As filed with the Securities and Exchange Commission on November 10, 1997.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DISPATCH MANAGEMENT SERVICES CORP.
(Exact name of registrant as specified in its charter)
Delaware 4215 13-3967426
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
DISPATCH MANAGEMENT SERVICES CORP.
65 West 36th Street
New York, New York 10018
(212) 268-2910
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Linda M. Jenkinson
Chief Executive Officer
DISPATCH MANAGEMENT SERVICES CORP.
65 West 36th Street
New York, New York 10018
(212) 268-2910
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Bruce S. Mendelsohn, Esq. Bruce E. Macdonough, Esq.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. GREENBERG TRAURIG HOFFMAN LIPOFF
1333 New Hampshire Avenue, N.W. ROSEN & QUENTEL, P.A.
Suite 400 1221 Brickell Avenue
Washington, D.C. 20036 Miami, Florida 33131
(202) 887-4000 (305) 579-0500
Approximate date of commencement of proposed sale of securities to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
If this Form is a post-effective amendment filed pursuant to 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
===============================================================
Proposed maximum Amount of
Title of each class aggregate offering registration fee
of securities to be price
registered
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Common Stock, $0.01
par value per share $80,500,000 $24,394
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(1) Estimated solely for purpose of calculating the registration fee pursuant
to Rule 457(o).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act, or until the Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawful
prior to the registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION -- DATED NOVEMBER 10, 1997
PROSPECTUS
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[_______] Shares
Dispatch Management Services Corp.
Common Stock
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All of the ____ shares of common stock, par value $0.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by Dispatch Management
Services Corp. (the "Company").
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price for the Common
Stock will be between $___ and $___ per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
The Company has applied for inclusion of the Common Stock in The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol "DMSC."
See "Risk Factors" on pages 9 to 16 for a discussion of certain material factors
that should be considered in connection with an investment in the Common Stock
offered hereby.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
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Per Share ......... $ $ $
Total(3) .......... $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$_____________.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to ____________ additional shares of Common Stock on
the same terms and conditions as set forth above. If all such additional
shares are purchased by the Underwriters, the total Price to Public will
be $____, the total Underwriting Discounts and Commissions will be $______
and the total Proceeds to Company will be $_____. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made at the office of
Prudential Securities Incorporated, One New York Plaza, New York, New York, on
or about ________________, 1997.
Prudential Securities Incorporated
____________, 1997
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
related notes appearing elsewhere in the Prospectus. Unless otherwise indicated,
all share, per share and financial information in the Prospectus: (i) have been
adjusted to give effect to the Combinations; and (ii) assumes that the
Underwriters' over-allotment option has not been exercised.
Simultaneously with and as a condition to the closing of the Offering made
by this prospectus (the "Prospectus"), the Company will acquire, in separate
combination transactions (the "Combinations"), in exchange for cash or shares of
its Common Stock or a combination of both, 35 urgent, on-demand, point-to-point
courier firms and one software firm (each, together with one software firm
previously acquired by the Company a "Founding Company", and collectively, the
"Founding Companies"). Unless otherwise indicated, all references to the
"Company" and "DMS" herein mean Dispatch Management Services Corp., its
subsidiaries and the Founding Companies. For more information about the
Combinations, see "The Company."
The Company
Dispatch Management Services Corp. has been recently formed to create one
of the largest providers of urgent, on-demand point-to-point ("Point-to-Point")
delivery services in the world. The Company focuses on Point-to-Point delivery
by foot, bicycle, motorcycle, car and truck and operates in 16 of the largest
metropolitan markets in the United States as well as in London, U.K. and
Wellington, New Zealand. The Company believes that it has the largest market
share for Point-to-Point delivery services in each of London, New York City, San
Francisco, Washington, D.C., Seattle and Denver. The Company also believes that
it is the only courier firm focused exclusively on consolidating the highly
fragmented Point-to-Point delivery industry. The Company intends to become the
largest consolidator focused on this market. The Company's pro forma combined
revenues for the year ended December 31, 1996 and the six months ended June 30,
1997 were $125.6 million and $66.6 million, respectively.
Management believes that the Company's distinctive operating methodology
(the "DMS Model") significantly differentiates it from both local market
competitors and other large, same-day delivery service providers who compete in
the Point-to-Point delivery services market on a limited basis. The DMS Model is
designed to reduce operating complexities inherent in the Point-to-Point
delivery industry and allows for both significant growth and increased
profitability. Key elements of the DMS Model include: (i) restructuring the
Company's courier operations into three distinct functions relating to dispatch,
road management and marketing management; (ii) utilizing proprietary software to
manage order entry and delivery completion, on-time performance and transaction
processing; (iii) operating multiple brands in local markets in order to target
specific customers through individual brand identities and capitalize on niche
marketing opportunities; (iv) empowering the courier fleet, rather than
dispatchers, to determine optimal use of road resources ("Free Call Dispatch");
and (v) incentivizing the Company's workforce in each of the three functions to
maximize operating efficiency and profitability. Management has chosen to focus
on the Point-to-Point delivery business because of: (i) the customers'
requirements for immediate service and responsiveness, which management believes
enables the Company to distinguish the DMS Model from the operating methods
employed by its competitors; (ii) the Company's ability to charge premium
pricing for guaranteed, on-time delivery; and (iii) the lack of a focused
national or international consolidator.
The Company believes that the DMS Model provides it with significant
competitive advantages, including the ability to provide higher levels of
customer service and to guarantee the delivery of time-critical parcels in as
little as 15 minutes. The Company also believes that implementation of the DMS
Model creates an entrepreneurial environment which facilitates increased
personnel utilization, lower transaction processing costs as a percentage of
revenue and increased profitability. In addition, the Company believes the
resulting reduction of operating
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2
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complexity allows the Company to substantially increase the number of
transactions the Company is able to process with minimal incremental cost.
The Company's founders and senior executives have significant experience
operating Point-to-Point courier companies or consolidating back-office
operations of transaction-oriented Fortune 100 companies. The Company's founder
created the DMS Model in 1991. Since 1994, the Company's management team has
introduced certain components of the DMS Model and has refined the DMS Model
through licensing arrangements with a number of courier firms, including 19
Founding Companies in 14 of the 16 markets in which the Company will operate
subsequent to the Offering. These companies collectively represented 18.9% of
the Company's pro forma combined revenues in 1996. The Company's founders and
management team have developed and have begun implementing a conversion and
integration plan with each of the Founding Companies in order to expedite the
full conversion to the DMS Model.
The Company's growth strategy is intended to increase revenue and
profitability by increasing market penetration in existing markets and expanding
into new markets. A significant portion of the Company's growth strategy is to
acquire additional brands in existing markets. The Company believes that it will
be able to achieve significant operating efficiencies by converting acquired
companies to the DMS Model and consolidating their operations into existing DMS
operations. The Company intends to further develop its relationships with
existing clients and to expand its client base by (i) niche marketing the
Company's services through multiple brands in each market and (ii) providing
enhanced services not currently provided to customers, such as guaranteed,
on-time delivery. The Company intends to enter new markets by acquiring
companies which on a combined or stand-alone basis will make the Company the
largest or second largest provider of Point-to-Point delivery services in such
market. The Company also intends to expand its 1-800-COURIER(TM) network, which
currently is operating in seven markets, and its 1-800 DELIVER(TM) brand name to
develop a premium branded national accounts program.
The following table lists the Founding Companies and sets forth their
revenues for the twelve months ended December 31, 1996:
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Unaudited
Pro Forma Combined Revenues
for 12 Months Ended
December 31, 1996
Brand Name (dollars in thousands)
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London, U.K
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West One $24,148
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Security Despatch 9,794
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New York Metro Area
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Earlybird Courier 13,189
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Atlantic Freight 8,728
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Bullit Courier 7,696
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Eveready Express 2,607
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San Francisco
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Aero Delivery 10,998
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S-Car-Go Courier 1,155
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Zap Courier 941
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Battery Point 732
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Studebaker 342
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Minneapolis/Phoenix
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1 800 COURIER - Minneapolis/Phoenix 8,536
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Washington, DC
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Washington Express 5,800
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Rocket Courier 394
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AFS Courier 518
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3
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Pro Forma Combined Revenues
for 12 Months Ended
December 31, 1996
(dollars in thousands)
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Atlanta
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MLQ Express 5,310
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Denver
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Kangaroo Express 2,650
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1 800 COURIER-Denver 1,247
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Los Angeles
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National Messenger 2,413
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1 800 COURIER - L.A.X 1,212
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Houston
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A&W Couriers 1,560
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Houston Flash 1,201
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Boston
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1 800 COURIER- Boston 1,343
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1 800 COURIER- Hollis, New Hampshire 1,022
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Time Couriers 0
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Seattle
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Fleetfoot Messenger 2,172
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Jet City 135
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Dallas
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Striders Courier 1,014
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United Messenger 738
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Detroit
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Express Messenger 1,612
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Wellington, New Zealand
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KiwiCorp 1,552
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Portland
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1 800 COURIER - Portland 1,919
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Chicago
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Deadline Express 1,177
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Philadelphia
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Time Cycle 600
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Software Companies
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Fleetway Systems 1,092
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Kiwi Express 23
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Total $125,570
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4
The Offering
Common Stock Offered by the Company ...................... _________ shares
Common Stock to be issued to Founding Companies
in the Combinations ................................ _________ shares (1)
Common Stock held by Existing Shareholders of the
Company ............................................ _________ shares (1)
Common Stock to be Outstanding after the Offering ........ _________ shares (2)
Use of Proceeds .......................................... To pay the cash
portion of the
purchase price
for the Founding
Companies and for
general corporate
purposes,
including future
acquisitions. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol ................... DMSC
(1) Assumes an initial public offering price of $___ per share at the
mid-point of the proposed offering range. The Company will issue Common
Stock to the Founding Companies valued at $43.0 million. Accordingly, if
the initial public offering price is higher than $___ per share, the
number of shares to be issued in the Combinations will be reduced and the
existing shareholders will hold a greater percentage of the Company's
outstanding Common Stock subsequent to the Offering. Conversely if the
initial public offering price is less than $___ per share, the number of
shares to be issued in the Combinations will be increased and the existing
shareholders will hold a lower percentage of the Company's outstanding
Common Stock subsequent to the Offering. See "The Company -- The
Combinations."
(2) Excludes _____ shares of Common Stock reserved for issuance under the
Company's Stock Option Plan. The Company expects to issue options to
acquire ______ shares of Common Stock to certain members of management at
the initial public offering price which will vest in equal increments over
a five-year period beginning immediately following this Offering.
Risk Factors
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the impact to investors from various
events that could adversely affect Company's business. See "Risk Factors."
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5
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Summary Pro Forma Combined Financial Data
(in thousands, except share and per share data)
The Company has been identified as the "accounting acquiror" in connection
with the Combinations. The following unaudited summary pro forma statement of
operations data for the Company have been adjusted to give effect to (i) the
consummation of the Combinations and (ii) certain pro forma adjustments to the
historical financial statements as described in the notes below. The following
unaudited summary pro forma combined balance sheet data for the Company have
been adjusted to give effect to (i) the consummation of the Combinations and
(ii) the consummation of the Offering and the application of the net proceeds
therefrom. The summary pro forma data are not necessarily indicative of the
Company's operating results or financial position that might have occurred had
the events described above been consummated at the beginning of the period and
should not be construed as representative of future operating results or
financial position. The summary pro forma combined financial data should be read
in conjunction with the Unaudited Pro Forma Combined Financial Statements and
the related notes thereto and the historical financial statements of the
Founding Companies and the related notes thereto included elsewhere in the
Prospectus.
Pro Forma
---------------------------------------
Twelve
Months Ended Six Months Ended
December 31, 1996 June 30,
----------------- ----------------
1996 1997
---- ----
Statement of Operations Data (1):
Revenues $125,570 $60,981 $66,552
Cost of revenues 76,845 37,137 41,021
-------- ------- -------
Gross profit 48,725 23,844 25,531
Sales and marketing expenses 7,012 3,570 3,639
General and administrative expenses (2) 10,145 5,000 5,702
Other operating expenses 21,624 10,457 10,606
Depreciation and amortization (3) 3,952 1,954 2,161
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Operating income 5,992 2,863 3,423
Interest and other expense, net 1,345 606 525
-------- ------- -------
Income before income taxes 4,647 2,257 2,898
Provision for income taxes (4) 2,512 1,231 1,488
-------- ------- -------
Net income $ 2,135 $ 1,026 $ 1,410
======== ======= =======
Net income per share $ $ $
Shares used in computing
pro forma net income per
share (5)
As of June 30, 1997
--------------------------------
Pro Forma Pro Forma
Combined (6) As Adjusted (7)
------------ ---------------
Balance Sheet Data:
Working capital (deficit) $(39,213)(8) $ 4,754
Total assets 97,664 109,588
Long term debt, net of current maturities 3,437 --
Stockholder's equity 31,641 91,363
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(Footnotes begin on next page)
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7
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(1) The pro forma combined statement of operations data assumes that the
Combinations and the disposition of a business segment at one of the
Founding Companies occurred on January 1, 1996.
(2) The pro forma combined statement of operations data reflect pro forma
reductions in (i) salaries, bonuses and benefits to the owners of the
Founding Companies (the "Compensation Differential") aggregating
approximately $2.1 million, $1.1 million and $810,000, and (ii) royalty
payments made by certain Founding Companies related to franchise
agreements which will be terminated with the closing of the Combinations,
for the year ended December 31, 1996 and the six-month periods ended June
30, 1996 and 1997, respectively.
(3) Primarily consists of amortization of goodwill to be recorded as a result
of the Combinations computed on the basis described in the Note 3 of Notes
to the Unaudited Pro Forma Combined Financial Statements.
(4) Assumes the Company is subject to a corporate income tax rate of 40%. The
higher resulting effective tax rate is due to the amortization of certain
goodwill expenses which are not tax deductible.
(5) Assumes an initial per share offering price of $____ and includes: (i)
_________ shares to be issued to owners of certain of the Founding
Companies; (ii) _________ shares held by the existing shareholders of the
Company; (iii) the _________ shares required to be sold in the Offering to
pay the cash portion of the Combination consideration and to pay expenses
associated with this Offering and the Combinations; and ____ shares
related to the dilution attributable to options and warrants granted with
an exercise price below the initial public offering price, in accordance
with the treasury stock method.
(6) The pro forma combined balance sheet data assume that the Combinations
were consummated on June 30, 1997.
(7) Adjusted for the sale of the ________ shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(8) Reflects $40.6 million of cash consideration due to certain owners of the
Founding Companies pursuant to the Combinations and excludes $12.3 million
subject to an earnout. See "The Company - The Combinations."
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8
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information contained in the Prospectus,
in connection with an investment in the shares of Common Stock offered hereby.
The Prospectus contains forward-looking statements. The words
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"will," "could," "may" and similar expressions are intended to identify
forward-looking statements. These statements include information regarding
future net cash flows. Such statements reflect the Company's current views with
respect to future events and financial performance and involves certain risks
and uncertainties, including without limitation the risks described below in
"Risk Factors." Should one or more of these risks or uncertainties occur, or
should underlying assumptions prove incorrect, actual results may vary
materially and adversely from those anticipated, believed, estimated or
otherwise indicated.
Risks Relating to Conversion to the DMS Model. None of the Founding
Companies has utilized every aspect of the DMS Model. Subsequent to the
Offering, the Company intends to convert the operations of the Founding
Companies, and of future acquisitions, to the DMS Model to the extent feasible.
The process of converting an existing Point-to-Point courier operation to the
DMS Model involves the implementation of the Free Call Dispatch system as well
as the integration of new software systems, pricing structures, billing methods,
personnel utilization practices and data standardization. Changes in the pricing
structures and billing methods could result in the loss of customers. The
process of conversion in a particular market may involve unforeseen
difficulties, including delays in the consolidation of facilities, complications
and expenses in implementing the new operating software system, or the loss of
customers or key operating personnel, any of which can cause substantial delays
to the conversion process in such particular market and may have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, Brand Managers, as defined, are expected to have
substantial authority with respect to the continuing operation of the Founding
Companies subsequent to the Offering. There are significant limitations on the
Company's ability to terminate such Brand Managers. Additionally, the timing of
any acquisitions of additional Point-to-Point courier firms and their respective
conversion to the DMS Model may have a significant impact on the Company's
financial results, particularly in quarters immediately following such
acquisitions. Many of the key elements of the DMS Model have been described in
various public forums, such as trade shows and industry publications, and also
have been made available to companies that are or have been licensees of the
Company but are not a Founding Company. Although the software used in the DMS
Model is proprietary, certain other key elements of the DMS Model cannot be
protected by patents or trademarks. Therefore, there can be no assurance that
other Point-to-Point courier companies will not be able to effectively replicate
the DMS Model and implement it more effectively than the Company and at a lower
cost. See "Business--The DMS Model."
Absence of Combined Operating History; Risks of Integration. The Company
was founded in September 1997, has conducted no operations other than in
connection with the Offering and the Combinations, and has generated no revenues
to date other than receipt of licensing fees. Although the Company has entered
into agreements to acquire the Founding Companies (other than one software
company that was previously acquired) simultaneously with and as a condition to
the closing of the Offering, the Company and the Founding Companies operate as
separate, independent businesses. Consequently, the historical and pro forma
financial information contained herein may not be indicative of the Company's
financial condition and historical or future operating results. See "The
Company" and "Certain Transactions."
The process of integrating acquired businesses often involves unforeseen
difficulties and may require a disproportionate amount of the Company's
financial and other resources, including management time. The success of the
Company will depend, in part, on the extent to which the Company is able to
institute and centralize accounting and other administrative functions such as
billing, collections and cash management, implement financial controls,
eliminate the unnecessary duplication of other functions and otherwise integrate
the Founding
9
Companies, and such additional businesses the Company may acquire in the future,
into a cohesive, efficient enterprise. The Company may experience delays,
complications and unanticipated expenses in implementing, integrating and
operating such systems, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company's founders or senior management group will be able
to successfully integrate, profitably manage or achieve anticipated cost savings
from the combined operations of the Founding Companies or implement the
Company's business, internal and acquisition growth strategies subsequent to the
Offering. The inability of the Company to successfully integrate the Founding
Companies would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Acquisition
Strategy" and "Management."
Management of Growth. The Company expects to expend significant time and
effort in expanding its existing businesses and identifying, acquiring and
integrating acquisitions. There can be no assurance that the Company's
management and financial reporting systems, procedures and controls will be
adequate to support the Company's operations as they expand. Any future growth
also will impose significant added responsibilities on members of senior
management, including the need to identify, recruit and integrate additional
management and employees. There can be no assurance that such additional
management and employees will be identified and retained by the Company. To the
extent that the Company is unable to manage its growth efficiently and
effectively, or is unable to attract and retain additional qualified personnel,
the Company's business, financial condition and results of operations could be
materially adversely effected. See "Business -- Internal Growth Strategy" and
"Management."
Risks Relating to the Company's Acquisition Strategy. One of the Company's
primary growth strategies is to increase its revenues and profitability and
expand the markets it serves through the acquisition of additional
Point-to-Point courier businesses. Several large, national publicly traded
companies have begun to consolidate the delivery industry through the
acquisition of independent Point-to-Point courier companies. As a result,
competition for acquisition candidates is intense and there can be no assurance
that the Company will be able to compete effectively for acquisition candidates
on terms deemed acceptable to the Company. There also can be no assurance that
the Company will be able to successfully convert acquired businesses to the DMS
Model and integrate such businesses into the Company without substantial costs,
delays or other operational or financial problems. In addition, there can be no
assurance that companies acquired in the future either will be beneficial to the
successful implementation of the Company's overall strategy or will ultimately
produce returns that justify the investment therein, or that the Company will be
successful in achieving meaningful economies of scale through the acquisitions
thereof. Further, acquisitions involve a number of special risks, including
possible adverse effects on the Company's operating results and the timing of
those results, diversion of management's attention, dependence on retention,
hiring and training of key personnel, risks associated with unanticipated
problems or legal liabilities, and the realization of intangible assets, some or
all of which could have a material adverse effect on the Company's business,
financial condition and results of operations, particularly in the fiscal
quarters immediately following the consummation of such transactions. Customer
dissatisfaction or performance problems at a single acquired company could also
have an adverse effect on the reputation of the Company. In addition, there can
be no assurance that the Founding Companies or other Point-to-Point courier
companies acquired in the future will achieve the anticipated level of revenues
and earnings. To the extent that the Company is unable to acquire additional
Point-to-Point courier firms or integrate such businesses successfully, the
Company's ability to expand its operations and increase its revenues and
earnings to the degree desired would be reduced significantly.
Factors Affecting Internal Growth. Certain of the Founding Companies have
individually experienced significant revenue and earnings growth over the past
few years. There can be no assurance that these Founding Companies will continue
to experience internal growth comparable to these levels, if at all. From time
to time, certain of the Founding Companies have been unable to hire and train as
many couriers, operating and sales personnel as necessary to meet the increasing
demands of these businesses. Factors affecting the ability of each of these
Founding Companies to experience continued internal growth includes, but are not
limited to, the continued relationships with existing customers, the ability to
expand the customer base, the ability to recruit and retain
10
qualified couriers, operating and sales personnel, continued access to capital
and the ability to cross-sell services between the Founding Companies. See
"Business -- Internal Growth Strategy."
Need for Additional Financing. The Company currently intends to finance
future acquisitions by using a combination of shares of its Common Stock and
cash. In the event that the Common Stock of the Company does not maintain a
sufficient market value, or potential acquisition candidates are unwilling to
accept the Company's Common Stock as part of or all of the consideration to be
paid for their business, the Company may be required to utilize its cash
resources, if available, to maintain its acquisition program. If the Company has
insufficient cash resources to pursue acquisitions, its growth could be limited
unless it is able to obtain additional capital through debt or equity financing.
There can be no assurance that the Company will be able to obtain such financing
if and when it is needed or that, if available, such financing can be obtained
on terms the Company deems acceptable. The inability to obtain such financing
could negatively impact the Company's acquisition program and have a resulting
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company intends to seek a line of credit,
there can be no assurance that the Company will be able to obtain such line of
credit in such amounts and on terms the Company deems acceptable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Pro Forma Combined Liquidity and Capital Resources."
Risks of RMS. Under the DMS Model, all road operations will be performed
by a Road Management Center (an "RMS Center"). All couriers will be employees
of, or independent contractors with, an RMS Center. Each RMS Center is owned and
managed by persons other than the founders, management or major shareholders of
the Company. The relationship between each RMS Center and the Company is
governed by contractual arrangements which permit each RMS Center to provide
services to other courier firms that are not owned by or affiliated with the
Company. Although the Company has an option to acquire control of the RMS
Centers (which results in the consolidation of the RMS Center with the Company
for financial reporting purposes), the Company may not be able to exercise the
same degree of control over the couriers and over road operations as did the
Founding Companies. Moreover, there can be no assurance that the Company will
not be deemed to be responsible for the liabilities of the couriers or the RMS
Center, such as liabilities for accidents, loss of documents or taxes. The RMS
Centers have never been operated on this large a scale so there can be no
assurance that the RMS Centers will be able to efficiently handle the operation
of delivery services on a national scale. Failure of the RMS Centers to succeed
in operating the delivery services on a national scale may have a material
adverse impact on the Company's business, financial condition and results of
operations.
Certain Tax Matters Related to Independent Contractors. Subsequent to the
Offering, a significant number of the couriers utilized by the Company and all
Brand Managers will be independent contractors and employees. From time to time,
federal and state taxing authorities have sought to assert that independent
contractors in the Point-to-Point delivery industry, including those utilized by
the Company, are employees of the Company, rather than independent contractors.
In addition, the Internal Revenue Service has also asserted (including against
one Founding Company) that reimbursements paid to owner-operator employees for
automobile allowances constitute additional compensation, rather than payments
made pursuant to a plan or a vehicle rental arrangement. See Note 3 to the
financial statements of Aero Special Delivery Services, Inc. The Company does
not pay or withhold any federal or state employment tax with respect to or on
behalf of independent contractors. The Company believes that the independent
contractors utilized by the Company are not employees of the Company under
existing interpretations of federal and state laws. However, there can be no
assurance that federal and state authorities will not challenge this position,
or that other laws or regulations, including tax laws, or interpretations
thereof, will not change. The Company expects to enter into agreements with one
or more RMS Centers in each metropolitan market the Company serves to
coordinate, manage and employ or contract with couriers. The Founding Companies
currently employ or contract with most of these couriers directly. If, as a
result of any of the foregoing, the Company is required to pay for and
administer added benefits to independent contractors, the Company's operating
costs would increase. In addition, the Company could become responsible for
certain past and future employment taxes. Additionally, if the Company is
required to pay back-up withholding
11
taxes with respect to amounts previously paid to such persons, it may be
required to pay penalties. Any of the foregoing circumstances could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- The DMS Model" and "Employees and
Independent Owners/Contractors."
Limitations on Access to Radio Channels. The Company relies to a
significant extent on the use of two-way radio channels to communicate with its
courier fleet. Such radio channels are made available, on a limited basis, by
local government authorities and the Federal Communications Commission.
Accordingly, providers of the transmission networks for the radio channels may
have the ability to restrict, or substantially increase the costs with respect
to, the Company's use or access to the radio channels. The Company is
particularly susceptible to limitations on access to radio channels in the
metropolitan New York City market, where the Company will be required to
increase the number of radio channels to which it has access in order to fully
implement the DMS Model in that market. The Company may, at its own expense, be
required to incur substantial costs to obtain, build or maintain its own
transmission networks in the event that third party owners of the current
transmission networks restrict or otherwise obstruct the Company's access to
radio channels. Any increases in the costs of radio transmission, obstruction of
current radio channel service or any need for the Company to build its own
transmission networks could severely inhibit the Company's ability to deliver
Point-to-Point delivery services and have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with the Point-to-Point Delivery Industry; General
Economic Conditions. The Company's revenues and earnings are especially
sensitive to events that affect the delivery services industry, including
extreme weather conditions, economic factors affecting the Company's significant
customers, increases in fuel prices and shortages of or disputes with labor, any
of which could result in the Company's inability to service its clients
effectively or the ability of the Company to profitably manage its operations.
In addition, demand for the Company's services may be negatively impacted by
downturns in the level of general economic activity and employment in the United
States or the U.K. The development and increased popularity of facsimile
machines and electronic mail via the Internet has recently reduced the demand
for certain types of Point-to-Point delivery services, including those offered
by the Company. As a result, Point-to-Point courier firms are increasingly
dependent upon delivery requests for items that are unable to be delivered via
alternative methods. There can be no assurance that similar industry-wide
developments will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Effect of Potential Fluctuations in Quarterly Operating Results. The
Company may experience significant quarter to quarter fluctuations in its
results of operations. Quarterly results of operations may fluctuate as a result
of a variety of factors including, but not limited to, the timing of the
integration of the Founding Companies and other 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 period to period comparisons of its results of operations are not
necessarily meaningful or indicative of the results that the Company may achieve
in any subsequent quarter or full year. Such quarterly fluctuations may result
in volatility in the market price of the Common Stock of the Company, and it is
possible that in future quarters the Company's results of operations could be
below the expectations of the public market. Such an event could have a material
adverse effect on the market price of the Common Stock of the Company. Several
of the Founding Companies recorded a net loss for the six months ended June 30,
1997. No assurance can be given that these Founding Companies will become
profitable in the future or that their respective financial performance will be
accretive to the Company's earnings.
Claims Exposure. The Company is exposed to claims for personal injury,
death and property damage as a result of automobile, bicycle and other accidents
involving its employees and independent contractors. The Company may also be
subject to claims resulting from the non-delivery or delayed delivery of
packages, many of which claims could be significant because of the unique or
time sensitive nature of the deliveries. The Company intends to carry liability
insurance and independent contractors are required to maintain the minimum
amounts of
12
liability insurance required by state law. However, there can be no assurance
that claims will not exceed the amount of coverage. In addition, the Company's
increased visibility and financial strength as a public company may create
additional claims exposure. If the Company were to experience a material
increase in the frequency or severity of accidents, liability claims, workers'
compensation claims or unfavorable resolution of claims, the Company's insurance
costs could significantly increase and operating results could be negatively
affected. In addition, future claims against the Company or one of the Founding
Companies could negatively affect the Company's reputation and could have a
correspondingly material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Technology. The Company's business is dependent upon a
number of different information and telecommunication technologies to operate
the DMS Model, manage a high volume of inbound and outbound calls and process
transactions accurately and on a timely basis. Any impairment of the Company's
ability to process transactions on an accurate and timely basis could result in
the loss of customers and diminish the reputation of the Company.
Currently, many of the Founding Companies operate on separate computer and
telephone systems, several of which utilize different technologies. There can be
no assurance that the contemplated integration of these systems and conversion
to the Company's proprietary software will be successful or completed on a
timely basis or without unexpected costs. There can also be no assurance that
the Company will be able to continue to design, develop and refine its computer
systems and software on a cost efficient basis, whether due to the loss of
employees or otherwise. Any of the foregoing would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company utilizes computer hardware and operating systems
designed and manufactured by Apple Computer, Inc. ("Apple"). Any material
changes in computer and operating platform technology designed and manufactured
by Apple which is incompatible with the Company's current computer systems, or
the discontinuance of Apple computer hardware or support services, would have a
material adverse effect on the Company's business, financial condition and
results of operations. If the Company decides to change its hardware and
operating systems to a different operating platform technology, there can be no
assurance that the Company will be able to successfully make such a change or
that such new hardware and operating systems will be as effective as the
existing hardware and operating system.
Dependence on Availability of Qualified Courier Personnel. The Company is
dependent upon its ability to attract, train and retain qualified courier
personnel and independent contractors who possess the skills and experience
necessary to meet the needs of its operations. The Company competes in markets
in which unemployment is relatively low and the competition for couriers and
other employees is intense. The Company must continually evaluate, train and
upgrade its pool of available couriers to keep pace with demands for delivery
services. There can be no assurance that qualified courier personnel will
continue to be available in sufficient numbers and on terms acceptable to the
Company. The inability to attract and retain qualified courier personnel would
have a material adverse impact on the Company's business, financial condition
and results of operations. See "Business -- The DMS Model" and "Employees and
Independent Owner/Contractors."
Reliance on Key Personnel. The Company's success is largely dependent on
the efforts and relationships of R. Gregory Kidd, the Company's founder and
Chairman of the Board of Directors, Linda M. Jenkinson, the Company's Chief
Executive Officer, the executive officers and senior managers of the Founding
Companies and Brand Managers. Furthermore, the Company will likely be dependent
on the senior management of any businesses acquired in the future, particularly
the Brand Managers and sales representatives who have on-going relationships
with customers. The loss of the services of any of these individuals could have
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that such individuals will
continue in their present capacity for any particular period of time. The
Company does not intend to obtain key man life insurance covering any of its
executive officers or other members of senior management. However, the Company
has entered into two-year employment contracts with its five executive officers.
In addition, the Company's future success and plans for growth also depend on
the Company's ability to
13
attract, train and retain skilled personnel in all areas of its business. See
"Management," "-Risks of RMS" and "-Dependence on Availability of Qualified
Courier Personnel."
Competition. The market for Point-to-Point delivery services is highly
competitive and has low barriers to entry. Many of the Company's competitors
operate in only one location and may have more experience and brand recognition
than the Company in such local market. In addition, several large, national,
publicly traded companies have begun to consolidate the Point-to-Point delivery
industry through the acquisition of independent Point-to-Point courier
companies. Other companies in the industry compete with the Company not only for
the provision of services but also for acquisition candidates. Some of these
companies have longer operating histories and greater financial resources than
the Company. In addition, other firms involved in segments other than
Point-to-Point delivery services may expand into this market in order to provide
their customers with "one-stop" shopping of delivery and logistics services.
Many of such companies have greater financial resources and brand name
recognition than the Company. There can be no assurance that any of the
foregoing would not have a material adverse effect on the Company's business,
financial condition and results of operations.
Reliance on Key Markets. A significant portion of the Company's revenues
and profitability are attributable to services rendered in the metropolitan
London, New York City and San Francisco markets. Revenues from the London, New
York City and San Francisco markets accounted for 28.60% 24.9% and 12.2%,
respectively, of pro forma combined revenues, during the six months ended June
30, 1997. Therefore, the Company's results of operations are significantly
affected by fluctuations in the general economic and business cycles in these
markets. The Company's reliance on these individual markets makes it susceptible
to risks that it would not otherwise be exposed to if it operated in a more
geographically diverse market. The Company believes that it will be susceptible
to geographic concentration risks for the foreseeable future.
Risk of Business Interruptions and Dependence on Single Facilities in a
Market. The Company believes that its future results of operations will be
dependent in large part on its ability to provide prompt and efficient service
to its customers. Upon conversion of the Company to the DMS Model, the Company's
operations typically will be performed at a single DMS Center for each
respective metropolitan market it services and, therefore, the operation of such
DMS centers are dependent on continuous computer, electrical and telephone
service. As a result, any disruption of the Company's day-to-day operations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Substantial Proceeds from the Offering Payable to Affiliates. The Company
will use a substantial portion of the net proceeds from the Offering to meet its
cash requirements relating to the consummation of the acquisitions of the
Founding Companies. The Company will pay subject to adjustments, approximately
$52.9 million in cash, of which $12.3 million is the Earnout and subject to
possible repayment to the Company from the stockholders of the Founding
Companies. See "The Company - The Combinations." After payment of the cash
portion of the purchase price for the Founding Companies, no assurance can be
given that the remaining net proceeds of the Offering will be sufficient to meet
the Company's requirements for working capital and potential acquisitions. See
"Use of Proceeds" and "Certain Transactions."
Permits and Licensing. The Company's operations are subject to various
state, local and federal regulations that, in many instances, require permits
and licenses. Additionally, some of the Company's operations may involve the
delivery of items subject to more stringent regulation, including hazardous
materials, requiring the Company to obtain additional permits. The failure of
the Company to maintain required permits and licenses, or to comply with
applicable regulations, could result in substantial fines or revocation of the
Company's permits and licenses which could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
delays in obtaining approvals, for the transfer or grant of permits or licenses,
or failure to obtain such approvals could delay or impede the Company's
acquisition program. See "Business -- Regulation and
14
Safety."
Regulatory Compliance. As a public company, the Company will be subject to
continuing compliance with federal securities laws and may also be subject to
increased scrutiny with respect to laws applicable to all businesses, such as
employment, safety and environmental regulations. Certain of the Company's
management have no experience in managing a public company. There can be no
assurance that management will be able to effectively and timely implement
programs and policies that adequately respond to such increased legal and
regulatory compliance requirements.
Foreign Exchange. A significant portion of the Company's operations are
conducted in the U.K. Exchange rate fluctuations between the U.S. dollar and
British pound will result in fluctuations in the amounts relating to the U.K.
currency reported in the Company's consolidated financial statements due to
repatriation of earnings from the U.K. to the United States or translation of
the earnings of the Company's U.K. operations into U.S. dollars for financial
reporting purposes. The Company also conducts operations in New Zealand and
intends to pursue acquisitions in other foreign countries. The Company does not
intend to enter into hedging transactions with respect to its foreign currency
exposure. There can be no assurance that fluctuations in foreign currency
exchange rates will not have a material adverse impact on the Company's
business, financial condition or results of operations.
Development of New Services. The Company believes that its long-term
success depends on its ability to enhance its current services, develop new
services that utilize the DMS Model and address the increasingly sophisticated
needs of its customers. The failure of the Company to develop and introduce
enhancements and new services in a timely and cost-effective manner in response
to changing technologies, customer requirements or increased competition could
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Business - Internal Growth Strategy."
Potential Liability for Breach of Confidentiality. A substantial portion
of the Company's business involves the handling of documents containing
confidential and other sensitive information. There can be no assurance that
unauthorized disclosure will not result in liability to the Company. It is
possible that such liabilities could have a material adverse effect on the
Company's business, financial conditions or results of operations.
Control by Existing Management and Stockholders. After the Offering,
existing shareholders of the Company will beneficially own approximately ____%
of the Company's outstanding Common Stock (approximately _____% assuming that
the Underwriters' over-allotment option is exercised in full). In light of the
foregoing, such persons will have the ability to significantly influence the
election of the Company's directors and the outcome of all other issues
submitted to the Company's shareholders. Such persons, together with the
staggered Board of Directors and the anti-takeover effects of certain provisions
contained in the Delaware General Corporation Law and in the Company's
Certificate of Incorporation and Bylaws (including, without limitation, the
ability of the Board of Directors of the Company to issue shares of Preferred
Stock and to fix the rights and preferences thereof), also may have the effect
of delaying, deferring or preventing an unsolicited change in the control of the
Company, which may adversely affect the market price of the Common Stock or the
ability of shareholders to participate in a transaction in which they might
otherwise receive a premium for their shares. See "Management," "Principal
Stockholders" and "Description of Capital Stock."
Shares Eligible for Future Sale. Upon completion of the Offering, the
Company will have a total of ________________ shares of Common Stock
outstanding. Of these shares, the _____________ shares of Common Stock offered
hereby (_______ shares if the Underwriters' over-allotment options are exercised
in full) will be freely tradeable without restriction or registration under the
Securities Act by persons other than "affiliates" of the Company, as defined
under the Securities Act. The remaining shares of Common Stock outstanding will
be "restricted securities" as that term is defined by Rule 144 as promulgated
under the Securities Act. Upon completion of the Offering, the Company will have
options outstanding to purchase _______________
15
shares of Common Stock. In addition, options for the purchase of _____________
additional shares will remain available for issuance under the Company's 1997
Stock Incentive Plan. See "Management - 1997 Stock Incentive Plan" and "Shares
Eligible for Future Sale."
Under Rule 144 (and subject to the conditions thereof, including volume
limitations), all _____________ restricted shares (______ restricted shares if
the Underwriters' over-allotment options are exercised in full) will become
eligible for sale after the Offering. However, all of such restricted shares are
also subject to lockup restrictions as described below. The holders of these
shares, which include the Company's executive officers, directors and certain
shareholders, have agreed that they will not, without the prior written consent
of the Company, for a period of two years from the consummation of the Offering.
After such two-year period, the foregoing restriction will expire and shares
permitted to be sold under Rule 144 would be eligible for sale. In addition,
such executive officers, directors and certain shareholders have also agreed
that they will not, without the prior written consent of Prudential Securities
Incorporated, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise dispose of or transfer
(or announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other disposition or transfer of) any shares of Common
Stock or any other securities convertible into, or exercisable or exchangeable
for, shares of Common Stock or other similar securities of the Company,
currently beneficially owned or hereafter acquired by such holders for a period
of 180 days from the date of the Prospectus. After such 180-day period, the
foregoing restriction will expire and shares permitted to be sold under Rule 144
would be eligible for sale. The Company and Prudential Securities Incorporated
on behalf of the Underwriters, respectively, may, in their sole discretion, at
any time and without prior notice, release all or any portion of the shares of
Common Stock subject to such agreements to which they are party.
Prior to the Offering, there has been no public market for the Common
Stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Shares Eligible for Future Sale."
No Prior Public Market; Volatility of Stock Price. Prior to the Offering,
there has been no public market for the Common Stock, and there can be no
assurance that an active trading market will develop or continue following the
Offering, or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price for the
Common Stock will be determined by negotiations among the Underwriters based on
several factors, and may not be indicative of the market price for the Common
Stock after the Offering. See "Underwriting." The Company believes that various
factors unrelated to the Company's performance, such as general economic
conditions, changes or volatility in the financial markets and changing market
conditions in the Point-to-Point delivery industry, as well as various factors
related to the Company's performance, such as quarterly or annual variations in
the Company's financial results, could cause the market price of the Common
Stock to fluctuate substantially.
Immediate and Substantial Dilution; Dividend Policy. Purchasers of the
Common Stock offered hereby will experience immediate and substantial dilution
in the pro forma as adjusted net tangible book value per share of Common Stock
from the initial public offering price set forth on the cover of this
Prospectus. Assuming an initial offering price of $_________ per share, such
dilution to new investors will be $________ per share while the pro forma as
adjusted net tangible book value of the shares of Common Stock owned by the
existing shareholders will increase by $_________ per share. See "Dilution."
The Company anticipates that for the foreseeable future, its earnings will
be retained for the operation and expansion of its business and that it will not
pay cash dividends. In addition, the Company anticipates that any credit
facility agreement into which it enters will limit the payment of cash dividends
without the lender's consent. See "Dividend Policy."
16
THE COMPANY
Overview
The Company has been recently formed 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 16 of the largest metropolitan markets in the United States as well
as in London, U.K. and Wellington, New Zealand. The Company believes that it has
the largest market share for Point-to-Point delivery services in each of London,
New York City, San Francisco, Washington, D.C., Seattle and Denver. The Company
also believes that it is the only courier firm focused exclusively on
consolidating the highly fragmented Point-to-Point delivery industry. The
Company intends to become the largest consolidator focused on this market. The
Company's pro forma combined revenues for the year ended December 31, 1996 and
the six months ended June 30, 1997 were $125.6 million and $66.6 million,
respectively.
