed in the consolidated financial
statements related to the Acquisitions.
4. Stockholders' Equity and Comprehensive Loss
The Company utilizes the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS
No. 130 requires the reporting and display of comprehensive loss and its
components in the financial statements. SFAS No. 130 also requires the
Company to classify items of other comprehensive income or loss by their
nature in financial statements.
Changes in stockholders' equity and comprehensive income (loss) during the
six months ended June 30, 2000 and 1999 were as follows (dollars in
thousands):
7
June 30, 2000 June 30, 1999
--------------------------- ---------------------------
Stockholders' Comprehensive Stockholders' Comprehensive
Equity Loss Equity Loss
------------- ------------- ------------- -------------
Stockholders' equity at
beginning of period $ 84,764 $ 99,373
Comprehensive loss:
Net loss (287) $ (287) (1,485) $ (1,485)
Common stock/additional
paid-in capital: 171 1
Issuances 913
For payment of 1
acquisition debt (1,944) (1,170)
Foreign currency
translation adjustment (917) (917) (658) (658)
------ -------- -------- --------
Total (2,064) $ (1,204) (3,312) $ (2,143)
------ -------- -------- --------
Stockholders' equity
at end of period 82,700 $ 96,061
====== ========
During the six months ended June 30, 2000, the Company cancelled 777,940
shares of common stock previously held in escrow pending resolution of
certain loan and earn-out arrangements.
5. Taxation
The Company's effective tax rate can vary depending on the financial
performance of the different geographic operating regions. The Company has
incurred income tax expense in the United Kingdom and Australasian
divisions, which are not currently benefiting from significant
carryforward tax losses generated in the United States.
6. Legal Proceedings
The Company is involved in several acquisition-related disputes concerning
the interpretation of certain acquisition contracts, including non-compete
agreements and the earn-out provisions, and the transferability of
unregistered stock issued in connection with the acquisitions. The Company
has accrued $4,800 and $5,600 as an estimate of the liability with respect
to these cases at June 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.
7. Segment Information
The Company operates in one reportable segment: on-demand delivery
services. The Company evaluates the performance of its geographic regions
based on operating income (loss) excluding interest expense, other income
and expense, the effects of non-recurring items, and income tax expense.
The following is a summary of local operations by geographic region for
2000 and 1999:
8
Six months ended United United
June 30, 2000 States Kingdom Australasia Total
------------- ------ ------- ----------- -----
Net revenue $ 53,598 $ 31,970 $ 8,241 $ 93,809
Operating income 1,986 1,355 712 4,053
Identifiable
assets 26,126 9,174 3,760 39,060
Capital
expenditures 693 743 117 1,553
Depreciation 945 626 131 1,702
Six months ended United United
June 30, 1999 States Kingdom Australasia Total
------------- ------ ------- ----------- -----
Net revenue $ 65,757 $ 39,221 $ 8,604 $113,582
Operating income 275 3,077 456 3,808
Identifiable
assets 29,399 18,890 3,147 51,436
Capital
expenditures 366 358 108 832
Depreciation 1,053 384 63 1,500
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Company's consolidated financial statements, including the
notes thereto, and the other financial information appearing elsewhere in this
report. Statements regarding future economic performance, management's plans and
objectives, and any statements concerning its assumptions related to the
foregoing contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute forward-looking statements.
Certain factors which may cause actual results to vary materially from these
forward-looking statements accompany such statements or are listed in "Factors
Affecting the Company's Prospects" set forth below and in the Company's annual
report on Form-10K for the year ended December 31, 1999.
Overview
The Company was formed in 1997 to create one of the largest providers of
point-to-point delivery services in the world. The Company focuses on
point-to-point delivery by foot, bicycle, motorcycle, car and truck and operates
in 22 of the largest metropolitan markets in the United States as well as the
United Kingdom, Australia and New Zealand.