History
While consulting in New Zealand during the 1980s, R. Gregory Kidd, the
Company's founder and Chairman, observed the use by certain delivery firms of a
Free Call Dispatch operating methodology which enabled couriers, rather than
dispatchers, to decide which deliveries to make and in which order. Mr. Kidd
concluded that firms utilizing Free Call Dispatch were able to achieve higher
levels of customer service than firms where dispatchers generally have absolute
authority in assigning and routing deliveries to the courier fleet ("Command and
Control Dispatch"). Mr. Kidd began to implement the use of the Free Call
Dispatch model on a larger scale and developed a proprietary software system and
operating methodology which would support the model. Mr. Kidd's efforts resulted
in the development of the Company's DMS Model.
The DMS Model was first implemented on a test basis in New Zealand in
1991. The DMS Model was first introduced in the United States in 1994 in four
Founding Companies in San Francisco. Margin improvements were realized by these
firms as a result of a reduction of back-office staff from eleven to five and a
significant increase in courier productivity. Since 1994, certain components of
the DMS Model have been utilized by 19 courier firms in 14 cities, representing
l8.9% of the Company's pro forma combined revenues in 1996.
The Combinations
Between September and November 1997, the Company entered into separate
agreements to acquire the Founding Companies in exchange for cash or Common
Stock or a combination of both. The purpose of the Combinations is to
consolidate the operations of DMS and the Founding Companies into one
corporation. The Combinations will be effective simultaneously with the closing
of the Offering and the Founding Companies, or their investors, will receive an
aggregate of shares of Common Stock (assuming a price to the public in the
Offering of $____________ and that there are no appraisal shares) and an
aggregate of $52.9 million in cash from the net proceeds of the Offering (which
includes $12.3 million subject to earnout provisions). The existing stockholders
of the Company will hold the difference between (i) the ___________ shares of
Common Stock to be outstanding after the Combinations, exclusive of the ______
shares sold in the Offering, are effective (exclusive of the ______ shares to be
sold in the Offering), and (ii) the total number of shares issued to the
Founding Companies or their respective investors. The specific number of shares
of Common Stock to be issued in the Combinations to the Founding Companies or
their investors (the "Stock Consideration") will be determined by dividing $43.0
million by the price to the public in the Offering.
17
The table below illustrates the aggregate number of shares of Common Stock that
will be issued to the Founding Companies and held by the existing stockholders
of the Company in connection with the Combinations if the price to the public
is, alternatively $ ___, $___ or $___.
Number of Shares of Common Stock if the Price to the Public
-----------------------------------------------------------
is:
---
$ $ $
----- ----- -----
Founding Companies
----- ----- -----
----- ----- -----
Existing Stockholders of the Company
----- ----- -----
----- ----- -----
Total after the Combination
(exclusive of the _____ shares of ----- ----- -----
Common Stock sold in the Offering)
===== ===== =====
===== ===== =====
In certain situations, a portion of the cash consideration issued pursuant
to the Combinations will be subject to possible repayment (the "Earnout") by the
former owners of the Founding Companies if the financial results of the Founding
Company fail to meet certain financial targets. The former owners of the
Founding Companies will each give a promissory note to the Company in the
principal amount of the Earnout, which note will be secured by a pledge of the
Stock Consideration received in the respective Combination. Such shares of
Common Stock will be held in escrow for two years. The promissory note will be
forgiven incrementally over the escrow period as the requisite financial targets
are met. Failure to meet those targets will, in effect, result in a reduction of
the cash consideration.
The consideration to be paid for each of the Founding Companies was
determined through arms-length negotiations between the Company and
representatives of each Founding Company.
Certain factors considered by the parties in determining the consideration
to be paid included historical operating results and the future prospects of
each Founding Company.
The consummation of the Combinations is subject to customary conditions
which include, among others, the accuracy of the representations and warranties
of each Founding Company and of the Company on the closing date of the
Combinations, the performance by each Founding Company of all covenants included
in the agreements relating to the Combinations and the nonexistence of a
material adverse change in the business, financial condition and results of
operations of each Founding Company.
In September 1997, Kiwi Express Software, L.L.C. ("Kiwi Express"), founded
by Mr. Kidd and a provider of dispatch software to DMS Centers in the United
States and New Zealand, was merged into the Company. See "Certain Transactions."
Upon consummation of the Offering, the Company also intends to acquire Brookside
Systems and Programming Limited, a U.K. company that conducts business under the
tradename "Fleetway." Fleetway develops and markets software systems principally
to the Point-to-Point delivery industry in the U.K. and currently has software
licensing agreements with over 300 courier firms.
Upon the consummation of the Offering, the Company intends to operate
certain of the brands acquired in the Combinations (each, a "Brand") through
agreements ("Brand Manager Agreement") with former owners (each, a "Brand
Manager"). Each Brand Manager will be responsible for managing his or her Brand
to maximize its
18
revenues and profit margins. The Brand Manager will receive payments according
to a formula based on the "Contribution" (which is defined as total revenue less
certain expenses attributable to the Brands and certain administrative and
corporate overhead allocations). The Contribution Percentage (defined as the
Contribution divided by total revenue of the Brand) between 7.5% and 15% accrues
to the Brand Manager. The Contribution Percentage in excess of 15% accrues to
the Brand Manager and the Company in a proportion of 25% and 75%, respectively.
Payments to each Brand Manager are to be made in a combination of cash and
shares of Common Stock of the Company. The Brand Manager Agreement can be
terminated by the Company, upon approval of the Business Steering Committee
(consisting of the President of the Company and certain Brand Managers), under
certain limited conditions. The Brand Manager has the right to terminate the
Brand Manager Agreement upon six months' written notice. Founding Companies
representing approximately 50% of the Company's revenues for the six months
ended June 30, 1997 will not have Brand Manager Agreements, in which case all
operating income will accrue to the Company.
Pursuant to the agreements entered into in connection with the
Combinations, the stockholders of the Founding Companies have agreed not to
compete with the Company for a two-year period, commencing on the date of
consummation of the Offering for persons who are not Brand Managers and
commencing on the date that all consideration payable under the Combination has
been received for persons who are Brand Mangers.
The Founding Companies
The following table sets forth certain information regarding the Founding
Companies:
=======================================================================================
Acquisition Consideration
=========================
Pro Forma Combined Brand
Revenues for 12 Cash Value of Manager
Months Ended Value(1) Common Agreement
December 31, 1996 Stock
(dollars in thousands)
========================================================================================
London, U.K
- - - - ----------------------------------------------------------------------------------------
West One $ 24,148 $16,613 $ 2,477 No
- - - - ----------------------------------------------------------------------------------------
Security Despatch 9,794 5,923 0 No
- - - - ----------------------------------------------------------------------------------------
New York Metro Area
- - - - ----------------------------------------------------------------------------------------
Earlybird Courier 13,189 12,092 4,649 Yes
- - - - ----------------------------------------------------------------------------------------
Atlantic Freight 8,728 143 4,125 Yes
- - - - ----------------------------------------------------------------------------------------
Bullit Courier 7,696 3,540 3,000 No
- - - - ----------------------------------------------------------------------------------------
San Francisco
- - - - ----------------------------------------------------------------------------------------
Aero Delivery 10,998 2,141 3,730 No
- - - - ----------------------------------------------------------------------------------------
S-Car-Go Courier 1,155 234 638 Yes
- - - - ----------------------------------------------------------------------------------------
Battery Point 732 222 428 Yes
- - - - ----------------------------------------------------------------------------------------
Minneapolis/Phoenix
- - - - ----------------------------------------------------------------------------------------
1 800 COURIER - Minneapolis, Phoenix 8,536 577 4,264 Yes
- - - - ----------------------------------------------------------------------------------------
Washington, DC
- - - - ----------------------------------------------------------------------------------------
Washington Express 5,800 1,176 2,792 Yes
- - - - ----------------------------------------------------------------------------------------
Atlanta
- - - - ----------------------------------------------------------------------------------------
MLQ Express 5,310 4,678 0 No
- - - - ----------------------------------------------------------------------------------------
Denver
- - - - ----------------------------------------------------------------------------------------
Kangaroo Express 2,650 681 1,079 Yes
- - - - ----------------------------------------------------------------------------------------
1 800 COURIER - Denver 1,247 70 774 Yes
- - - - ----------------------------------------------------------------------------------------
Los Angeles
========================================================================================
19
=======================================================================================
Acquisition Consideration
=========================
Pro Forma Combined Brand
Revenues for 12 Cash Value of Manager
Months Ended Value(1) Common Agreement
December 31, 1996 Stock
(dollars in thousands)
========================================================================================
National Messenger 2,413 665 1,210 Yes
- - - - ----------------------------------------------------------------------------------------
1 800 COURIER - L.A.X 1,212 376 450 No
- - - - ----------------------------------------------------------------------------------------
Boston
- - - - ----------------------------------------------------------------------------------------
1 800 COURIER - Boston 1,343 193 636 Yes
- - - - ----------------------------------------------------------------------------------------
Seattle
- - - - ----------------------------------------------------------------------------------------
Fleetfoot Messenger 2,172 0 1,279 Yes
- - - - ----------------------------------------------------------------------------------------
Houston
- - - - ----------------------------------------------------------------------------------------
A&W Couriers 1,560 294 755 Yes
- - - - ----------------------------------------------------------------------------------------
Detroit
- - - - ----------------------------------------------------------------------------------------
Express Messenger 1,612 250 720 Yes
- - - - ----------------------------------------------------------------------------------------
Chicago
- - - - ----------------------------------------------------------------------------------------
Deadline Express 1,177 0 914 Yes
- - - - ----------------------------------------------------------------------------------------
Software Company
- - - - ----------------------------------------------------------------------------------------
Fleetway Systems 1,092 838 2,016 No
- - - - ----------------------------------------------------------------------------------------
Other Founding Companies 13,006 2,251 7,103 No
- - - - ----------------------------------------------------------------------------------------
Total $125,570 $52,957 $43,039
========================================================================================
(1) Includes $12.3 million subject to certain Earnouts. See "-- The
Combinations."
The Company's executive offices are located at Dispatch Management
Services Corp., 65 West 36th Street, New York, New York 10018, and its telephone
number is (212) 268-2910.
20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the _______ shares of
Common Stock offered hereby, after deducting the underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$60.1 million ($69.9 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $____ per
share. Of the net proceeds $52.9 million will be used to pay the cash portion of
the purchase price for the Founding Companies, of which approximately $12.3
million is subject to the Earnout.
Approximately $7.2 million of the proceeds from the Offering will be used
to repay indebtedness of the Company. Approximately $7.2 million of such
indebtedness was incurred by the Founding Companies, bears interest at rates
ranging from __________% to ____________% per annum and matures between
____________, 1997 and ________________________. Approximately $1.0 million of
the indebtedness was incurred by the Company in July 1997 to partially fund
expenses associated with this Offering and the Combinations (the "Bridge Loan").
The Bridge Loan bears interest at 10% per annum and matures on the earlier of
the consummation of the Offering or on January 22, 1999. The parties who
provided the Bridge Loan also received shares of Common Stock, representing a
1.4% interest in the Company after the Offering.
The Company will have approximately $1.9 million in cash as a result of
the Combinations which will be used for working capital and for general
corporate purposes, which are expected to include future acquisitions of
Point-to-Point courier firms. The Company has held preliminary discussions with
a number of such acquisition candidates; however, except for the Combinations,
the Company has no agreement with respect to any acquisition. Pending such uses,
the net proceeds will be invested in short-term, interest-bearing, investment
grade securities.
DIVIDEND POLICY
The Company has never declared or paid any dividends, intends to retain
all of its earnings, if any, to finance the expansion of its business and for
general corporate purposes, including future acquisitions, and does not
anticipate declaring or paying any cash dividends on its Common Stock for the
foreseeable future. In addition, in the event the Company is successful in
obtaining one or more lines of credit, it is likely that any such facility will
include restrictions on the ability of the Company to pay dividends.
21
CAPITALIZATION
The following table sets forth the pro forma combined capitalization of
the Company at June 30, 1997 and as adjusted to give effect to the Offering and
the application of the net proceeds. See "Use of Proceeds." This table should be
read in conjunction with the Pro Forma Combined Financial Statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
June 30, 1997
------------------------
Pro Forma Pro Forma
Combined As Adjusted
-------- -----------
Cash and cash equivalents .......................... $ 1,871 $ 1,871
======== ========
Payable to Founding Companies (1) .................. $ 40,639 $ --
======== ========
Short-term debt and current portion of
long-term debt (2) ............................... 3,722 --
======== ========
Long-term debt, less current maturities (2) ........ $ 3,437 $ --
Stockholders' equity:
Preferred Stock: $0.01 par value, 10,000,000 shares
authorized; none issued or outstanding ......... -- --
-------- --------
Common Stock: $0.01 par value, 100,000,000 shares
authorized; and ____ shares issued and
outstanding, pro forma; _____ shares issued and
outstanding, pro forma as adjusted (3) ......... 29 29
Accumulated paid-in capital ...................... 31,634 91,356
Retained deficit ................................. (22) (22)
-------- --------
Total stockholders' equity ..................... 31,641 91,363
-------- --------
Total capitalization ......................... $ 35,078 $ 91,363
======== ========
- - - - ----------
(1) Excludes $12.3 million paid to certain of the former owners of the
Founding Companies in connection with the Earnout. This amount is subject
to repayment to the Company and is recorded as a note receivable on the
Company's June 30, 1997 pro forma combined balance sheet. See "The Company
- The Combinations."
(2) For a description of the Company's debt, see Notes to Historical Financial
Statements of the Founding Companies included elsewhere in the Prospectus.
(3) Excludes _____ shares of Common Stock reserved for issuance under the
Company's Stock Option Plan of which ______ are expected to be issued
concurrently with the Offering. See "Management - 1997 Stock Incentive
Plan" and "Certain Transactions."
22
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of their
Common Stock from the initial public offering price. The pro forma net tangible
book value of the Company as of _____________, 1997 was $_____________ or
$______ per share of Common Stock. Pro form net tangible book value per share
represents the amount of the Company's tangible net worth divided by the total
number of shares of Common Stock outstanding as of __________, 1997 assuming
that the Combinations had been consummated as of such date. After giving effect
to the sale of _________ shares of Common Stock by the Company in the Offering
(assuming an initial public offering price of $_________ per share) and the
application of the net proceeds therefrom (after deduction of underwriting
discounts and commissions and estimated Offering expenses payable by the
Company), the pro forma net tangible book value of the Company as of
____________, 1997 would have been $________ million or $_______ per share of
Common Stock. This represents an immediate increase in net tangible book value
of $_______ per share to existing shareholders and an immediate dilution of
$________ per share to purchasers of shares in the Offering. The following table
illustrates the per share dilution:
Assumed initial public offering price ........ $
Pro forma net tangible book value before
the Offering ........................... $
Increase in pro forma tangible book
value per share attributable to
new investors ..........................
Pro forma as adjusted net tangible book
value after the Offering ...............
Dilution in pro forma net tangible book -------
value to new investors ................. $
=======
The following table sets forth on a pro forma basis as of ___________,
1997 the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the Company's
existing shareholders (including persons who receive Common Stock pursuant to
the Combinations) and to be paid by new investors in the Offering (assuming an
initial public offering price of $______ per share) and before deduction of
underwriting discounts and commissions and estimated Offering expenses:
Shares Purchased(1) Total Consideration Average
------------------- ------------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing shareholders (2) % $ % $
New investors ............
------ ------- ------ -------
Total .................... % $ %
====== ======= ====== =======
- - - - ----------
(1) Excludes ______ shares of Common Stock reserved for issuance under the
Company's Stock Option Plan of which _____ are expected to be issued
concurrently with the Offering. See "Management - 1997 Stock Incentive
Plan" and "Certain Transactions."
(2) Includes persons who receive Common Stock pursuant to the Combinations.
23
SELECTED PRO FORMA COMBINED FINANCIAL DATA
(in thousands, except share and per share data)
The Company has been identified as the "accounting acquiror" in
connection with the Combinations. The following unaudited summary pro
forma statement of operations data for the Company have been adjusted to
give effect to (i) the consummation of the Combinations and (ii) certain
pro forms adjustments to the historical financial statements as described
in the notes below. The following unaudited summary pro forma combined
balance sheet data for the Company have been adjusted to give effect to
(i) the consummation of the Combinations and (ii) the consummation of the
Offering and the application of the net proceeds therefrom. The summary
pro forma data are not necessarily indicative of the Company's operating
results or financial position that might have occurred had the events
described above been consummated at the beginning of the period and should
not be construed as representative of future operating results or
financial position. The summary pro forms combined financial data should
be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements and the related notes thereto and the historical financial
statements of the Founding Companies and the related notes thereto
included elsewhere in the Prospectus.
Pro Forma
--------------------------------------
Twelve
Months Ended Six Months Ended
December 31, 1996 June 30,
----------------- -----------------
1996 1997
---- ----
Statement of Operations Data (1):
Revenues $125,570 $60,981 $66,552
Cost of revenues 76,845 37,137 41,021
-------- ------- -------
Gross profit 48,725 23,844 25,531
Sales and marketing expenses 7,012 3,570 3,639
General and administrative expenses (2) 10,145 5,000 5,702
Other operating expenses 21,624 10,457 10,606
Depreciation and amortization (3) 3,952 1,954 2,161
-------- ------- -------
Operating income 5,992 2,863 3,423
Interest and other expense, net 1,345 606 525
-------- ------- -------
Income before income taxes 4,647 2,257 2,898
Provision for income taxes (4) 2,512 1,231 1,488
-------- ------- -------
Net income $ 2,135 $ 1,026 $ 1,410
======== ======= =======
Net income per share $ $ $
Shares used in computing
pro forma net income per
share (5)
As of June 30, 1997
-----------------------------
Pro Forma Pro Forma, As
Combined(6) Adjusted(7)
----------- -------------
Balance Sheet Data:
Working capital (deficit) $(39,213)(8) $ 4,754
Total assets 97,664 109,588
Long term debt, net of current maturities 3,437 --
Stockholder's equity 31,641 91,363
- - - - ----------
(Footnotes begin on next page)
24
(1) The pro forma combined statement of operations data assumes that the
Combinations and the disposition of a business segment at one of the
Founding Companies occurred on January 1, 1996.
(2) The pro forma combined statement of operations data reflect pro forma
reductions in (i) salaries, bonuses and benefits to the owners of the
Founding Companies (the "Compensation Differential") aggregating
approximately $2.1 million, $1.1 million and $810,000, and (ii) royalty
payments made by certain Founding Companies related to franchise
agreements which will be terminated with the closing of the Combinations,
for the year ended December 31, 1996 and the six-month periods ended June
30, 1996 and 1997, respectively.
(3) Consists of amortization of goodwill to be recorded as a result of the
Combinations computed on the basis described in the Note 3 of Notes to the
Unaudited Pro Forma Combined Financial Statements.
(4) Assumes the Company is subject to a corporate income tax rate of 40%. The
higher resulting effective tax rate is due to the amortization of certain
goodwill expenses which are not tax deductible.
(5) Assumes an initial per share offering price of $____ and includes: (i)
_________ shares to be issued to owners of certain of the Founding
Companies; (ii) _________ shares held by the existing shareholders of the
Company; (iii) the ________ shares required to be sold in the Offering to
pay the cash portion of the Combination consideration and to pay expenses
associated with this Offering and the Combinations and; __ shares related
to the dilution attributable to options and warrants granted with an
exercise price below the initial public offering price, in accordance with
the treasury stock method.
(6) The pro forma combined balance sheet data assume that the Combinations
were consummated on June 30, 1997.
(7) Adjusted for the sale of the _________ shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(8) Reflects $40.6 million of cash consideration due to certain owners of the
Founding Companies pursuant to the Combinations and excludes $12.3 million
subject to an earnout. See "The Company - The Combinations."
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected Pro
Forma Combined Financial Data," the Unaudited Pro Forma Combined Financial
Statements of the Company and the related Notes thereto and the Founding
Companies' Audited Historical Financial Statements and the related Notes thereto
appearing elsewhere in this Prospectus. A number of statements in this
Prospectus address activities, events or developments which the Company
anticipates may occur in the future, including such matters as the Company's
strategy for acquisition and internal growth and improved profitability,
additional capital expenditures (including the amount and nature thereof),
acquisitions of assets and businesses, industry trends and other such matters.
These statements are based on certain assumptions and analyses made by the
Company in light of its perception of historical trends, current business and
economic conditions and expected future developments, as well as other factors
the Company believes are reasonable or appropriate. However, whether actual
results and developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, including those
set forth in "Risk Factors"; general economic, market or business conditions;
the business opportunities (or lack thereof) that may be presented to and
pursued by the Company; changes in laws or regulations; and other factors, many
of which are beyond the control of the Company. Consequently, there can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized that they will have the
expected consequences to or effects on the Company or its business or
operations.
Introduction
The Company has been recently formed 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 16 of the largest metropolitan markets in the United States as well
as in London, U.K. and Wellington, New Zealand. The Company believes that it has
the largest market share for Point-to-Point delivery services in each of London,
New York City, San Francisco, Washington, D.C., Seattle and Denver. The Company
also believes that it is the only courier firm focused exclusively on
consolidating the highly fragmented Point-to-Point delivery industry. The
Company intends to become the largest consolidator focused on this market. The
Company's pro forma combined revenues for the year ended December 31, 1996 and
the six months ended June 30, 1997 were $125.6 million and $66.6 million,
respectively.
Basis For Presentation
Management does not believe that a period-to-period comparison of the
results of operations of the Founding Companies whose financial statements are
included elsewhere in this Prospectus would be meaningful to prospective
investors. The Founding Companies have been managed as independent private
companies and, as such, their results of operations reflect different corporate
and tax structures which have been influenced, among other things, their
historical levels of owners' compensation. The owners of the Founding Companies
have agreed to certain reductions in their salaries, bonuses and benefits in
connection with the organization of the Company. The Compensation Differentials
for the year ended December 31, 1996 and for the six months ended June 30, 1997
were $2.1 million and $810,000, respectively, and have been reflected as pro
forma adjustments in the Unaudited Pro Forma Combined Statements of Operations.
The Unaudited Pro Forma Combined Statements of Operations includes a provision
for income tax as if the Company were taxed as a C corporation.
Integration Synergies. Subsequent to the Offering, the Company believes
that it could realize savings from: (i) increased productivity of courier
fleets; (ii) increased productivity of dispatchers and order takers; (iii)
greater volume discounts from suppliers; (iv) consolidation of insurance
programs and treasury functions; and (v) consolidation of other corporate
operations, such as research and development and financial and management
reporting. Integration of the Founding Companies may also present opportunities
to reduce costs through the elimination of duplicative functions and through
increased employee utilization. However, subsequent to the
26
Offering, the Company will incur significant additional costs and expenditures
for corporate management and administration, corporate expenses related to being
a public company, systems integration and facilities expansion. Although, these
integration synergies, potential savings and additional costs may make
historical operating results not comparable to, or indicative of, future
performance, such matters are not presently quantifiable with any degree of
certainty. Accordingly, neither the anticipated savings nor the anticipated
costs have been included in the unaudited pro forma financial data presented
herein. There can be no assurance that the Company will achieve any such cost
savings. See "Risk Factors - Risks Relating to Conversion to the DMS Model," "-
Risks of Integration" and "- Effect of Potential Fluctuations in Quarterly
Operating Results."
Although there can be no assurance, management believes that use of the
DMS Model enables courier-companies to achieve higher margins than typically
associated with Point-to-Point courier companies. The following table sets forth
certain (i) combined operating margin information, which has been derived from
the historical financial statements included elsewhere in this Prospectus, and
(ii) unaudited pro forma combined operating margin information. This information
is presented with respect to (i) Founding Companies which have utilized the
Company's proprietary software since January 1, 1996 ("DMS Founding Companies")
and (ii) Founding Companies which, as of January 1, 1996, were not utilizing
such software ("Non-DMS Founding Companies"). The DMS Founding Companies
represent approximately 10% of the Company's combined revenues in 1996 and
Non-DMS Founding Companies represent approximately 79% of the Company's combined
revenues in 1996. During the periods presented below, the Founding Companies
were not under common control or management and, therefore, the data presented
may not be comparable to or indicative of post-Combination results to be
achieved by the Company. Further, none of the Founding Companies has, to date,
utilized all aspects of the DMS Model, and there can be no assurance that the
results reflected below are indicative of results to be achieved upon full
utilization of the DMS Model. In addition, the average size of the Non-DMS
Founding Companies is significantly larger than the DMS Founding Companies.
There can be no assurance that the higher margins of the DMS Founding Companies
illustrated below are not directly attributable to the relatively fewer
complexities involved in the operation of a smaller company. Finally, the
following data does not purport to compare the performance of the DMS Founding
Companies prior to and subsequent to the utilization of the Company's
proprietary software, and the conversion process itself could temporarily reduce
margins. Accordingly, no definitive conclusion can be drawn as to the degree to
which the Company's proprietary software, or other components of the DMS Model,
contributed to improvements in the operational performance of the DMS Founding
Companies.
Historical Pro Forma Combined
Combined Operating Margin (1) Operating Margin (2)
----------------------------- --------------------
Six Months
Year Ended Six Months Ended Year Ended Ended
December 31, 1996 June 30, 1997 December 31, 1996 June 30, 1997
----------------- ------------- ----------------- -------------
DMS Founding Companies 5.7% 8.3% 6.3% 8.0%
Non-DMS Founding Companies 2.8% 3.1% 4.8% 4.6%
(1) Derived from the historical financial statements included elsewhere in the
Prospectus.
(2) Derived from the unaudited pro forma combined financial statements of the
Company included elsewhere in the Prospectus and reflects pro forma
adjustments for goodwill amortization, the Compensation Differential and
royalty payments made by certain Founding Companies. See Notes 1, 2, 3 and
4 to the Selected Pro Forma Combined Financial Data.
Revenues. The Company primarily earns revenues from fees charged for
Point-to-Point delivery services with the remainder of revenues being derived
from strategic stocking and other services. Revenues consist primarily of
charges to customers for individual delivery services and weekly or monthly
charges for other ongoing
27
services. Revenues are recognized when the services are performed. The revenue
per transaction for a particular delivery service is dependent upon a number of
factors, including the time sensitivity of a particular delivery, special
handling requirements and local market conditions.
Cost of Revenues. Cost of revenues consists of costs relating directly to
performance of services, including earned courier compensation and employee
benefits, if any, vehicle lease expenses and the cost of managing the Company's
courier fleet. The Company believes that the Point-to-Point delivery business
offers higher gross margins than scheduled or routed deliveries, which results
from lower courier compensation as a percentage of revenue as well as premium
pricing for time-sensitive deliveries. The Company's couriers have historically
been compensated based on a fixed percentage of the revenue for a delivery.
However, the Company intends to realign courier compensation to an effort-based
pricing standard. Management believes that this effort-based fee structure
maximizes courier fleet productivity and allows it to better manage its pricing
policies and gross margins.
Sales and Marketing Expenses. Sales and marketing expenses include
expenses related to new business development, account management and local brand
marketing initiatives. Examples include Brand Manager compensation, sales
commissions and advertising and other promotional expenses. The Company
anticipates the need for additional investment in sales and marketing
initiatives including the implementation and execution of the l-800-DELIVER(TM)
and l-800-COURIER(TM) national brand strategies. Prior to the consummation of
the Combinations, compensation expense for the former owners of the Founding
Companies were classified as the General and Administrative Expenses of the
Founding Companies. Subsequent to the Offering, payments under Brand Manager
Agreements and compensation to sales personnel will appear in Sales and
Marketing Expenses.
General and Administrative Expenses. General and administrative expenses
include salaries and benefits of management and administrative staff,
professional fees, expenditures for research and development, training costs and
expenses related to comprehensive insurance programs.
Other Operating Expenses. Other operating expenses include costs for
execution of order taking, dispatch management, customer service and local
supervisory personnel.
Depreciation And Amortization. The Company has no significant investment
in warehousing facilities or transportation equipment, and as such, depreciation
expense primarily relates to depreciation of office, communication and computer
equipment. Amortization expense primarily relates to the amortization of
acquisition goodwill. In July 1996, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 97 ("SAB 97") relating to business
combinations immediately prior to an initial public offering. SAB 97 requires
that these Combinations be accounted for using the purchase method of
acquisitions accounting. A total of $700,000 of the purchase price has been
allocated to in-process research and development and will be expensed upon
closing of the Combinations. The excess of the fair value of the consideration
received in the Combinations over the fair value of the net assets to be
acquired totals approximately $66.9 million. The excess purchase price will be
recorded as goodwill on the Company's balance sheet. Goodwill will be amortized
as a non-cash charge to the income statement over a period ranging from 5 to 40
years. The pro forma impact of this amortization expense for the year ended
December 31, 1996 was approximately $2.1 million, of which approximately
$400,000 was deductible for income tax purposes. The Company expects to continue
to make acquisitions and anticipates that certain acquisitions will be accounted
for using the purchase method of accounting. As a consequence, in the future
the Company will incur additional expense for the amortization of acquired
intangible assets, primarily goodwill.
Pro Forma Combined Results of Operations
The pro forma combined results of operations of the Founding Companies for
the periods presented may not be comparable to, and may not be indicative of,
the Company's post-combination results of operations because: (i) the Founding
Companies were not under common control or management during the periods
presented; (ii) the Company will incur incremental costs related to its new
corporate management and the costs of being a public company; and (iii) the
combined data do not reflect potential benefits and cost savings the Company
expects to
28
realize when operating as a combined entity. The following discussion should be
read in conjunction with the Unaudited Pro Forma Combined Financial Statements
and the related Notes thereto and certain Founding Companies' Historical
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
The following table sets forth the combined results of operations of the
Founding Companies on a pro forma combined basis and as a percentage of revenues
for the periods indicated.
Six Months Ended June 30,
-------------------------
1996 1997
---- ----
(in thousands)
Revenues $60,981 100.0% $66,552 100.0%
Cost of revenues 37,137 60.9 41,021 61.6
------- ------- ------- -------
Gross profit 23,844 39.1 25,531 38.4
Sales and marketing expenses 3,570 5.9 3,639 5.5
General and administrative expenses 5,000 8.2 5,702 8.6
Other operating expenses 10,457 17.1 10,606 15.9
Depreciation and amortization 1,954 3.2 2,161 3.2
------- ------- ------- -------
Operating income $ 2,863 4.7% $ 3,423 5.1%
======= ======= ======= =======
Pro Forma Combined Results for the Six Months Ended June 30, 1997 Compared to
the Six Months Ended June 30, 1996
Revenues. Revenues increased approximately $5.6 million, or 9.1%, to $66.6
million for the six months ended June 30, 1997 from $61.0 million for the six
months ended June 30, 1996. This increase was primarily attributable to
increased transaction volume from new and existing customers and was partially
offset by decreases in revenues from those Founding Companies participating in a
former national courier franchise.
Cost of Revenues. Cost of revenues increased approximately $3.9 million,
or 10.5%, to $41.0 million for the six months ended June 30, 1997 from $37.1
million for the six months ended June 30, 1996. The increase was due primarily
to increased revenues. The gross profit margin decreased slightly from 39.1% to
38.4% during the first six months of 1997.
Sales and Marketing Expenses. Sales and marketing expenses increased
approximately $100,000, or 1.9%, to $3.7 million for the six months ended June
30, 1997 from $3.6 million for the six months ended June 30, 1996. This increase
is due primarily to an increase in revenues and business development activity.
As a percentage of revenues, selling and marketing expenses decreased to 5.5%
for the six months ended June 30, 1997 from 5.9% for the six months ended June
30, 1996 due to economies of scale.
General and Administrative Expenses. General and administrative expenses
increased approximately $700,000, or 14.0%, to $5.7 million for the six months
ended June 30, 1997 from $5.0 million for the six months ended June 30, 1996.
This increase is due primarily to an increase in owner's compensation. As a
percentage of revenues, general and administrative expenses increased to 8.6%
for the six months ended June 30, 1997 from 8.2% for the six months ended June
30, 1996.
Other Operating Expenses. General and administrative expenses increased
approximately $100,000, or 1.4%, to $10.6 million for the six months ended June
30, 1997 from $10.5 million for the six months ended June 30, 1996. As a
percentage of revenues, general and administrative expenses decreased to 15.9%
for the six months ended June 30, 1997 from 17.1% for the six months ended June
30, 1996.
29
Operating Income. As a result of the above, operating income increased
approximately $600,000 or 19.6%, to $3.4 million for the six months ended June
30, 1997 from $2.8 million for the six months ended June 30, 1996. As a
percentage of revenues, operating income increased to 5.1% for the six months
ended June 30, 1997 from 4.7% for the six months ended June 30, 1996.
Pro Forma Combined Liquidity and Capital Resources
The Company is a holding company that will conduct all of its operations
through its subsidiaries. Accordingly, the Company's principal sources of
liquidity are the cash flow of its subsidiaries, cash available from credit
facilities that it may establish and the unallocated net proceeds of this
Offering. After the closing of the Combinations and this Offering, the Company
will have approximately $1.9 million in cash, working capital of approximately
$4.8 million and no indebtedness outstanding on a pro forma combined basis on
June 30, 1997.
The Company is seeking a $25 million credit facility, which it anticipates
will be secured by assets of the Company and will require the Company to comply
with various loan covenants including: (i) maintenance of certain financial
ratios; (ii) restrictions on additional indebtedness; and (iii) restrictions on
liens, guarantees, advances and dividends. The facility is intended to be used
for acquisitions, capital expenditures, refinancing of Founding Company
indebtedness, if necessary, and for general corporate purposes. There can be no
assurance that the Company will obtain such a credit facility.
Capital expenditures totaled approximately $2.3 million in 1996 and
approximately $1.0 million in the six months ended June 30, 1997, primarily for
office equipment and computers and facility upgrades. Subsequent to this
Offering, the Company expects to make capital expenditures to upgrade certain
components of its management and financial reporting systems, to install an
internal computer intranet network and communications system integrating the
Founding Companies and subsequently acquired businesses and to establish a
centralized administrative services center. Management presently anticipates
that such capital expenditures will total approximately $5.0 million over the
next two years; however, no assurance can be made with respect to the actual
timing and amount of such expenditures.
The Company intends to pursue further acquisition opportunities, the
timing, size or success of which are unpredictable as well as the associated
potential capital commitments. The Company expects to fund further acquisitions
primarily through a combination of a portion of the unallocated net proceeds of
this Offering, cash flow from operations and borrowings, including borrowings
under the proposed line of credit, as well as issuances of additional shares of
Common Stock.
The Company believes that cash flow from operations will be sufficient to
fund the Company's operations for the foreseeable future. In addition, the
Company believes that cash flow from operations, borrowings under a potential
credit facility and the unallocated net proceeds of this Offering, will be
sufficient to implement its growth strategy. To the extent that the Company's
acquisition strategy proceeds at a rate faster than is presently contemplated,
it may be necessary to finance such acquisitions through the issuance of
additional equity securities, issuance of additional indebtedness or both. See
"Risk Factors - Need for Additional Financing."
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 Founding Companies and other 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 period to period comparisons of its results of operations are not
necessarily meaningful or indicative of the results that the Company may achieve
in any subsequent quarter or full year. Such quarterly fluctuations may result
in volatility in the market
30
price of the Common Stock of the Company, and it is possible that in future
quarters the Company's results of operations could be below the expectations of
the public market. Such an event could have a material adverse effect on the
market price of the Common Stock of the Company. Several of the Founding
Companies recorded a net loss for the six months ended June 30, 1997.
31
BUSINESS
General
The Company has been recently formed 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 16 of the largest metropolitan markets in the United States as well
as in London, U.K. and Wellington, New Zealand. The Company believes that it has
the largest market share for Point-to-Point delivery services in each of London,
New York City, San Francisco, Washington, D.C., Seattle and Denver. The Company
also believes that it is the only courier firm focused exclusively on
consolidating the highly fragmented Point-to-Point delivery industry. The
Company intends to become the largest consolidator focused on this market. The
Company's pro forma combined revenues for the year ended December 31, 1996 and
the six months ended June 30, 1997 were $125.6 million and $66.6 million,
respectively.
Industry
The $60 billion expedited small-package delivery industry in the United
States consists of multi-day delivery companies (such as Federal Express and
United Parcel Service) and same-day delivery and courier companies. The $15
billion same-day delivery market in the United States consists of: (i) intercity
and interstate line-haul specialists; (ii) route specialists, which service
preset routes through a central distribution hub or on a scheduled basis; and
(iii) Point-to-Point specialists, which focus on urgent (4 to 5 hours or less),
on-demand, local deliveries.
According to Courier Magazine, a leading industry publication, the U.S.
market for Point-to-Point delivery services is approximately $4 billion and is
served by more than 4,000 delivery companies, primarily closely held, single
center operations serving a limited geographic area. Based upon their
experience, management of the Company believes that most Point-to-Point courier
firms are small or mid-sized operations with annual revenues of $2 million or
less performing less than 600 deliveries a day. Historically, the barriers to
starting a Point-to-Point delivery service have been low in comparison to the
substantial resources required to enter into national or regional overnight or
route delivery services. However, management of the Company believes that the
urgent nature of Point-to-Point deliveries does not allow for the effective
utilization of overnight or route specialist operations. The complexities of
managing large volumes of Point-to-Point deliveries, including the time critical
nature of deliveries and constantly changing delivery locations, limit the
economies of scale and route density normally sought by line-haul or route
specialists. Management believes that the Company is the only company having a
national or an international network of delivery firms focused primarily on the
Point-to-Point delivery market
In recent years, the emergence of alternative technologies, such as
facsimile machines and the Internet, have increased pressure on the same-day
delivery industry to improve cost competitiveness and service levels and to
develop into new market niches. The same technological advancements have led to
more rapid ordering and production capabilities for products, greater
expectations regarding delivery times and movement toward just-in-time inventory
standards; all these factors have increased the demand for urgent delivery of
products. The Company believes that many of the smaller Point-to-Point courier
companies lack the communication technology and coverage capability to
adequately service this increased demand for urgent delivery of products.
Additionally, in an effort to control costs and focus on core competencies, many
businesses are seeking to reduce their reliance on in-house transportation
departments by turning to third-party providers for such services. Management
believes that these trends favor larger and well capitalized courier firms, such
as the Company.
The employees of "traditional" Point-to-Point courier firms typically work
in only one of the basic courier functional areas - telephone answering (call
capture), courier dispatch, or back-office accounting. Moreover, dispatchers
generally have absolute authority in assigning and routing deliveries to the
courier fleet ("Command and Control Dispatch"), whereby one person receives an
incoming call from a customer and enters pick-up and delivery information into a
computer terminal. A summary of the order is transferred to the dispatch area,
often in
32
the form of paper tickets. The dispatcher typically analyzes the current status,
location and availability of the entire courier fleet before assigning the order
to a particular courier. The dispatcher often delays assigning a particular
order until it can be grouped with other deliveries or assigned to a particular
courier. The Company believes that providing the dispatcher with this degree of
authority often leads to late deliveries, routing inefficiencies, favoritism
between dispatchers and selected couriers resulting in under-utilization of the
courier work force; this in turn leads to higher courier turnover and undue
dependence of courier firms on the dispatchers. Additionally, the Company
believes that segregation of each back-office function leads to inaccurate
communications, reduced customer service levels and inefficient staffing levels.
As a result, the Company believes that Command and Control Dispatch cannot be
used for large volumes of transactions without significant increases in labor.
The DMS Model
Management has chosen to focus on the Point-to-Point delivery business
because of: (i) the customers' requirements for immediate service and
responsiveness, which management believes enables the Company to distinguish the
DMS Model from the operating methods employed by its competitors; (ii) the
Company's ability to charge premium pricing for guaranteed on-time delivery; and
(iii) the lack of a focused national or international consolidator. Prior to
this Offering, none of the Founding Companies has incorporated every aspect of
the DMS model into their respective operations. However, since 1994, the
Company's management team has introduced certain components of the DMS Model and
has refined the DMS Model through licensing arrangements with a number of
courier firms, including 19 Founding Companies in 14 of the 16 markets in which
the Company will operate subsequent to this Offering. These companies
represented 18.9% of the Company's pro forma revenues in 1996. However,
following this Offering, the Company will continue to support the conversion of
the Founding Companies to the DMS Model.
Key elements of the DMS Model include:
The DMS Model. The DMS Model organizes the Company's business into three
discrete functions: (i) Dispatch Management Services; (ii) Road Management
Services; and (iii) Marketing Management Services.
o Dispatch Management Services refers to back-office functions such as
telephone answering (call capture), order taking, dispatch and
back-office accounting. Under the DMS Model, a single DMS Center is
used to consolidate the back-office functions for several
independent Brands in each geographic region in which the Company
operates. Each DMS Center is structured to facilitate interactive
communication among, and to maximize utilization of, all personnel
within the DMS Center. DMS Center employees are positioned around
"donut" shaped work stations that promote a constant exchange of
information. Prompt capture of the customer's call is the top
priority of DMS Center personnel. The Company cross-trains personnel
to improve the quality and service levels of each DMS Center. For
example, during peak demand periods, a greater number of employees
can be made available to serve as order capturers, while during
off-peak periods, more employees can devote time to administrative
functions such as job audit and payment processing. DMS Center
personnel, including dispatchers in peak workload periods, answer
customers' calls on telephone lines dedicated to specific Brands and
enter the orders into computers using the Company's proprietary
software. The Company intends to standardize customer information,
pricing and geographic zoning data among Brands permitting the call
capturers to answer telephones and enter orders more quickly and
with fewer keystrokes or chances for error than competitors'
systems.
o Road Management Services refers to the management of the courier
fleet Management believes a financially incentivized, team-oriented
courier fleet is an integral part of the success of the DMS Model.