Results of operations
9
Three months ended Six months ended
June 30, 2000 June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 61.4 60.4 61.4 61.2
----- ----- ----- -----
Gross profit 38.6 39.6 38.6 38.8
Selling, general and
administrative expenses 31.2 30.7 29.9 31.8
Depreciation and amortization 4.7 3.9 4.4 3.6
----- ----- ----- -----
Operating income 2.7 5.0 4.3 3.4
Interest expense 4.4 3.2 4.2 3.2
Amortization and write-off of
deferred financing costs 0.2 1.9 0.2 1.0
----- ----- ----- -----
Loss before income taxes (1.9) (0.1) (0.1) (0.8)
Provision for income taxes 0.0 0.2 0.2 0.5
----- ----- ----- -----
Net loss (1.9) (0.3) (0.3) (1.3)
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Net Revenue
Net revenue for the three months ended June 30, 2000 decreased by $11.4 million,
or 20.2%, to $45.0 million from $56.5 million for the three months ended June
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 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
June 30, 2000 June 30, 1999
------------- -------------
United States $26,088 57.9% $32,647 57.8%
United Kingdom 14,938 33.2 19,309 34.2
Australasia 4,020 8.9 4,497 8.0
------- ----- ------- -----
Total $45,046 100.0% $56,453 100.0%
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.
Cost of Revenue
Cost of revenue for the three months ended June 30, 2000 decreased by $6.5
million, or 18.9%, to $27.6 million from $34.1 million for the three months
ended June 30, 1999. This decrease was primarily due to the decrease in net
revenue noted above, and to a lesser extent to the benefits associated with the
continued physical integration of a number of previously independent courier
fleets. Expressed as a percentage of net revenue, cost of revenue for the three
months ended June 30, 2000 increased to 61.4%, from 60.4% for the three months
ended June 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 June 30,
2000, cost of revenue percentages for the United States, United Kingdom and
Australasia were 61.1%, 62.3%, and 59.8%, respectively, as compared to 59.2%,
62.1%, and 62.0%, respectively, for the comparable 1999 period.
10
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30,
2000 decreased by $3.3 million, or 19.0%, to $14.0 million from $17.3 million
for the three months ended June 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 three months ended June 30, 2000
increased to 31.2%, from 30.7% for the three months ended June 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 June 30, 2000, selling, general and
administrative expense percentages for the United States, United Kingdom, and
Australasia were 30.9%, 32.3%, and 28.7%, respectively, as compared to 31.8%,
29.0%, and 30.8%, respectively, for the comparable 1999 period.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended June 30, 2000
was $2.1 million, or 4.7% of revenue, an increase of $0.1 million as compared to
the three months ended June 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 June 30, 2000 was $2.1 million, or 4.7% of the Company's
net revenue. This represents a decrease of $0.8 million from the same period in
1999. The 1999 interest and deferred financing costs include a write-off of $0.9
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 9.9% to 10.4% during the three months ended June 30, 2000,
compared with 9.0% to 9.2% for the three months ended June 30, 1999. The Company
amortized $0.1 million of deferred financing fees during the three months ended
June 30, 2000. Interest expense incurred on the senior bank debt during the
three months ended June 30, 2000 amounted to $2.0 million.
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 June 30, 2000 is a direct result of lower profitability in the
United Kingdom and the utilization of carryforward losses in the United States.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Net Revenue
Net revenue for the six months ended June 30, 2000 decreased by $19.8 million,
or 17.4%, to $93.8 million from $113.6 million for the six months ended June 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 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):
11
Six months ended Six months ended
June 30, 2000 June 30, 1999
------------- -------------
United States $ 53,598 57.1% $ 65,757 57.9%
United Kingdom 31,970 34.1 39,221 34.5
Australasia 8,241 8.8 8,604 7.6
-------- ----- -------- -----
Total $ 93,809 100.0% $113,582 100.0%
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.