Under the DMS Model, couriers are incentivized using an effort-based
fee structure. The couriers are compensated per delivery, with the
courier fee set by utilizing pre-
33
determined zone pricing standards that reward the effort needed to
complete a delivery with the appropriate courier fee. Management
believes that compensating its couriers on an effort-based standard
eliminates the demotivation created by fixed salary compensation. In
addition, management believes that a commission-based structure
where a courier is paid a fixed percentage of the total delivery
price creates inefficiencies by putting the couriers' focus on the
price of the delivery, rather than the effort required to complete
the delivery. Management believes that its effort-based fee
structure maximizes courier fleet productivity and allows it to
better manage its pricing policies and gross margins. In addition,
this fee structure allows couriers to earn higher levels of overall
compensation and for that compensation to be aligned with the
specific effort involved in making the delivery.
Management also believes that the consolidation of courier fleets
for multiple Brands in a single metropolitan area provides
significant efficiencies. Pooling the courier resources of multiple
Brands in a single metropolitan area enhances courier coverage and
optimizes courier staffing levels, which leads to an increase in
overall productivity of the courier fleet. Accordingly, subsequent
to the Combinations, the Company intends to establish a single,
independent RMS Center in each of its markets. Subject to guidelines
and standards established by the Company, each RMS Center will be
responsible for hiring, training, rostering and managing the
couriers. The Company believes that segregating the courier cost and
management function into separate RMS Centers will increase the
profitability of the RMS Center and the Company by: (i) better
motivating the couriers through team management and peer governance;
and (ii) focusing the RMS Center exclusively on road management and
minimizing road management costs.
o Marketing Management Services refers to the continued decentralized
promotion of each of the Founding Company's Brand names to
capitalize on its particular market niche, goodwill and established
name recognition. Former owners of 25 of the Founding Companies
(representing 50% of the Company's combined pro forma 1996 revenues)
will enter into Brand Manager Agreements pursuant to which such
former owners will continue to have primary responsibility for the
Marketing Management Services component of their Founding Company.
See "The Company -The Combinations." Marketing Management Services
functions for Brands not covered by a Brand Manager will be
performed by an employee of the Company who will receive
performance-based compensation. In each case, a dedicated sales and
marketing team will be responsible for increasing penetration of
existing accounts and the overall revenues of their specific Brand.
Each Brand will have customized marketing materials providing
customers with a summary of frequently used time-based service
levels, pricing schedules and modification charges.
Proprietary Technology. The Company has developed a proprietary software
system to support multiple Brands and a Free Call Dispatch environment while
facilitating the consolidation of dispatch and road management services. Data
standards used on a Company-wide basis simplifies and streamlines the Company's
data entry and record keeping functions. The Company's software automatically
routes the customer's order to a dispatcher, who announces the job to a pool of
couriers under the Free Call Dispatch system. The software allows the dispatcher
to view in a "windows"-based environment, on a single screen, all deliveries in
progress for each courier, including an automatic, color-coded countdown of the
time remaining for each delivery. The software automatically records the job
with the proper billing rate, using standardized zone sheets, cost matrices and
service codes, and records the commission to be paid to the courier. See "-Free
Call Dispatch."
Utilization of Multiple Brands. The DMS Model is designed to support the
growth of Brands within established market niches. Maintaining the
distinctiveness of preexisting tradenames for acquired courier firms allows the
Company to capitalize on the goodwill while continuing to operate in a framework
of consolidated back-office and road work forces.
34
Free Call Dispatch. Under the Free Call Dispatch system, immediately upon
receiving an order for delivery, the dispatcher announces the specifics of the
job to the entire courier fleet via a two-way radio. A courier who believes that
he or she can complete the pickup and delivery within the time requirements
responds to the dispatcher and requests the job based on, among other factors,
their proximity to the job pick-up location. The Company believes that Free Call
Dispatch, combined with effort-based compensation (including zero payout to
couriers for deliveries not made on time) improves the utilization of the
courier fleet, increases on-time deliveries and provides couriers with the
opportunity to earn higher aggregate compensation than available under Command
and Control Dispatch or from the Company's competitors. Free Call Dispatch
allows couriers to exchange deliveries in progress. Management believes that
these hand-offs permit couriers to perform multiple deliveries all going to the
same general area, thus increasing productivity of couriers and speed of
deliveries. Additionally, bicycle couriers frequently meet with vehicle couriers
for hand-offs on downtown deliveries in certain metropolitan areas, reducing the
risk of traffic jams and the need of the vehicle courier to find parking in a
crowded area. In both cases, the couriers themselves, rather than the
dispatchers, are given the communication and operating tools to initiate
selection of work and hand-offs between team members and among different teams.
Incentivize Workforce. The Company seeks to incentivize all segments of
its workforce - DMS employees, couriers and Brand Managers - in order to
maximize operating efficiency and profitability. Employees who work in the
Company's DMS Centers will be compensated incrementally for each new back-office
task at which the employees become proficient. In addition, profit-sharing,
bonuses, stock options and other incentive compensation will be available to
employees based on the overall performance of the DMS Center. Couriers will be
compensated per delivery with effort-based compensation, with zero payout for
deliveries that are not delivered in a timely manner.
A Brand Manager will be incentivized under the Brand Manager Agreement by
receiving payments according to a formula based on the Brand's contribution.
Contribution is defined as total revenue less certain expenses attributable to
the Brands and certain administrative and corporate overhead allocations. The
Contribution Percentage (defined as the Contribution divided by total revenue of
the Brand) between 7.5% and 15% accrues to the Brand Manager. The Contribution
Percentage in excess of 15% accrues to the Brand Manager and the Company in a
proportion of 25% and 75%, respectively.
Acquisition Strategy
The Company intends to implement an aggressive acquisition program in the
highly fragmented Point-to-Point delivery industry. Management believes that the
Company will be an attractive acquirer to local and regional Point-to-Point
courier companies due to: (i) its unique operating model and proprietary
software platform, which facilitates increased levels of productivity, customer
service and profitability; (ii) the Brand Manager strategy, which allows the
seller to participate in the increased profitability and continued growth of the
Brand under the DMS Model; (iii) the increased customer account opportunities
resulting from participation in a large organization; and (iv) its strategy for
focusing exclusively on consolidating the Point-to-Point delivery market.
The Company's acquisition strategy targets growth in both existing and new
markets:
Expansion of Existing Markets. The Company intends to rapidly acquire
additional businesses in each of the markets where it currently operates
in order to increase capacity utilization and market share of each DMS
Center. The Company intends to acquire Point-to-Point courier firms with
strong customer relationships that, due to the nature of their customer
base and service levels provided, can be assimilated efficiently into
existing DMS Centers The Company believes that these "fill-in"
acquisitions typically can be absorbed without a corresponding increase in
administrative costs and will broaden the Company's range of delivery
services. Brand Managers of existing DMS Centers will be incentivized to
seek acquisition targets in local markets.
Enter New Markets. The Company also intends to expand into new markets,
primarily by acquiring companies in the top U.S. metropolitan markets
which are not presently served by a DMS Center. Ultimately,
35
the Company intends to be the largest or second largest provider of
Point-to-Point delivery services in every market where it has a presence.
Management will target "platform" acquisition candidates with strong
customer relationships and operating management to form the base of a new
DMS Center. The Company currently operates in 16 of the largest markets
for Point-to-Point delivery services in the United States, and in London,
U.K. and New Zealand.
One of the Company's executive officers, Lever F. Stewart, as Director of
Business Development, will be responsible for the acquisition program and
working with regional management to identity acquisition opportunities. In
addition, several of the Company's other senior executives and Brand Managers
have held prominent positions in national courier trade associations and have
developed significant relationships and visibility with local delivery company
owners, which the Company believes is a competitive advantage in identifying
appropriate acquisition candidates and executing its acquisition strategy. Once
a business is acquired, the Company will assign a team to convert the acquired
company to the DMS Model and integrate the acquisition into the Company. Certain
back-office operations, including accounting, billing, payroll and cash
management will be performed by the Company's central office.
The Company intends to finance future acquisitions by using as
consideration a combination of shares of its Common Stock and cash. For selected
acquisitions, the Company intends to retain the services of the former owners
and managers through Earnout or Brand Manager Agreements, which will further
incentivize such retained personnel based on the future profitability of their
acquired Brands.
For a discussion of certain risks associated with the Company's future
acquisition strategy, see "Risk Factors - Risks Relating to the Company's
Acquisition Strategy" and "-Need for Additional Financing."
Internal Growth Strategy
The Company intends to drive internal growth by: (i) expanding market
share; (ii) enhancing services; (iii) developing a premium national brand name;
(iv) forming strategic alliances; and (v) improving profitability.
Expanding Market Share. The Company intends to expand market share in
existing markets by target marketing the Company's services to specific
customer segments requiring reliable Point-to-Point delivery capabilities
(such as commercial and investment banking firms, law firms, financial
printers and hospitals). The Company intends to continue to operate
existing and acquired Brands independently, supported by a single
operations staff in each market, in order to capitalize on existing Brand
recognition and maximize revenues.
Enhancing Services. The Company intends to introduce enhanced service to
its customers, such as time critical guaranteed services in as little as
15 minutes and written proof of pickup and delivery. Such services are
generally not provided by other Point-to-Point courier companies. Further,
the Company intends to expand the practice of certain of the Founding
Companies of providing hardware or software to a client to allow them to
directly place orders through their own computers instead of the
telephone. The Company believes that these direct entry capabilities and
other expanded services will facilitate the use of the Company's services
by large volume clients. The Company also intends to expand the practice
of providing customers with these high-quality, customer-oriented
services, which will differentiate the Company from traditional courier
firms and will generate increased demand for the Company's services.
Developing Premium National Brand. As part of its marketing efforts, the
Company intends to promote its own national brand identity through its
service marks l-800-DELIVER(TM) and 1-800-COURIER(TM). The Company
believes that the development of these national Brands will permit the
Company to better pursue national accounts that require coverage in more
than one metropolitan area. The Company believes that offering these
customers the ability to receive consolidated bills for such deliveries,
as well as uniformity of services, will result in increased revenues.
36
Forming Strategic Alliances. The Company expects to enter into agreements
with providers of facilities management services and logistics to enhance
the Company's ability to service its customers who require strategic
stockpiling of service repair items. The Company also intends to seek
alliances that will allow it to cross-sell its Point-to-Point delivery
services to the customers of other service providers, including overnight
and same-day delivery providers, who do not focus on the Point-to-Point
delivery market. The Company does not compete in such areas other than
Point-to-Point deliveries and believes that it can enhance service
offerings of other overnight and same-day delivery service providers
through these alliances.
Improving Profitability. The DMS Model is designed to improve operating
margins. The Company expects cost savings will be achieved primarily
through (i) the utilization of single back-offices to support multiple
Brands and (ii) the restructuring of courier compensation to improve road
service utilization. The Company expects additional cost savings through
(i) the consolidation of accounting, finance, management and certain other
administrative functions, (ii) the daily review of audit reports to
identify and resolve discrepancies prior to billing, and (iii) the use of
uniform monthly billing and settlement cycles.
Customers
The Company currently has more than 20,000 customers, including
professional service organizations, large corporations, healthcare institutions
and retail and manufacturing firms. No one customer accounts for more than 5% of
the Company's sales. Customers typically do not enter into contracts for the
long-term supply of Point-to-Point delivery services.
Competition
The market for Point-to-Point delivery services is highly competitive and
has low barriers to entry. Many of the Company's competitors operate in only one
location and may have more experience and brand recognition than the Company in
such local market. In addition, several large, national, publicly traded
companies have begun to consolidate the Point-to-Point delivery industry through
the acquisition of independent courier companies. Other companies in the
industry compete with the Company not only for the provision of services but
also for acquisition candidates. Some of these companies have longer operating
histories and greater financial resources than the Company. In addition, other
firms involved in segments other than Point-to-Point delivery services may
expand into the Point-to-Point market in order to provide their customers with
"one-stop" shopping of delivery and logistics services. Many of such companies
have greater financial resources and brand name recognition than the Company.
The Company believes that the principal competitive factors in the
Point-to-Point delivery industry are reliability, service flexibility and
pricing.
Financial Reporting Systems
Management has selected the existing billing and financial system of one
of the largest Founding Companies as the basis for integrating its network of
DMS Centers into a common financial reporting platform. Information regarding
customer accounts, pricing and administrative and courier costs will be
available for management to monitor daily revenue and gross margins, thereby
enabling management to identify emerging trends and manage customer pricing and
courier fees to maximize profitability. The Company believes that its current
financial reporting system is sufficient to accommodate the centralization of
all collections, billing and treasury functions and to support the
implementation of the Company's growth strategy.
37
Regulation and Safety
The Company's operations are subject to various state and local
regulations and, in many instances, require permits and licenses from state
authorities. In connection with the operation of certain motor vehicles and the
handling of hazardous materials, the Company is subject to regulation by the
United States Department of Transportation and the corresponding agencies in the
states in which such courier operations occur. The Company's relationship with
its employees is subject to regulation by the Occupational Health and Safety
Administration and regulation with respect to hours of work, workers'
compensation and other matters. To the extent the Company holds licenses to
operate two-way radios to communicate with couriers, the Company is also
regulated by the Federal Communications Commission. The Company believes that it
is in substantial compliance with all applicable regulatory requirements
relating to its operations. Failure of the Company to comply with the applicable
regulations could result in substantial fines or revocation of the Company's
operating permits.
The Company currently carries liability insurance which the Company
believes is adequate. In addition, independent owner/operators are required to
maintain liability insurance of at least the minimum amounts required by state
law and to provide the Company with a certificate of insurance verifying that
they are in compliance. Subsequent to the Offering, the Company intends to
subject all couriers to periodic drug testing as well as background
investigations of their records with the Department of Motor Vehicles in the
applicable states.
Intellectual Property
The Company continually develops and refines the DMS Model and enhances
existing proprietary technology. The Company primarily relies on a combination
of copyright, trade secrets, confidentiality procedures and contractual
provisions to protect its intellectual property. Despite these protections, it
may be possible for unauthorized parties to copy, obtain or use certain portions
of the DMS Model and proprietary technology. While any misappropriation of the
Company's intellectual property could have a material adverse effect on the
Company's competitive position, the Company believes that protection of
proprietary rights is less significant to the Company's business than the
continued pursuit of its operating strategies and other factors, such as the
Company's relationship with industry participants and the experience and
abilities of its key personnel.
The Company has registered several trade and service marks, including: DMS
Corp.(TM), 1-800-COURIER(TM) and 1-800-DELIVER(TM). The Company also owns the
Internet domain name "www.DMS-Corp.com." The Company has no knowledge of any
specific infringement to, or any prior claims of ownership of, trademarks that
would materially adversely affect the Company's current results of operations
and financial condition. The Company intends to vigorously defend its
proprietary rights against infringement.
Employees and Independent Owner/Operators
Immediately prior to the consummation of the Combinations, the Founding
Companies employed a work force of approximately 3,620 people, including
approximately 2,900 couriers, 600 operations staff and 120 people in management
positions. Of the couriers, approximately 2,100 are employees and 800 are
independent contractors. The Company is not a party to any collective bargaining
agreements. The Company believes that its relationship with its employees is
good.
From time to time, federal and state authorities have sought to assert
that independent owner/operators in the Point-to-Point delivery industry,
including those utilized by the Company, are employees rather than independent
contractors. The Company believes that independent owner/operators utilized by
the Company are not employees under existing interpretations of federal and
state laws. However, there can be no assurance that federal and state
authorities will not challenge this position, or that other laws or regulations,
including tax laws, or interpretations thereof, will not change. If, as a result
of any of the foregoing, the Company is required to pay
38
for and administer added benefits to independent owner/operators, the Company's
operating costs would increase. See "Risk Factors - Claims Exposure" and
"- Dependence on Availability of Qualified Courier Personnel."
Facilities
Upon consummation of the Offering and the Combinations, the Company will
operate from 51 leased facilities, which total approximately 310,000 square
feet. Those facilities are principally used for operations, general and
administrative functions and training. In addition, several facilities also
contain storage and warehouse space for Company equipment and inventory as well
as for the strategic stockpiling of service repair items for certain customers.
After consummation of the Offering and the Combinations, the Company intends to
consolidate the back-office operations and to contract all of the road
operations with the local RMS Center. The number of facilities therefore will be
consolidated to conform to the needs of the DMS Centers of the Company. This is
likely to result in the reduction of a number of facilities operated by the
Company.
The table below summarizes the location of the Company's existing
facilities.
Number of
Facilities
----------
London, U.K. ..................................... 5
New York Metropolitan Area ....................... 11
San Francisco, CA ................................ 4
Phoenix, AZ ...................................... 1
Atlanta, GA ...................................... 4
Washington, D.C. ................................. 1
Los Angeles, CA .................................. 3
Houston, TX ...................................... 1
Boston, MA ....................................... 1
Seattle, WA ...................................... 4
Dallas, TX ....................................... 2
Detroit, MI ...................................... 1
Chicago, IL ...................................... 1
Wellington, New Zealand .......................... 1
Philadelphia, PA ................................. 1
Denver, CO ....................................... 6
Minneapolis, MN .................................. 1
Portland, OR ..................................... 1
Hollis, NH ....................................... 2
The Company's corporate headquarters are located in New York, New York.
The Company believes that its properties are generally well maintained, in good
condition and adequate for its present needs. Furthermore, the Company believes
that suitable additional or replacement space will be available when required.
Legal Proceeding
The Company is, from time to time, a party to legal proceedings arising in
the normal course of its business. Management believes that none of the legal
proceedings currently outstanding will have a material adverse effect on the
Company's business, financial conditions or results of operations.
39
MANAGEMENT
Directors and Executive Officers
The following table sets forth information concerning the Company's
directors and executive officers. Subsequent to the Offering, the Company
intends to appoint five additional, independent directors to the Board. These
individuals have not been identified as of the date of this Prospectus.
Name Age Position
---- --- --------
R. Gregory Kidd .................... 38 Chairman of the Board
Linda M. Jenkinson ................. 35 Chief Executive Officer; Director
Gilbert D. Carpel .................. 51 President
Kevin Holder ....................... 41 Chief Operating Officer
Marko Bogoievski ................... 34 Chief Financial Officer
Lever F. Stewart ................... 38 Director of Business Development
Alison Davis ....................... 36 Director
Michael Fiorito .................... 37 Director
R. Gregory Kidd has served as the Chairman of the Board of Directors of
the Company since September 1997. From November 1996 to September 1997, Mr. Kidd
was the Chairman of the Board of Directors of Dispatch Management Services,
L.L.C., a Point-to-Point delivery company which was merged with and into the
Company. From 1991 to 1996, Mr. Kidd was a founder of Kiwi Corp., a
Point-to-Point delivery company which purchased several beta site courier firms
to test and refine the DMS Model. Prior to this, Mr. Kidd was a consultant with
Booz Allen & Hamilton, a management consultant firm, from 1985 until 1990. Mr.
Kidd has a Masters degree in management from the Yale School of Management.
Linda M. Jenkinson has served as the Chief Executive Officer and a
director of the Company since August 1997. Since January 1994, Ms. Jenkinson has
been involved in developing and refining the DMS Model in the United States.
From January 1994 to August 1997, Ms. Jenkinson was with A.T. Kearney, a
management consulting firm, in various positions, where she was most recently
named an Officer. From August 1991 to December 1993, Ms. Jenkinson was a Manager
with Price Waterhouse, an accounting and consulting firm. Ms. Jenkinson has a
Masters in Business Administration from the Wharton School at the University of
Pennsylvania.
Gilbert D. Carpel has served as President of the Company since September
1997. Since 1987, Mr. Carpel has held various senior executive positions with
Washington Express Services, Inc., a Point-to-Point delivery firm and a Founding
Company, including Executive Vice President (1992 to present) and Chief
Executive Officer (1987 - 1992). In addition, Mr. Carpel founded Sky Courier, an
air courier firm which was subsequently sold to Airborne Express.
Kevin Holder has served as the Chief Operating Officer of the Company and
its predecessor entities since October 1995. From August 1993 to October 1995,
Mr. Holder was a Principal of Sonet Systems, a software vendor to the courier
industry. From October 1981 to August 1993, Mr. Holder was the President of
Washington Express Services, Inc., a Point-to-Point delivery firm and a Founding
Company.
Marko Bogoievski has served as the Chief Financial Officer of the Company
since September 1997. From April 1996 to September 1997, Mr. Bogoievski was the
Chief Financial Officer of Ansett New Zealand Limited, an airline and
transportation subsidiary of News Corporation, Inc. From June 1993 to April
1996, Mr. Bogoievski was a Finance Director of Lion Nathan Limited, a
publicly-held brewer operating in Australia, New Zealand and China. Mr.
Bogoievski has a Masters in Business Administration from the Harvard Graduate
School of Business.
40
Lever F. Stewart has served as the Director of Business Development of the
Company since September 1991. From August 1996 to September 1997, Mr. Stewart
was the Chief Executive Officer of Phoenix Couriers, a Point-to-Point delivery
company. From 1988 to 1996, Mr. Stewart was the General Counsel and an executive
officer of Rock-Tenn Company, a publicly-held national paperboard products and
packaging business. Prior to that time, Mr. Stewart was a practicing attorney
with the law firm of King & Spalding specializing in corporate mergers and
acquisitions and securities laws.
Alison Davis will become a director of the Company following the
consummation of the Offering. Since August 1993, Ms. Davis has been a Vice
President and Principal of A.T. Kearney, a management consulting firm. From
December 1991 to July 1993, Ms. Davis was a Senior Engagement Manager of
McKinsey & Company, a management consulting firm.
Michael Fiorito will become a director of the Company following the
consummation of the Offering. Since 1980, Mr. Fiorito has been the Chief
Executive Officer, President and Chairman of Total Management, LLC, and its
predecessor, Early Bird Courier Service, Inc., a delivery company and a Founding
Company.
Subsequent to the Offering, the Board of Directors of the Company will
consist of nine directors divided into three classes with each class serving for
a term of three years. At each annual meeting of stockholders, directors will be
elected by the holders of the Common Stock to succeed those directors whose
terms are expiring. See "Description of Capital Stock - Common Stock" The
Company expects that the Board of Directors will establish an Acquisition
Committee, an Audit Committee, a Compensation Committee, an Executive Committee
and a Nominating Committee. The members of each committee are expected to be
determined at the first meeting of the Board of Directors following the
consummation of the Combinations.
Messrs. Kidd, Carpel, Holder and Ms. Jenkinson have agreed to vote all the
shares of Common Stock they beneficially own in favor of electing Mr. Fiorito to
the Board of Directors.
All officers serve at the discretion of the Board of Directors.
Director Compensation
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as a director. Each director
who is not an employee of the Company or one of its subsidiaries receives a fee
of $2,000 for attendance at each Board of Directors' meeting and $1,000 for each
committee meeting (unless held on the same day as a Board of Directors'
meeting). Directors are also reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors or committees thereof incurred in
their capacity as directors.
Executive Compensation; Employment Agreements; Covenants-Not-To-Compete
Linda M. Jenkinson, Gilbert D. Carpel, Kevin Holder, Marko Bogoievski and
Lever F. Stewart will each enter into an employment agreement (the "Employment
Agreement") with the Company providing for an annual base salary of $180,000,
$95,000, $180,000, $180,000 and $180,000, respectively. Mr. Kidd does not have
an Employment Agreement with the Company and receives no salary; he has entered
into an agreement not to compete with the Company. Each of the Employment
Agreements will be for a term of two years. Unless terminated or not renewed by
the Company or the executive officer, the term of the Employment Agreements will
continue thereafter on a year-to-year basis on the same terms and conditions
existing at the time of renewal. R. Gregory Kidd, the Chairman of the Company,
will not be receiving compensation from the Company, but will enter into a
Non-Competition Agreement with the Company. The Non-Competition Agreement and
each Employment Agreement will contain a covenant not to compete (the
"Non-Compete Covenant") with the Company during the term of such agreement and
for a period of one year immediately following termination of employment. Under
the Non-Compete Covenant, the party to the Employment Agreement or the Non
Competition Agreement
41
will be prohibited from (i) inducing or attempting to persuade any employee of
the Company to discontinue such employment relationship, or (ii) soliciting any
person, corporation, partnership or other entity or organization which at any
time during the term of employment was a customer of the Company, except for
mailings made to the general public or segments of the general public and other
forms of general advertising shall not be included. The Non-Compete Covenant may
be enforced by injunctions and shall survive the termination of employment with
the Company.
Each of the Employment Agreements will provide that, in the event of
termination of employment by the Company without cause the executive officer
will be entitled to receive from the Company: (i) any unpaid base salary,
bonuses or benefits accrued through the date of termination; (ii) reimbursement
of expenses incurred through the date of termination, (iii) the base salary for
a period of two years from the date of termination at the annual rate thereof
immediately preceding such termination; (iv) an annual bonus for a period of two
years following such termination at an annual rate equal to the executive
officer's average annual bonus over the five fiscal years of the Company (or the
period of employment if less than five years) immediately preceding the fiscal
year in which the termination occurred, payable in equal installments together
with the base salary and (v) the continuation of group life, health and
disability benefits for a period of two years from the date of termination.
1997 Stock Incentive Plan
No stock options were granted to, or exercised by or held by any director
or executive officer in 1996. In November 1997, the Board of Directors and the
Company's stockholders approved the Company's 1997 Stock Incentive Plan (the
"Plan"). The purpose of the Plan is to provide directors, officers, employees,
consultants and independent contractors with additional incentives by increasing
their ownership interests in the Company. Individual awards under the Plan may
take the form of one or more of: (i) either incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs");
(iii) dividend equivalent rights; (iv) performance awards; (v) restricted or
deferred stock; and (vi) other awards not otherwise provided for, the value of
which is based in whole or in part upon the value of the Common Stock.
The Compensation Committee will administer the Plan and generally select
the individuals who will receive awards and the terms and conditions of those
awards. The maximum number of shares of Common Stock that may be subject to
outstanding awards, determined immediately after the grant of any award, may not
exceed the greater of ______ shares or ___% of the aggregate number of shares of
Common Stock outstanding. Shares of Common Stock which are attributable to
awards which have expired, terminated or been canceled or forfeited are
available for issuance or use in connection with future awards.
The Plan will terminate on the day preceding the tenth anniversary of the
date of its adoption unless sooner terminated by the Board of Directors. The
Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
In connection with the Offering NQSOs to purchase a total of ___________
shares of Common Stock of the Company will be granted as follows: [ ]. In
addition, options to purchase approximately __________ shares will be granted to
the employees of the Founding Companies. The grants of all of the foregoing
options will be effective as of the closing of the Offering and each will have
an exercise price equal to the initial public offering price per share in the
Offering. These options will vest at the rate of 20% per year commencing on the
first anniversary of the date of this Prospectus, and will expire 10 years from
the date of grant.
The Plan provides for (i) the automatic grant to each non-employee
director serving at the commencement of the Offering of an option to purchase
5,000 shares, and thereafter (ii) the automatic grant to each non-employee
director of an option to purchase 3,000 shares on the first business day after
the annual meeting of the stockholders
42
of the Company ("Directors' Options"). Directors' Options will have an exercise
price per share equal to 100% of the fair market value of such shares at the
date of grant. Directors' Options will expire at the earlier of 10 years from
the date grant or three months after termination of service as a director for
any reason other than disability, death or for cause or for one year after
termination of service as a director by reason of the director's resignation or
removal due to disability. Directors' Options will be immediately exercisable to
the extent they were vested as of the date the director was terminated. If a
director is terminated for cause, as described in the Plan, then any options
granted to such director will immediately terminate in full and no rights
thereunder may be exercised. In addition, the Plan permits non-employee
directors to elect to receive, in lieu of cash directors' fees, shares or
credits representing "deferred shares" that may be settled at future dates, as
elected by the director. The number of shares or deferred shares received will
be equal to the number of shares which, at the date the fees would otherwise be
payable, will have an aggregate fair market value equal to the amount of such
fees.
43
CERTAIN TRANSACTIONS
Other Transactions
On September 9, 1997, Kiwi Express Software Services, LLC ("Kiwi
Express") which developed much of the proprietary software used in the DMS
Model, merged into the Company. R. Gregory Kidd, the Chairman of the Company and
Linda M. Jenkinson, the Company's Chief Executive Officer, owned membership
interests in Kiwi Express of 64.89% and 10.00%, respectively. As consideration
for the merger, Mr. Kidd and Ms. Jenkinson are entitled to receive upon
consummation of the Offering, shares of Common Stock of the Company equal to
$324,450 and $50,000, respectively, divided by the initial public offering
price. The Company believes that the price paid to acquire Kiwi Express is at
least as favorable to the Company as would be available from an independent
third party.
On September 12, 1997, the Company agreed to acquire Earlybird
Courier for $13.9 million in cash and $4.6 million worth of shares of Common
Stock of the Company valued at the initial public offering price. Michael
Fiorito, a director of the Company, is a 45% shareholder of Earlybird Courier.
Mr. Fiorito has also entered into a Brand Manager Agreement with the Company. In
addition, the Company has agreed to pay Mr. Fiorito compensation equal to two
weeks revenues of any courier company acquired by the Company that is identified
and sourced by Mr. Fiorito. The Company believes that the price paid to acquire
Earlybird Courier is at least as favorable to the Company as would be available
from an independent third party.
On September 12, 1997, the Company agreed to acquire Washington
Express for $2.79 million worth of shares of Common Stock of the Company valued
at the initial public offering price. Gilbert D. Carpel, the President of the
Company, is a 61% shareholder of Washington Express. Mr. Carpel has also entered
into a Brand Manager Agreement with the Company. The Company believes that the
price paid to acquire Washington Express is at least as favorable to the Company
as would be available from an independent third party.
On September 12, 1997, the Company agreed to acquire Kiwicorp
Limited for $____ million worth of shares of Common Stock of the Company valued
at the initial public offering price. R. Gregory Kidd, Chairman of the Board of
Directors of the Company, is a _% shareholder of Kiwicorp Limited. Mr. Kidd has
also entered into a Brand Manager Agreement with the Company. The Company
believes that the price paid to acquire Kiwicorp Limited is at least as
favorable to the Company as would be available from an independent third party.
Company Policy
In the future, any transactions with officers, directors and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the disinterested members of the Board of Directors.
44
PRINCIPAL STOCKHOLDERS
Based on an initial public offering price of $___ per share, the following
table sets forth certain information regarding the beneficial ownership of the
Common Stock of the Company, after giving effect to the Combinations and the
Offering, by: (i) each person known to beneficially own more than 5% of the
outstanding shares of Common Stock; (ii) each of the Company's directors; (iii)
each named executive officer, and (iv) all executive officers and directors as a
group. All persons listed have an address in care of the Company's principal
executive offices and have sole voting and investment power with respect to
their shares unless otherwise indicated.
Shares Beneficially owned After
-------------------------------
Offering
--------
Name and Address of Beneficial Owner (1) Number Percent
------ -------
R. Gregory Kidd ........................
Linda M. Jenkinson .....................
Gilbert D. Carpel ......................
Michael Fiorito ........................
Kevin Holder ...........................
Marko Bogoievski .......................
Lever F. Stewart .......................
All Directors and Executive ............
Officers as a Group (8 persons) ........
- - - - ----------
* Less than l%
(1) Unless indicated otherwise, the address of the beneficial owners is 65
West 36th Street, New York, New York 10018.
45
DESCRIPTION OF CAPITAL STOCK
General
The Company's authorized capital stock consists of 110,000,000 shares of
Capital Stock, par value $.01 per share, consisting of 100,000,000 shares of
Common Stock and 10,000,000 shares of preferred stock, par value $0.01 per share
(the "Preferred Stock").
Common Stock
Subsequent to the Offering and the Combinations, there will be ____ shares
of the Common Stock issued and outstanding.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. Holders of Common Stock are entitled to share ratably in the
net assets of the Company upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. The holders of Common Stock have no preemptive rights to purchase
shares of stock of the Company. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of the
Company. All outstanding shares of Common Stock are, and the shares of Common
Stock to be issued pursuant to this Prospectus will be upon payment therefor,
fully paid and nonassessable.
The Board of Directors is classified into three classes as nearly equal in
number as possible, with the term of each class expiring on a staggered basis.
See "Management - Board of Directors." The classification of the Board of
Directors may make it more difficult to change the composition of the Board of
Directors and thereby may discourage or make more difficult an attempt by a
person or group to obtain control of the Company. Cumulative voting for the
election of directors is not permitted, enabling holders of a majority of the
outstanding Common Stock to elect all members of the class of directors whose
terms are then expiring.
Preferred Stock
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the Preferred
Stock, in each case without any further action or vote by the stockholders. The
Company has no current plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
46
Statutory Business Combinations Provision
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
Limitation on Directors' Liabilities
Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
47
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering the Company will have ___________
shares of Common Stock outstanding. Of these shares, the ___________ shares of
Common Stock sold in the Offering (________________ shares if the Underwriters'
over-allotment options are exercised in full) will be freely tradeable by
persons other than affiliates of the Company, without restriction under the
Securities Act.
The remaining _______ shares of Common Stock (____________ shares if the
Underwriters' over-allotment options is exercised in full) will be "restricted"
securities within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemptions contained in
Rule 144. All ____________ (______________ if the Underwriters' over-allotment
options are exercised in full) of the restricted shares will be beneficially
owned by persons who are affiliates of the Company and after the date of this
Prospectus, will be eligible for public sale pursuant to Rule 144, subject to
the volume restrictions discussed below. However, all of such restricted shares
are subject to lock up restrictions. Pursuant to these restrictions the holders
of these restricted shares, including the Company's executive officers,
directors and certain shareholders have agreed that they will not, without the
prior written consent of the Company, for a period of two years from the
consummation of this Offering. After such two-year period, the foregoing
restriction will expire and shares permitted to be sold under Rule 144 would be
eligible for sale. In addition, such executive officers, directors and certain
shareholders have also agreed that they will not, without the prior written
consent of Prudential Securities Incorporated directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise dispose of or transfer (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other disposition
or transfer of) any shares of Common Stock or any other securities convertible
into, or exercisable or exchangeable for, shares of Common Stock or other
similar securities of the Company, currently beneficially owned or hereafter
acquired by such persons for a period of 180 days from the date of this
Prospectus. After such 180-day period, the foregoing restriction will expire and
shares permitted to be sold under Rule 144 would be eligible for sale. The
Company and Prudential Securities Incorporated, respectively, may, in their sole
discretion, at any time and without prior notice, release all or any portion of
the shares of Common Stock subject to such agreements to which they are party.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned his or her shares for at least one year (including the prior
holding period of any prior owner other than an affiliate) is entitled to sell
within any three-month period that number of shares which does not exceed the
greater of 1% of the outstanding shares of the Common Stock, or the average
weekly trading volume during the four calendar weeks preceding each such sale.
Sales under Rule 144 also are subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not or has not
been deemed an "affiliate" of the Company for at least three months, and who has
beneficially owned shares for at least two years (including the holding period
of any prior owner other than an affiliate) would be entitled to sell such
shares under Rule 144 without regard to the limitations discussed above.
Upon the completion of the Offering, there will be outstanding options to
purchase________ shares of Common Stock, of which options to purchase
___________ shares under the 1997 Stock Incentive Plan are vested and will
generally become exercisable from ___ through ___ at $_____ per share. The
remaining ____ options to be granted under the 1997 Stock Incentive Plan will
vest and become exercisable from _____ through _____ at a price per share equal
to the initial public offering price. In addition, options for the purchase of
_____ additional shares of Common Stock will remain available for issuance under
the 1997 Stock Incentive Plan following the completion of the Offering. The
Company intends to file one or more Registration Statements on Form S-8 to
register under the Securities Act all of the _______ shares of Common Stock that
are issuable upon the exercise of outstanding stock options and that may be
subject to stock options that are issuable in the future under the 1997 Stock
Incentive Plan. These registration statements are expected to be filed as soon
as practicable after the Offering and are expected to become effective
immediately upon filing. Shares covered by the registration statements will be
eligible for sale in the public market after the effective date of the
registration statements, subject to Rule 144 limitations applicable to
affiliates of the Company. See "Management - 1997 Stock Incentive Plan."
48
Prior to the Offering, there has been no public market for the Common
Stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
49
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated is acting as the Representative, have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company, the numbers of shares of Common Stock set forth below
opposite their respective names:
Number of
Underwriters Shares
------------ ------
Prudential Securities Incorporated ...................
----------
Total ..............................................
==========
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representative, have advised the Company
that they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $__________ per
share; and that such dealers may reallow a concession of $___________ per share
to certain other dealers. After the initial public offering, the offering price
and the concessions may be changed by the Representative.
The Company and its executive officers and directors have agreed that they
will not, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase, or
otherwise dispose of or transfer (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other disposition
or transfer of) any shares of Common Stock or any other securities convertible
into, or exercisable for shares of Common Stock or other similar securities of
the Company, currently beneficially owned or hereafter acquired by such persons,
for a period of 180 days after the date of this Prospectus. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
prior notice, release all or any portion of the shares of Common Stock subject
to such agreements.
The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M promulgated by the Securities and Exchange
Commission, pursuant to which such persons may bid for or purchase Common Stock
for the purpose of stabilizing its market price. The Underwriters also may
create a short position for the account of the Underwriters by selling more
Common Stock in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following the closing of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to __________ shares of Common Stock, by exercising the
Underwriters' over-allotment options referred to above. In addition, Prudential
Securities Incorporated on behalf of the Underwriters, may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim from
an Underwriter (or selling group member participating in the Offering) for the
account of the other Underwriters the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the
50
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined through negotiation between the Company and the
Representative of the Underwriters. Among the factors to be considered in making
such determination will be the prevailing market conditions, the results of
operations of the Company in recent periods relevant to its prospectus and the
prospects for its industry in general, the management of the Company and the
market prices of securities for companies in businesses similar to that of the
Company.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Akin, Gump, Strauss, Hauer &
Feld, L.L.P., Washington, D.C. Certain legal matters related to the Offering
will be passed upon for the Underwriters by Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A., Miami, Florida.
EXPERTS
The financial statements of Dispatch Management Services Corp. at June 30,
1997 included in this Prospectus have been so included in reliance on the report
(which contains an explanatory paragraph relating to Dispatch Management
Services Corp. ability to contain as a going concern) of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Bridge Wharf Investments Limited as of
September 30, 1996 and June 30, 1997 and for the nine months ended June 30, 1997
and for the two years in the period ended September 30, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
(London, England), independent accountants, given on the authority of said firm
as experts in accounting and auditing.
The consolidated financial statements of Security Despatch Limited
(excluding the mail room services operations) as of March 3l, 1996 and 1997 and
for the three years in the period ended March 3l, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
(London, England), independent accountants, given on the authority of said firm
as experts in accounting and auditing.
The financial statements of Brookside Systems and Programming Limited as
of March 31, 1996 and 1997 and for each of the three years in the period ended
March 31, 1997 included in this Prospectus have been so included in reliance on
the report of Price Waterhouse (London, England), independent accountants, given
on the authority of said firm as experts in accounting and auditing.
The combined financial statements of Earlybird Courier Service, LLC, Total
Management Support Services, LLC and their Affiliates at December 31, 1995 and
1996, and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Atlantic Freight Systems, Inc.
and affiliated companies as of December 31, 1995 and 1996 and for each of the
three years in the period ended December 31, 1996 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Bullit Courier Services, Inc. as
of February 29, 1996 and February 28, 1997 and for the three years in the period
ended February 28, 1997 included in this Prospectus have been so
51
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Aero Special Delivery Service, Inc. as of June
30, 1996 and 1997 and for the years then ended included in this Prospectus have
been so included in reliance on the report (which contains an explanatory
paragraph relating to the Aero Special Delivery Service, Inc.'s ability to
continue as a going concern as described in Note 3 to the financial statements)
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The financial statements of S-Car-Go Courier, Inc. as of December 31, 1995
and 1996 and for the years then ended included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Gregory W. Austin, Sole Proprietorship (d/b/a
Battery Point Messenger and Alpha Express) as of December 3l, 1995 and 1996 and
for the years then ended included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of American Eagle Endeavors, Inc. as
of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996 included in this Prospectus have been so included in
reliance on the report (which contains an explanatory paragraph relating to the
American Eagle Endeavors, Inc.'s ability to continue as a going concern as
described in Note 6 to the financial statements) of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Washington Express Services, Inc. as of
September 30, 1995 and 1996 and for the three years in the period ended
September 30, 1996 included in this Prospectus have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
The financial statements of MLQ Express, Inc. as of February 28, 1996 and
1997 and for each of the three years in the period ended February 28, 1997
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The financial statements of Kangaroo Express as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The financial statements of Transpeed Courier Services, Inc. as of
December 31, 1995 and 1996 and for the years then ended included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of National Messenger, Inc. as of November 30,
1995 and 1996 and for the years then ended included in this Prospectus have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Profall, Inc. as of December 31, 1995 and 1996
and for the years then ended included in this Prospectus have been so included
in reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
52
The financial statements of Expressit Couriers, Inc. as of December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 included in this Prospectus have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The financial statements of Fleetfoot Max, Inc. as of August 31, 1996 and
1997 and for the three years in the period ended August 31, 1997 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
The financial statements of A&W Couriers, Inc. as of December 31, 1995 and
1996 and for the years then ended included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Express Enterprise, Inc. - Ground Operations
as of December 31, 1995 and 1996 and for the years then ended included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of RJK Enterprises Inc. (d/b/a Deadline Express)
as of December 31, 1996 and for the period from March 6, 1996 to December 31,
1996, appearing in this Prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Upon completion of the Offering, the Company will be subject to the
information requirements of the Exchange Act, and in accordance therewith will
file reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza
Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its
regional offices located at 7 World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the
Commission at Judiciary Plaza, 450 Fifth Street, N.W, Washington, D.C. 20549, at
prescribed rates. The Commission maintains an Internet web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of that site
is http://www.sec.gov.
53
INDEX TO FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF DISPATCH MANAGEMENT
SERVICES CORP.
Introduction to Unaudited Pro Forma Combined Financial Statements
Pro Forma Combined Balance Sheet (Unaudited)
Pro Forma Combined Statement of Operations (Unaudited)
Notes to Unaudited Pro Forma Combined Financial Statements
DISPATCH MANAGEMENT SERVICES CORP.
Report of Independent Accountants
Balance Sheet as of June 30, 1997
Notes to Financial Statements
EARLYBIRD COURIER SERVICE, LLC, TOTAL MANAGEMENT SUPPORT SERVICES LLC AND THEIR
AFFILIATES D/B/A EARLYBIRD COURIER
Report of Independent Auditors
Combined Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997
(Unaudited)
Combined Statements of Operations and Retained Earnings (Accumulated Deficit)
For Each of the Three Years in the Period ended December 31, 1996 and Six
Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Combined Statements of Cash Flows for Each of the Three Years in the Period
ended December 31, 1996 and Six Months ended June 30, 1996 (Unaudited) and
1997 (Unaudited)
Notes to Combined Financial Statements
ATLANTIC FREIGHT SYSTEMS, INC. D/B/A/ ATLANTIC FREIGHT
Report of Independent Accountants
Combined Balance Sheets as of December 31, 1995 and 1996 and June 30,
1997 (Unaudited)
Combined Statements of Income for Each of the Three Years in the
Period ended December 31, 1996 and Six Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Combined Statements of Stockholders' Equity for Each of the Three
Years in the Period ended December 31, 1996 and Six Months ended
June 30, 1997 (Unaudited)
Combined Statements of Cash Flows for Each of the Three Years in the
Period ended December 31, 1996 and Six Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Notes to Combined Financial Statements
BULLIT COURIER SERVICES, INC. D/B/A/ BULLIT COURIER
Report of Independent Accountants
Consolidated Balance Sheets as of February 29, 1995 and February 28,
1996 and May 31, 1997 (Unaudited)
Consolidated Statement of Operations for Each of the Three Years in the
Period ended February 28, 1997 and Three Months ended May 31, 1996
(Unaudited) and 1997 (Unaudited)
Consolidated Statements of Stockholders' Equity for Each of the Three
Years in the Period ended February, 1997 and Three Months ended
May 31, 1997 (Unaudited)
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period ended February, 1997 and Three Months ended May 31,
1996 (Unaudited) and 1997 (Unaudited)
Notes to Consolidated Financial Statements
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED D/B/A FLEETWAY SYSTEMS
Report of Independent Accountants
Balance Sheets as of March 31, 1996 and 1997 and June 30, 1997 (Unaudited)
Statements of Operations for Each of the Three Years in the Period
ended March 31, 1997 and the Three Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
F-1
Statements of Cash Flows for Each of the Three Years in the Period
ended March 31, 1997 and the Three Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Notes to Financial Statements
BRIDGE WHARF INVESTMENTS LIMITED D/B/A WEST ONE
Report of Independent Accountants
Balance Sheets as of September 30, 1995 and 1996 and June 30, 1997
Profit and Loss Account for the Two Years ended September 1996 and
the Nine Months ended June 30, 1997
Statements of Cash Flows for the Two Years ended September 1996 and the Nine
Months ended June 30, 1997
Notes to Financial Statements
SECURITY DESPATCH LIMITED (EXCLUDING THE MAIL ROOM SERVICES OPERATIONS) D/B/A
SECURITY DESPATCH
Report of Independent Accountants
Consolidated Balance Sheets as of March 31, 1996 and 1997 and June 30, 1997
(Unaudited)
Consolidated Statements of Operations for Each of the Three Years in the
Period ended March 31, 1997 and Three Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period ended March 31, 1997 and Three Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Notes to Consolidated Financial Statements
AERO SPECIAL DELIVERY SERVICE, INC. D/B/A AERO DELIVERY
Report of Independent Accountants
Balance Sheets as of June 30, 1996 and 1997
Statements of Operations for the Years ended June 30, 1996 and 1997
Statements of Stockholders' Deficiency for the Years ended June 30,
1996 and 1997
Statements of Cash Flows for the Years ended June 30, 1996 and 1997
Notes to Financial Statements
S-CAR-GO COURIER, INC. D/B/A S-CAR-GO COURIER
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (Unaudited)
Statements of Operations for the Years ended December 31, 1995 and
1996 and the Six Months ended June 30, 1996 (Unaudited) and 1997
(Unaudited)
Statements of Stockholders' Equity for the Years ended December 31,
1995 and 1996 and the Six Months ended June 30, 1997 (Unaudited)
Statements of Cash Flows for the Years ended December 31, 1995 and
1996 and the Six Months ended June 30, 1996 (Unaudited) and 1997
(Unaudited)
Notes to Financial Statements
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP D/B/A BATTERY POINT MESSENGER AND ALPHA
EXPRESS D/B/A BATTERY POINT
Report of Independent Accountants
Statements of Assets, Liabilities and Net Assets as of December 31, 1995
and 1996 and June 30, 1997 (Unaudited)
Statements of Operations and Changes in Net Assets for the Two Years ended
December 31, 1996 and the Six Months ended June 30, 1996 (Unaudited) and
1997 (Unaudited)
Statements of Cash Flows for the Two Years ended December 31, 1996 and the
Six Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Notes to Financial Statements
F-2
WASHINGTON EXPRESS SERVICES, INC. D/B/A WASHINGTON EXPRESS
Report of Independent Accountants
Balance Sheets as of September 30, 1995 and 1996 and June 30, 1997
(Unaudited)
Statements of Operations for Each of the Three Years in the Period
ended September 30, 1996 and Nine Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Statements of Stockholders' Equity (Deficiency) for Each of the Three Years
in the Period ended September 30, 1996 and Nine Months ended June 30,
1996 (Unaudited) and 1997 (Unaudited)
Statements of Cash Flows for Each of the Three Years in the Period
ended September 30, 1996 and Nine Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Notes to Financial Statements
MLQ EXPRESS, INC. D/B/A MLQ EXPRESS
Report of Independent Accountants
Balance Sheets as of February 28, 1996 and 1997 and May 31, 1997 (Unaudited)
Statements of Operations for Each of the Three Years in the Period
ended February 28, 1997 and Three Months ended May 31, 1996
(Unaudited) and 1997 (Unaudited)
Statements of Stockholders' Equity for Each of the Three Years in the
Period ended February 28, 1997 and the Three Months ended May 31,
1996 (Unaudited) and 1997 (Unaudited)
Statements of Cash Flows for Each of the Three Years in the Period
ended February 28, 1997 and Three Months ended May 31, 1996
(Unaudited) and 1997 (Unaudited)
Notes to Financial Statements
AMERICAN EAGLE ENDEAVORS, INC. D/B/A 1-800 COURIER-PHOENIX, MINNEAPOLIS
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30,
1997 (Unaudited)
Consolidated Statements of Operations for Each of the Three Years in
the Period ended December 31, 1996 and Six Months ended June 30,
1996 (Unaudited) and 1997 (Unaudited)
Consolidated Statements of Stockholders' Equity (Deficit) for Each of
the Three Years in the Period ended December 31, 1996 and Six
Months June 30, 1997 (Unaudited)
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period ended December 31, 1996 and Six Months ended June 30,
1996 (Unaudited) and 1997 (Unaudited)
Notes to Consolidated Financial Statements
KANGAROO EXPRESS OF COLORADO SPRINGS, INC. D/B/A KANGAROO EXPRESS
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (Unaudited)
Statements of Operations for Each of the Three Years in the Period
ended December 31, 1996 and the Six Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Statements of Stockholder's Equity for Each of the three Years in the Period
ended December 31, 1996 and Six Months ended June 30, 1997 (Unaudited)
Statements of Cash Flows for Each of the Three Years in the Period ended
December 31, 1996 and the Six Months ended June 30, 1996
(Unaudited) and 1997 (Unaudited)
Notes to Financial Statements
F-3
TRANSPEED COURIER SERVICES, INC. D/B/A 1-800 COURIER-DENVER
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (Unaudited)
Statements of Operations for the Years ended December 31, 1995 and 1996 and
the Six Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Statements of Stockholders' Equity for the Years ended December 31, 1995 and
1996 and the Six Months ended June 30, 1997 (Unaudited)
Statements of Cash Flows for the Years ended December 31, 1995 and 1996 and
the Six Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Notes to Financial Statements
NATIONAL MESSENGER, INC. D/B/A NATIONAL MESSENGER
Report of Independent Accountants
Balance Sheets as of November 30, 1995 and 1996 and May 31, 1997 (Unaudited)
Statements of Operations for the Two Years ended November 30, 1996
and the Six Months ended May 31, 1996 (Unaudited) and 1997 (Unaudited)
Statements of Shareholders' Equity (Deficit) for the Two Years ended November
30, 1996 and the Six Months ended May 31, 1997 (Unaudited)
Statements of Cash Flows for the Two Years ended November 30, 1996
and the Six Months ended May 31, 1996 (Unaudited) and 1997
(Unaudited)
Notes to Financial Statements
PROFALL, INC. D/B/A 1 800 COURIER-L.A.X.
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (Unaudited)
Statements of Operations for the Years ended December 31, 1995 and
1996 and Six Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Statements of Shareholders' Equity for the Years ended December 31,
1995 and 1996 and Six Months ended June 30, 1997 (Unaudited)
Statements of Cash Flows for the Years ended December 31, 1995 and
1996 and Six Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Notes to Financial Statements
A&W COURIERS, INC. D/B/A A&W COURIERS
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (Unaudited)
Statements of Operations for the Years ended December 31, 1995 and
1996 and Six Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Statements of Stockholders' Equity for the Years ended December 31,
1995 and 1996 and Six Months ended June 30, 1997 (Unaudited)
Statements of Cash Flows for the Years ended December 31, 1995 and
1996 and Six Months ended June 30, 1996 (Unaudited) and 1997
(Unaudited)
Notes to Financial Statements
FLEETFOOT MAX, INC. D/B/A FLEETFOOT MESSENGER
Report of Independent Accountants
Balance Sheets as of August 31, 1996 and 1997
Statements of Operations for Each of the Three Years in the Period ended
August 31, 1997
Statements of Changes in Stockholders' Equity (Deficit) for Each of the Three
Years in the Period ended
Statements of Cash Flows for Each of the Three Years in the Period ended
August 31, 1997
Notes to Financial Statements
EXPRESSIT COURIERS, INC. D/B/A 1 800 COURIER-BOSTON
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (Unaudited)
F-4
Statements of Operations for Each of the Three Years in the Period ended
December 31, 1996 and the Six Months ended June 30, 1996 (Unaudited) and
1997 (Unaudited)
Statements of Changes in Stockholders' Equity for Each of the Three Years in
the Period ended December 31, 1996 and the Six Months ended June 30, 1997
(Unaudited)
Statements of Cash Flows for Each of the Three Years in the Period ended
December 31, 1996 and the Six Months ended June 30, 1996 (Unaudited) and
1997 (Unaudited)
Notes to Financial Statements
EXPRESS ENTERPRISE, INC. (GROUND OPERATIONS) D/B/A EXPRESS MESSENGER
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (Unaudited)
Statements of Operations for the Two Years ended December 31, 1996
and the Six-Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Statements of Stockholders' Equity as of December 31, 1995 and 1996 and the
Six-Months ended June 30, 1997 (Unaudited)
Statements of Cash Flows for the Two Years ended December 31, 1996 and the
Six-Months ended June 30, 1996 (Unaudited) and 1997 (Unaudited)
Notes to Financial Statements
RJK ENTERPRISES INC. D/B/A DEADLINE EXPRESS
Report of Independent Auditors
Balance Sheets as of December 31, 1996 and June 30, 1997 (Unaudited)
Statements of Operations and Accumulated Deficit for the period from March 6,
1996 to December 31, 1996 and the period from March 6, 1996 to June 30,
1996 (Unaudited) and the Six Months ended June 30, 1997 (Unaudited)
Statements of Cash Flows for the period from March 6, 1996 to December 31,
1996 and the period from March 6, 1996 to June 30, 1996 (Unaudited) and
the Six Months ended June 30, 1997 (Unaudited)
Notes to Financial Statements
F-5
DISPATCH MANAGEMENT SERVICES CORP.
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give
effect to the acquisitions by Dispatch Management Services Corp. (the "Company")
of the outstanding capital stock of the Founding Companies. The Company will
acquire, in separate combination transactions (the "Combinations") in exchange
for cash and shares of Common Stock, certain courier firms simultaneously with
and as a condition to the closing of the Company's initial public offering (the
"Offering"), which will be accounted for using the purchase method of
accounting. The Company has been identified as the accounting acquiror.
The unaudited pro forma combined balance sheet gives effect to the
Combinations and the Offering as if they had occurred on June 30, 1997. The
unaudited pro forma combined statements of operations give effect to these
transactions as if they had occurred on January 1, 1996.
The Company has preliminarily analyzed the savings that it expects to be
realized from reductions in salaries and certain benefits to the stockholders of
the Founding Companies. To the extent the stockholders and management of the
Founding Companies have agreed prospectively to reductions in salary, bonuses,
and benefits, these net reductions have been reflected in the pro forma combined
statement of operations. With respect to other potential cost savings, the
Company has not and cannot quantify these savings until completion of the
Combinations. It is anticipated that these savings will be partially offset by
the costs of being a publicly held company and the incremental increase in costs
related to the Company's new management. However, these costs, like the savings
that they offset, cannot be quantified accurately. Neither the anticipated
savings nor the anticipated costs have been included in the pro forma combined
financial statements of the Company.
The pro forma adjustments are based on estimates, available information
and certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what the
Company's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates and are not necessarily
representative of the Company's financial position or results of operations for
any future period. Since the Founding Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. See "Risk Factors" included
elsewhere herein.
F-6
DMS
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(Unaudited)
(000's)
American Eagle
ASSETS DMS West One Aero EarlyBird Bullit Security Disp Endeavors
--------------------------------------------------------------------------
Current assets:
Cash and cash equivalents 4 313 173 5 3 295
Accounts receivable, net 29 4,105 1,253 2,630 716 1,926 675
Prepaid and other current assets 394 313 249 459 71 1,347 52
--------------------------------------------------------------------------
Total current assets 427 4,731 1,675 3,094 790 3,273 1,022
Property and equipment, net 2,483 442 314 97 178 280
Other assets 114 152 41 623 209
Goodwill, net
--------------------------------------------------------------------------
Total assets 427 7,328 2,117 3,560 928 4,074 1,511
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt 109 1,233 128 464
Accounts payable 1,635 392 617 253 2,950 419
Accrued expenses 249 763 3,043 1,088 91 107
Other current liabilities 116 12 42
Payable to shareholders of founding co.
--------------------------------------------------------------------------
Total current liabilities 365 2,398 3,544 2,938 484 2,950 1,032
Long-term debt, less current maturities 1,149 720 1,846 264 291
Other long term liabilities 114
--------------------------------------------------------------------------
Total liabilities 365 3,547 4,264 4,784 748 2,950 1,437
Stockholders' equity
Common Stock 84 125 200 5 25 2,071 1
Treasury stock (1,331) (148)
Additional paid-in capital 69 1,285 156
Retained earnings (22) 3,656 (2,347) 33 303 (2,232) (83)
--------------------------------------------------------------------------
Total stockholders' equity 62 3,781 (2,147) (1,224) 180 1,124 74
--------------------------------------------------------------------------
Total liabilities and stockholders' equity 427 7,328 2,117 3,560 928 4,074 1,511
==========================================================================
ASSETS Atlantic Frt Washington Exp MLQ Courier Kangaroo Nat'l Messenger Fleetfoot
---------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents 71 43 5 62 58 106
Accounts receivable, net 783 866 610 308 320 263
Prepaid and other current assets 45 246 84 11 4 5
---------------------------------------------------------------------------------
Total current assets 899 1,155 699 381 382 374
Property and equipment, net 757 443 149 129 47 97
Other assets 161 36 92 9 27
Goodwill, net
---------------------------------------------------------------------------------
Total assets 1,817 1,634 940 519 429 498
=================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt 61 716 29 170
Accounts payable 515 115 27 28 12
Accrued expenses 271 100 102 70 29 111
Other current liabilities 289 206 389 70
Payable to shareholders of founding co.
---------------------------------------------------------------------------------
Total current liabilities 1,136 1,137 518 127 99 293
Long-term debt, less current maturities 320 181 52 187
Other long term liabilities 240 100 16 23
---------------------------------------------------------------------------------
Total liabilities 1,696 1,418 518 195 99 503
Stockholders' equity
Common Stock 15 377 2 50
Treasury stock (262) (126)
Additional paid-in capital 18 109 33
Retained earnings 368 (161) 404 215 328 38
---------------------------------------------------------------------------------
Total stockholders' equity 121 216 422 324 330 (5)
---------------------------------------------------------------------------------
Total liabilities and stockholders' equity 1,817 1,634 940 519 429 498
=================================================================================
ASSETS Fleetway 1800Denver
--------------------
Current assets:
Cash and cash equivalents 17
Accounts receivable, net 173 132
Prepaid and other current assets 17
--------------------
Total current assets 173 166
Property and equipment, net 68 78
Other assets 448 44
Goodwill, net
--------------------
Total assets 689 288
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt 154
Accounts payable 765 36
Accrued expenses 60
Other current liabilities
Payable to shareholders of founding co.
--------------------
Total current liabilities 765 250
Long-term debt, less current maturities 26 28
Other long term liabilities
--------------------
Total liabilities 791 278
Stockholders' equity
Common Stock 1
Treasury stock
Additional paid-in capital
Retained earnings (102) 9
--------------------
Total stockholders' equity (102) 10
--------------------
Total liabilities and stockholders' equity 689 288
====================
F-7
Detroit Profall
ASSETS: Battery Point Express 1-800-CourLAX Express IT A&W Couriers Deadline
---------------------------------------------------------------------------
Current assets:
Cash and cash equivalents 18 69 22 198
Accounts receivable, net 125 158 171 88 157 119
Prepaid and other current assets 6 2 24 21 16
---------------------------------------------------------------------------
Total current assets 149 158 242 134 376 135
Property and equipment, net 6 42 71 77 52 9
Other assets 18 125 84 10 4
Goodwill, net
---------------------------------------------------------------------------
Total assets 173 325 313 295 438 148
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt 18 90 171 78
Accounts payable 3 47 38 110 43 65
Accrued expenses 13 31 107 26 29
Other current liabilities 338 227
Payable to shareholders of founding co.
---------------------------------------------------------------------------
Total current liabilities 34 168 654 214 270 94
Long-term debt, less current maturities 48 67
Other long term liabilities 22
---------------------------------------------------------------------------
Total liabilities 34 238 654 214 270 161
Stockholders' equity
Common Stock 1 10 1 3 1
Treasury stock
Additional pain-in capital 59 58
Retained earnings 139 86 (410) 80 107 (14)
---------------------------------------------------------------------------
Total stockholders' equity 139 87 (341) 81 168 (13)
---------------------------------------------------------------------------
Total liabilities and stockholders' equity 173 325 313 295 438 148
===========================================================================
Other Pro Forma
Founding Merger Pro Forma Offering
ASSETS: S*Car*Go Cour Companies Adjustments Combined Adjustments As adjusted
-----------------------------------------------------------------------------
Current assets:
Cash and cash equivalents 110 299 1,871 1,871
Accounts receivable, net 192 1,671 17,470 17,470
Prepaid and other current assets 145 3,511 (394) 3,117
-----------------------------------------------------------------------------
Total current assets 302 2,115 0 22,852 (394) 22,458
Property and equipment, net 32 413 (674) 5,590 5,590
Other assets 14 86 2,297 12,318 14,615
Goodwill, net 66,925 66,925 66,925
-----------------------------------------------------------------------------
Total assets 348 2,614 66,251 97,664 11,924 109,588
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt 301 3,722 (3,722)
Accounts payable 3 220 8,293 8,293
Accrued expenses 63 380 6,733 6,733
Other current liabilities 162 527 300 2,678 2,678
Payable to shareholders of founding co. 40,639 40,639 (40,639)
-----------------------------------------------------------------------------
Total current liabilities 228 1,428 40,939 62,065 (44,361) 17,704
Long-term debt, less current maturities 211 (1,953) 3,437 (3,437)
Other long term liabilities 21 (15) 521 521
-----------------------------------------------------------------------------
Total liabilities 228 1,660 38,971 66,023 (47,798) 18,225
Stockholders' equity
Common Stock 1 38 (2,982) 29 29
Treasury stock (11) 1,878 0 0
Additional pain-in capital 404 29,443 31,634 59,722 91,356
Retained earnings 119 523 (1,059) (22) (22)
-----------------------------------------------------------------------------
Total stockholders' equity 120 954 27,280 31,641 59,722 91,363
-----------------------------------------------------------------------------
Total liabilities and stockholders' equity 348 2,614 66,251 97,664 11,924 109,588
=============================================================================
F-8
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(000's)
American Eagle
DMS West One Aero EarlyBird Bullit Security Disp Endeavors Atlantic Frt
-----------------------------------------------------------------------------------------------
Net Revenues -- 24,148 10,998 22,894 7,696 9,794 8,536 8,728
Cost of Revenues -- 16,029 6,333 15,860 4,639 5,654 5,293 5,941
-----------------------------------------------------------------------------------------------
Gross profit 0 8,119 4,665 7,034 3,057 4,140 3,243 2,787
Operating expenses: --
Sales and marketing -- 1,119 900 1,818 358 232 1,535 105
General and administrative expenses -- 2,112 1,521 1,814 642 500 940 693
Other operating expenses -- 2,838 2,234 3,546 2,116 1,960 2,232
Depreciation and amortization -- 298 119 195 6 89 174 270
-----------------------------------------------------------------------------------------------
Operating income (loss) 0 1,752 (108) (339) (65) 1,359 594 (513)
Other (income) expense:
Interest expense -- 369 56 219 107 22 62 83
Other, net -- (2) 34 85 (56) 13 33 36
-----------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 0 1,385 (199) (643) (116) 1,324 499 (632)
Provision for income taxes -- 360 2 (33) 398 200 (123)
-----------------------------------------------------------------------------------------------
Net income (loss) 0 1,025 (199) (645) (83) 926 299 (509)
===============================================================================================
Washington Exp MLQ Courier Kangaroo Nat'l Messenger Fleetfoot Fleetway 1800Denver
-------------------------------------------------------------------------------------------
Net Revenues 5,800 5,310 2,650 2,413 2,172 1,092 1,247
Cost of Revenues 3,164 3,296 1,878 1,446 1,332 582 764
-------------------------------------------------------------------------------------------
Gross profit 2,636 2,014 772 967 840 510 483
Operating expenses:
Sales and marketing 483 233 27 86 368 50 58
General and administrative expenses 390 991 265 454 24 40 58
Other operating expenses 1,532 579 405 154 250 403 298
Depreciation and amortization 91 94 50 13 66 101 36
-------------------------------------------------------------------------------------------
Operating income (loss) 140 117 25 260 132 (84) 33
Other (income) expense:
Interest expense 70 43 10 57 23 19
Other, net (18) (38) (2) (34) 4
-------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 88 112 17 260 109 (107) 10
Provision for income taxes 38 32 5 (54)
-------------------------------------------------------------------------------------------
Net income (loss) 50 80 17 255 163 (107) 10
===========================================================================================
F-9
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(000's)
Profall
Battery Point Detroit Express 1-800-CourLAX Express IT A&W Couriers Deadline S*Car*Go Cour
------------------------------------------------------------------------------------------------
Net revenues 732 1,612 1,212 1,343 1,560 1,177 1,155
Cost of revenues 348 986 687 897 940 753 635
------------------------------------------------------------------------------------------------
Gross profit 384 626 525 446 620 424 520
Operating expenses:
Sales and marketing 22 16 27 102 143 84
General and administrative expenses 82 277 298 177 289 144 267
Other operating expenses 113 246 271 231 228 143 140
Depreciation and amortization 10 47 23 44 10 15
------------------------------------------------------------------------------------------------
Operating income (loss) 157 40 (67) (33) (9) (6) 14
Other (income) expense:
Interest expense 16 25 16 2
Other, net 3 (64) 14 (2) (5)
------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 154 24 (28) (63) (7) (1) 12
Provision for income taxes (24) 4 7
------------------------------------------------------------------------------------------------
Net income (loss) 154 24 (28) (39) (11) (1) 5
================================================================================================
Other
Founding Pro Forma Pro Forma
Companies Adjustments Combined
------------------------------------
Net revenues 13,006 (9,705) 125,570
Cost of revenues 7,836 (8,448) 76,845
------------------------------------
Gross profit 5,170 (1,257) 48,725
Operating expenses:
Sales and marketing 761 (1,515) 7,012
General and administrative expenses 1,643 (3,476) 10,145
Other operating expenses 2,066 (361) 21,624
Depreciation and amortization 193 2,008 3,952
------------------------------------
Operating income (loss) 507 2,087 5,992
Other (income) expense:
Interest expense 164 1,363
Other, net (19) (18)
------------------------------------
Income (loss) before provision
for income taxes 362 2,087 4,647
Provision for income taxes 4 1,696 2,512
------------------------------------
Net income (loss) 358 391 2,135
====================================
F-10
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(000's)
American Eagle
DMS West One Aero EarlyBird Bullit Security Disp Endeavors Atlantic Frt
---------------------------------------------------------------------------------------
Net revenues -- 11,691 5,464 10,653 3,956 5,051 4,296 3,767
Cost of revenues -- 7,640 3,109 7,209 2,193 2,967 2,712 2,798
---------------------------------------------------------------------------------------
Gross profit 0 4,051 2,355 3,444 1,763 2,084 1,584 969
Operating expenses:
Sales and marketing -- 672 450 851 203 93 781 50
General and administrative expenses -- 1,020 733 850 268 263 419 216
Other operating expenses -- 1,440 1,122 1,639 1,079 1,073 861
Depreciation and amortization -- 186 40 110 3 42 87 135
---------------------------------------------------------------------------------------
Operating income (loss) 0 733 10 (6) 210 613 297 (293)
Other (income) expense:
Interest expense -- 240 28 95 1 8 36 38
Other, net -- (16) 15 42 3 19
---------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 0 509 (33) (143) 209 605 258 (350)
Provision for income taxes -- 133 0 2 11 198 105 (126)
---------------------------------------------------------------------------------------
Net income (loss) 0 376 (33) (145) 198 407 153 (224)
=======================================================================================
Washington Exp MLQ Courier Kangaroo Nat'l Messenger Fleetfoot Fleetway 1800Denver Battery Point
------------------------------------------------------------------------------------------------------
Net revenues 2,856 2,179 1,336 1,123 1,041 683 593 346
Cost of revenues 1,530 1,305 923 719 617 278 378 164
------------------------------------------------------------------------------------------------------
Gross profit 1,326 874 413 404 424 405 215 182
Operating expenses:
Sales and marketing 247 96 14 42 186 27 26 11
General and administrative
expenses 197 464 133 219 10 18 25 41
Other operating expenses 763 297 189 74 123 185 139 54
Depreciation and amortization 34 41 17 7 22 47 18 5
------------------------------------------------------------------------------------------------------
Operating income (loss) 85 (24) 60 62 83 128 7 71
Other (income) expense:
Interest expense 27 17 5 29 9 8 2
Other, net (1) (30) (2) (11) 3
------------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 59 (11) 57 62 65 119 (4) 69
Provision for income taxes 25 1 (33)
------------------------------------------------------------------------------------------------------
Net income (loss) 34 (11) 57 61 98 119 (4) 69
======================================================================================================
F-11
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(000's)
Other
Profall Founding
Detroit Express 1-800-CourLAX Express IT A&W Couriers Deadline S*Car*Go Cour Companies
------------------------------------------------------------------------------------------------
Net revenues 815 533 696 783 487 537 6,239
Cost of revenues 518 325 461 469 298 295 3,718
------------------------------------------------------------------------------------------------
Gross profit 297 208 235 314 189 242 2,521
Operating expenses:
Sales and marketing 10 5 48 60 42 363
General and administrative
expenses 99 169 79 133 60 133 815
Other operating expenses 130 124 137 123 60 64 940
Depreciation and amortization 26 9 22 5 8 91
------------------------------------------------------------------------------------------------
Operating income (loss) 32 (94) (8) 5 9 (5) 312
Other (income) expense:
Interest expense 8 12 9 1 54
Other, net (37) 2 (4) (4)
------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 24 (69) (19) 9 9 (6) 262
Provision for income taxes (7) (3) 4
------------------------------------------------------------------------------------------------
Net income (loss) 24 (69) (12) 9 9 (3) 258
================================================================================================
Pro Forma Pro Forma
Adjustments Combined
-------------------------
Net revenues (4,144) 60,981
Cost of revenues (3,489) 37,137
-------------------------
Gross profit (655) 23,844
Operating expenses:
Sales and marketing (707) 3,570
General and administrative
expenses (1,364) 5,000
Other operating expenses (159) 10,457
Depreciation and amortization 999 1,954
-------------------------
Operating income (loss) 576 2,863
Other (income) expense:
Interest expense 627
Other, net (21)
-------------------------
Income (loss) before provision
for income taxes 576 2,257
Provision for income taxes 921 1,231
-------------------------
Net income (loss) (345) 1,026
=========================
F-12
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(000's)
American Eagle
DMS West One Aero EarlyBird Bullit Security Disp Endeavors
------------------------------------------------------------------------------
Net revenues -- 13,781 6,283 13,018 4,205 4,558 3,483
Cost of revenues -- 9,747 3,662 9,210 2,501 2,630 2,330
------------------------------------------------------------------------------
Gross profit 0 4,034 2,621 3,808 1,704 1,928 1,153
Operating expenses:
Sales and marketing -- 537 511 879 193 113 687
General and administrative
expenses -- 1,014 896 909 332 232 662
Other operating expenses -- 1,390 1,263 1,580 1,091 916
Depreciation and amortization 284 89 105 5 42 83
------------------------------------------------------------------------------
Operating income (loss) 0 809 (138) 335 83 625 (279)
Other (income) expense:
Interest expense 196 31 107 64 18 35
Other, net -- (3) 20 (23)
------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 0 616 (189) 228 19 607 (291)
Provision for income taxes -- 160 10 42 182 (123)
------------------------------------------------------------------------------
Net income (loss) 0 456 (189) 218 (23) 425 (168)
===============================================================================
Atlantic Frt Washington Exp MLQ Courier Kangaroo Nat'l Messenger Fleetfoot Fleetway 1800Denver
-----------------------------------------------------------------------------------------------------
Net revenues 4,308 2,849 2,981 1,380 1,255 1,226 683 543
Cost of revenues 3,001 1,453 1,793 949 749 768 278 339
-----------------------------------------------------------------------------------------------------
Gross profit 1,307 1,396 1,188 431 506 458 405 204
Operating expenses:
Sales and marketing 88 271 126 10 43 205 27 24
General and administrative
expenses 238 204 549 144 235 9 18 30
Other operating expenses 842 728 333 220 77 146 185 202
Depreciation and amortization 164 49 37 25 17 18 47 27
-----------------------------------------------------------------------------------------------------
Operating income (loss) (25) 144 143 32 134 80 128 (79)
Other (income) expense:
Interest expense 36 37 18 4 24 9 11
Other, net 5 (3) (22) (3) (27) (11)
-----------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes (66) 110 147 31 134 83 119 (79)
Provision for income taxes (24) 47 3 41
-----------------------------------------------------------------------------------------------------
Net income (loss) (42) 63 147 31 131 42 119 (79)
======================================================================================================
F-13
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(000's)
Profall
Battery Point Detroit Express 1-800-CourLAX Express IT A&W Couriers Deadline S*Car*Go Cour
-------------------------------------------------------------------------------------------------
Net revenues 405 993 807 717 841 622 704
Cost of revenues 173 617 405 436 485 393 362
-------------------------------------------------------------------------------------------------
Gross profit 232 376 402 281 356 229 342
Operating expenses:
Sales and marketing 7 14 17 44 94 87
General and administrative
expenses 32 143 215 96 115 94 121
Other operating expenses 58 155 158 76 129 94 78
Depreciation and amortization 4 24 18 19 4 9
-------------------------------------------------------------------------------------------------
Operating income (loss) 131 40 11 73 64 (53) 47
Other (income) expense:
Interest expense 1 8 13 5 (2) 4
Other, net (39) 4 (2) (41)
-------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 130 32 37 64 68 (12) 43
Provision for income taxes 1 25 13 17
-------------------------------------------------------------------------------------------------
Net income (loss) 130 32 36 39 55 (12) 26
=================================================================================================
Other
Founding Pro Forma Pro Forma
Companies Adjustments Combined
---------------------------------------------
Net revenues 7,093 (6,183) 66,552
Cost of revenues 4,254 (5,514) 41,021
---------------------------------------------
Gross profit 2,839 (669) 25,531
Operating expenses: 0
Sales and marketing 398 (736) 3,639
General and administrative
expenses 942 (1,528) 5,702
Other operating expenses 1,031 (146) 10,606
Depreciation and amortization 88 1,003 2,161
---------------------------------------------
Operating income (loss) 380 738 3,423
Other (income) expense:
Interest expense 44 663
Other, net 7 (138)
---------------------------------------------
Income (loss) before provision
for income taxes 329 738 2,898
Provision for income taxes 1,094 1,488
---------------------------------------------
Net income (loss) 329 (356) 1,410
=============================================
F-14
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(In thousands, except share amounts)
NOTE 1 - GENERAL
Dispatch Management Services Corp. (the "Company") was founded to create
the largest provider of urgent, on-demand, point-to-point courier and delivery
services in the world. The Company has conducted no operations to date and will
acquire the Founding Companies concurrently with and as a condition to the
closing of this Offering.
The historical financial statements reflect the financial position and
results of operations of the Company and the Founding Companies and were derived
from the respective Founding Companies' financial statements where indicated.
The periods included in these financial statements for the individual Founding
Companies are as of the respective periods, as indicated in the accompanying
financial statements, or a date within 93 days of December 31, 1996. The audited
historical financial statements included elsewhere herein have been included in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
80.
NOTE 2 - ACQUISITION OF FOUNDING COMPANIES
Concurrently and as a condition with the closing of this Offering, the
Company will acquire the Founding Companies in separate transactions,
in exchange for cash or shares of its Common Stock or a combination of both. The
acquisitions will be accounted for using the purchase method of accounting with
the Company being identified as the accounting acquiror.
The following table sets forth the consideration to be paid in cash and in
shares of Common Stock to the common stockholders of each of the Founding
Companies. For purposes of computing the estimated purchase price for accounting
purposes, the value of shares is determined using an estimated fair value of
[$11.25] per share, which represents a discount of 25 percent from the assumed
initial public offering price of [$15.00] per share due to restrictions on the
sale and transferability of the shares issued. The estimated purchase price for
the acquisitions is based upon preliminary estimates and is subject to certain
purchase price adjustments at and following closing.
F-15
Shares of
Common
Brand Name Cash Stock
- - - - ---------- ---- -----
West One $ 16,613 165,133
Aero Delivery 248,667
Earlybird Courier 8,605 309,917
Bullit Courier 3,540 200,000
Security Despatch 5,923
1 800 COURIER - Phoenix, Minneapolis 284,267
Atlantic Freight 275,007
Washington Express 186,133
MLQ Courier 4,678
Kangaroo Express 71,933
National Messenger 146 80,687
Fleetfoot Max 85,280
Fleetway Systems 838 134,400
1 800 COURIER - Denver 51,600
Battery Point 39 28,513
Express Messenger 48,000
1 800 COURIER - L.A.X. 30,000
1 800 COURIER - Boston 42,400
A&W Couriers 50,307
Deadline Express 60,933
S-CAR-GO Courier 42,560
Other Founding Companies 257 473,531
-------- ---------
Total $ 40,639 2,869,268
======== =========
F-16
NOTE 3 - UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
Merger Adjustments Offering Adjustments Post
------------------------ Pro Forma ------------------------ Merger
ASSETS (A) (B) (C) (D) Adjustments (E) (F) (G) Adjustments
------- ------- ------- ----- ----------- ------- ------- ------- -----------
Current assets:
Cash and cash equivalents -- 60,116 (52,957) (7,159) --
Accounts receivable, net --
Prepaid and other current assets -- (394) (394)
------- ------- ------- ---- ------- ------- ------- ------- -------
Total current assets 59,722 (52,957) (7,159) (394)
Property and equipment, net (674) (674)
Other assets 700 (700) -- 12,318 12,318
Goodwill, net 66,625 300 66,925
------- ------- ------- ---- ------- ------- ------- ------- -------
Total assets 66,651 (700) 300 66,251 59,722 (40,639) (7,159) 11,924
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt -- (3,722) (3,722)
Accounts payable --
Accrued expenses --
Other current liabilities 300 300
Payable to shareholders of founding co. 40,639 40,639 (40,639) (40,639)
------- ------- ------- ---- ------- ------- ------- ------- -------
Total current liabilities 40,639 -- 300 40,939 (40,639) (3,722) (44,361)
Long-term debt, less current maturities -- (1,953) (1,953) (3,437) (3,437)
Other long term liabilities (15) (15)
------- ------- ------- ---- ------- ------- ------- ------- -------
Total liabilities 40,639 (1,968) 300 38,971 (40,639) (7,159) (47,798)
Stockholders' equity
Common Stock (2,982) (2,982)
Treasury stock 1,878 1,878
Additional paid-in capital (40,639) 70,082 29,443 59,722 59,722
Retained earnings (359) (700) (1,059)
------- ------- ------- ---- ------- ------- ------- ------- -------
Total stockholders' equity (40,639) 68,619 -- 27,280 59,722 -- -- 59,722
(700)
------- ------- ------- ---- ------- ------- ------- ------- -------
Total liabilities and
stockholders' equity -- 66,651 (700) 300 66,251 59,722 (40,639) (7,159) 11,924
======= ======= ======= ==== ======= ======= ======= ======= =======
(a) Records the liability for the cash portion of the consideration to be paid
to the stockholders of the Founding Companies in connection with the
Combinations.
(b) Records the purchase of the Founding Companies, consisting of $40,639 (net
of $12,318 of earnout) in cash and 2,869,268 shares of common stock valued
at $11.25 per share (or $32,279), for a total estimated purchase price of
$72,918. Adjustment also reflects $674 of certain assets which will not be
acquired and $1,968 of certain liabilities which will not be assumed in
the Combinations and the allocation of $700 of the purchase price to
acquired research and development activities (in-process research and
development) at a Founding Company. The excess purchase price over the
fair value of the net assets acquired is $66,925.
(c) Records the write-off of the acquired in-process research and development
from a Founding Company.
(d) Records the net deferred income tax liability attributable to the
temporary differences between the financial reporting and tax basis of
assets and liabilities held in S Corporations of $ 300 at certain Founding
Companies.
(e) Records the cash proceeds from the issuance of shares of DMS Common Stock
net of estimated offering costs (based on an assumed initial public
offering of $______ per share). Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and
printing expenses.
(f) Records the cash portion of the consideration to be paid to the
stockholders of the Founding Companies in connection with the Combinations
($________) to be paid from proceeds of the Offering and the loan
receivable of $12,318 related to earnout.
(g) Records the use of a portion of the proceeds from the Offering to repay
short-term and long-term debt assumed in the Combinations.