Cost of Revenue
Cost of revenue for the six months ended June 30, 2000 decreased by $11.9
million, or 17.1%, to $57.6 million from $69.5 million for the six months ended
June 30, 1999. This decrease was primarily due to the decrease in net revenue
noted above, and to a lesser extent to the benefits associated with the
continued physical integration of a number of previously independent courier
fleets. Expressed as a percentage of net revenue, cost of revenue for the six
months ended June 30, 2000 increased to 61.4%, from 61.2% for the six months
ended June 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 six months ended June 30, 2000,
cost of revenue percentages for the United States, United Kingdom and
Australasia were 61.2%, 62.1%, and 60.9%, respectively, as compared to 60.0%,
62.9%, and 62.4%, respectively, for the comparable 1999 period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended June 30,
2000 decreased by $8.2 million, or 22.6%, to $28.0 million from $36.1 million
for the six months ended June 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 six months ended June 30, 2000
decreased to 29.9%, from 31.8% for the six months ended June 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 six months ended June 30, 2000, selling, general and
administrative expense percentages for the United States, United Kingdom, and
Australasia were 29.2%, 31.2%, and 28.6%, respectively, as compared to 34.4%,
27.8%, and 30.4%, respectively, for the comparable 1999 period.
Depreciation and Amortization
Depreciation and amortization expense for the six months ended June 30, 2000 was
$4.2 million, or 4.4% of revenue, a decrease of $0.1 million as compared to the
six months ended June 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 six months ended June 30, 2000 was $4.1 million, or 4.4% of the Company's
net revenue. This represents a decrease of $0.6 million from the same period in
1999. The 1999 interest and deferred financing costs include a write-off of $0.9
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 six months ended June 30, 2000,
compared with 6.2% to 7.1% for the six months ended June 30, 1999. The Company
12
amortized $0.2 million of deferred financing fees during the three months ended
June 30, 2000. Interest expense incurred on the senior bank debt during the six
months ended June 30, 2000 amounted to $3.9 million.
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 six months
ended March 31, 2000 is a direct result of lower profitability in the United
Kingdom and the utilization of carryforward losses in the United States.
Liquidity and Capital Resources
The Company is a holding company that conducts all of its operations through its
wholly-owned subsidiaries. Accordingly, the Company's principal sources of
liquidity are the cash flow of its subsidiaries, and cash available, if any,
from its credit facility.
At June 30, 2000, the Company had $1.7 million in cash and cash equivalents,
$3.3 million of bank overdrafts, $73.7 million of senior bank debt, and $5.9
million of short and long-term acquisition-related debt. Net cash provided from
operating activities for the six months ended June 30, 2000 was $2.2 million.
Accounts receivable days sales outstanding decreased by 4.8 days during the six
months ended June 30, 2000, primarily as a result of seasonal collection
patterns. Net cash used in investing and financing activities were $1.6 million
and $1.1 million, respectively, for the six months ended June 30, 2000. Capital
expenditures totaled $1.6 million in the six months ended June 30, 2000,
primarily for office and technology-related expenditures. Application of the
various DMS operating practices requires investment in existing operating
centers. Management presently anticipates that such additional capital
expenditures will total $7.0 million over the next two years, including $3.5
million of computer equipment, $2.5 million of communications equipment, and
$1.0 million of leasehold improvements. However, no assurance can be made with
respect to the actual timing and amount of such expenditures.
Senior Credit Facility
On April 8, 1999, the Company entered into a definitive Amended and Restated
Credit Agreement with NationsBank N.A. and a syndicate of senior lenders (the
"Credit Agreement"). The Credit Agreement provided for a revolving loan
commitment of $78.4 million, which included a sub-limit of $3.9 million for
existing standby letters of credit. The revolving loan commitment is reduced by
the amount of monthly principal repayments. Pursuant to the Second Amendment to
the Credit Agreement dated March 30, 2000, all amounts drawn under the line of
credit must be repaid on May 31, 2001, with minimum principal payments of
$500,000 for January 2000, $150,000 per month for April 2000 through November
2000, and $300,000 per month from December 2000 through May 2001. 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 $15.0 million, by December
31, 2000 (the "Capital Event Requirement"). As of June 30, 2000 the Company was
in default of certain financial covenants described in the Credit Agreement. On
July 26, 2000, the senior lenders agreed to waive the covenants in default for
May and June 2000 and extended the expiration date of the Credit Agreement to
August 31, 2001.