F-17
NOTE 4 - UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statements of
operations adjustments:
For the year ended December 31, 1996:
Total
Pro Forma
(A) (B) (C) (D) (E) Adjustments
------ ------ ------ ------ ------ -----------
Net revenues (9,705) (9,705)
Cost of Revenues (8,448) (8,448)
Gross profits (1,257) (1,257)
------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing (1,515) (1,515)
General and administrative expenses (2,071) (381) (1,024) (3,476)
Other operating expenses (361) (361)
Depreciation and amortization -- 2,066 (58) 2,008
------ ------ ------ ------ ------ ------
Operating income (loss) 2,071 381 (2,066) 1,701 2,087
Other (income) expense:
Interest expense
Other, net
------ ------ ------ ------ ------ ------
Income (loss) before provision for
income taxes 2,071 381 (2,066) 1,701 2,087
Provision for income taxes -- -- 1,696 1,696
------ ------ ------ ------ ------ ------
Net income (loss) 2,071 381 (2,066) 1,701 (1,696) 391
====== ====== ====== ====== ====== ======
For the Six months ended June 30, 1997:
Total
Pro Forma
(A) (B) (C) (D) (E) Adjustments
------ ------ ------ ------ ------ -----------
Net revenues (6,183) (6,183)
Cost of revenues (5,514) (5,514)
------ ------ ------ ------ ------ ------
Gross profit (669) (669)
Operating expenses:
Sales and marketing (736) (736)
General and administrative expenses (810) (403) (315) (1,528)
Other operating expenses (146) (146)
Depreciation and amortization -- 1,039 (36) 1,003
------ ------ ------ ------ ------ ------
Operating income (loss) 810 403 (1,039) 564 738
Other (income) expense:
Interest expense
Other, net
------ ------ ------ ------ ------ ------
Income (loss) before provision for
income taxes 810 403 (1,039) 564 738
Provision for income taxes -- 1,094 1,094
------ ------ ------ ------ ------ ------
Net income (loss) 810 403 (1,039) 564 (1,094) (356)
====== ====== ====== ====== ====== ======
For the Six months ended June 30, 1996:
Total
Pro Forma
(A) (B) (C) (D) (E) Adjustments
------ ------ ------ ------ ------ -----------
Net revenues (4,144) (4,144)
Cost of revenues (3,489) (3,489)
------ ------ ------ ------ ------ ------
Gross profit (655) (655)
Operating expenses:
Sales and marketing (707) (707)
General and administrative expenses (1,119) (125) (120) (1,364)
Other operating expenses (159) (159)
Depreciation and amortization -- 1,039 (40) 999
------ ------ ------ ------ ------ ------
Operating income (loss) 1,119 125 (1,039) 371 576
Other (income) expense:
Interest expense
Other, net
------ ------ ------ ------ ------ ------
Income (loss) before provision for
income taxes 1,119 125 (1,039) 371 576
Provision for income taxes -- 921 921
------ ------ ------ ------ ------ ------
Net income (loss) 1,119 125 (1,039) 371 (921) (345)
====== ====== ====== ====== ====== ======
F-18
(a) Reflects the reductions in salaries, bonuses and benefits to the owners of
the Founding Companies to which they have agreed prospectively.
(b) Reflects the reduction in royalty payments made by certain Founding
Companies in accordance with franchise agreements which will be terminated
as a result of the Combinations.
(c) Reflects the amortization of goodwill to be recorded as a result of the
Combinations over 5 to 40-year estimated lives.
(d) Reflects the disposal of a segment of a business at one Founding Company.
Approximately 80% of the segment was disposed of subsequent to the June
30, 1997 balance sheet and management has a formal plan to dispose of the
remaining portion of the segment prior to the close of the Combinations.
(e) Reflects the incremental provision for federal and state income taxes
assuming all entities were subject to federal and state income tax and
relating to the other statements of operations' adjustments assuming a
corporate income tax rate of 40% and that a majority of the goodwill is
non-deductible.
F-19
Report of Independent Accountants
To the Board of Directors and Stockholders of
Dispatch Management Services Corp.
In our opinion, the accompanying balance sheet presents fairly, in
all material respects, the financial position of Dispatch Management Services
Corp. at June 30, 1997, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying balance sheet has been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1, the realization of the
recorded assets and liabilities is subject to the receipt of future proceeds
which are currently anticipated from a public offering. Should such proceeds not
be received, there is substantial doubt about the Company's ability to continue
as a going concern. No adjustments have been recorded to reflect this
uncertainty.
Price Waterhouse LLP
Detroit, Michigan
September 15, 1997
F-20
DISPATCH MANAGEMENT SERVICES CORP.
BALANCE SHEET
(Dollars in Thousands)
June 30,
1997
--------
Assets
Cash $ 4
Accounts receivable and other 29
Deferred offering costs 394
-----
Total assets $ 427
=====
Liabilities and Stockholders' Equity
Accrued liabilities $ 249
Accounts payable to related party 116
Stockholders' equity
Preferred stock, $.01 par, 10,000,000
shares authorized
Series A 14,000 shares issued and outstanding
Common stock, $.01 par, 100,000,000 shares
authorized, 10 shares issued and outstanding
Additional paid-in-capital 84
Accumulated deficit (22)
-----
Total stockholders' equity 62
-----
Total liabilities and stockholders' equity $ 427
=====
See accompanying notes to financial statements.
F-21
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
Dispatch Services Management Corp. (the "Company") was incorporated on
September 9, 1997. Dispatch Management Services LLC ("DMS LLC") merged
into the Company effective September 9, 1997. The owners of DMS LLC, in
connection with the merger, received in exchange for their ownership
interest in DMS LLC, common and preferred stock of the Company as
described further in Note 2. The merger was consummated to facilitate an
initial public offering of securities and was accounted for at historical
cost because the same shareholder group controlled both entities.
Dispatch Management Services LLC, Inc. was founded in November 1996 to
create a nationwide network of same-day, on-demand delivery services. The
Company intends to acquire a number of U.S. and foreign business (the
"Mergers"), upon consummation of an initial public offering (the
"Offering") of its common stock and, subsequent to the Offering, continue
to acquire through merger or purchase, similar companies to expand its
international operations.
The Company has not conducted any significant operations, and all
activities to date have primarily related to the Offering and the Mergers.
The Company's cash balances were mainly generated from the capitalization
of the Company and from the receipt of certain software license fees as
discussed further in Note 3. Accordingly, statements of operations and
cash flows for this period would not provide meaningful information and
have been omitted. Operating expenses subsequent to inception consist
mainly of certain administrative costs. As of June 30, 1997, approximately
$394 has been incurred in connection with the Offering, and the Company
has capitalized these costs as deferred offering costs. These costs
include consulting, legal and accounting fees which will be offset against
the proceeds of the Offering at closing. The Company is dependent upon the
Offering to execute the pending Mergers. There is no assurance that the
pending Mergers discussed will be completed or that the Company will be
able to generate future operating revenues.
On September 9, 1997, the Company acquired Kiwi Express Software LLC
("Kiwi") for consideration of 100 shares of Series B preferred stock. The
shareholders of Kiwi are also among the shareholders of the company. Each
share of Series B preferred stock will, upon the initial public offering
of securities, be automatically converted into sufficient shares of common
stock such that the aggregate consideration received by the Series B
stockholders will equal $500. The acquisition will be accounted for as a
purchase as no single shareholder controlled both Kiwi and the Company.
Summary financial information of Kiwi is as follows:
As of and for the six months
ended June 30, 1997
(unaudited)
Revenue $107
Net income 32
Total assets 101
Net assets 62
2. Stockholders' Equity
The capital structure of DMS LLC at June 30, 1997 has been conformed to
reflect the current capital structure of the Company. In conjunction with
the initial capitalization of DMS LLC 2,000,000 shares of Class A common
stock were issued for a total consideration of $2. In addition, at various
times prior to June 30, 1997, DMS LLC issued approximately 14,000 shares
of Class B common stock for approximately $5.83 per share. Subsequent to
June 30, 1997, DMS LLC issued approximately 117,000 shares of Class B
common stock for approximately $5.83 per share in addition to the shares
of Class B common stock issued related to certain notes payable as
discussed further in Note 6.
Under the terms of the merger agreement of DMS LLC into the Company, each
200,000 shares of Class A common stock of DMS LLC was exchanged for 1
share of common stock of the Company, and each share of Class B common
stock of DMS LLC was exchanged for 1 share of Series A preferred stock of
the Company. Each share of Series A preferred stock will upon the initial
public offering of securities, be converted into one share of common stock
should the initial public offering price be greater than $8.33. To the
extent that the initial public offering price is less than $8.33 per share
additional shares of common stock will be issued such that the total value
of the common stock received for each share of Series A preferred stock
will be $8.33.
3. Software License Agreement
In December 1996, the Company entered into a software license and
development agreement with Kiwi under which the Company was granted an
exclusive world-wide license for the use of certain proprietary software
owned by Kiwi. The software helps manage and operate the dispatching,
billing, collection and settlement functions for companies performing
point-to-point urgent delivery services
Under the terms of the software license and development agreement, the
Company has the right to grant sub-licenses for the use of the software to
those companies performing point-to-point urgent delivery services. To the
extent the Company has sub-licensed the use of the software, the Company
shall pay Kiwi a license fee equal to a defined license percentage
(currently 1%) of the sub-licensee's adjusted receipts related to
point-to-point delivery services.
As of June 30, 1997, the Company has sub-licensed the software to
approximately nineteen companies. Under the terms of the sub-license
agreements, the Company will receive a sub-license fee equal to a defined
license percentage (currently 1%) of the sub-licensee's adjusted receipts
related to point-to-point delivery services.
F-22
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
Accounts payable to related party at June 30, 1997 on the accompanying
balance sheet primarily represent software license fees due Kiwi. Accounts
receivable at June 30, 1997 on the accompanying balance sheet primarily
represent primarily amounts due the Company from sub-licensees.
4. 1-800-DELIVER License Agreement
The Company has entered into a license agreement with Universal Coupon
Corporation and 1-800-DELIVER-TO-YOU CORP. for the use of certain
toll-free telephone numbers. The terms of the licensing agreement required
the Company to make an initial payment of $5 followed by monthly payments
thereafter of $1. The Company has the option to purchase the license
outright for a price of $100 with the sum of the initial payment and
one-half of all the license fees paid (not to exceed $50) being credited
towards the purchase price. At June 30, 1997, approximately $13 related to
this license is included in deferred offering costs on the accompanying
balance sheet.
5. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 128. Earnings per share (SFAS No.
128). For the Company, SFAS No. 128 will be effective for the year ended
December 31, 1997. SFAS No. 128 simplifies the standards required under
current accounting rules for computing earnings per share and replaces the
presentation of primary earnings per share and fully-diluted earnings per
share with a presentation of basic earnings per share (basic EPS) and
diluted earnings per share (diluted EPS). Basic EPS excludes dilution and
is determined by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could offer if securities
and other contracts to issue common stock were exercised or converted into
common stock. Diluted EPS is computed similarly to fully-diluted earnings
per share under current accounting rules. The implementation of SFAS No.
128 is not expected to have a material effect on the Company's earnings
per share as determined under current accounting rules.
The Company plans to adopt a stock incentive plan. Statement of Financial
Standards No. 123, "Accounting for Stock-Based Compensation", allows
entities to choose between a new fair value based method of accounting for
employee stock options or similar equity instruments and the current,
intrinsic value-based method of accounting prescribed by Accounting
Principles Board Option No. 25, ("APB 25"). Entities electing to remain
with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share as of the fair value method of accounting
had been applied. The Company will provide pro forma disclosure of net
income and earnings per share, as applicable, in the notes to future
consolidated financial statements.
6. Subsequent Events
Note Payable
During July 1997 the Company entered into a $1,000 loan agreement with DMS
Equity Investors Limited Partnership (" Partnership"). This note bears
interest at the rate of 10% and matures the earlier of the following: (1)
a date eighteen months after the date of the note or (2) the closing date
of the initial public offering of the equity securities. On the maturity
date, the unpaid principal balance and accrued interest shall be due and
payable in full. The note is secured by substantially all of the assets of
the Company.
In conjunction with entering into the loan arrangement, the Company
entered into investment agreements with the four members of the
Partnership. Under the terms of the investment agreements, the Company
issued a total of 28,580 shares of common stock to the four partners in
exchange for a total investment of $3. Each of the four partners is
entitled to own .35% of the common stock of the corporation formed
calculated on a fully diluted basis after giving effect to the issuance of
securities in an initial public offering.
Share Purchase Agreement
In August 1997 the Company entered into a definitive share purchase
agreement to acquire the outstanding shares of Brookside Systems and
Programming Limited ("Brookside") effective contemporaneously with the
Offering. Brookside develops and markets software to the courier industry
in the United Kingdom. In accordance with the share purchase agreement,
the Company made a non-refundable down-payment of approximately $323.
F-23
7. Unaudited Subsequent Events
The Company has signed definitive agreements to either acquire by merger
or purchase certain assets and liabilities from a number of companies
(Founding Companies) to be effective contemporaneously with the Offering.
F-24
Report of Independent Auditors
The Members and Stockholders
Earlybird Courier Service, LLC,
and Total Management Support Services, LLC
We have audited the accompanying combined balance sheets of Earlybird
Courier Service, LLC, Total Management Support Services, LLC and their
affiliates (collectively, the "Company"), which is comprised of the companies
listed in Note 2, as of December 31, 1995 and 1996, and the related combined
statements of operations and retained earnings (accumulated deficit), and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Earlybird Courier
Service, LLC, Total Management Support Services, LLC and their affiliates at
December 31, 1995 and 1996 and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
September 3, 1997, except for Note 11,
as to which the date is October 1, 1997
F-25
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED BALANCE SHEETS
(Dollars in Thousands)
December 31 June 30
1995 1996 1997
---------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2 $ 6 $ 5
Accounts receivable, less allowance for doubtful
accounts of $50 (1995 and 1996) (Note 5) 1,908 2,462 2,630
Prepaid expenses 106 99 109
Other current assets 15 2 --
Due from stockholder (Note 9) 250 350 350
---------------------------
Total current assets 2,281 2,919 3,094
Property and equipment--net (Notes 4 and 5) 459 356 314
Intangible assets--net of accumulated amortization
of $290 (1995) and $431 (1996) (Note 5) 202 65 39
Due from affiliate 28 33 38
Other noncurrent assets 88 100 75
---------------------------
$ 3,058 $ 3,473 $ 3,560
===========================
Liabilities and stockholders' deficiency
Current liabilities:
Notes payable, current portion (Note 5) $ 549 $ 1,426 $ 1,233
Accounts payable 562 866 617
Accrued salaries and payroll taxes payable 402 274 849
Accrued expenses 332 587 234
Deferred revenue 36 -- --
Other current liabilities 7 5 5
---------------------------
Total current liabilities 1,888 3,158 2,938
Notes payable (Note 5) 1,067 857 946
Subordinated notes payable (Note 5) 900 900 900
Commitments and contingencies (Note 7)
Stockholders' deficiency (Note 3 ):
Common stock 5 5 5
Additional paid-in capital 69 69 69
Treasury stock (1,331) (1,331) (1,331)
Retained earnings (accumulated deficit) 460 (185) 33
---------------------------
Total stockholders' deficiency (797) (1,442) (1,224)
---------------------------
$ 3,058 $ 3,473 $ 3,560
===========================
See accompanying notes to financial statements.
F-26
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Accumulated Deficit)
(Dollars in Thousands)
(Note 10)
Year ended December 31 Six months ended June 30
1994 1995 1996 1996 1997
----------------------------------------------------------
(Unaudited)
Net sales (Note 8) $ 17,760 $ 21,967 $ 22,894 $ 10,653 $ 13,018
Cost of sales 12,978 15,187 15,860 7,209 9,210
---------------------------------------------------
Gross margin 4,782 6,780 7,034 3,444 3,808
Operating expenses 3,291 4,595 5,436 2,535 2,516
Sales and marketing 1,006 1,072 1,072 482 526
General and administrative expenses 387 506 670 323 326
Depreciation and amortization excluding
amortization of covenant not to compete 55 138 195 110 105
---------------------------------------------------
Operating income (loss) 43 469 (339) (6) 335
Other expenses:
Interest expense (Note 5) 157 260 219 95 107
Covenant not to compete (Note 5) 85 85 85 42 --
---------------------------------------------------
Income (loss) before provision for local
income taxes (199) 124 (643) (143) 228
Provision for local income taxes (Note 6) 15 30 2 2 10
---------------------------------------------------
Net income (loss) (214) 94 (645) (145) 218
Retained earnings (accumulated deficit),
beginning of period 580 366 460 460 (185)
---------------------------------------------------
Retained earnings (accumulated deficit),
end of period $ 366 $ 460 $ (185) $ 315 $ 33
===================================================
Unaudited pro forma information (Note 6):
Historical net income (loss) before
provision for income taxes (214) 94 (645) (145) 218
Provision (benefit) for income taxes (96) 42 (290) (65) 98
---------------------------------------------------
Pro forma net income (loss) $ (118) $ 52 $ (355) $ (80) $ 120
===================================================
See accompanying notes to financial statements.
F-27
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six months
Year ended December 31 ended June 30
1994 1995 1996 1996 1997
--------------------------------------
(Unaudited)
Operating activities
Net (loss) income $(214) $ 94 $(645) $(145) $ 218
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 182 273 315 167 105
Changes in operating assets and
liabilities:
Accounts receivable (186) (390) (554) (13) (168)
Prepaid expenses 17 (101) 7 54 (10)
Other current assets (1) 82 13 13 2
Due from affiliate (28) (1) (5) (12) (5)
Other noncurrent assets 169 (71) (12) (140) 25
Accounts payable and accrued
expenses 45 262 559 (132) (602)
Accrued salaries and payroll
taxes payable 39 217 (128) 109 575
Deferred revenue (132) 36 (36) (36) --
Other current liabilities 28 (124) (2) (2) --
--------------------------------------
Net cash provided by (used in)
operating activities (81) 277 (488) (137) 140
Investing activities
Purchases of property and equipment (239) (291) (75) (54) (37)
--------------------------------------
Net cash used in investing activities (239) (291) (75) (54) (37)
Financing activities
Proceeds from notes payable 560 -- 925 418 16
Payments on notes payable (276) (553) (258) (129) (120)
Payments to former owners (87) (250) (100) (100) --
Financing costs (60) (96) -- -- --
Proceeds from subordinated notes payable -- 900 -- -- --
--------------------------------------
Net cash provided by (used in)
financing activities 137 1 567 189 (104)
--------------------------------------
Net increase (decrease) in cash and
cash equivalents (183) (13) 4 (2) (1)
Cash and cash equivalents at beginning
of period 198 15 2 2 6
--------------------------------------
Cash and cash equivalents at end of $ 15 $ 2 $ 6 $ -- $ 5
period
======================================
Supplemental disclosure of cash flow
information
Interest paid $ 157 $ 250 $ 209 $ 95 $ 107
======================================
Local income taxes paid $ 28 $ 26 $ 2 $ 2 $ --
======================================
See accompanying notes to financial statements.
F-28
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1995 and 1996 and
the six months ended June 30, 1996 and 1997
(Information as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 is unaudited)
1. Business Organization
Earlybird Courier Service, LLC ("Earlybird LLC") is engaged in the
logistics and courier business in the New York Metropolitan area. Total
Management Support Services, LLC ("TMSS LLC") is engaged in full-service
outsourcing and facilities management for clients located in several major
cities throughout the United States. Total Management LLC is a holding
company and the direct owner of Earlybird LLC and TMSS LLC. On January 1,
1995, Earlybird Messenger Service, Inc. transferred substantially all of
its operating assets and liabilities to a newly formed entity, Total
Management LLC, which was immediately followed by a contribution of these
assets and liabilities from Total Management LLC to a newly formed entity,
Earlybird LLC. Simultaneously, Total Management Support Services, Inc.
transferred substantially all of its operating assets and liabilities to
Total Management LLC, which was immediately followed by a contribution of
these assets and liabilities from Total Management LLC to a newly formed
entity, TMSS LLC. Earlybird Messenger Service, Inc. and Total Management
Support Services, Inc. own 88% and 1%, respectively, of Total Management
LLC.
Effective January 1, 1995, one stockholder effectively owns approximately
90% of Earlybird LLC, TMSS LLC, Total Management LLC, approximately 100%
of Earlybird Messenger Service, Inc. and approximately 60% of Total
Management Support Services, Inc.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying combined financial statements include the accounts of
Earlybird LLC, TMSS LLC, Total Management LLC, Earlybird Messenger
Service, Inc. and Total Management Support Services, Inc. all of which are
under common control (collectively, the "Company"). Although the majority
stockholder did not have a majority interest prior to January 1, 1995, the
statements of operations and retained earnings (accumulated deficit) and
cash flows for the year ended December 31, 1994 have also been combined
because they represent the results of operations and cash flows of the
predecessor businesses. All significant intercompany balances and
transactions have been eliminated in the accompanying combined financial
statements.
Unaudited Information
The unaudited financial statements at June 30, 1997 and for the six months
ended June 30, 1996 and 1997 reflect adjustments, all of which are of a
normal recurring nature, which are, in the opinion of management,
necessary to a fair presentation. The results for the interim periods
presented are not necessarily indicative of full year results.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Courier services and facilities management revenues are recognized in the
period in which they are earned.
Deferred Revenue
Deferred revenue represents revenue received in advance for services
provided in January 1996.
F-29
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (continued)
Cash Equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
The Company maintains its cash principally in one financial institution.
Depreciation
Depreciation of property and equipment is provided for on the
straight-line basis and accelerated methods over the estimated useful
lives of the assets, which range from three to eight years. Leasehold
improvements are depreciated over the lives of the respective leases.
Intangible Assets
Intangible assets consist of deferred financing costs and a covenant
not-to compete. Deferred financing costs are amortized over the term of
the related financing and the covenant not-to-compete is amortized over
the term of the covenant.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes payable and accrued expenses approximates fair
value because of the short maturity of these instruments. The estimated
fair value of long-term debt approximates its carrying value.
Additionally, interest rates on outstanding debt are at rates which
approximate market rates for debt with similar and average maturities.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and, accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
F-30
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
3. Stockholders' Deficiency (dollars in thousands)
Common Stock
(No Par Value)
Additional
Members Number of Paid-in Treasury
Capital Shares Amount Capital Stock
------------------------------------------------------------------------
Total Management Support Services, Inc.
(200 shares authorized) $ - 50 $ 1 $ 69 $ (199)
Earlybird Messenger Service, Inc.
(200 shares authorized) - 35 4 - (1,132)
------------------------------------------------------------------------
Balance at December 31, 1994 - 85 5 69 (1,331)
Earlybird Courier Service, LLC - - - - -
Total Management Support Services, LLC - - - - -
Total Management LLC - - - - -
Net loss for the year ended
December 31, 1995 - - - - -
------------------------------------------------------------------------
Balance at December 31, 1995 - 85 5 69 (1,331)
Net loss for the year ended
December 31, 1996 - - - - -
------------------------------------------------------------------------
Balance at December 31, 1996 - 85 5 69 (1,331)
Net income for the six months ended
June 30, 1997 - - - - -
------------------------------------------------------------------------
Balance at June 30, 1997 $ - 85 $ 5 $ 69 $ (1,331)
========================================================================
Retained
Earnings Total
(Accumulated Stockholders'
Deficit) (Deficiency)
----------------------------------
Total Management Support Services, Inc.
(200 shares authorized) $ 581 $ 452
Earlybird Messenger Service, Inc.
(200 shares authorized) (215) (1,343)
----------------------------------
Balance at December 31, 1994 366 (891)
Earlybird Courier Service, LLC - -
Total Management Support Services, LLC - -
Total Management LLC - -
Net loss for the year ended
December 31, 1995 94 94
----------------------------------
Balance at December 31, 1995 460 (797)
Net loss for the year ended
December 31, 1996 (645) (645)
----------------------------------
Balance at December 31, 1996 (185) (1,442)
Net income for the six months ended
June 30, 1997 218 218
==================================
Balance at June 30, 1997 $ 33 $ (1,224)
==================================
Earlybird Messenger Service, Inc. has treasury stock of 65 shares of
common stock and Total Management Support Services, Inc. has treasury
stock of 50 shares of common stock.
4. Property and Equipment
Property and equipment consists of the following (dollars in thousands):
December 31
--------------------------
1995 1996
--------------------------
Furniture and fixtures $ 554 $ 572
Leasehold improvements 192 199
Computer equipment 439 489
Automobiles 8 8
--------------------------
1,193 1,268
Less accumulated depreciation 734 912
--------------------------
$ 459 $ 356
==========================
F-31
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
5. Financing Arrangements
Notes Payable
Notes payable consists of the following (dollars in thousands):
December 31
1995 1996
-------------------------
Note due to the National Westminster Bank (a) $ 19 $ -
Equipment loan due to Sterling National
Bank & Trust Company (b) 63 17
Credit line with Sterling National Bank &
Trust Company (b) 289 1,214
Copytex equipment loan (c) 53 21
Notes payable to former stockholder (d) 1,192 1,031
-------------------------
1,616 2,283
Less current portion due within one year 549 1,426
-------------------------
$ 1,067 $ 857
=========================
(a) The note due to National Westminster Bank bore interest at 11.75%
per annum, and was repaid in monthly installments over a five year
period.
(b) The Company has entered into several credit agreements with the
Sterling National Bank & Trust Company. These credit arrangements
consisted of an equipment loan with interest at 8.875% per annum and
a short-term credit line. The equipment loan is collateralized by
equipment of the Company and is guaranteed by officers of the
Company. The loan principal is being repaid in 40 equal monthly
installments with the last payment due April 1, 1997. The short-term
credit line is collateralized by accounts receivable and bears
interest at the bank's prime rate plus 1-1/4%.
(c) This loans for the purchase of equipment is repayable in 36 equal
monthly installments including interest through July 1997.
(d) Effective January 1, 1993, Earlybird Messenger Service, Inc.
repurchased stock of the company held by one of its stockholders.
The purchase price was $1,500,000 inclusive of interest at 8% per
annum, payable in 96 equal monthly installments commencing February
1, 1994. The principal amount due on this note amounted to
approximately $891,000 and $771,000 at December 31, 1995 and 1996,
respectively. Earlybird Messenger Services, Inc. also entered into a
noncompetition agreement with this former stockholder for a period
of 4 years commencing January 1, 1993. As consideration for entering
into this agreement, Earlybird Messenger Service, Inc. agreed to pay
$500,000 to the former stockholder in 96 equal monthly installments
commencing in February 1, 1994. Accordingly, the covenant
not-to-compete was valued at the present value of the $500,000 to be
paid using a discount rate of 8%. The present value of the amount
payable for the covenant not-to-compete amounted to approximately
$301,000 and $260,000 at December 31, 1995 and 1996, respectively.
F-32
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
5. Financing Arrangements (continued)
Subordinated Notes Payable
On February 28, 1995, Total Management LLC entered into two term loan
commitments, with a venture capital group (the "Lender"), to borrow
$900,000 in installments of $500,000 and $400,000, respectively, at prime
plus 1/2% with repayment terms to commence no earlier than March 1, 1998.
Simultaneously, Total Management LLC issued to the Lender warrants to
acquire up to 50% of the equity of Total Management LLC, in lieu of
repayment of the loans, subject to certain terms and conditions. The
warrants expire on February 28, 1998. Financing costs incurred amounted to
approximately $155,000 (of which $60,000 was paid in 1994) and are being
amortized over the three year period ending in February 1998.
Effective January 1, 1996 through December 31, 1996, the Company was
entitled to defer the payment of interest on the subordinated notes
payable. Effective January 1, 1997, the lender irrevocably waived the
payment of all interest accrued for the period from January 1, 1996 to
December 31, 1996 and waived the accrual and payment of any future
interest on the aforementioned notes.
6. Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Total Management LLC, Earlybird LLC and
TMSS LLC file separate income tax returns and are treated as Partnerships
for federal, New York State and New York City income tax purposes. These
entities file their tax returns on the cash basis of accounting. Earlybird
Messenger Service, Inc. and Total Management Support Services, Inc. also
file separate income tax returns and have elected to be treated as S
Corporations under Subchapter S of the Internal Revenue Code. Accordingly,
the Company is not subject to federal income taxes because the
stockholders include the Company's income in their personal income tax
returns. The LLC's are subject to New York City unincorporated business
tax and the S Corporations are subject New York City Corporate income
taxes and New York state minimum tax.
The unaudited pro forma income tax information included in the combined
statements of operations and retained earnings (accumulated deficit)
represents an adjustment to record a provision for income taxes as if the
Company had been subject to federal and state income taxes for all periods
presented. The provision (benefit) for pro forma income taxes on net
income (loss) using an effective rate of 45% differs from the amounts
computed by applying the applicable federal statutory rate (34%) due to
state and local taxes.
7. Commitments and Contingencies
Lease Commitments
Office space is leased under operating leases expiring through 2001. The
leases provide for minimum annual rent, plus expense escalations. The
Company leases certain equipment for periods up to five years under
operating leases, expiring through 2002.
F-33
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
7. Commitments and Contingencies (continued)
The approximate minimum rental commitments under noncancellable leases for
office space and equipment are as follows (dollars in thousands):
Year ending December 31:
1997 $ 403
1998 625
1999 640
2000 526
2001 505
2002 76
--------
Total minimum payments required $ 2,775
========
Rent expense amounted to approximately $215,000, $260,000 and $355,000,
for the years ended December 31, 1994, 1995 and 1996, respectively.
Litigation
In the normal course of business, the Company is subject to certain claims
and litigation, including unasserted claims. The Company and its counsel
are of the opinion that, based on information presently available, such
legal matters will not have a material adverse effect on the financial
position or results of operations of the Company.
8. Significant Customers
For the years ended December 31, 1995 and 1996, one customer, an office
supplies manufacturer and distributor, accounted for 15% and 14%,
respectively, of the Company's total revenue.
For the year ended December 31, 1996, one customer, a financial services
firm, accounted for 12% of the Company's total revenue.
9. Amount Due from Stockholder
The amount due from stockholder is interest-free and has no fixed
repayment terms.
The Company has also guaranteed certain obligations of this stockholder
amounting to approximately $632,000 at December 31, 1996.
F-34
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
10. Business Segments (dollars in thousands)
Six months ended
Year ended December 31, June 30,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
Net sales:
Courier services $ 9,996 $ 13,867 $ 13,189 $ 6,509 $ 6,835
Facilities management 7,764 8,100 9,705 4,144 6,183
--------------------------------------------------
17,760 21,967 22,894 10,653 13,018
--------------------------------------------------
Cost of sales:
Courier services 6,739 8,195 7,412 3,720 3,696
Facilities management 6,239 6,992 8,448 3,489 5,514
--------------------------------------------------
12,978 15,187 15,860 7,209 9,210
--------------------------------------------------
Gross margin:
Courier services 3,257 5,672 5,777 2,788 3,139
Facilities management 1,525 1,108 1,257 656 669
--------------------------------------------------
4,782 6,780 7,034 3,444 3,808
--------------------------------------------------
Operating expenses:
Courier services 2,563 3,873 3,185 1,394 1,359
Facilities management 728 722 2,251 1,141 1,157
--------------------------------------------------
3,291 4,595 5,436 2,535 2,516
--------------------------------------------------
Sales and marketing:
Courier services 399 515 303 144 143
Facilities management 607 557 769 338 383
--------------------------------------------------
1,006 1,072 1,072 482 526
--------------------------------------------------
Depreciation and amortization:
Courier services 37 107 137 70 69
Facilities management 18 31 58 40 36
--------------------------------------------------
55 138 195 110 105
--------------------------------------------------
General and administrative 387 506 670 323 326
--------------------------------------------------
Operating income (loss) $ 43 $ 469 $ (339) $ (6) $ 335
==================================================
Identifiable assets:
Courier services $ 1,482 $ 2,403 $ 2,356 $ 2,765 $ 2,530
Facilities management 717 655 1,117 376 1,030
--------------------------------------------------
$ 2,199 $ 3,058 $ 3,473 $ 3,141 $ 3,560
==================================================
Capital expenditures:
Courier services $ 122 $ 161 $ 23 $ 27 $ 13
Facilities management 117 130 52 27 24
--------------------------------------------------
$ 239 $ 291 $ 75 $ 54 $ 37
==================================================
F-35
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
11. Subsequent Events
On September 30, 1997, the Company sold certain of its facilities
management business assets consisting primarily of six customer accounts
for $1.25 million. Under the terms of the sale agreement, the Company
entered into a covenant not to compete in the facilities management
business for a period of five years. Net sales, cost of sales, gross
margin and accounts receivable related to these customers were as follows
(dollars in thousands):
Year ended Six months ended June 30
December 31, ------------------------
1996 1996 1997
-------------------------------------
Net sales $ 3,553 $ 1,526 $ 2,704
Cost of sales 2,844 1,217 2,162
-------------------------------------
Gross margin $ 709 $ 309 $ 542
=====================================
Accounts receivable $ 218 $ 235 $ 154
=====================================
In October 1997, the Board of Managers resolved to discontinue its
facilities managements business and the officers of the Company were
authorized to sell the remaining facilities management business or
discontinue such operations.
12. Agreement with DMS (Unaudited)
Earlybird Courier Service, LLC and Total Management Support Services LLC
(collectively the LLC's) have entered into a definitive agreement with
Dispatch Management Services Corp. ("DMS") pursuant to which DMS will
acquire substantially all of the assets and assume substantially all of
the liabilities of the LLC's in exchange for cash and common stock of DMS
concurrent with the consummation of an initial public offering of the
common stock of DMS.
F-36
Report of Independent Accountants
To the Board of Directors and Stockholders of
Atlantic Freight Systems, Inc.
In our opinion, the accompanying combined balance sheets and the
related combined statements of operations, combined stockholders' equity and
combined cash flows present fairly, in all material respects, the financial
position of Atlantic Freight Systems, Inc. and affiliated companies as listed in
Note 1 at December 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Philadelphia, PA
September 3, 1997
F-37
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED BALANCE SHEETS
(Dollars in Thousands)
December 31,
------------- June 30,
1995 1996 1997
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 42 $ 71 $ 71
Accounts receivable, net 950 1,158 783
Prepaid and other current assets 53 63 45
Related party receivable 124
------- ------- -------
Total current assets 1,169 1,292 899
Property and equipment, net 658 802 757
Other 105 119 161
------- ------- -------
$ 1,932 $ 2,213 $ 1,817
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $ -- $ -- $ 61
Accounts payable 369 794 515
Accrued expenses 64 64 105
Short-term lease obligation 100 165 166
Related party payable 79 361 289
------- ------- -------
Total current liabilities 612 1,384 1,136
Deferred income taxes 328 243 218
Long-term lease obligation 295 405 320
Other 25 18 22
------- ------- -------
Total liabilities 1,260 2,050 1,696
------- ------- -------
Commitments and contingencies
Stockholders' equity:
Common stock $1.00 par value; 15,000 shares
authorized; 15,000 shares issued, 10,000 shares outstanding 15 15 15
Retained earnings 919 410 368
Less - Treasury stock, at cost (5,000 shares at June 30, 1997,
December 31, 1996 and 1995) (262) (262) (262)
------- ------- -------
Total stockholders' equity 672 163 121
------- ------- -------
Total liabilities and stockholders' equity $ 1,932 $ 2,213 $ 1,817
======= ======= =======
See accompanying notes to combined financial statements.
F-38
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF INCOME
(Dollars in Thousands)
Six months ended
Years Ended December 31, June 30,
------------------------------------ ---------------------------
1994 1995 1996 1996 1997
(Unaudited)
Net sales $ 5,338 $ 6,104 $ 8,728 $ 3,767 4,308
Cost of sales (2,904) (3,546) (5,941) (2,798) (3,001)
----------- ----------- ------------ ------------ ------------
Gross margin 2,434 2,558 2,787 969 1,307
Operating expenses 1,269 1,454 2,232 861 842
Sales and marketing expenses 132 115 105 50 88
General and administrative expenses 485 659 693 216 238
Depreciation and amortization 52 153 270 135 164
----------- ----------- ------------ ------------ ------------
Operating income (loss) 496 177 (513) (293) (25)
----------- ----------- ------------ ------------ ------------
Other (income)/expense
Interest expense 9 43 83 38 36
Other (income)/expense, net (5) (12) 36 19 5
------------ ------------ ------------ ------------ ------------
Income (loss) before provision (benefit)
for income taxes 492 146 (632) (350) (66)
Provision (benefit) for income taxes 203 76 (123) (126) (24)
----------- ----------- ------------ ------------ ------------
Net income (loss) $ 289 $ 70 $ (509) $ (224) $ (42)
=========== =========== ============ ============ ============
See accompanying notes to combined financial statements.
F-39
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Common Treasury Retained
stock stock earnings
Balance at January 1, 1994 $ 15 $ (262) $ 560
1994 net income 289
------ --------- --------
Balance at December 31, 1994 15 (262) 849
------ --------- --------
1995 net income 70
------ --------- --------
Balance at December 31, 1995 15 (262) 919
------ --------- --------
1996 net loss (509)
------ --------- --------
Balance at December 31, 1996 15 (262) 410
Six months ended June 30, 1997
net loss (unaudited) (42)
------ --------- --------
Balance at June 30, 1997 (unaudited) $ 15 $ (262) $ 368
====== ========= ========
See accompanying notes to combined financial statements.
F-40
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six months ended
Year Ended December 31, June 30,
----------------------- -----------------
1994 1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities
Net income (loss) $ 289 $ 70 $(509) $(224) $ (42)
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating
activities
Depreciation and amortization 52 153 270 135 164
Changes in assets and liabilities:
Accounts receivable (281) (163) (208) 1 375
Related party receivable 9 (22) 125 123 --
Prepaid and other current assets (33) (3) (10) 19 18
Other assets (16) (51) (14) (8) (13)
Accounts payable 75 123 425 96 (189)
Accrued expenses 5 85 (8) (25) (40)
Short-term lease obligation 10 68 65 55 1
Deferred income taxes 194 63 (85) (80) (59)
----- ----- ----- ----- -----
Net cash provided by (used for)
operating activities 304 323 51 92 215
----- ----- ----- ----- -----
Cash flows from investing activities
Purchases of property and equipment (211) (531) (414) (414) (119)
----- ----- ----- ----- -----
Net cash used for investing activities (211) (531) (414) (414) (119)
----- ----- ----- ----- -----
Cash flows from financing activities
Increase in line of credit -- -- -- -- 61
(Issuances to) borrowings from related parties (51) (33) 282 142 (71)
Principal payments under long-term lease obligation (5) 245 110 198 (86)
----- ----- ----- ----- -----
Net cash provided by (used for)
financing activities (56) 212 392 340 (96)
----- ----- ----- ----- -----
Net increase in cash and equivalents 37 4 29 18 --
Cash and equivalents at beginning of the period 1 38 42 42 71
----- ----- ----- ----- -----
Cash and equivalents at end of the period $ 38 $ 42 $ 71 $ 60 $ 71
===== ===== ===== ===== =====
Cash paid for
Interest $ 9 $ 43 $ 83 $ 38 $ 36
Income taxes 14 0 3 0 0
See accompanying notes to combined financial statements.
F-41
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Business Organization and Basis of Presentation
Atlantic Freight Systems, Inc.; Pacific Freight Systems, Inc.; Westchester
Putnam Freight Services, Inc.; Atlantic Freight Services, Inc.; and
Atlantic Freight of ATL, Inc. provide same day, on-demand delivery
services under the trade name of Atlantic Freight Systems, Inc. These
services are provided to the metropolitan and suburban areas surrounding
Newark Airport (New Jersey), JFK Airport (New York City), Stewart Airport
(Newburgh, NY), Philadelphia Airport (Pennsylvania), Atlanta Airport
(Georgia), and Savannah Airport (Georgia). Operations at the Philadelphia,
Atlanta and Savannah Airports have been discontinued or divested effective
December 31, 1996. See Note 9 for further discussion.
These financial statements present the historical financial position,
results of operations and cash flows of these combined entities and their
consolidated subsidiaries during the periods presented. These combined
companies were centrally owned and managed for all periods presented and
are collectively referred to as "Atlantic Freight Systems, Inc." or the
"Company" throughout these financial statements. All significant
intercompany transactions have been eliminated.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately
three months or less at date of purchase to be cash equivalents.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets which generally range from 3-15 years.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/payable, related parties
receivable/payable and accrued expenses approximates fair value because of
the short maturity of these instruments. The estimated fair value of other
long-term liabilities approximates its carrying value. Additionally,
interest rates on outstanding debt are at rates which approximate market
rates for debt with similar terms and average maturities.
F-42
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. The Company provides its services predominately to the air
freight forwarding industry in the New York metropolitan area. Receivables
are not collaterized and accordingly, the Company performs ongoing credit
evaluations of its customers to reduce the risk of loss. The Company's ten
largest customers accounted for approximately 70%, 64% and 65% of sales in
1994, 1995 and 1996 respectively.
Major customers
In 1994, the Company's three largest customers accounted for approximately
25%, 15% and 10% of sales. In 1995, the Company's two largest customers
accounted for approximately 23% and 14% of sales. In 1996, the Company's
two largest customers accounted for approximately 23% and 11% of sales.
Fiscal Year
The fiscal year of the Company ends on the Saturday nearest to December
31. For ease of presentation, the year-end date is presented throughout
these financial statements as December 31, for 1994, 1995 and 1996.
Income taxes
The Company is a C-Corporation for federal and state income tax purposes.
The Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (FAS 109).
Unaudited Interim Financial Statements
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and June 30, 1997 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the results for the interim periods.
3. Allowance for Doubtful Accounts
Balance at Charged to Balance
beginning costs and at end
of period expenses Write-offs of period
Year ended December 31, 1994 $ 16 $ 113 $ (100) $ 29
Year ended December 31, 1995 $ 29 $ 222 $ (185) $ 66
Year ended December 31, 1996 $ 66 $ 536 $ (377) $ 225
The increase in the allowance for doubtful accounts receivable as of
December 31, 1996 relates to bad debts associated with the Company's
operations in Philadelphia, Atlanta and Savannah.
F-43
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
4. Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------
1995 1996
Equipment $ 132 $ 181
Furniture and fixture 14 14
Vehicles 600 963
Other 122 122
------ ------
868 1,280
Accumulated depreciation and amortization 210 478
------ ------
$ 658 $ 802
====== ======
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
was approximately $52, $149 and $270, respectively. Vehicles totaling $526
and $862 at December 1995 and 1996 represent capitalized leases.
The Company leases certain warehousing and office facilities and vehicles
under capital and operating leases expiring on various dates through 2000.
The leases generally provide for the lessee to pay taxes, maintenance,
insurance and certain other operating costs of the leased property. The
leases on most of the properties contain renewal provisions. Future
minimum lease payments required under leases that have noncancelable lease
terms in excess of one year at December 31, 1996 are as follows:
Fiscal year Capitalized Operating
leases leases
1997 $ 298 $ 558
1998 275 586
1999 191 410
2000 75 338
2001 45
------ ------
Total minimum lease payments 839 $1,937
======
Imputed interest 269
------
Present value of minimum
capitalized lease payments 570
------
Current portion 165
------
Long-term capitalized lease obligations $ 405
======
F-44
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
5. Lease Commitments
The Company subleases certain of these leased properties to certain
customers. Total rental income, recorded as a reduction in rental expense
of $169, $120 and $109 in 1994, 1995 and 1996, respectively. Rental
expense, net of rental income, charged to operations was approximately
$85, $210 and $322 for the years ended December 31, 1994, 1995 and 1996,
respectively.
6. Income Taxes
The provision for income taxes comprises:
Year ended December 31,
--------------------------------
1994 1995 1996
Current tax expense
Federal $ 12 $ 7 $ -
State and local 3 2 2
--------- --------- --------
15 9 2
Deferred tax 188 67 (125)
--------- --------- --------
Provision (benefit) for income taxes $ 203 $ 76 $ (123)
========= ========= ========
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
Year ended December 31,
----------------------------------------
1994 1995 1996
Taxes computed at federal statutory rate (35%) $ 181 $ 71 $ (214)
State taxes (net of federal benefit) 33 13 (40)
Other, net (11) (8) 131
------------ ---------- ----------
Provision (benefit) for income taxes $ 203 $ 76 $ (123)
=========== ========== ==========
Effective rate 41.3% 52.1% (19.4)%
=========== ========== ==========
The Company's effective tax rate varies from the statutory tax rate for
the year ended December 31, 1996 mainly due to the recognition of a
deferred tax valuation allowance.
F-45
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
6. Income Taxes (Continued)
Temporary differences giving rise to the Company's deferred tax assets and
liabilities comprised the following:
December 31,
-----------------
1995 1996
Deferred tax assets
Tax loss carryforwards $ -- $251
Bad debts 20 25
Accrued liabilities 18 22
----- ----
Gross deferred tax assets 38 298
Deferred tax valuation allowance -- (137)
----- ----
Net deferred tax assets 38 161
Deferred tax liabilities
Cash to accrual adjustment 250 181
Property and equipment 116 223
----- ----
Net deferred tax liability $ 328 $243
===== ====
At December 31, 1996, a valuation allowance has been provided against
certain deferred tax assets based on management's assessment of the
ultimate realization of such assets.
7. Related Party Transactions
The Company provided distribution services to an affiliated air freight
services company, amounting to $93, $130 and $117 in 1994, 1995 and 1996,
respectively. The Company believes that the amounts charged to the
affiliated company approximate the fair value of the services provided. In
December 1995, the shareholders of the Company sold their interest in the
affiliated entity to a relative of one of the principal shareholders of
the Company.
The Company provided the affiliated company with certain administrative
services, including accounting and insurance administration activities.
All costs related to these services are charged to the affiliated company
using allocation methods management believes are reasonable. The allocated
charges approximated $21, $17 and $30 in 1994, 1995 and 1996,
respectively.
The Company borrows from and/or loans to, the Company's shareholders and
various relatives of the shareholders. As of December 31, 1995 and 1996,
the amounts owed to related parties were $79 and $361, respectively. As of
December 31, 1995 and 1996, the amounts due from related parties were $124
and $0, respectively. All related party loans to/from are payable upon
demand. On certain related party notes payable, the Company pays interest
at rates ranging from 10% to 12%. Interest expense totaled $7, $17 and $18
for related party notes payable in 1994, 1995 and 1996, respectively.
F-46
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
8. Commitments and Contingencies
The Company is involved in various legal proceedings arising in the
ordinary course of business. Based upon the information presently
available and the Company's evaluation of the proceedings pending,
management believes that the adverse determination of any such proceedings
or all of them combined will not have a material adverse effect on the
Company's business or financial position, results of operations, or cash
flows.
9. Subsequent Events
Divestitures and acquisitions
On December 31, 1996, the Company discontinued the operations of Atlantic
Freight Services Inc., the facility serving the Philadelphia Airport. In
March 1997, the Company sold Atlantic Freight of ATL, Inc., the facilities
serving the Atlanta and Savannah Airports. The cost of these divestitures
was not material to the combined financial position of the Company. These
facilities commenced operations in 1996 and combined accounted for $1,103
of revenues and $165 of operating losses in 1996.
In June 1997, the Company reduced its ownership interest in Lognet, Inc.,
a transportation industry internet service provider, from 65% to 40%.
Proceeds from the sale approximated $50.
In June 1997, the Company purchased Stewart Inc., a competitor serving
Stewart Airport, for approximately $100.
Line of credit
On January 15, 1997, the Company entered into a $100 line of credit
agreement with a maturity date of January 31, 1998. Commitment fees are
nominal. Interest is variable at a per annum rate equal to the sum of
3.50% plus the 30-day commercial paper rate. Collateral on the line of
credit consists of an equity security portfolio owned by one of the
principal shareholders of the Company. The portfolio must be valued at an
aggregate value of no less than $150.
10. Unaudited Subsequent Events
The Company and its stockholders have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which the
Company will merge with DMS. All outstanding shares of the Company will be
exchanged for cash and common stock of DMS concurrent with the
consummation of the initial public offering of the common stock of DMS.
F-47
Report of Independent Accountants
To the Board of Directors and Shareholders of
Bullit Courier Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Bullit Courier Services, Inc., and its subsidiaries at February 28, 1997 and
February 29, 1996, and the results of their operations and their cash flows for
each of the three years in the period ended February 28, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Detroit, Michigan
September 11, 1997
F-48
BULLIT COURIER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
February 29, February 28, May 31,
1996 1997 1997
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 150 $ 63 $ 3
Accounts receivable, less allowance for
uncollectible accounts of $18 697 693 716
Other assets 57 48 55
------- ----- -----
Total current assets 904 804 774
Property and equipment, net 112 99 97
Deferred tax asset - noncurrent 11 44 44
Other assets 13 13 13
------- ----- -----
Total assets $ 1,040 $ 960 $ 928
======= ===== =====
Liabilities and Stockholders' Equity
Current liabilities
Notes payable to former shareholder $ 9 $ 17 $ 12
Line of credit 50 154 94
Current portion long-term debt 34 34 34
Accounts payable 232 314 253
Payroll taxes 80 26 45
Accrued expenses and other liabilities 97 10 46
------- ----- -----
Total current liabilities 502 555 484
Note payable to former shareholder 17
Bank loans payable 306 273 264
------- ----- -----
Total long-term debt 323 273 264
------- ----- -----
Total liabilities 825 828 748
------- ----- -----
Commitments and contingencies
Stockholders' equity
Common stock, no par value, authorized
200 shares; 60 issued and outstanding 25 25 25
Less - treasury stock, 140 shares repurchased (148) (148) (148)
Retained earnings 338 255 303
------- ----- -----
Total stockholders' equity 215 132 180
------- ----- -----
Total liabilities and stockholders' equity $ 1,040 $ 960 $ 928
======= ===== =====
See accompanying notes to financial statements.
F-49
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in Thousands, except per share data)
Three months
Year ended ended
------------------------------------------- --------------------------
February 28, February 29, February 28, May 31, May 31,
1995 1996 1997 1996 1997
(Unaudited)
Net sales $ 6,856 $ 6,704 $ 7,696 $ 2,062 $ 2,172
Cost of sales 4,270 4,119 4,639 1,146 1,308
----------- ------------ ----------- ------------ -----------
Gross margin 2,586 2,585 3,057 916 864
Operating expenses 1,659 1,758 2,116 633 533
Sales and marketing 346 373 358 107 68
General and administrative
expenses 511 489 642 151 138
Depreciation 23 14 6 2 2
----------- ------------ ----------- ------------ -----------
Operating income (loss) 47 (49) (65) 23 123
----------- ------------ ----------- ------------ -----------
Interest expense 8 8 107 3 33
Other income (5) (12) (56) (1)
----------- ------------ ----------- ------------ -----------
Income (loss) before provision
(benefit) for income taxes 44 (45) (116) 21 90
Provision (benefit) for income
taxes 27 (11) (33) 11 42
----------- ------------ ----------- ------------ -----------
Net income (loss) $ 17 $ (34) $ (83) $ 10 $ 48
=========== ============ =========== ============ ===========
See accompanying notes to financial statements.
F-50
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except number of shares)
Common stock Treasury stock
------------ --------------
Number Retained Number
of shares Amount earnings of shares Amount Total
Stockholders' equity, February 28, 1994 60 $ 25 $ 355 140 $ (148) $ 232
Net income 17 17
---- ----- ------- ----- ------- -------
Stockholders' equity, February 28, 1995 60 25 372 140 (148) 249
Net loss (34) (34)
---- ----- ------- ----- ------- -------
Stockholders' equity, February 29, 1996 60 25 338 140 (148) $ 215
Net loss (83) (83)
---- ----- ------- ----- ------- -------
Stockholders' equity, February 28, 1997 60 25 255 140 (148) 132
Net income (unaudited) 48 48
---- ----- ------- ----- ------- -------
Stockholders' equity, May 31, 1997 (unaudited) 60 $ 25 $ 303 140 $ (148) $ 180
==== ===== ======= ===== ======= =======
See accompanying notes to financial statements.
F-51
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Three months
Year ended ended
----------------------------------------- ----------------------
February 28, February 29, February 28, May 31, May 31,
1995 1996 1997 1996 1997
(Unaudited)
Cash flow from operating activities
Net income (loss) $ 17 $ (34) $ (83) $ 10 $ 48
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Depreciation 23 14 6 2 2
Deferred taxes (49) (11) (33) -- --
Other 16 -- 7 8 --
Changes in assets and liabilities
Accounts receivable 98 (166) 4 (28) (23)
Other current assets (93) 44 9 21 (7)
Accounts payable (59) 86 82 12 (61)
Payroll taxes payable 111 (31) (54) (60) 19
Other accrued expenses 18 (12) (87) 23 36
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities 82 (110) (149) (12) 14
--------- --------- --------- --------- ---------
Cash flow from financing activities
Repayments on note payable to former
shareholder (51) (39) (9) (3) (5)
Repayments on long-term bank loans (31) (33) (33) (43) (9)
Short-term bank borrowings, net 25 25 104 34 (60)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities (57) (47) 62 (12) (74)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 25 (157) (87) (24) (60)
Cash and cash equivalents, beginning
of year 282 307 150 150 63
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year $ 307 $ 150 $ 63 $ 126 $ 3
========= ========= ========= ========= =========
Supplemental data
Cash paid for
Income taxes $ 89 $ 10 $ 31 $ 15 $ 5
Interest 8 8 107 8 21
See accompanying notes to financial statements.
F-52
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Description of the Business
Description of the Business
Bullit Courier Services, Inc. and Subsidiaries (the Company or Bullit) was
incorporated on March 30, 1978 under the laws of the State of New York.
The Company is organized into Bullit Services, Inc. (the Parent) and its
two wholly-owned subsidiaries. The subsidiary Bullit Messenger and
Manpower, Inc. (Messenger) conducts foot messenger and performs
outsourcing services and the subsidiary Bullit Motor Services, Inc.,
(Motor), performs trucking services.
Messenger operates the majority of its business in the mid and downtown
areas of Manhattan and services the small parcel (one to ten pounds)
sector of delivery needs. The majority of the Company's customers are
based in Manhattan. Deliveries are made by foot and through public
transportation.
Motor operates the Company's headquarters in Brooklyn, New York. Motor
services the New York metropolitan region's light-end (10 to 500 pounds)
and freight (500 to 2,000 pounds) trucking needs. Motor is generally a
rush delivery service and operations are conducted 24 hours a day, 365
days a year.
Both Messenger and Motor service the same customers from a multi-industry
base including financial institutions, the garment center and textile
firms and printers.
2. Summary of Significant Accounting Policies
Basis of Presentation
Through the fiscal year ended February 28, 1995, Spartan Worldwide
Delivery, Inc., (Spartan), an airborne delivery services business, and
through the fiscal year ended February 28, 1996, On-Line Automated
Services, a computer consulting business, were wholly-owned subsidiaries
of Bullit. Both businesses were operated at separate locations, conducted
independent operations, and did not share costs with the parent. Only the
assets and operations of Bullit Services, Inc., and its two wholly-owned
subsidiaries that exist at February 28, 1997, Messenger and Motor, are
included, accordingly, the accompanying financial statements exclude the
effects of operations of Spartan and On-Line.
Principles of consolidation
All significant intercompany balances and transactions are eliminated in
consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the balance sheet dates and the reported amounts of revenues and expenses
for the periods presented. Actual results may differ from such estimates.
F-53
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (Continued)
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately
three months or less at date of purchase to be cash equivalents.
Property and equipment
Property and Equipment are stated at cost and are depreciated using
various accelerated methods over the estimated useful lives of the assets
or the terms of the lease, whichever is shorter, as follows:
Years
-----
Equipment 5
Furniture 7
Vehicles 5
Leasehold improvements 31.5
Expenditures for equipment, furniture, leasehold improvements and vehicles
are capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Upon disposition of property and equipment, the cost
and accumulated depreciation are removed from the related accounts, and
any resulting gain or loss is reflected in the results of operations for
the period.
Income taxes
The Company applies the liability method in accounting for income taxes in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS
No. 109). Under this method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted rates
and laws that will be in effect when the differences are expected to
reverse.
Concentration of credit risk
The Company performs messenger and truck delivery services to businesses
located principally in the New York Metropolitan region. Financial
instruments which potentially subject the Company to credit risk consists
primarily of accounts receivable, and accordingly, the Company performs
ongoing credit evaluations of its customers to reduce the risk of loss.
The Company grants credit to customers in the ordinary course of business.
Fair value of financial instruments
For certain of the company's financial instruments, including cash,
accounts receivable, notes payable and short-term borrowings, accounts
payable, and other accrued liabilities, the carrying amounts approximate
fair value due to their short maturities. Long-term floating rate notes
are carried at amounts that approximate fair value. The estimated fair
value of long-term debt is primarily based on borrowing rates currently
available to the company for bank loans with similar terms and maturities.
F-54
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (Continued)
Unaudited Interim Financial Data
The interim financial data as of May 31, 1997 and for the three months
ended May 31, 1996 and May 31, 1997 is unaudited; however, in the opinion
of the Company, the interim data includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. Trade Receivables
At February 29, 1996, and February 28, 1997, three customers represented
20%, 10%, and 9%; and 26%, 18% and 10%, respectively, of total
receivables. For the three years ended February 28, 1997, the three
customers represented 19%, 11%, and 9%; and 23%, 14%, and 12%; and 28%,
17%, and 11%, respectively, of net sales.
4. Allowance for Doubtful Accounts
The allowance for doubtful accounts consists of the following:
Balance at Charged to Balance at
beginning costs and end of
of period expenses Write-offs period
Year ended February 29, 1996 $18 $ 3 $ 3 $18
Year ended February 28, 1997 18 117 117 18
5. Property and Equipment
Property and equipment consists of the following:
February 29, February 28,
1996 1997
Furniture and equipment $462 $462
Automobiles 38 --
Leasehold improvements 104 104
---- ----
604 566
---- ----
Less - accumulated depreciation 492 467
---- ----
Property and equipment, net $112 $ 99
==== ====
F-55
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
6. Debt
Long-term debt
The Company has obtained a Small Business Administration (SBA) loan with a
financial institution for $405 to refinance its previous debt and provide
working capital. The balance is payable over eleven years at a stated
interest rate of 2.75% above prime rate in effect at the beginning of each
Adjustment Period, as defined in the loan agreement (11.0% at February 28,
1997). There are no compensating balances, however, the loan is personally
guaranteed by the officers of the Company. At February 29, 1996 and
February 28, 1997, the current and long-term portions outstanding are as
follows:
1996 1997
SBA loan $340 $307
Less - current portion 34 34
---- ----
Total long-term $306 $273
==== ====
Annual maturity on the SBA loan outstanding at February 28, 1997 is as
follows: 1998, $34; 1999, $34; 2,000, $34; 2001, $34; 2002, $34; 2003 and
thereafter, $137. Interest expense on the SBA loan for each of the three
years ended February 28, 1997 was $38, $8, and $8, respectively.
Short-term debt
In addition, the Company has a line of credit with the same financial
institution, which is renewed on an annual basis. At February 29, 1996 and
February 28, 1997, borrowings under this agreement were $50 and $154
payable at 11.25% and 11.50%, respectively. Interest expense related to
the credit line for each of the three years ended February 28, 1997 was:
$2, $3, and $13. At February 28, 1997, the unused borrowing capacity under
the line of credit totaled $46.
Note Payable to former shareholder
The Company has a note payable to a former shareholder at a stated annual
interest of 6% related to the exchange of treasury stock. At February 29,
1996, and February 28, 1997, the amounts due to the shareholders were as
follows:
1996 1997
Note payable $ 26 $ 17
Less - current portion 9 17
---- ----
Total long term $ 17 $ --
==== ====
F-56
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
7. Income Taxes
The following are the components of the income tax provision:
Year ended
------------------------------------------
February 28, February 28, February 28,
1995 1996 1997
Current
Federal $ 16 $ - $ -
State and local 11
----- ------ -------
27
Deferred
Federal (11) (33)
State and local
(11) (33)
----- ------ -------
Income tax provision (benefit) $ 27 $ (11) $ (33)
===== ====== =======
Reconciliation between income tax expense/(benefit) and the income taxes
computed by applying the U.S. statutory rate to income before income taxes
is as follows:
Year ended
------------------------------------------
February 28, February 28, February 28,
1995 1996 1997
Federal income tax provision
computed at U.S. statutory rate $ 15 $ (15) $ (39)
State and local income taxes, net
of federal benefit 7
Meals and entertainment 5 4 6
----- ------ -------
Income tax provision (benefit) $ 27 $ (11) $ (33)
===== ====== =======
Temporary differences giving rise to the Company's deferred tax assets are
minimal.
8. Commitments and Contingencies
Operating Lease
The Company leases offices from unrelated parties under operating lease
arrangements. Future minimum lease payments under noncancelable operating
leases with an initial or remaining term in excess of one year in effect
at February 28, 1997, are as follows:
F-57
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Amount
Year
1998 $59
1999 38
---
Total $97
===
9. Related Parties
On a month-to-month basis the Company leases its corporate office building
and warehousing facilities from entities controlled by officers of the
Company. Rental expense paid to related parties for each of the three
years ended February 28, 1997 was as follows:
1995 1996 1997
Corporate offices $105 $ 68 $ 68
Warehouses 131 68 68
---- ---- ----
Total $236 $136 $136
==== ==== ====
10. Unaudited Subsequent Event
The Company and its stockholders have entered into a definitive agreement
with Dispatch Management Services Corp. pursuant to which the Company will
merge with DMS. All outstanding shares of the Company will be exchanged
for cash and common stock of DMS concurrent with the consummation of the
initial public offering of the common stock of DMS.
F-58
Report of Independent Accountants
To the Board of Directors and Stockholders of
Brookside Systems and Programming Limited
We have audited the accompanying balance sheets of Brookside Systems
and Programming Limited as of March 31, 1997 and 1996, and the related profit
and loss accounts and statements of change in cash flows for each of the three
years in the period ended March 31, 1997, all expressed in pounds sterling and
prepared on the basis set forth in Note 1 to the financial statements. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United Kingdom generally
accepted auditing standards which do not differ in any material respect from
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company at March
31, 1997 and 1996, and the results of the Company's operations and its cash
flows for each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom
differ in certain significant respects from accounting principles accepted in
the United States. The application of the latter would have affected the
determination of the loss expressed in pounds sterling for each of the three
years in the period ended March 31, 1997 and the determination of shareholders
equity and financial position also expressed in pounds sterling at March 31,
1997 and 1996. Note 21 to the financial statements summarizes this effect for
each of the years ended March 31, 1997 and 1996, and as at March 31, 1997 and
1996.
Price Waterhouse
London, England
October 15, 1997
F-59
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
BALANCE SHEETS
(Pounds Sterling in Thousands)
March 31, June 30,
--------- --------
1996 1997 1997
(Unaudited)
Fixed assets
Intangible assets (pounds) 169 (pounds) 251 (pounds) 269
Tangible assets 34 38 41
--- --- -----
203 289 310
Current assets
Debtors due within one year 117 88 104
Creditors: amounts falling due within one year (327) (457) (459)
----- ----- -----
Net current liabilities (210) (369) (355)
---- ---- ---
Total assets less current liabilities (7) (80) (45)
---- ------ -----
Creditors: amounts falling due after more than one
year (25) (17) (16)
----- ----- ------
(32) (97) (61)
======= -===== =======
Capital and reserves
Share capital - equity - - -
Profit and loss account (32) (97) (61)
--- ---- ----
Shareholders funds (pounds) (32) (pounds) (97) (pounds) (61)
==== ==== ====
See accompanying notes to financial statements.
F-60
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
STATEMENTS OF OPERATIONS
(Pounds Sterling in Thousands)
Three Months
Year End March 31, Ended June 30,
------------------ --------------
1995 1996 1997 1996 1997
(Unaudited)
Turnover (pounds) 502 (pounds) 643 (pounds) 655 (pounds) 152 (pounds) 207
Cost of sales (346) (348) (349) (78) (83)
------ ----- ------ ---- ----
Gross profit 156 295 306 74 124
Administrative expenses (268) (286) (357) (95) (82)
------ ----- ------ ---- ----
Operating profit/(loss) (112) 9 (51) (21) 42
Interest payable and similar charges (3) (6) (14) (3) (5)
------ ----- ------ ---- ----
Profit/(loss) on ordinary activities before taxation (115) 3 (65) (24) 37
Taxation on profits from ordinary activities 12 - - - -
Profit/(loss) on ordinary activities after taxation (103) 3 (65) (24) 37
------ ----- ------ ---- ----
Dividends - - - - -
Retained profit for the financial year (pounds) (103) (pounds) 3 (pounds) (65) (pounds) (24) (pounds) 37
====== ===== ====== ==== ====
All amounts relate to continuing activities.
All recognised gains and losses are included in the profit and loss account.
See accompanying notes to financial statements.
F-61
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
STATEMENTS OF CASH FLOWS
(Pounds Sterling in Thousands)
Three Months
Year Ended March 31, Ended June 30,
-------------------- --------------
1995 1996 1997 1996 1997
(Unaudited)
Net cash inflow from operating activities (pounds) 52 (pounds) 53 (pounds) 155 (pounds) 50 (pounds) 53
Returns on investments and
servicing of finance (3) (6) (14) (4) (5)
Capital expenditure (62) (111) (146) (38) (34)
---- ------ ----- ---- ---
Cash inflow before use of liquid
resources and financing (13) (64) (5) 8 14
Financing - 32 (7) (2) (2)
---- ------ ----- ---- ---
Increase/(decrease) in cash in the year (pounds)(13) (pounds) (32) (pounds) (12) (pounds) 6 (pounds)12
==== ====== ===== ==== ===
See accompanying notes to financial statements.
F-62
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS
(Pounds Sterling in Thousands)
1. Accounting Policies
Basis of Accounting
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following accounting policies have been applied.
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1997 and June 30, 1996 is unaudited; however in the opinion
of the Company, the interim data includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the
results for the interim period.
Turnover
Turnover represents amounts invoiced, excluding value added tax, in
respect of the sale of services to customers.
Research and development
Research expenditure is written off to the profit and loss account in the
year in which it is incurred. Development expenditure is written off in
the same way unless the directors are satisfied as to the technical,
commercial and financial viability of individual projects. In this
situation, the expenditure is deferred and amortised over the period
during which the company is expected to benefit.
Depreciation
Deprecation is provided to write off cost, less estimated residual values
of all tangible fixed assets over their expected useful lives. It is
calculated at the following rates:
Fixtures, fittings and equipment 15 - 33 1/3% reducing balance
Assets Held Under Lease Agreements
Tangible assets acquired under finance lease agreements are capitalised at
cost and are written off over the shorter of their expected working lives
or the lease term. The related finance costs are charged to the profit and
loss account appropriate to the terms of the agreements.
Payments under operating leases are charged to the profit and loss account
on a straight line basis over the term of the lease.
Pensions
The pension costs charged in the financial statement represent the
contributions payable by the company during the year in accordance with
SSAP 24.
Deferred Taxation
Provision is made for deferred taxation using the liability method in
respect of all timing differences to the extent that it is probable a
liability will crystallise in the foreseeable future.
F-63
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Operating Profit/(Loss)
Year Ended March, 31
--------------------
1995 1996 1997
Operating profit/(loss) for the year was
arrived at after charging:
Depreciation of tangible fixed assets (pounds) 8 (pounds) 12 (pounds) 15
Research and development:
Amortisation of development expenditure 33 39 46
Operating lease rentals of:
Plant and machinery 21 18 22
Land and buildings 27 15 29
Hire of plant and machinery 6 5 4
Auditors' remuneration 2 2 2
Directors remuneration 19 9 19
---- ---- ----
(pounds) 116 (pounds) 100 (pounds) 137
3. Employees
Year Ended March, 31
--------------------
1995 1996 1997
Staff costs amounted to:
Wages and salaries (pounds) 188 (pounds) 195 (pounds) 250
Social security costs 16 18 22
Pension costs 10 10 11
---- ---- ----
(pounds) 214 (pounds) 223 (pounds) 283
==== ==== ====
4. Interest Payable and Similar Charges
Year Ended March, 31
--------------------
1995 1996 1997
Bank loans and overdrafts (pounds) 3 (pounds) 6 (pounds) 14
==== ==== ====
All loans and overdrafts are wholly repayable within five years.
5. Taxation on Profits from Ordinary Activities
Year Ended March, 31
--------------------
1995 1996 1997
UK corporation tax (pounds) 12 (pounds) - (pounds) -
==== ==== ====
F-64
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Intangible Assets
Development costs
Costs
At March 31, 1995 (pounds) 217
Additions 85
---
At March 31, 1996 302
Additions 128
---
At March 31, 1997 (pounds) 430
===
Provisions for diminution in value
At March 31, 1995 (pounds) 94
Charge for year 39
---
At March 31, 1996 133
Charge for year 46
---
At March 31, 1997 (pounds) 179
===
Net book value
At March 31, 1996 (pounds) 169
===
At March 31, 1997 (pounds) 251
===
F-65
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Tangible Assets
Fixtures, fittings
and equipment
Costs
At March 31, 1995 (pounds) 44
Additions 26
--
At March 31, 1996 70
Additions 19
--
At March 31, 1997 (pounds) 89
==
Depreciation
At March 31, 1995 (pounds) 24
Charge for year 12
--
At March 31, 1996 36
Charge for year 15
--
At March 31, 1997 (pounds) 51
==
Net Book Value
At March 31, 1996 (pounds) 34
==
At March 31, 1997 (pounds) 38
==
8. Debtors
As at March 31,
---------------
1996 1997
Amounts due within one year:
Trade debtors (pounds) 101 (pounds) 76
Other debtors 16 12
--- ---
(pounds) 117 (pounds) 88
=== ===
F-66
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Creditors: Amounts falling due within one year
As at March 31,
---------------
1996 1997
Bank loans and overdrafts (pounds) 67 (pounds) 80
Trade creditors 94 86
Other taxation and social security 36 104
Other creditors 130 187
--- ---
(pounds) 327 (pounds) 457
=== ===
The company meets its day to day working capital requirements through an
overdraft facility which is repayable on demand. The facility was last
reviewed by the company's bankers on 16 June 1997 with review dates every
six months.
In August 1997 the Company received (pounds)200 from Dispatch Management
Services Corp. in anticipation of its acquisition of the Company. This
cash is to be retained by the Company whether or not the acquisition
proceeds.
The overdraft existing as at 30 June 1997 has now therefore been paid off
and the personal guarantee of (pounds)80 given by the directors as
security for the loan and overdraft (see note 20) has been removed. In
addition to this the directors have a loan account which it is the
directors' intention should be paid off prior to the acquisition.
The loan of (pounds)35 taken out in June 1996 (see note 10), continues to
be paid off over five years at eight hundred pounds per month.
10. Creditors: Amounts falling due after more than one year
As at March 31,
---------------
1996 1997
Loans
Wholly repayable within five years (pounds) 32 (pounds) 24
included in current liabilities (7) (7)
-- --
(pounds) 25 (pounds) 17
== ==
11. Pension Costs
The company operates a defined contribution scheme for the benefit of
certain employees. The fund is administered by trustees and is separate
from the company. Contributions charged to the profit and loss account in
the year amount to (pounds)11 (1996 : (pounds)10).
F-67
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
12. Share Capital
As at March 31,
---------------
1996 1997
Authorized
100 Ordinary shares of(pounds)1 each (pounds) 100 (pounds) 100
=== ===
Allotted, called up and fully paid
2 Ordinary shares of(pounds)1 each (pounds) 2 (pounds) 2
=== ===
13. Profit and Loss Account
As at March 31,
---------------
1996 1997
Accumulated losses at 1 April (pounds) (35) (pounds) (32)
Retained profit/(loss) for the year 3 (65)
--- ---
Accumulated losses at 31 March (pounds) (32) (pounds) (97)
=== ===
14. Reconciliation of Shareholders' Funds
Year Ended March 31,
--------------------
1996 1997
Profit/(loss) for the financial year (pounds) 3 (pounds) (65)
Shareholders' funds at the beginning
of the year (35) (32)
--- ---
Shareholders' funds at the end of the
year (pounds) (32) (pounds) (97)
==== ===
15. Reconciliation of Operating Profit to Net Cash Inflow From Operating
Activities
Year Ended March 31,
--------------------
1995 1996 1997
Operating profit/(loss) (pounds) (112) (pounds) 9 (pounds) (51)
Depreciation charges 8 12 15
Amortization charges 33 39 46
(Increase)/decrease in debtors 61 (62) 29
Increase in creditors 62 55 117
---- --- ---
Net cash inflow from operating
activities (pounds) 52 (pounds) 53 (pounds) 156
==== === ===
F-68
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
16. Analysis of Cash Flows for Headings Netted in the Cash Flow Statement
Year Ended March 31,
--------------------
1995 1996 1997
Returns on investments and servicing of finance
Interest paid (pounds) (3) (pounds) (6) (pounds) (14)
---- ---- ----
Net cash outflow from returns on investments
and servicing of finance (3) (6) (14)
==== ==== ====
Capital expenditure and financial investment
Purchase of tangible fixed assets (13) (26) (19)
Sale of fixed assets 1 -- --
Development costs (50) (85) (128)
---- ---- ----
Net cash outflow for capital expenditure
and financial investment (62) (111) (147)
==== ==== ====
Financing
Debt due beyond a year:
New secured loan payable within five years -- 32 --
Repayment of amounts borrowed -- -- (7)
---- ---- ----
Net cash inflow from financing -- 32 (7)
Net cash inflow from operating activities (pounds) 52 (pounds) 53 (pounds) 156
==== ==== ====
17. Analysis of Changes in Net Debt
At April At March At March
1, 1995 Cashflow 31, 1996 Cashflow 31, 1997
Overdrafts 28 32 60 13 73
Debt due after 1 year -- 25 25 (8) 17
Debt due within 1 year -- 7 7 -- 7
--- --- --- --- ---
28 64 92 5 97
=== === === === ===
F-69
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
18. Reconciliation of Net Cash Flow to Movement in Net Debt
Year Ended March 31,
--------------------
1995 1996 1997
Decrease in cash in the year (pounds) (13) (pounds) (32) (pounds) (12)
Cash inflow from (increase)/decrease
in debt in the year - (32) 7
----- ----- -----
Increase in net debt from cashflows (13) (64) (5)
Net debt at beginning of year (15) (28) (92)
----- ----- -----
Net debt at the end of year (pounds) (28) (pounds) (92) (pounds) (97)
===== ===== =====
19. Annual Commitments Under Operating Leases
The Company had annual commitments under non cancellable operating leases
as follows:
As At March 31,
--------------
1996 1997
Plant and machinery:
Within one year (pounds) 9 (pounds) 10
Between two and five years 17 17
--- ---
26 27
=== ===
Land and buildings:
Within one year - -
Between two and five years 29 29
--- ---
(pounds) 29 (pounds) 29
=== ===
20. Related Party Transaction
The following related parties have undertaken transactions with the
Company during the year:
The directors Rebecca and Roy Clark;
Fleetway Systems Services Limited - a company owned and controlled by both
the directors;
Fleetway Systems - a partnership in which the two directors
are joint partners.
The directors have a joint loan account with the Company which provided
the Company with interest free working capital during the year.
1996 1997
Directors loan (pounds) 53 (pounds) 60
F-70
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
The directors have provided a personal guarantee of (pounds)80 to the bank
as security for the loan and overdraft.
The company Fleetway Systems Services Limited (FSSL) sells computer
hardware which is often sold in conjunction with the programming and
software services of Brookside Systems and Programming Limited. The
following represents a summary of the transactions between the two
companies during the year.
1996 1997
Wages costs rebilled to FSSL (pounds) 37 (pounds)42
Hardware and car leasing costs rebilled to FSSL 25 73
Expenses rebilled from FSSL to Brookside 7 19
== ==
Amount payable to FSSL at year end (pounds) - (pounds)11
== ==
During the year transactions representing recharges of expenses incurred
on behalf of Fleetway Systems were made by the Company. All recharges
were made at arms-length and at a commercial rate.
1996 1997
Commissions paid to Fleetway Systems (pounds) 108 (pounds) 118
Costs recharged to Fleetway Systems 4 10
=== ===
Amounts payable to Fleetway Systems at the
year end (pounds) 10 (pounds) -
=== ===
21. Summary of Differences Between UK and US Generally Accepted Accounting
Practices (GAAP)
The financial statements included in this report have been prepared in
accordance with UK GAAP which differ in certain significant respects from
US GAAP. The main differences between UK GAAP and US GAAP which affect the
Company's net profit and net assets are set out below.
(i) Income Taxes
Under UK GAAP, deferred income taxes are accounted for to the extent
that it is considered probable that a liability or asset will
crystallise in the foreseeable future. Under US GAAP, deferred taxes
are accounted for on all temporary differences and a valuation
allowance is established to reduce deferred tax assets to the amount
which "more likely than not" will be realised in future tax returns.
Deferred tax amounts also arise as a result of the other US GAAP
adjustments.
The UK deferred tax asset can be reconciled as follows to the US
GAAP net deferred tax asset:
F-71
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
21. Summary of Differences Between UK and US Generally Accepted Accounting
Practices (GAAP) (Continued)
1996 1997
Deferred tax asset under UK GAAp (pounds) Nil (pounds) Nil
Tax effects on timing differences:
Tax losses 15 15
Capital allowances - -
-- --
Gross deferred tax assets in accordance with
US GAAP 15 22
-- --
Deferred tax valuation allowance (15) (22)
-- --
Net deferred tax assets in accordance with
US GAAP (pounds) Nil (pounds) Nil
=== ===
(ii) Effects on Conforming to US GAAP - Impact on Net Profit
The adjustments to reported net loss required to conform with US
GAAP are as follows:
Year Ended March 31,
--------------------
1996 1997
Net Profit/(Loss)
Net profit of the Group under UK GAAP (pounds) 3 (pounds) (65)
== ====
Net profit under US GAAP (pounds) 3 (pounds) (65)
== ====
(iii) Effects of Conforming to US GAAP - Impact on Net Equity
The adjustments to reported net equity required to conform to US
GAAP are as follows:
Year Ended March 31,
--------------------
1996 1997
Shareholders funds
Capital and reserves of the Company under UK GAAP (pounds) (32) (pounds) (12)
Adjustments:
Deferred tax - -
--- ---
Total US GAAP adjustments - -
--- ---
Approximate shareholders' deficit under
US GAAP (pounds) (32) (pounds) (12)
=== ===
F-72
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
21. Summary of Differences Between UK and US Generally Accepted Accounting
Practices (GAAP) (Continued)
(iv) Cash Flow Information -
The Company's financial statements include Statements of Cash Flows
in accordance with UK Accounting Standard FRS 1, "Cash Flow
Statements". The statement prepared under FRS 1 (revised 1996)
presents substantially the same information as that required under
US Statement of Financial Accounting Standard No 95 (FAS 95).
Under FRS 1 (revised 1996) cash flows are presented for (i)
operating activities; (ii) returns on investments and servicing of
finance; (iii) taxation; (iv) investing activities; and (v)
financing activities. FAS 95 only requires presentation of cash
flows from operating, investing and financing activities.
Cash flows under FRS 1 (revised 1996) in respect of interest
received, interest paid (net of that capitalised), interest on
finance leases and taxation would be included within operating
activities under FAS 95. Capitalised interest would be included in
investing activities under US GAAP.
Cash under FRS 1 (revised 1996) include cash in hand and deposits
repayable on demand less overdrafts repayable on demand. Under FAS
95 all short term borrowings and bank overdrafts are included in
financing activities.
The following statements summarise the statement of cash flows for
the Company as if they had been presented in accordance with US GAAP
and include the adjustments which reconcile cash and cash
equivalents under US GAAP to cash and cash equivalents reported
under UK GAAP.
Year Ended March 31,
--------------------
1995 1996 1997
Net cash inflow from operating activities (pounds) 49 (pounds) 47 (pounds) 142
Net cash used in investing activities (62) (111) (147)
Net cash provided by financing activities 13 64 5
--- ---- ----
Net increase/(decrease) in cash and cash equivalents - - -
--- ---- ----
Cash under US GAAP at beginning of year - - -
Cash under US GAAP at end of year - - -
Bank overdrafts and other under UK GAAP at
end of year (28) (92) (97)
--- ---- ----
Cash/(overdraft) under UK GAAP at end of year (pounds) (28) (pounds) (92) (pounds) (97)
=== ==== ====
F-73
Report of Independent Accountants
To the Board of Directors and shareholders of
Bridge Wharf Investments Limited
We have audited the accompanying balance sheets of Bridge Wharf
Investments Limited as of June 30, 1997 and September 30, 1996, and the related
profit and loss accounts and statements of cash flows for nine months ended June
30, 1997 and each of the two years in the period ended September 30, 1996, all
expressed in pounds sterling and prepared on the basis set forth in Note 1 to
the financial statements. These financial statements are the responsibility of
the Group's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with United Kingdom generally
accepted auditing standards which do not differ in any material respect from
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the group at June
30, 1997 and September 30, 1996, and the results of the Group's operations and
its cash flows for the nine months ended June 30, 1997 and each of the two years
in the period ended September 30, 1996 in conformity with generally accepted
accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom
differ in certain significant respects from accounting principles generally
accepted in the United States. The application of the latter would have affected
the determination of the consolidated profit expressed in pounds sterling for
the nine months ended June 30, 1997 and each of the two years in the period
ended September 30, 1996 and the determination of consolidated shareholders
equity and consolidated financial position also expressed in pounds sterling at
June 30, 1997 and September 30, 1996. Note 26 to the consolidated financial
statements summarises this effect for the nine months ended June 30, 1997 and
the year ended September 30, 1996 and as at June 30, 1997 and September 30,
1996.
Price Waterhouse
London, England
October 15, 1997
F-74
BRIDGE WHARF INVESTMENTS LIMITED
BALANCE SHEETS
(Pounds Sterling in Thousands)
Year Ended Nine Months
September 30, Ended June 30,
------------- --------------
1996 1997
Fixed assets
Intangible assets (pounds) 89 (pounds) 78
Tangible assets 1,411 1,546
------ -----
1,500 1,624
Current assets
Debtors due within one year 3,036 3,626
Cash and deposits 635 889
---- ---
3,671 4,515
Creditors: amounts falling due within one year (2,797) (3,388)
------ -----
Net current assets 874 1,127
------ -----
Total assets less current liabilities (pounds) 2,374 (pounds) 2,751
====== ======
Creditors: amounts falling due after more
than one year (958) (983)
------ -----
(pounds) 1,416 (pounds) 1,768
====== ======
Capitals and reserves
Share capital - equity 75 75
Profit and loss account 1,341 1,693
----- -----
Total shareholders' funds (pounds) 1,416 (pounds) 1,768
====== ======
See accompanying notes to financial statements.