Outstanding principal balances under the line of credit bear interest at
increments between 1.75% and 4.00% over the LIBOR rate, depending on the
Company's ratio of Funded Debt to trailing quarter annualized EBITDA (as defined
in the Credit Agreement). The pricing level at June 30, 2000 was LIBOR + 3.75%
(30-Day LIBOR at June 30, 2000 was 6.68%). Borrowings under the line of credit
are collateralized by a first lien on all of the assets of the Company,
including the shares of common stock of certain of the Company's subsidiaries.
Other financial covenants include: (i) maintenance of a positive monthly pre-tax
income on a consolidated basis (adjusted for certain non-cash gains and losses),
(ii) a maximum total debt to EBITDA ratio, (iii) maintenance of a collateral
coverage ratio, and (iv) a minimum quarterly interest coverage ratio, defined as
EBITDA as a ratio to cash interest expense. The Credit Agreement prohibits (i)
liens, pledges and guarantees that can be granted by the Company, (ii) the
declaration or payment of cash dividends, and (iii) the sale of stock of the
Company's subsidiaries. The Credit Agreement
13
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, it would look to renegotiate or
refinance the debt at probable 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. The Company believes that cash flow from
operations will be sufficient to fund the Company's operations and the
acquisition-related notes payable repayment schedule. The Company's ability to
continue as a going concern is dependent upon, i) achieving and maintaining cash
flow from operations sufficient to satisfy its current obligations, and ii)
complying with the financial and other covenants set forth in the Credit
Agreement as amended by the Second Amendment to the Credit Agreement dated March
30, 2000. Given the current Credit Agreement restrictions, the Company is
unlikely to pursue further acquisition opportunities during the next twelve to
eighteen months.
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.
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 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.
Factors Related to Our Financial Condition. DMS is highly leveraged. This
substantial indebtedness may severely limit cash flow available for our
operations and could adversely affect our ability to service debt or obtain
additional financing if necessary. As of June 30, 2000, DMS had $73.7 million
outstanding under its credit agreement. The credit agreement
14
requires repayment of all outstanding indebtedness on August 31, 2001 and the
payment each month of [$150,000 through November 2000 and $300,000 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 $15.0 million, by
December 31, 2000. DMS was in default of certain of the financial covenants and
obtained a waiver of the covenants in default for May and June 2000 on July 26,
2000. If DMS is unable to meet the terms of the financial covenants or the other
covenants in the future, a default could result under the credit agreement. A
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 upon the expiration of 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 upon the expiration of the
credit agreement.
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 $0.8 million based upon the amount of the Company's variable rate
debt outstanding at June 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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders.
The annual stockholders meeting was held on June 15, 2000. Holders on the record
date for the annual meeting of 12,316,145 shares of the Common Stock were
entitled to cast one vote per share on each matter presented at the meeting. The
agenda items received the following vote:
1. Election of Directors. The nominee for Director were elected pursuant to the
following vote:
Nominee For Authority Withheld
------- --- ------------------
Anne Smyth 10,304,955 152,374
H. Steve Swink 10,301,453 155,876
2. Ratification of the appointment of the Company's independent accountants for
the fiscal year ending December 31, 2000. The appointment was ratified by the
following vote:
15
For Against Abstain
--- ------- -------
10,409,859 30,095 17,375
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Employment Agreement for Douglas A. Roth, dated May 15, 2000
27.1 Financial date schedule
99.1 First Amendment to the Credit Agreement
99.2 Second Amendment to the Credit Agreement
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: August 2, 2000 By: /s/ Douglas A. Roth
-------------------------------------
Douglas A. Roth
Chief Financial Officer
16
INDEX TO EXHIBITS
Exhibit
Number Description
10.1 Employment Agreement for Douglas A. Roth, dated May 15, 2000
27.1 Financial data schedule
99.1 First Amendment to the Credit Agreement
99.2 Second Amendment to the Credit Agreement
17