F-75
BRIDGE WHARF INVESTMENTS LIMITED
PROFIT AND LOSS ACCOUNT
(Pounds Sterling in Thousands)
Year Ended Nine Months
September 30, Ended June 30,
------------- ---------------
1995 1996 1997
Turnover (pounds) 11,840 (pounds) 15,093 (pounds) 13,039
Cost of sales (8,813) (11,592) (10,370)
------ ------ ------
Gross profit 3,027 3,501 2,669
Distribution costs (359) (356) (278)
Administrative expenses (1,822) (2,097) (1,526)
Other operating income 5 1 3
------ ------ ------
Operating profit 851 1,049 868
Other interest receivable and similar income 17 10 4
Interest payable and similar charges (138) (194) (160)
------ ------ ------
Profit on ordinary activities before taxation 730 865 712
Taxation on profits from ordinary activities (225) (223) (216)
------ ------ ------
Profit on ordinary activities after taxation 505 642 496
Dividends (144) (192) (144)
------ ------ ------
Retained profit for the financial year (pounds) 361 (pounds) 450 (pounds) 352
====== ====== ======
All amounts relate to continuing activities.
All recognised gains and losses are included in the profit and loss account.
See accompanying notes to financial statements.
F-76
BRIDGE WHARF INVESTMENTS LIMITED
STATEMENTS OF CASH FLOWS
(Pounds Sterling in Thousands)
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Cash inflows from
operating activities (pounds) 588 (pounds) 642 (pounds) 508
Returns on investments and
servicing of finance (265) (376) (300)
Taxation (234) (230) (255)
Capital expenditure and financial
investment (945) (271) (140)
---- ---- ----
Cash outflows before use of liquid
resources and financing (856) (235) (187)
Financing 968 73 143
---- ---- ----
Increase/(decrease) in cash in the year (pounds) 112 (pounds) (162) (pounds) (44)
==== ==== ====
See accompanying notes to financial statements.
F-77
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
These financial statements have been prepared under the historical cost
convention using the following accounting policies:
Turnover
The turnover shown in the profit and loss account represents amounts
invoiced during the year, exclusive of Value Added Tax.
Amortisation
Amortisaiton is calculated so as to write off the cost of an asset, net of
anticipated disposal proceeds, over the useful economic life of that asset
as follows:
Goodwill 10 years Straight line
Depreciation
Depreciation is calculated so as to write off the cost of an asset, net of
anticipated disposal proceeds, over the useful economic life of that asset
as follows:
Freehold property 2% Straight line
Equipment 25% reducing balance
Furniture, fixtures and fittings 25% reducing balance
Motor Vehicles 25% reducing balance
Hire purchase agreements
Assets held under hire purchase agreements are capitalised and disclosed
under tangible fixed assets at their fair value. The capital element of
the future payments is treated as a liability and the interest is charged
against the profit and loss account so as to produce a constant periodic
rate of charge on the remaining balance of the obligation for each
accounting period.
2. Turnover
Turnover and profit before tax are attributable to the one principal
activity of the company which is the provision of courier, messenger and
car transportation services.
3. Other operating income
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Insurance claims (pounds) 5 (pounds) 1 (pounds) 3
F-78
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Operating Profit
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Operating profit for the year was arrived at
after charging:
Amortisation (pounds) 15 (pounds) 15 (pounds) 11
Profit on disposal of fixed assets - (4) -
Depreciation of tangible fixed assets 195 171 144
Operating lease rentals of:
Plant and machinery 32 32 21
Auditors' remuneration - Audit 9 9 6
- Non-Audit 2 4 2
(pounds) 253 (pounds) 227 (pounds) 184
==== ==== ====
The average number of employees including
directors employed by the group during the
year was as follows 79 102 120
==== ==== ====
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
The related staff costs amounted to:
Wages and salaries (pounds) 1,415 (pounds) 1,810 (pounds) 1,688
Social security costs 143 180 169
----- ----- -----
(pounds) 1,558 (pounds) 1,990 (pounds) 1,857
===== ===== =====
5. Interest Receivable and Similar Income
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Bank interest receivable (pounds) 17 (pounds) 10 (pounds) 4
F-79
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Interest Payable and Similar Charges
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Bank interest (pounds ) 54 (pounds) 70 (pounds) 70
Mortgage interest 25 55 41
Hire purchase interest charge 2 11 13
Shareholders' loan 25 26 14
Directors' loan interest 32 32 22
--- --- --------
(pounds) 138 (pounds) 194 (pounds) 160
==== ==== ====
All loans and overdrafts are wholly repayable within five years.
7. Taxation on Profits from Ordinary Activities
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
UK corporation tax charge (pounds) 225 (pounds) 255 (pounds) 216
Underprovision in respect of prior years - (32) -
--- --- ---
(pounds) 225 (pounds) 223 (pounds) 216
=== === ===
The corporation tax liabilities for the years ended September 30, 1996 and
1995 have been calculated based upon computations that have been submitted
to the Inland Revenue, however, no computations submitted since 1993 have
been agreed with the Inland Revenue and are subject to continuing
correspondence.
8. Dividends
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Paid on ordinary shares (pounds) 144 (pounds) 192 (pounds) 144
=== === ===
F-80
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Intangible Assets
Goodwill
Cost:
Balance bought forward / carried forward for all periods (pounds) 145
---
Amortisation
Balance brought forward September 30, 1995 41
Amortisation charge for the year 15
---
Balance carried forward September 30, 1996 56
Amortisation change for the period 11
---
Balance carried forward at June 30 67
===
Net book value:
At September 30, 1996 89
---
At June 30, 1995 78
===
F-81
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
10. Tangible Assets
Freehold Equipment Furniture, Motor Total
Property Fixtures and Vehicles
Fittings
Cost
At September 30, 1995 (pounds) 712 (pounds) 650 (pounds) 193 (pounds) 127 (pounds) 1,682
Addition - 62 30 237 329
Disposals - - - (10) (10)
--- --- --- --- -----
At September 30, 1996 712 712 223 354 2,001
Addition - 8 - 279 287
Disposals - - - (15) (15)
--- --- --- --- -----
At June 30, 1997 712 720 223 618 2,273
Depreciation
At September 30, 1995 14 321 58 31 424
Disposals - - - (5) (5)
Charge 14 88 37 32 171
-- -- -- -- ---
At September 30, 1996 28 409 95 58 590
Disposals - - - (7) (7)
Charge 11 52 22 59 144
-- -- -- -- ---
At June 30, 1997 39 461 117 110 727
Net Book Value
At September 30, 1996 684 303 128 296 1,411
=== === === === =====
At September 30, 1997 (pounds) 673 (pounds) 259 (pounds) 106 (pounds) 508 (pounds) 1,546
=== === === === =====
F-82
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
11. Cash and Deposits
September 30, June 30,
------------- --------
1996 1997
Cash at bank and in hand (pounds) 335 (pounds) 589
Deposits lodged as security 300 300
--- ---
(pounds) 635 (pounds) 889
=== ===
Pursuant to the acquisition of the business of Rapid Despatch in October 1993,
an amount of (pounds)300 has been lodged in an escrow account to act as security
for future commission payments to the previous owners of Rapid Despatch.
12. Debtors
As at September 30, As at June 30,
------------------- --------------
1996 1997
Amounts due within one year:
Trade debtors (pounds) 2,974 (pounds) 3,438
Prepayments and accrued income 62 188
----- -----
(pounds) 3,036 (pounds) 3,626
===== =====
13. Creditors: Amounts falling due within one year
As at September 30, As at June 30,
------------------- --------------
1996 1997
Bank overdrafts (secured) (pounds) 379 (pounds) 677
West Bromwich Building Society 8 10
Trade finance loan 765 976
Trade creditors 362 455
Other taxation and social security 700 568
Hire purchase agreements 78 122
Accruals 298 412
Corporation tax 207 168
----- -----
(pounds) 2,797 (pounds) 3,388
===== =====
The bank overdraft is secured by a fixed and floating charge over the
assets of the business. The trade finance loan is secured by a fixed
charge over the trade debtors reflected in these accounts.
F-83
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
14. Creditors: Amounts falling due after more than one year
As at September 30, As at June 30,
------------------- --------------
1996 1997
Other creditors:
Hire purchase agreements (pounds) 63 (pounds) 95
West Bromwich Building Society 471 464
Shareholders' loan 212 212
Directors' loan account 212 212
--- ---
(pounds) 958 (pounds) 983
=== ===
The mortgage is secured by a fixed charge over the freehold property of
the company. It is repayable over twenty years and interest is charged at
11.25% per annum fixed until November 11, 2000. The amount repayable after
five years is (pounds)425.
15. Share Capital
Authorised share capital
As at September 30, As at June 30,
------------------- --------------
1996 1997
1,000,000 Ordinary shares of
(pounds)1 each (pounds) 1,000 (pounds) 1,000
===== =====
Allotted, called up and fully
paid
Equity share capital:
75,000 ordinary shares of
(pounds)1 each (pounds) 75 (pounds) 75
----- -----
(pounds) 75 (pounds) 75
===== =====
16. Reserves
Profit and
Loss Account
As September 30, 1995 (pounds) 891
Profit for the year (pounds) 450
-----
At September 30, 1996 (pounds) 1,341
-----
Profit for the nine months (pounds) 352
At June 30, 1997 (pounds) 1,693
=====
F-84
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
17. Reconciliation of Shareholders' Funds
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1996 1997
Profit for the financial year (pounds)642 (pounds)496
Dividends (192) (144)
---- ------
Net increase in shareholders' funds 450 352
Shareholders' funds at the beginning of the year 966 1,416
---- ------
Shareholders' funds at the end of the year (pounds)1,416 (pounds)1,768
==== ======
18. Reconciliation of Operating Profit to Net Cash Inflow From Operating
Activities
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Operating profit (pounds)851 (pounds)1,049 (pounds)868
Amortisation 15 15 11
Depreciation charges 195 171 144
Profit on disposal of fixed asset -- (4) --
Increase in debtors (635) (1,055) (590)
Increase in creditors 162 466 75
---- ------ ----
Net cash inflow from operating activities (pounds)588 (pounds)642 (pounds)508
==== ====== ====
F-85
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
19. Analysis of Cash Flows for Headings Netted in the Cash Flow Statement
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Returns on investments and servicing of finance
Interest received (pounds)17 (pounds)10 (pounds)4
Interest paid (136) (183) (147)
Finance charges on hire purchases (2) (11) (13)
Dividends paid (144) (192) (144)
---- ---- ----
Net cash outflow from returns on investments
and servicing of finance (pounds)(265) (pounds)(376) (pounds)(300)
---- ---- ----
Capital expenditure and financial investment
Purchase of tangible fixed assets (945) (281) (148)
Disposals -- 10 8
Net cash outflow for capital expenditure
and financial investment (pounds)(945) (pounds)(271) (pounds)(140)
==== ==== ====
Financing
Capital repayments hire purchases contracts (pounds)(8) (pounds)(42) (pounds)(63)
Net cash inflow/(outflow) from long term loans 487 (9) (6)
Net inflow from trade finance 489 124 212
---- ---- ----
Net cash inflow from financing (pounds)968 (pounds)73 (pounds)143
==== ==== ====
F-86
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
20. Analysis of Changes in Net Debt
Cash at Bank and in Hand
At September 30, Cash Non cash At September
1994 Flows flows 30, 1995
Cash at Bank (pounds)114 (pounds)201 (pounds)-- (pounds)315
Bank Overdrafts (108) (89) -- (197)
---- ---- ---- ----
6 112 -- 118
Debt due within one year (151) (489) -- (640)
Debt due after one year (425) (487) -- (912)
Hire purchase contracts -- 8 (142) (134)
---- ---- ---- ----
Net debt (pounds)(570) (pounds)(856) (pounds)(142) (pounds)(1,568)
At September 30, Cash Non cash At September
1995 Flows flows 30, 1996
Cash at Bank (pounds)315 (pounds)20 (pounds)-- (pounds)335
Bank Overdrafts (197) (182) -- (379)
---- ---- ---- ----
118 (162) (44)
Debt due within one year (640) (125) (8) (773)
Debt due after one year (912) 9 8 (895)
Hire purchase contracts (134) 42 (49) (141)
---- ---- ---- ----
Net debt (pounds)(1,568) (pounds)(236) (pounds)(49) (pounds)(1,853)
At September 30, Cash Non cash At September
1996 Flows flows 30, 1997
Cash at Bank (pounds)335 (pounds)254 (pounds)-- (pounds)589
Bank Overdrafts (379) (298) -- (677)
---- ---- ---- ----
(44) (44) (88)
Debt due within one year (773) (206) (7) (986)
Debt due after one year (895) -- 7 (888)
Hire purchase contracts (141) 63 (139) (217)
---- ---- ---- ----
Net debt (pounds)(1,853) (pounds)(187) (pounds)(139) (pounds)(2,179)
F-87
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
21. Reconciliation of Net Cash Flow to Movement in Net Debt
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Increase in cash and cash equivalents in the period (pounds)112 (pounds)(162) (pounds)(44)
In-flows from debts due within one year (489) (125) (206)
In-flows from debt due after one year (487) 9 --
Inception of hire purchase leases (142) (49) (139)
Repayment of hire purchase leases 8 42 63
Net debt at beginning of year (570) (1,568) (1,853)
----- ------ ------
Net debt at end of year (pounds)(1,568) (pounds)(1,853) (pounds)(2,179)
===== ====== ======
22. Contingent Liabilities
There is a legal dispute outstanding concerning amounts owed as commission
to a third party who introduced business to the company. The directors
consider, at present, adequate provisions have been established for this
potential liability.
23. Annual Commitments Under Hire Purchase Agreement
Future commitments under such agreements are as follows:
As at September 30, As at June 30,
------------------- --------------
1996 1997
Amounts payable within 1 year 79 140
Amounts payable between 2 to 5 years 75 93
Less: finance charges relating to future periods (13) (16)
--- ----
(pounds)141 (pounds)217
=== ====
24. Capital Commitments
There was no capital expenditure either authorised or contracted for as at
June 30, 1997, September 30, 1996 and September 30, 1995.
25. Interests of Directors in Transactions of the Company
During the periods the company paid the following to Smith Summerfield &
Lewis, a firm of chartered accountants, in which the two directors of the
company are partners. The payments were made for consultancy services
provided by the two directors.
Year to September 30, 1995 (pounds)120
Year to September 30, 1996 (pounds)84
Nine months to June 30, 1997 (pounds)65
26. Summary of Differences Between UK and US Generally Accepted Accounting
Practices (GAAP)
F-88
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
The financial statements included in this report have been prepared in
accordance with UK GAAP which differ in certain significant respects from
US GAAP. The main differences between UK GAAP and US GAAP which affect the
Group's net profit and net assets are set out below.
i) Income Taxes
Under UK GAAP, deferred income taxes are accounted for to the extent
that it is considered probable that a liability or asset will
crystallise in the foreseeable future. Under US GAAP, deferred taxes
are accounted for on all temporary differences and a valuation
allowance is established to reduce deferred tax assets to the amount
which "more likely than not" will be realised in future tax returns.
Deferred tax amounts also arise as a result of the other US GAAP
adjustments.
The UK deferred tax liability can be reconciled as follows to the US
GAAP net deferred tax liability:
1995 1996 1997
Deferred tax liability under UK GAAP (pounds)Nil (pounds)Nil (pounds)Nil
Tax effects on timing differences:
Tax losses -- -- --
Capital allowances 17 48 68
---- ---- ----
Gross deferred tax liability in accordance with
US GAAP 17 48 68
Deferred tax valuation allowance -- -- --
---- ---- ----
Net deferred tax liability in accordance with
US GAAP (pounds)17 (pounds)48 (pounds)68
==== ==== ====
The US GAAP provision is comprised as follows:
1995 1996 1997
UK Corporation tax (pounds)241 (pounds)254 (pounds)236
==== ==== ====
F-89
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
26. Summary of Differences Between UK and US Generally Accepted Accounting
Practices (GAAP) (Continued)
ii) Effects on Conforming to US GAAP - Impact on Net Profit
The adjustments to reported net loss required to conform with US GAAP are
as follows:
Nine Months
Year Ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Net Profit
Net profit of the Group under UK GAAP (pounds)505 (pounds)642 (pounds)496
Adjustments:
Tax (17) (31) (20)
--- --- ---
Total US GAAP adjustment (17) (31) (20)
Net Profit under US GAAP (pounds)488 (pounds)611 (pounds)476
=== === ===
iii) Effects of Conforming to US GAAP - Impact on Net Equity
The adjustments to reported net equity required to conform to US GAAP are
as follows:
As at September 30, As at June 30,
------------------- --------------
1996 1997
Shareholders' funds
Capital and reserves of the Group under UK GAAP (pounds)1,416 (pounds)1,768
Adjustments:
Deferred tax (48) (68)
----- -----
Shareholders' funds under US GAAP (pounds)1,368 (pounds)1,700
===== =====
F-90
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
26. Summary of Differences Between UK and US Generally Accepted Accounting
Practices (GAAP) (Continued)
iv) Consolidated Cash Flow Information - Group
The company's financial statements include Consolidated Statements of Cash
Flows in accordance with UK Accounting Standard FRS 1, "Cash Flow
Statements". The statement prepared under FRS 1 (revised 1996) presents
substantially the same information as that required under US Statement of
Financial Accounting Standard No 95 (FAS 95).
Under FRS 1 (revised 1996) cash flows are presented for (i) operating
activities; (ii) returns on investments and servicing of finance; (iii)
taxation; (iv) investing activities; and (v) financing activities. FAS 95
only requires presentation of cash flows from operating investing and
financing activities.
Cash flows under FRS 1 (revised 1996) in respect of interest received,
interest paid (net of that capitalised), interest on finance leases and
taxation would be included within operating activities under FAS 95.
Capitalised interest would be included in investing activities under US
GAAP.
Cash under FRS 1 (revised 1996) includes cash in hand and deposits
repayable on demand less overdrafts repayable on demand. Under FAS 95 all
short term borrowings and bank overdrafts are included in financing
activities.
The following statements summarise the statement of cash flows for the
Group as if they had been presented in accordance with US GAAP and include
the adjustments which reconcile cash and cash equivalents under US GAAP to
cash and cash equivalents reported under UK GAAP.
Nine Months
Year ended September 30, Ended June 30,
------------------------ --------------
1995 1996 1997
Net cash inflow from operating activities (pounds)233 (pounds)227 (pounds)98
Net cash used in investing activities (945) (271) (140)
Net cash provided (used for) financing activities 335 (243) (213)
---- ---- ------
Net increase/(decrease) in cash and cash equivalents (377) (287) (255)
Cash under US GAAP at beginning of year (145) (522) (809)
---- ---- ------
Cash under US GAAP at end of year (522) (809) (1,064)
Trade Finance loan under UK GAAP at end of year 640 765 976
---- ---- ------
Net cash/(overdraft) under UK GAAP at end of year (pounds)118 (pounds)(44) (pounds)(88)
==== ==== ======
F-91
Report of Independent Accountants
To the Board of Directors and shareholders of
Security Despatch Limited
We have audited the accompanying consolidated balance sheets of Security
Despatch Limited and its subsidiaries (the "Group") as of March 31, 1997 and
1996, and the related consolidated statements of operations and change in cash
flows for each of the three years ended March 31, 1997, all expressed in pounds
sterling and prepared on the basis set forth in Note 1 to the consolidated
financial statements. These financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with United Kingdom generally
accepted auditing standards which do not differ in any material respect from
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the group at
March 31, 1997 and 1996, and the results of the Group's operations and its cash
flows for each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of the consolidated profit expressed in pounds sterling for each
of the three years in the period ended March 31, 1997 and the determination of
consolidated shareholders' equity and consolidated financial position also
expressed in pounds sterling at March 31, 1997 and 1996. Note 23 to the
consolidated financial statements summarises this effect for the years ended
March 31, 1997 and 1996, and as at March 31, 1997 and 1996.
Price Waterhouse
London, England
October 15, 1997
F-92
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
CONSOLIDATED BALANCE SHEETS
(Pounds Sterling in Thousands)
March 31, June 30,
--------- --------
1996 1997 1997
(Unaudited)
Fixed assets
Tangible assets (pounds)91 (pounds)110 (pounds)107
------ ------ ------
Current assets
Debtors due within one year 1,021 1,106 1,156
Intra division 177 554 689
Debtors due in greater than one year -- 199 493
Cash at bank and in hand 31 -- --
------ ------ ------
1,229 1,859 2,338
Creditors: amounts falling due within one year (1,118) (1,468) (1,770)
------ ------ ------
Net current assets 111 391 568
------ ------ ------
Total assets less current liabilities (pounds)202 (pounds)501 (pounds)675
====== ====== ======
Capitals and reserves
Share capital - equity 137 143 143
Share capital - non equity 1,250 1,100 1,100
Share premium account 752 771 771
Capital redemption reserve 616 766 766
Profit and loss account (563) (289) (115)
Goodwill (1,990) (1,990) (1,990)
------ ------ ------
Total shareholders' funds (pounds)202 (pounds)501 (pounds)675
====== ====== ======
Equity shareholders' deficit (1,048) (1,601) (1,775)
Non equity shareholders' funds 1,250 1,100 1,100
------ ------ ------
(pounds)202 (pounds)501 (pounds)675
====== ====== ======
See accompanying notes to financial statements.
F-93
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Pounds Sterling in Thousands)
Year End March 31, Three Months
------------------ Ended June 30,
--------------
1995 1996 1997 1996 1997
(Unaudited)
Turnover (pounds)4,858 (pounds)5,240 (pounds)5,900 1,382 1,564
Cost of sales 3,582 3,920 4,466 1,053 1,189
----- ----- ----- ----- -----
Gross profit 1,276 1,320 1,434 329 375
Administrative expenses 728 627 624 152 116
----- ----- ----- ----- -----
Operating profit 548 693 810 177 259
Interest payable and similar charges 16 24 13 5 11
----- ----- ----- ----- -----
Profit on ordinary activities before taxation 532 669 797 172 248
Taxation on profits from ordinary activities 105 220 239 57 74
----- ----- ----- ----- -----
Profit on ordinary activities after taxation 427 449 558 115 174
Dividends (non equity) 193 164 134 -- --
----- ----- ----- ----- -----
Retained profit for the financial year (pounds)234 (pounds)285 (pounds)424 (pounds)115 (pounds)174
===== ===== ===== ===== =====
All amounts relate to continuing activities.
All recognised gains and losses are included in the profit and loss account.
See accompanying notes to financial statements.
F-94
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Pounds Sterling in Thousands)
Year End March 31, Three Months
------------------ Ended June 30,
--------------
1995 1996 1997 1996 1997
(Unaudited)
Cash inflows/(outflows) from
operating activities (pounds)539 (pounds)568 (pounds)570 (pounds)264 (pounds)(213)
Returns on investments and
servicing of finance (208) (188) (147) (5) (11)
Taxation (102) (97) (191) -- (16)
Capital expenditure and financial
investment (31) (51) (70) (18) (9)
---- ---- ---- ---- ----
Cash inflows/outflows before use of liquid
resources and financing 198 232 162 241 (249)
Financing - net redemption of shares (250) (295) (125) -- --
---- ---- ---- ---- ----
Increase/(decrease) in cash in the year (pounds)(52) (pounds)(63) (pounds)37 (pounds)241 (pounds)(249)
==== ==== ==== ==== ====
See accompanying notes to financial statements.
F-95
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
Basis of Accounting
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following accounting policies have been applied.
Prior to February 28, 1997 Security Despatch Limited was the group's
ultimate parent company. As part of a group reorganisation in February
1997 designed to enable some shareholders to realise their investment, a
newly incorporated company Security Business Services Limited acquired a
100% of the share capital of Security Despatch Limited. The acquisition
was completed through offering Security Despatch shareholders either
shares and loan stock in Security Business Services Limited or cash for
their Security Despatch Limited shares. The cash element of the offer was
financed through a (pounds)1.75 million loan from Barclays Bank.
In order to present meaningful comparable information, the financial
statements of Security Despatch Limited have been presented for all
periods with no adjustments made in the financial statements to reflect
the effect of the reorganisation.
The unaudited management accounts of Security Business Services Limited
indicate that in the period to March 31, 1997 no income was earned and
that expenses of (pounds)392 were charged, consisting primarily of a bonus
of (pounds)343 to the managing director and loan interest and facility
fees of (pounds)49. Fixed assets at March 31, 1997 consisted solely of the
investment in Security Despatch Limited. Net current liabilities at March
31, 1997 amounting to (pounds)210 consisted primarily of corporation tax
recoverable of (pounds)130, amounts payable in respect of payroll taxes of
(pounds)156 and amounts owed to Security Despatch Limited of (pounds)173.
Borrowings at March 31, 1997 consisted of a (pounds)1,750 loan from
Barclays Bank and loan stock held by the shareholders of (pounds)2,111. As
part of the proposed transaction the loan stock will be acquired by the
purchaser and the loan from Barclays Bank will be repaid and will not form
part of the ongoing funding.
The unaudited management accounts for the three month period ended June
30, 1997 indicate that an additional (pounds)69 was charged to the profit
and loss account, consisting of (pounds)22 salary payments to the managing
director, (pounds)7 fee payments to non executive directors and (pounds)40
interest charges. No movements occurred in fixed assets during the period.
Net current liabilities at June 30, 1997 amounting to (pounds)234
consisted primarily of corporation tax recoverable of (pounds)130 and
amounts owed to Security Despatch Limited of (pounds)348. During the
period (pounds)87 of the term loan was repaid to Barclays reducing the
amount to (pounds)1,663 at June 30, 1997. The loan stock remained
unchanged at (pounds)2,111 at June 30, 1997.
Basis of Consolidation and Preparation
The consolidated accounts include the company and its subsidiary
undertakings ("the Group"). The results of subsidiaries acquired are
included from the date of their acquisition. The group uses the
acquisition method of accounting to consolidate the results of subsidiary
undertakings.
Security Despatch Limited consists of a courier operation and a mailroom
management operation. The mailroom management operation business is being
retained by the existing management and will not form part of the
operations of the Group in the future. Therefore these financial
statements have been
F-96
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
prepared on a carve-out basis and only reflect the historical financial
position, results of operations, and cash flows of the courier operation
as it will go forward, and as if the courier operation had operated as a
stand alone Group since 1994.
Transactions between the courier operation and the mail room management
operation are herein referred to as related party transactions.
Goodwill arising on the acquisition of a subsidiary is the difference
between the fair value of the consideration paid and fair value of the
assets and liabilities acquired.
Goodwill is written off directly to reserves in the year in which it
arises.
Turnover
Turnover represents amounts invoiced, excluding value added tax, in
respect of the sale of services to customers.
Cost of Sales
Cost of sales includes wages and salaries costs incurred in the provision
of the messenger service because in the opinion of the directors this is
the most appropriate.
Depreciation
Deprecation is provided to write off cost, less estimated residual values
of all tangible fixed assets over their expected useful lives. It is
calculated at the following rates:
Radio equipment 25% per annum
Computers 33.33% per annum
Furniture and office equipment 20% per annum
Assets Held Under Lease Agreements
Tangible assets acquired under finance lease agreements are capitalised at
cost and are written off over the shorter of their expected working lives
or the lease term. The related finance costs are charged to the profit and
loss account appropriate to the terms of the agreements.
Payments under operating leases are charged to the profit and loss account
on a straight line basis over the term of the lease.
Deferred Taxation
Provision is made for deferred taxation using the liability method in
respect of all timing differences to the extent that it is probable a
liability will crystallise in the foreseeable future.
F-97
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interim Financial Data
The interim financial data as of June 30, 1997 and for the three months
ended June 30, 1997 and June 30, 1996 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the results for the interim periods.
2. Turnover
Turnover is derived from the group's operation of a courier service and is
earned entirely in the UK.
3. Operating Profit
Year Ended March, 31
--------------------
1995 1996 1997
Operating profit for the year was arrived at
after charging:
Depreciation of tangible fixed assets (pounds)50 (pounds)49 (pounds)51
Operating lease rentals of:
Plant and machinery 18 17 11
Land and buildings 33 34 34
Auditors' remuneration 9 9 7
----- ----- -----
(pounds)110 (pounds)109 (pounds)103
===== ===== =====
The average number of employees including
directors employed by the group during the
year was as follows 59 63 75
===== ===== =====
The related staff costs amounted to:
Wages and salaries (pounds)973 (pounds)1,100 (pounds)1,134
Social security costs 102 106 119
----- ----- -----
(pounds)1,075 (pounds)1,206 (pounds)1,253
===== ===== =====
4. Interest Payable and Similar Charges
Year Ended March, 31
--------------------
1995 1996 1997
Bank loans and overdrafts (pounds)16 (pounds)24 (pounds)13
===== ===== =====
All loans and overdrafts are wholly repayable within five years
F-98
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Taxation on Profits from Ordinary Activities
Year Ended March, 31
--------------------
1995 1996 1997
UK corporation tax charge (pounds)105 (pounds)204 (pounds)239
Underprovision in respect of prior years -- 16 --
----- ---- ----
(pounds)105 (pounds)220 (pounds)239
===== ==== ====
6. Dividends
Year Ended March, 31
--------------------
1995 1996 1997
Preference - paid (pounds)193 (pounds)164 (pounds)134
===== ==== ====
7. Tangible Assets
Radio Computers Furniture Total
Equipment and Office
Equipment
Cost
At March 31, 1995 (pounds)194 (pounds)109 (pounds)64 (pounds)367
Additions 20 20 11 51
--- --- --- ---
At March 31, 1996 214 129 75 418
Additions 12 35 23 70
--- --- --- ---
At March 31, 1997 (pounds)226 (pounds)164 (pounds)98 (pounds)488
=== === === ===
Depreciation
At March 31, 1995 (pounds)154 (pounds)86 (pounds)38 (pounds)278
Charge for year 21 15 13 49
--- --- --- ---
At March 31, 1996 175 101 51 327
Charge for year 19 21 11 51
--- --- --- ---
At March 31, 1997 (pounds)194 (pounds)122 (pounds)62 (pounds)378
=== === === ===
Net Book Value
At March 31, 1996 (pounds)39 (pounds)28 (pounds)24 (pounds)91
=== === === ===
At March 31, 1997 (pounds)32 (pounds)42 (pounds)36 (pounds)110
=== === === ===
F-99
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Investments
Details of the subsidiary undertaking are as follows:
Name Country of Proportion Nature of Business
---------- ---------- ------------------
Registration of
------------ --
Voting
------
Rights 1995 1996 1997
------
Security Despatch Couriers
Limited England 100% Courier Courier Dormant
Security Despatch London
Limited England 100% Courier Courier Dormant
Security Despatch (Admin)
Limited England 100% Dormant Dormant Dormant
9. Debtors
As at March 31,
---------------
1996 1997
Amounts due within one year:
Trade debtors (pounds)968 (pounds)1,077
Other debtors 6 --
Prepayments and accrued income 47 29
----- -----
(pounds)1,021 (pounds)1,106
===== =====
Amounts falling due after more than one year:
Amounts owed by parent undertaking (pounds)-- (pounds)199
===== =====
10. Creditors: Amounts falling due within one year
As at March 31,
---------------
1996 1997
Bank overdrafts (secured) (pounds)252 (pounds)184
Trade creditors 147 234
Other taxation and social security 385 583
Other creditors 82 84
Accruals and deferred income 77 160
Corporation tax 155 207
ACT payable 20 16
----- -----
(pounds)1,118 (pounds)1,468
===== =====
The bank overdrafts are secured by a fixed and floating charge over the
assets of the company.
F-100
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Share Capital
1995 1996 1997 1995 1996 1997
No No No
Authorized
Ordinary shares of 10p each 1,114,443 1,114,443 1,114,443 (pounds)111 (pounds)111 (pounds)111
"A" ordinary shares of (pounds)1 each 20,000 20,000 20,000 20 20 20
"B" ordinary shares of 10p each 592,728 592,728 592,728 59 59 59
"C" ordinary shares of 1p each 651,190 651,190 651,190 7 7 7
"D" ordinary shares of (pounds)1 each 20,000 20,000 20,000 20 20 20
11% cumulative preference shares
of (pounds)1 each 1,866,176 1,866,176 1,866,176 1,866 1,866 1,866
----- ----- -----
(pounds)2,083 (pounds)2,083 (pounds)2,083
===== ===== =====
Allotted, called up and fully paid
Ordinary shares of 10p each 668,974 678,974 788,140 (pounds)67 (pounds)68 (pounds)79
"A" ordinary shares of (pounds)1 each 10,167 10,167 -- 10 10 --
"B" ordinary shares of 10p each 592,728 592,728 592,728 59 59 59
"C" ordinary shares of 1p each -- -- 527,466 -- -- 5
--------- --------- ----- ----- -----
Total Equity Shares 1,281,869 1,098,334 136 137 143
11% cumulative preference shares
of (pounds)1 each (non equity) 1,250,000 1,100,000 1,550 1,250 1,100
----- ----- -----
(pounds)1,686 (pounds)1,387 (pounds)1,243
===== ===== =====
i) During the year ended March 31,1995 250,000 preference shares were
redeemed at par.
ii) During the year ended March 31, 1996 300,000 preference shares were
redeemed at par.
iii) During the year ended March 31,1997:
a) 10,167 "A" ordinary shares of(pounds)1 each were exchanged for
89,166 ordinary shares of 10p each.
b) The warrant holders exercised their rights to acquire 527,466 "C"
ordinary shares of 1p each at a price of 1p per share.
c) Twenty thousand options granted on July 1993 were exercised at the
option price of 100p for each ordinary 10p share.
d) The rights were waived to the options granted in September 1993 for
156,230 ordinary 10p shares at an option price of 40p.
F-101
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
e) During the year, 150,000 preference shares were redeemed at par. It
is planned by the directors of the company to convert the preference
shares into ordinary shares post year end.
f) The ordinary shares, "B" ordinary shares, "C" ordinary shares and
"D" ordinary shares have one vote per share held, and the "A"
ordinary shares have eight votes per share held. The preference
shares have no voting rights.
All ordinary shares have equal rights to dividends and to the assets of
the company on winding up.
12. Reserves
Share Capital Profit
Premium Redemption and Loss
Account Reserve Account Goodwill
At March 31, 1995 (pounds)748 (pounds)316 (pounds)(548) (pounds)(1,990)
Redemption of preference shares -- 300 (300) --
Profit for the year -- -- 285 --
New shares issued 4 -- -- --
---- ---- ---- ------
At March 31, 1996 752 616 (563) (1,990)
Redemption of preference shares -- 150 (150) --
Profit for the year -- -- 424 --
New shares issued 18 -- -- --
Share capital converted 1
---- ---- ---- ------
At March 31, 1997 (pounds)771 (pounds)766 (pounds)(289) (pounds)(1,990)
=== === ==== ======
13. Reconciliation of Shareholders'
Funds
Year Ended March 31,
--------------------
1996 1997
Profit/(loss) for the financial year (pounds)449 (pounds)558
Dividends (164) (134)
----- -----
Retained profit for the financial year 285 424
New shares issued 5 25
Goodwill written off -- --
Redemption of preference shares at par (300) (150)
----- -----
Net increase/(decrease) in shareholders
funds (10) 299
Shareholders' funds at the beginning of
the year 212 202
---- ----
Shareholders' funds at the end of the
year (pounds)202 (pounds)501
==== ====
F-102
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Reconciliation of Operating Profit to Net Cash Inflow From Operating
Activities
Year Ended March 31,
--------------------
1995 1996 1997
Operating profit (pounds)548 (pounds)693 (pounds)810
Depreciation charges 50 49 51
Increase in debtors (110) (242) (660)
Increase in creditors 51 68 369
---- ---- ----
Net cash inflow from
operating activities (pounds)539 (pounds)568 (pounds)570
==== ==== ====
15. Analysis of Cash Flows for Headings Netted in the Cash Flow Statement
Year Ended March 31,
--------------------
1995 1996 1997
Returns on investments and
servicing of finance (pounds) (pounds) (pounds)
Interest paid (16) (24) (13)
Preference dividend paid (192) (164) (134)
---- ---- ----
Net cash outflow from returns
on investments and servicing
of finance (pounds)(208) (pounds)(188) (pounds)(147)
==== ==== ====
Capital expenditure and
financial investment
Purchase of tangible fixed
assets (31) (51) (70)
Net cash outflow for capital
expenditure and financial
investment (pounds)(31) (pounds)(51) (pounds)(70)
==== ==== ====
Financing
Issue of ordinary share capital -- 5 25
Redemption of preference share
capital (250) (300) (150)
---- ---- ----
Net cash outflow from financing (pounds)(250) (pounds)(295) (pounds)(125)
==== ==== ====
F-103
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Analysis of Changes in Net Debt
Cash at Bank Bank Net Debt
and in Hand Overdrafts
At April 1, 1994 (pounds)103 (pounds)209 (pounds)106
Cash flows (71) (19) 52
--- -----------------
At March 31, 1995 32 190 158
Cash flows (1) 62 63
--- --- ---
At March 31, 1996 31 252 221
Cash flows (31) (68) (37)
--- --- ---
At March 31, 1997 (pounds)-- (pounds)184 (pounds)184
=== === ===
17. Reconciliation of Net Cash Flow to Movement in Net Debt
Year Ended March 31,
--------------------
1995 1996 1997
Increase in cash in the
year and movement in
net debt in the year (pounds)52 (pounds)63 (pounds)(37)
Net debt at beginning
of year 106 158 221
--- --- ---
Net debt at end of year (pounds)158 (pounds)221 (pounds)184
=== === ===
18. Contingent Liabilities
At March 31, 1997 the company had guaranteed amounts advanced to its
parent, Security Business Services Limited. At the year end the potential
liability was (pounds)1,750 (1996: Nil, 1995: (pounds)190).
F-104
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Annual Commitments Under Operating Leases
The Group had annual commitments under non cancelable operating leases as
follows:
As At March 31,
---------------
1996 1997
Plant and machinery:
Within one year (pounds) 1,106 (pounds) 9,305
Between two and five years 16,153 1,929
------- ------
17,259 11,234
Land and buildings:
Within one year -- 34,010
Between two and five years 34,010 --
------- ------
34,010 34,010
(pounds)51,269 (pounds)45,244
======= =======
20. Capital Commitments
There was no capital expenditure either authorised or contracted for at
March 31, 1995, March 31, 1996 and March 31, 1997.
21. Related party transactions
During the year ended March 31, 1997, in the ordinary course of business,
management services with a value of (pounds)12 (1996: (pounds)12, 1995:
(pounds)81) were received from a company in which D J Coghlan and J B
Greenbury have an interest.
The Group incurs common overhead costs for courier and mail room
management operations. These costs have been allocated to respective
operations based upon revenue generated by each operation and an estimate
of time spent by the employees on each operation. Management of the Group
believes that the current method of allocating common overhead is
reasonable. Overhead costs allocated to the mailroom management operation
for the years ended March 31, 1995, 1996 and 1997 were approximately
(pounds)20, (pounds)100 and (pounds)236 respectively. At March 31 , 1996
and 1997, the Group had receivables from the mail room management
operation of (pounds)554 and (pounds)689 respectively. These are payable
on demand and do not accrue interest.
22. Ultimate Parent Company
At March 31, 1997 the company's ultimate parent company was Security
Business Services Limited. Security Business Services Limited was
incorporated on February 27, 1997 and acquired 100% of the share capital
of the company on February 28, 1997. Prior to February 28, 1997 Security
Despatch Limited regarded itself as the ultimate parent company.
F-105
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. Summary of Differences Between UK and US Generally Accepted Accounting
Practices (GAAP)
The consolidated financial statements included in this report have been
prepared in accordance with UK GAAP which differ in certain significant
respects from US GAAP. The main differences between UK GAAP and US GAAP
which affect the Group's consolidated net profit and net assets are set
out below.
a) Differences in measurement methods
i) Goodwill
Under UK GAAP, goodwill arising on acquisitions may be charged
against reserves in the year of acquisition. Negative goodwill,
being the excess of the fair value of the Group's share of net
tangible assets acquired over cost, is credited to reserves. Upon
subsequent disposal of an identification of impairment in respect of
an acquired asset or entity, the effect of any associated
positive/negative goodwill is eliminated from reserves and then
charged against/credited to profit and loss.
Under US GAAP, goodwill is capitalised in the balance sheet and is
subsequently amortised over its estimated useful economic life not
exceeding 40 years. In the event of negative goodwill arising, under
US GAAP the values assigned to non current assets acquired are
reduced accordingly.
For the purposes of restating shareholders' equity in accordance
with US GAAP, identifiable intangible assets and goodwill have been
reclassified as assets less accumulated amortisation based upon
their estimated useful economic lives. Identifiable intangible
assets and goodwill are amortised over a period of forty years on a
straight line basis.
ii) Income Taxes
Under UK GAAP, deferred income taxes are accounted for to the extent
that it is considered probable that a liability or asset will
crystallise in the foreseeable future. Under US GAAP, deferred taxes
are accounted for on all temporary differences and a valuation
allowance is established to reduce deferred tax assets to the amount
which "more likely than not" will be realised in future tax returns.
Deferred tax amounts also arise as a result of the other US GAAP
adjustments.
F-106
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The UK deferred tax asset can be reconciled as follows to the US GAAP net
deferred tax asset:
1996 1997
Deferred tax asset under UK GAAP (pounds)Nil (pounds)Nil
Tax effects on timing differences:
Tax losses -- --
Capital allowances 11 12
--- ---
Gross deferred tax assets in accordance with 11 12
US GAAP
Deferred tax valuation allowance Nil Nil
--- ---
Net deferred tax assets in accordance with
US GAAP (pounds)11 (pounds)12
=== ===
The US GAAP provision is comprised as follows:
1996 1997
UK Corporation tax (pounds)221 (pounds)238
=== ===
F-107
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. Summary of Differences Between UK and US Generally Accepted Accounting
Practices (GAAP) (Continued)
iii) Effects on Conforming to US GAAP - Impact on Net Profit
The adjustments to reported net loss required to conform with US GAAP are
as follows:
Year Ended March 31,
--------------------
1996 1997
Net Profit
Net profit of the Group under UK GAAP (pounds) 449 (pounds) 558
Adjustments:
Amortisation of goodwill (50) (50)
Tax (1) 1
---- --
Total US GAAP adjustment (51) (49)
Net Profit under US GAAP (pounds) 398 (pounds) 509
==== ====
iv) Effects of Conforming to US
GAAP - Impact on Net Equity
The adjustments to reported net equity required to conform to US GAAP are as
follows:
Year Ended March 31,
--------------------
1996 1997
Shareholders' funds
Capital and reserves of the
Group under UK GAAP (pounds) 202 (pounds) 501
Adjustments:
Goodwill gross 1,990 1,990
Less: accumulated depreciation (284) (334)
Deferred tax 11 12
------ ------
Total US GAAP adjustments 1,717 1,668
------ ------
Shareholders' funds under
US GAAP (pounds) 1,919 (pounds) 2,169
====== ======
v) Consolidated Cash Flow Information - Group
The company's financial statements include Consolidated Statements of Cash Flows
in accordance with UK Accounting Standard FRS 1, "Cash Flow Statements". The
statement prepared under FRS 1 (revised 1996) presents substantially the same
information as that required under US Statement of Financial Accounting Standard
No 95 (FAS 95).
F-108
SECURITY DESPATCH LIMITED
(excluding the mail room services operations)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under FRS 1 (revised 1996) cash flows are presented for (i) operating
activities; (ii) returns on investments and servicing of finance; (iii)
taxation; (iv) investing activities; and (v) financing activities. FAS 95 only
requires presentation of cash flows from operating investing and financing
activities.
Cash flows under FRS 1 (revised 1996) in respect of interest received, interest
paid (net of that capitalised), interest on finance leases and taxation would be
included within operating activities under FAS 95. Capitalised interest would be
included in investing activities under US GAAP.
Cash under FRS 1 (revised 1996) include cash in hand and deposits repayable on
demand less overdrafts repayable on demand. Under FAS 95 all short term
borrowings and bank overdrafts are included in financing activities.
The following statements summarise the statement of cash flows for the Group as
if they had been presented in accordance with US GAAP and include the
adjustments which reconcile cash and cash equivalents under US GAAP to cash and
cash equivalents reported under UK GAAP.
Year Ended March 31,
--------------------
1996 1997
Net cash inflow from operating activities (pounds) 447 (pounds) 336
Net cash used in investing activities (51) (70)
Net cash provided (used for) financing
activities (397) (327)
---- ----
Net increase/(decrease) in cash and cash
equivalents (1) (31)
Cash under US GAAP at beginning of year 32 31
---- ----
Cash under US GAAP at end of year 31 --
Bank overdrafts and other under UK GAAP at
end of year (252) (184)
---- ----
Net cash/(overdraft) under UK GAAP at end
of year (pounds) 221 (pounds) (184)
==== ====
F-109
Report of Independant Accountants
To the Board of Directors and Stockholders of
Aero Special Delivery Service, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' deficiency and of cash flows present fairly, in
all material respects, the financial position of Aero Special Delivery Service,
Inc. at June 30, 1996 and 1997 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has recurring losses and a stockholder's
deficiency due to recorded liabilities for withholding taxes, interest and
penalties in dispute. The uncertainties related to these matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Price Waterhouse LLP
San Francisco, California
September 9, 1997
F-110
AERO SPECIAL DELIVERY SERVICE, INC.
BALANCE SHEETS
(Dollars in Thousands)
June 30,
1996 1997
Assets
Current assets
Cash and cash equivalents $ 79 $ 173
Accounts receivable, net 1,123 1,253
Prepaid and other current assets 122 249
------- -------
Total current assets 1,324 1,675
Property and equipment, net 341 442
------- -------
$ 1,665 $ 2,117
======= =======
Liabilities and Stockholder's Deficiency
Current liabilities
Accounts payable $ 222 $ 392
Accrued expenses 328 362
Accrued payroll taxes, interest and
penalties in dispute 1,936 2,681
Current portion of capital lease obligation 49 89
Borrowings under a line of credit and
notes payable 288 20
------- -------
Total current liabilities 2,823 3,544
Due to related party 544 589
Capital lease obligation 90 131
------- -------
Total liabilities 3,457 4,264
------- -------
Commitments and contingencies
Stockholder's deficiency
Common stock ($10 par value, 20 shares
authorized, issued and outstanding) 200 200
Accumulated deficit (1,992) (2,347)
------- -------
Total stockholder's deficiency (1,792) (2,147)
------- -------
$ 1,665 $ 2,117
======= =======
See accompanying notes to financial statements.
F-111
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENT OF OPERATIONS
(Dollars in Thousands)
Years Ended
June 30,
1996 1997
Sales $ 10,496 $ 11,818
Cost of sales 5,972 6,887
-------- --------
Gross margin 4,524 4,931
-------- --------
Operating expenses 2,155 2,375
Sales and marketing 865 961
General and administrative expenses 886 940
Payroll taxes, interest and penalties
in dispute 522 745
Depreciation and amortization 77 168
-------- --------
Total expenses 4,505 5,189
-------- --------
Operating income (loss) 19 (258)
-------- --------
Related party interest expense 54 57
Other expense, net 28 40
-------- --------
82 97
-------- --------
Loss before provision for income taxes (63) (355)
Provision for income taxes -- --
-------- --------
Net loss $ (63) $ (355)
======== ========
See accompanying notes to financial statements.
F-112
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Dollars in Thousands)
Number Common Accumulated Total
of Shares Stock Deficit Deficit
Balance, June 30, 1995 20,000 $200 $(1,929) $(1,729)
Net loss for the year
ended June 30, 1996 (63) (63)
------ ---- ------- -------
Balance, June 30, 1996 20,000 200 (1,992) (1,792)
Net loss for the year
ended June 30, 1997 (355) (355)
------ ---- ------- -------
Balance, June 30, 1997 20,000 $200 $(2,347) $(2,147)
====== ==== ======= =======
See accompanying notes to financial statements.
F-113
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Years Ended
June 30,
1996 1997
Cash flows from operating activities:
Net loss $ (63) $(355)
Adjustments to reconcile net loss
to net cash provided by operating
activities
Depreciation and amortization 77 168
Loss on disposition of property and equipment 10 50
Changes in assets and liabilities
Accounts receivable 15 (130)
Prepaid and other current assets (41) (127)
Accounts payable (38) 170
Accrued expenses (40) 34
Accrued payroll taxes, interest and
penalties in dispute 522 745
----- -----
Net cash provided by operating activities 442 555
----- -----
Cash flows from investing activities
Purchases of property and equipment, net (132) (172)
----- -----
Net cash used for investing activities (132) (172)
----- -----
Cash flows from financing activities
Change in due to related party, net 34 45
Repayments under line of credit and notes
payable, net (230) (268)
Repayments of capital lease obligations (35) (66)
----- -----
Net cash used for financing activities (231) (289)
----- -----
Net increase in cash and cash equivalents 79 94
Cash and cash equivalents at beginning of
period -- 79
===== =====
Cash and cash equivalents at end of the
period $ 79 $ 173
===== =====
Supplemental cash flow information
Interest paid $ 55 $ 52
===== =====
Taxes paid, net of refunds received $ 1 $ (31)
===== =====
Supplemental disclosure of non-cash investing
and financing activities:
Acquisition of property and equipment
under capital leases $ 157 $ 147
===== =====
See accompanying notes to financial statements.
F-114
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. Business Organization
Aero Special Delivery Service, Inc. (the "Company"), a California
corporation in business since 1968, provides same-day, on-demand delivery
services in the San Francisco Bay Area and has four dispatching locations
throughout Northern California.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to customers.
Cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of approximately three months or less at date of purchase to be
cash equivalents.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided
using the straight line method over the estimated useful lives of the
related assets, which range from three to five years. Leasehold
improvements are depreciated over the shorter of the lease term or the
asset's useful life which range from three to four years. Expenditures for
repairs and maintenance are charged to expense as incurred.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/payable and accrued expenses
approximates fair value because of the short maturity of these
instruments. It is not practical to estimate the fair value of amounts
payable to related party due to the nature of the relationship involved.
The estimated fair value of borrowings under the line of credit, notes
payable and capital lease obligations approximates their carrying value as
their interest rates approximate market rates for debt with similar terms
and average maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and, accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
F-115
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (continued)
Income taxes
The Company applies the liability method in accounting for income taxes in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS
No. 109). Under this method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Advertising
The Company advertises primarily through radio, yellow pages and news print
advertisements. Advertising costs are expensed as incurred and totaled $199
and $240 for the years ended June 30, 1996 and 1997, respectively.
3. Payroll Tax Assessments and Going Concern
The Company has received assessments from the Internal Revenue Service
("IRS") based on an audit of the Company's 1989-1993 federal payroll tax
returns. The assessments are based on the IRS's position that reimbursements
paid to owner-operator employees for automobile allowances constitute
additional compensation rather than payments made pursuant to an accountable
plan under section 62 (c) of the Internal Revenue Code or pursuant to a valid
vehicle rental arrangement. The Company and legal counsel are contesting the
IRS assessments, and in June 1996 the Company filed a refund suit in the U.S.
Court of Federal Claims after paying one employee's withholding taxes.
As of June 30, 1996 and 1997, the Company had recorded withholding tax
liabilities of $1,176 and $1,281, respectively, for the full amount of the
IRS's assessments, including interest and penalties. The Company has offered
to settle this matter for $400, but a settlement has not been reached. In
addition, because the Company's practices for the treatment of automobile
allowances paid to employees in 1994 and years subsequent may not be in
compliance with the IRS's position, the Company has accrued an additional
liability of $1,400 as of June 30, 1997 ($760 at June 30, 1996) to cover the
estimated withholding taxes, interest and penalties on similar allowances
paid in years subsequent to 1993.
Due to the recorded liabilities for the IRS assessments and additional
withholding taxes for years not yet audited by the IRS, the Company has
recurring losses and a stockholder's deficiency at June 30, 1996 and 1997.
The Company continues to operate as a going concern and the financial
statements for the years ended June 30, 1996 and 1997 have been prepared
on that basis. However, the uncertainties related to the Company's ability
to satisfy the IRS assessments and the unasserted claim for additional taxes,
interest and penalties raise substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
F-116
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Allowance for Doubtful Accounts
The allowance for doubtful accounts consists of the following:
Balance Charged Balance
at to at
beginning costs and end of
of period expenses Write-offs period
Year ended June 30, 1996 $226 $200 $(254) $172
Year ended June 30, 1997 172 282 (267) 187
5. Property and Equipment
Property and equipment consists of the following:
June 30,
1996 1997
Vehicles $ 609 $ 609
Vehicles under capital leases 175 322
Furniture and equipment 48 102
Computer equipment 71 124
Leasehold improvements 76 82
----- ------
979 1,239
Accumulated depreciation and
amortization (638) (797)
----- ------
$ 341 $ 442
===== ======
F-117
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Accrued Expenses
Accrued expenses are comprised the following:
June 30,
1996 1997
Salaries and wages $125 $139
Payroll taxes 85 94
Accrued vacation 100 111
Other 18 18
---- ----
$328 $362
==== ====
7. Line of Credit and Notes Payable
At June 30, 1996, the Company had borrowed $57 under a line of credit
agreement with a bank. The line was unsecured and required monthly
interest payments. The line bore interest at the bank's prime rate plus
3-1/2% (11.75% at June 30, 1996). The outstanding balance was paid in full
in December 1996.
At June 30, 1996, the Company had a note payable with a balance
outstanding of $65. The note was unsecured, non-interest bearing and was
paid in full by December 1996.
At June 30, 1996 and 1997, the Company had a note payable with a balance
outstanding of $166 and $20, respectively. The note was unsecured, bore
interest at 8% and was paid in full in August 1997.
Capital lease liability
The Company has numerous delivery vehicles under various lease agreements,
which qualify as capital leases. Future minimum lease payments related to
these agreements are as follows:
Fiscal year
1998 $105
1999 81
2000 61
----
247
Less imputed interest (27)
----
220
Less: current portion (89)
----
$131
====
F-118
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Income Taxes
The following reconciles the federal income tax benefit computed at the
U.S. federal income tax rate to the provision for income taxes:
Year Ended
June 30,
1996 1997
Tax benefit computed at federal statutory
rate (34%) $(23) $(121)
State tax benefit (5) (22)
Adjustment to deferred tax asset valuation
allowance 23 139
Other 5 4
---- -----
$ -- $ --
==== =====
The Company has recorded a full valuation allowance for net deferred tax
assets which otherwise would have been recognized at June 30, 1996 and
1997 based on management's assessment of the ultimate realization of such
assets. Accordingly, no benefit has been recorded for the loss for the
years then ended.
Temporary differences which otherwise would give rise to deferred tax
assets and liabilities are as follows:
June 30,
1996 1997
Payroll taxes and interest in dispute $ 776 $ 1,075
Net operating loss carryforwards 436 135
Accrued vacation and interest -- 176
Cash basis to accrual basis adjustment (186) (153)
Others, net 32 (7)
------- -------
Net deferred tax asset 1,058 1,226
Valuation allowance (1,058) (1,226)
------- -------
$ -- $ --
======= =======
At June 30, 1997, the Company had available net operating loss
carryforwards of $370 for federal income tax purposes. The carryforwards
are limited to future taxable earnings of the Company and expire in 2009.
F-119
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Related Party Transactions and Balances
Due to related party consists of the following:
June 30,
1996 1997
Note payable to stockholder, interest
payable at 9%, due February 2000 $ 591 $ 591
Note payable to stockholder, interest
payable at 9%, due July 2000 28 48
Accrued interest 107 164
----- -----
726 803
Receivable from stockholder, non-interest
bearing, due on demand (182) (214)
----- -----
$ 544 $ 589
===== =====
10. Commitments and Contingencies
Operating leases
The Company leases certain office equipment and automobiles under
operating leases expiring on various dates through 2001. Future minimum
lease payments under operating leases that have noncancelable lease terms
at June 30, 1997, are as follows:
Fiscal year
1998 $213
1999 162
2000 127
2001 111
2002 9
----
$622
====
Rental expense charged to operations was $155 and $217 for the years ended
June 30, 1996 and 1997, respectively.
Litigation
In addition to the IRS assessments and additional withholding taxes in
dispute (Note 3), the Company is party to other legal proceedings arising
in the ordinary course of business. In the opinion of management, their
ultimate resolution will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
F-120
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
11. Subsequent Events (Unaudited)
The Company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which the
Company will merge with DMS. All outstanding shares of the Company will be
exchanged for cash and common stock of DMS concurrent with the
consummation of the initial public offering of the common stock of DMS.
F-121
Report of Independent Accountants
To the Stockholder of
S-Car-Go Courier, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of S-Car-Go Courier,
Inc. at December 31, 1995 and 1996, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
San Francisco, California
August 29, 1997
F-122
S-CAR-GO COURIER, INC.
BALANCE SHEETS
(Dollars in Thousands, except per share amounts)
December 31, June 30,
1995 1996 1997
(Unaudited)
Assets
Current assets:
Cash $ 29 $ 75 $110
Accounts receivable 141 185 192
---- ---- ----
Total current assets 170 260 302
Intangible assets, net, 11 7 4
Property and equipment, net 24 18 32
Other assets 1 -- 10
---- ---- ----
$206 $285 $348
---- ---- ----
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7 $ 8 $ 3
Accrued expenses 30 117 46
Taxes payable 1 29 17
Deferred income taxes 43 21 60
Notes payable to related parties 36 16 102
---- ---- ----
Total current liabilities 117 191 228
---- ---- ----
Stockholders' equity
Common stock $1.00 par value; 1,000 shares
authorized 500 shares issued and outstanding 1 1 1
Retained earnings 88 93 119
---- ---- ----
Total stockholders' equity 89 94 120
---- ---- ----
$206 $285 $348
---- ---- ----
See accompanying notes to financial statements.
F-123
S-CAR-GO COURIER, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Years Ended Six Months Ended
December 31, June 30,
1995 1996 1996 1997
(Unaudited)
Net sales $838 $1,155 $537 $704
Cost of sales 489 693 323 391
---- ------ ---- ----
Gross margin 349 462 214 313
---- ------ ---- ----
Operating expenses 96 140 64 78
Sales and marketing 32 87 44 87
General and administrative expenses 110 206 103 92
Depreciation and amortization 16 15 8 9
---- ------ ---- ----
Total expenses 254 448 219 266
---- ------ ---- ----
Operating income (loss) 95 14 (5) 47
Interest expense 2 2 1 4
---- ------ ---- ----
Income (loss) before provision for
income taxes 93 12 (6) 43
Provision for income taxes 40 7 (3) 17
---- ------ ---- ----
Net income (loss) $ 53 $ 5 $ (3) $ 26
==== ====== ==== ====
See accompanying notes to financial statements.
F-124
S-CAR-GO COURIER, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands, except per share amounts)
Number Common Retained Total
of Shares Stock Earnings Equity
Balance, December 31, 1994 500 $1 $35 $36
Net income for the year ended
December 31, 1995 53 53
--- -- ---- ----
Balance, December 31, 1995 500 1 88 89
Net income for the year ended
December 31, 1996 5 5
--- -- ---- ----
Balance, December 31, 1996 500 1 93 94
Net income for six months ended
June 30, 1997 (unaudited) 26 26
--- -- ---- ----
Balance, June 30, 1997 (unaudited) 500 $1 $119 $120
=== == ==== ====
See accompanying notes to financial statements.
F-125
S-CAR-GO COURIER, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months
Years Ended Ended
December 31, June 30,
1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities:
Net income $ 53 $ 5 $ (3) $ 26
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 16 14 7 9
Changes in assets and liabilities:
Accounts receivable (51) (44) (68) (7)
Other assets -- 1 -- (10)
Accounts payable (19) 1 (5) (5)
Accrued expenses (35) 87 21 (71)
Income taxes payable -- 28 19 (12)
Deferred income taxes 39 (22) 20 39
---- ---- ---- -----
Net cash provided by operating activities 3 70 (9) (31)
---- ---- ---- -----
Cash flows from investing activities:
Purchases of property and equipment (4) (4) (4) (20)
---- ---- ---- -----
Net cash used for investing activities (4) (4) (4) (20)
---- ---- ---- -----
Cash flows from financing activities:
Repayment of notes to related parties, net (4) (20) (9) 86
---- ---- ---- -----
Net (decrease) increase in cash (5) 46 (22) 35
Cash at beginning of period 34 29 29 75
---- ---- ---- -----
Cash at end of period $ 29 $ 75 $ 7 $ 110
==== ==== ==== =====
See accompanying notes to financial statements.
F-126
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
S-Car-Go Courier, Inc. (the "Company") was incorporated in 1992. The
Company provides same-day, on-demand delivery services to customers in and
around the San Francisco Bay Area. Two major customers comprised 23% an
29% of revenues in 1995 and 1996.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Revenue recognition
Revenues are recognized upon delivery of packages to the customer.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets. Property and equipment consists of computer equipment and vehicles
with estimated useful lives of 5 years.
Fair value of financial instruments
The carrying amount of accounts receivable/payable and accrued expenses
approximates fair value because of the short maturity of these instruments.
The fair value of notes payable to related parties cannot be estimated due
to the related party relationships involved (Note 6).
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the Company
performs ongoing credit evaluations of its customers to reduce the risk of
loss.
Income taxes
The Company is a C-Corporation for federal and state income tax purposes.
The Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (FAS 109).
Unaudited interim financial statements
The interim financial data as of June 30, 1997 and for the six months ended
June 30, 1996 and June 30, 1997 is unaudited, however, in the opinion of
management, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods.
F-127
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (continued)
Intangible asset
The intangible asset is a covenant not to compete agreement entered into
with a former stockholder in connection with the redemption in 1994 of
common stock. Consideration paid for the covenant was $23, which is being
amortized over its life of 5 years.
3. Property and Equipment
Property and equipment consists of the following:
December 31,
1995 1996
Equipment $ 63 $ 67
Vehicles 12 12
---- ----
75 79
Less: Accumulated depreciation (51) (61)
---- ----
$ 24 $ 18
==== ====
Depreciation expense for the years ended December 31,
1995 and 1996 was $11 and $10.
4. Accrued Expenses
Accrued expenses consist of the following:
December 31,
1995 1996
Payroll and payroll taxes $19 $ 43
Bonus 11 63
Consulting -- 11
--- ----
Total accrued expenses $30 $117
=== ====
F-128
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
5. Income Taxes
The provision for income taxes consists of the following:
December 31,
1995 1996
Current tax expense
Federal $ 1 $ 23
State
-- 6
--- ----
1 29
--- ----
Deferred tax expense
Federal 30 (17)
State 9 (5)
--- ----
39 (22)
--- ----
$40 $ 7
=== ====
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
December 31,
1995 1996
Taxes computed at federal statutory rate (34%) $ 31 $ 4
State taxes (net of federal benefit) 6 1
Other 3 2
----- -----
Provision for income taxes $ 40 $ 7
===== =====
Effective rate 43.0% 58.3%
===== =====
F-129
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
5. Income Taxes (continued)
Temporary differences giving rise to the Company's deferred tax
liabilities were as follows:
December 31,
1995 1996
Deferred tax liabilities:
Accrual basis receivables/payables, net $ 40 $ 20
Property and equipment 3 1
---- ----
$ 43 $ 21
==== ====
6. Related Party Transactions
Notes payable to related parties
In March 1994, the Company borrowed $50 from a relative of the stockholder.
The note matures in March 1998 and bears interest at 7% payable annually.
On May 31, 1997, the Company issued a note payable to the stockholder.
Principle is payable on demand and bears interest at 12% per annum, payable
monthly.
Investment in related party
In October 1994, San Francisco Dispatch Brokerage Center, Inc. ("SFDBC"),
a California Corporation, was formed for the purpose of performing the
dispatch, billing, accounting and other related functions for four
delivery service companies in San Francisco. Upon formation of SFDBC, the
Company contributed property and equipment to SFDBC in exchange for 20% of
its common stock. The value of the property and equipment was immaterial.
The Company accounts for this investment under the cost method as results
of applying the equity method would not differ materially.
The expenses of SFDBC are allocated among the four founding delivery service
companies based on the transactions and revenue volume of each. In addition,
the Company's stockholder serves as a non-compensated officer of SFDBC. The
total expenses attributed to the Company were $107 and $154 in 1995 and 1996,
respectively. SFDBC also provides similar services for another delivery
service company. The resulting profit is distributed to the founding
companies monthly. These profits totaled $11 and $14 in 1995 and 1996,
respectively.
7. Subsequent Events (Unaudited)
Merger
The Company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which the Company
will merge with DMS. All outstanding shares of the Company will be
F-130
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
exchanged for cash and common stock of DMS concurrent with the
consummation of the initial public offering of the common stock of DMS.
F-131
Report of Independent Accountants
To Gregory W. Austin
In our opinion, the accompanying statement of assets, liabilities
and net assets and the related statements of operations and changes in net
assets and of cash flows present fairly, in all material respects, the financial
position of Gregory W. Austin d/b/a Battery Point Messenger and Alpha Express at
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles. These financial statements are your responsibility; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
San Francisco, California
August 29, 1997
F-132
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
d/b/a BATTERY POINT MESSENGER and ALPHA EXPRESS
STATEMENT OF ASSETS, LIABILITIES AND NET ASSETS
(Dollars in Thousands)
December 31, June 30,
1995 1996 1997
(Unaudited)
Assets
Current assets:
Cash $ 2 $ 2 $ 18
Accounts receivable 102 115 125
Prepaid and other current assets 7 9 6
---- ---- ----
Total current assets 111 126 149
Property and equipment, net 11 7 6
Intangible assets, net 27 21 18
---- ---- ----
$149 $154 $173
==== ==== ====
Liabilities and Net Assets
Current liabilities:
Accounts payable $ 6 $ 2 $ 3
Accrued payroll 6 10 13
Accrued customer list payable 12 -- --
Borrowings under line of credit 19 21 18
---- ---- ----
Total current liabilities 43 33 34
Net assets 106 121 139
---- ---- ----
$149 $154 $173
==== ==== ====
See accompanying notes to financial statements.
F-133
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
d/b/a BATTERY POINT MESSENGER and ALPHA EXPRESS
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
(Dollars in Thousands)
Years Ended Six Months
December 31, Ended June 30
----- -----
1995 1996 1996 1997
----- ----- ----- -----
(Unaudited)
Net sales $ 576 $ 732 $ 346 $ 405
Cost of sales 315 397 190 189
----- ----- ----- -----
Gross margin 261 335 156 216
----- ----- ----- -----
Operating expenses 82 113 53 58
Sales and marketing 3 24 12 7
General and administrative expenses 26 31 15 16
Depreciation and amortization 7 10 5 4
----- ----- ----- -----
118 178 85 85
----- ----- ----- -----
Operating income 143 157 71 131
Interest expense 2 3 2 1
----- ----- ----- -----
Excess of income over expenses (net income) 141 154 69 130
Net assets at beginning of period 46 106 106 121
Distributions to owner (81) (139) (47) (112)
----- ----- ----- -----
Net assets at end of period $ 106 $ 121 $ 128 $ 139
----- ----- ----- -----
Unaudited pro forma information:
Pro forma income before income taxes $ 141 $ 154 $ 69 $ 130
Provision for income taxes (56) (62) (28) (52)
----- ----- ----- -----
Pro forma net income $ 85 $ 92 $ 41 $ 78
===== ===== ===== =====
See accompanying notes to financial statements.
F-134
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
d/b/a BATTERY POINT MESSENGER and ALPHA EXPRESS
STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Years Ended Six Months
December 31, Ended June 30,
1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities:
Excess of income over expenses (net income) $ 141 $ 154 $ 69 $ 130
Adjustments to reconcile excess
of income over expenses
(net income) to cash provided by
operating activities:
Depreciation and amortization 7 10 5 4
Changes in assets and liabilities:
Accounts receivable (49) (13) 3 (10)
Prepaid and other current assets (4) (2) -- 3
Accounts payable 3 (4) (4) 1
Accrued expenses 1 4 5 3
----- ----- ---- -----
Net cash provided by operating activities 99 149 78 131
----- ----- ---- -----
Cash flows from investing activities:
Purchase of customer list (18) (12) (12) --
Purchases of property and equipment, net (10) -- -- --
----- ----- ---- -----
Net cash used for investing activities (28) (12) (12) --
----- ----- ---- -----
Cash flows from financing activities:
Change in borrowings under line of credit, net 9 2 3 (3)
Distributions to owner (81) (139) (47) (112)
----- ----- ---- -----
Net cash used for financing activities (72) (137) (44) (115)
----- ----- ---- -----
Net (decrease) increase in cash (1) -- 22 16
Cash at beginning of period 3 2 2 2
----- ----- ---- -----
Cash at end of period $ 2 $ 2 $ 24 $ 18
===== ===== ==== =====
See accompanying notes to financial statements.
F-135
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
d/b/a BATTERY POINT MESSENGER and ALPHA EXPRESS
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
Battery Point Messenger was founded in 1988 by Gregory W. Austin and
operates as a sole proprietorship. The financial statements are based on
the assets, liabilities and transactions recorded in the accounting
records of Gregory W. Austin dba Battery Point Messenger and Alpha
Express. All assets and liabilities of a personal nature not recorded in
such records have been excluded from the financial statements.
In May 1995 Battery Point Messenger purchased the customer list of Alpha
Express along with the rights to the use of such name. Battery Point
Messenger and Alpha Express (the Company) provide same-day, on-demand
delivery services predominately in the San Francisco central business
district. Deliveries are performed by bike messengers.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets. Property and equipment consists primarily of computer and
communications equipment and is being depreciated over 5 years.
Intangible asset
In May 1995, the Company purchased the customer lists of Alpha Express
accompanied by a covenant not to compete for five years from the seller.
The purchase price of $30 was capitalized and is being amortized over five
years using the straight-line method. Accumulated amortization was $3 and
$9 at December 31, 1995 and 1996. Amortization expense for the years ended
December 31, 1995 and 1996 was $3 and $6, respectively.
Fair value of financial instruments
The carrying amount of cash, accounts receivable/payable and accrued
expenses approximates fair value because of the short maturity of these
instruments. Additionally, interest rates on the line of credit is a rate
which approximate market rates for debt with similar terms.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
F-136
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
d/b/a BATTERY POINT MESSENGER and ALPHA EXPRESS
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (Continued)
Advertising costs
The Company advertises through the use of color brochures and direct
mailings. Advertising costs are expensed as incurred and amounted to $2
and $20 for the years ended December 31, 1995 and 1996, respectively.
Income taxes
The Company is a sole proprietorship and, accordingly, income generated
from its operations is taxed at the individual level. Therefore, a
provision for income taxes has not been provided. However, proforma income
tax expense has been included in the statement of operations and changes
in net assets to reflect the estimated income tax expense the Company
would have incurred had it been a corporation for all periods presented.
Unaudited interim financial statements
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and June 30, 1997 is unaudited; however in the opinion
of management, the interim data includes all adjustments, consisting of
only normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. Property and Equipment
Property and equipment consists of the following:
December 31,
1995 1996
Communication equipment $ 24 $ 24
Computer equipment 11 11
Furniture and fixtures 2 2
Other 3 3
---- ----
40 40
Accumulated depreciation (29) (33)
---- ----
$ 11 $ 7
==== ====
Depreciation expense for the years ended December 31, 1995 and 1996 was
approximately $4 and $4, respectively.
4. Line of Credit
The Company has a $23 revolving business line of credit with its primary
banking institution. Principal and interest payments, which amount to 2%
of the ending monthly balance, are paid on a monthly basis. Annual
percentage rate was 13% and 13.5% at December 31, 1996 and 1995,
respectively.
F-137
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
d/b/a BATTERY POINT MESSENGER and ALPHA EXPRESS
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
5. Related Parties
In October 1994, San Francisco Dispatch Brokerage Center, Inc. (SFDBC), a
California corporation, was formed for the purpose of performing the
dispatch, billing, accounting and other related functions for several
delivery services in San Francisco. Upon formation of SFDBC, the Company
contributed property and equipment to SFDBC in exchange for 20% of its
common stock. The value of the property and equipment was immaterial. The
Company accounts for this investment under the cost method as results of
applying the equity method would not differ materially.
Upon formation of SFDBC through February 28, 1997, Gregory W. Austin
served as an officer of SFDBC and was paid an annual salary of $24. All
salaries and expenses of SFDBC are allocated among the four founding
delivery service companies based on transactions and revenue volume of
each. SFDBC also provided similar services to other messenger companies.
The revenues earned on these services are distributed to the founding
delivery service companies monthly and have been classified as a reduction
of operating expenses as they are immaterial. The total expenses, net of
associate revenues, charged to the Company were $82 and $113 in 1995 and
1996, respectively.
6. Subsequent Events
Purchase of customer list
On July 1, 1997, the Company purchased the customer list of A to Z
Couriers (California) Inc. for $30. The customer list consisted of one
hundred sixty-three accounts that are now serviced by Battery Point
Messenger and Alpha Express.
7. Subsequent Events (Unaudited)
Merger
The Company has entered into a definitive agreement with Dispatch
Management Services Corp. ("DMS") pursuant to which the Company will merge
with the DMS. The Company's assets will be exchanged for cash and common
stock of DMS Corporation concurrent with the consummation of the initial
public offering of the common stock of DMS.
F-138
Report of Independent Accountants
To the Board of Directors and Stockholders of
Washington Express Services, Inc.
In our opinion, the accompanying balance sheets, and the related
statements of operations, of stockholders' equity (deficiency) and of cash flows
present fairly, in all material respects, the financial position of Washington
Express Services, Inc. at September 30, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Detroit, Michigan
August 29, 1997
F-139
WASHINGTON EXPRESS SERVICES, INC.
BALANCE SHEETS
(Dollars in Thousands)
September 30, June 30,
1995 1996 1997
---- ---- ----
(Unaudited)
Assets
Current assets
Cash $ 19 $ 7 $ 43
Accounts receivable, net 685 681 866
Loan receivable - stockholder 90
Prepaid and other current assets 53 57 56
----- ------- -------
Total current assets 757 835 965
Property and equipment, net 157 242 443
Deposits 17 62 36
----- ------- -------
Total assets $ 931 $ 1,139 $ 1,444
===== ======= =======
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities
Line of credit $ 285 $ 403 $ 575
Accounts payable and accrued expenses 266 176 280
Deferred income tax liability 207 236 206
Obligations under capital leases 26 33 14
Notes payable 77 127
----- ------- -------
Total current liabilities 784 925 1,202
Long-term liabilities
Obligations under capital leases 53 73 100
Notes payable 59
Notes payable - stockholders 119 116 122
----- ------- -------
Total liabilities 956 1,114 1,483
----- ------- -------
Commitments
Stockholders' Equity
Common stock $.01 par value (100,000 shares
authorized; 9,332 issued and outstanding) and
additional paid-in capital 377 377 377
Advance to stockholder (Note 14) (135) (135) (190)
Accumulated deficit (267) (217) (226)
----- ------- -------
Total stockholders' equity (deficiency) (25) 25 (39)
----- ------- -------
Total liabilities and stockholders'
equity (deficiency) $ 931 $ 1,139 $ 1,444
===== ======= =======
See accompanying notes to financial statements.
F-140
WASHINGTON EXPRESS SERVICES, INC.
STATEMENT OF OPERATIONS
(Dollars in Thousands)
Nine Months
Year Ended September 30, Ended June 30,
--------------------------- -------------------
1994 1995 1996 1996 1997
(Unaudited)
Net sales $5,881 $6,056 $ 5,800 $ 4,372 $ 4,341
Cost of sales 3,094 3,239 3,164 2,368 2,302
------ ------ ------- ------- -------
Gross margin 2,787 2,817 2,636 2,004 2,039
Selling, General and Administrative Expenses
Operating expenses 1,540 1,666 1,532 1,160 1,216
Sales and marketing 423 459 483 359 386
General and administrative expenses 540 435 390 300 316
Depreciation and amortization 79 67 91 53 83
------ ------ ------- ------- -------
Operating income 205 190 140 132 38
Other (income) expense
Interest expense 128 91 70 44 70
Other, net 5 4 (18) (13) (16)
------ ------ ------- ------- -------
Income (loss) before provision for income taxes 72 95 88 101 (16)
Provision (benefit) for income taxes 30 40 38 43 (7)
------ ------ ------- ------- -------
Net income (loss) $ 42 $ 55 $ 50 $ 58 $ (9)
====== ====== ======= ======= =======
See accompanying notes to financial statements.
F-141
WASHINGTON EXPRESS SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in Thousands)
Retained
Earnings Total
Common Advance to (Accumulated Stockholders'
Stock Stockholder Deficit) Equity (Deficiency)
----- ----------- ----------- -------------------
Balance at September 30, 1993 $ 377 $ -- $(364) $13
Net income 42 42
----- ----- ----- ---
Balance at September 30, 1994 377 (322) 55
Advances to stockholder (135) (135)
Net income 55 55
----- ----- ----- ---
Balance at September 30, 1995 377 (135) (267) (25)
Net income 50 50
----- ----- ----- ---
Balance at September 30, 1996 377 (135) (217) 25
Net loss (unaudited) (9) (9)
Advances to stockholder (unaudited) (55) (55)
----- ----- ----- ---
Balance at June 30, 1997 (unaudited) $ 377 $(190) $(226) $(39)
===== ===== ===== ===
See accompanying notes to financial statements.
F-142
WASHINGTON EXPRESS SERVICES, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended
Year Ended September 30, June 30,
--------------------- -------------
1994 1995 1996 1996 1997
(Unaudited)
Operating activities
Net income (loss) $ 42 $ 55 $ 50 $ 58 $ (9)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 70 66 91 53 83
Loss on disposal of assets 4 5 1 1
Deferred income taxes 28 (20) 29 35 (30)
Changes in operating assets and liabilities:
Accounts receivable (32) (1) 4 (196) (185)
Deposits 1 2 (45) (11) 26
Prepaid expenses 14 19 (4) (13) 1
Accounts payable and accrued expenses (81) 156 (90) (54) 104
Accrued interest payable - shareholders 28 8 8 6 6
----- ----- ----- ----- -----
Net cash provided by (used in) operating activities 74 290 44 (121) (4)
----- ----- ----- ----- -----
Investing activities
Net cash used in investing activities-purchase of
property and equipment (31) (21) (111) (91) (159)
----- ----- ----- ----- -----
Financing activities
Increase (reduction) in line of credit (25) (155) 118 241 172
Repayments from (advances to) stockholder 9 (41) (55)
Decrease (increase) in loan receivable - stockholder (90) (54) 90
Principal payments on notes payable - stockholders (18) (4) (11) (11)
Proceeds from notes payable 77 77 109
Principal payments on capital lease obligations (26) (50) (39) (26) (117)
----- ----- ----- ----- -----
Net cash provided by (used in) financing activities (60) (250) 55 227 199
----- ----- ----- ----- -----
Net increase (decrease) in cash (17) 19 (12) 15 36
Cash at beginning of period 17 -- 19 19 7
----- ----- ----- ----- -----
Cash at end of period $ -- $ 19 $ 7 $ 34 $ 43
===== ===== ===== ===== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 100 $ 83 $ 62 $ 38 $ 64
===== ===== ===== ===== =====
Income taxes $ 15 $ 14 $ 51 $ 8 $ 23
===== ===== ===== ===== =====
Capital lease obligations incurred for
purchase of property and equipment $ -- $ 73 $ 66 $ 66 $ 125
===== ===== ===== ===== =====
See accompanying notes to financial statements.
F-143
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
Washington Express Services, Inc. (the "Company") provides same-day,
on-demand delivery services in the Washington, DC metropolitan area.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Property and equipment
Property and equipment are carried at cost. Depreciation is primarily
provided for using the modified accelerated cost recovery system over the
estimated useful lives of the related assets (5 to 31.5 years).
Fair value of financial instruments
The carrying amount of cash, accounts receivable/payable, notes
receivable/payable, accrued expenses and amounts payable under line of
credit agreements approximates fair value because of the short maturity of
these instruments. The estimated fair value of long-term debt and other
long-term liabilities approximates its carrying value. Additionally,
interest rates on outstanding debt are at rates which approximate market
rates for debt with similar terms and average maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
Income taxes
The Company is a C-Corporation for federal and state income tax purposes.
The Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (FAS 109).
Unaudited Interim Financial Statements
The interim financial data as of June 30, 1997 and for the nine months
ended June 30, 1997 and June 30, 1996 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the results of the interim periods.
F-144
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
3. Allowance for Doubtful Accounts
Balance at Charged to Balance
Beginning Costs and at end
of Period Expenses Write-offs of Period
--------- -------- ---------- ---------
Year ended September 30, 1994......................... $ 19 $ 60 $ (69) $ 10
Year ended September 30, 1995......................... $ 10 $ 25 $ (34) $ 1
Year ended September 30, 1996......................... $ 1 $ 6 $ (1) $ 6
4. Prepaid and Other Current Assets
Prepaid and other current assets comprised the following:
September 30,
---------------
1995 1996
Prepaid workers compensation $ 30 $ 1
Prepaid insurance 9 17
Prepaid income taxes 19
Other 14 20
------ ------
Total prepaid and other current assets $ 53 $ 57
====== ======
5. Property and Equipment
Property and equipment comprised the following:
September 30,
---------------
1995 1996
Computer equipment $ 242 $ 381
Office equipment 230 222
Furniture and fixtures 35 38
Other 30 30
------ ------
537 671
Accumulated depreciation and amortization 380 429
------ ------
$ 157 $ 242
====== ======
Included in property and equipment at September 30, 1995 and 1996 are
assets acquired under capital leases in the gross amount of $162 and $228
and accumulated depreciation of $73 and $164, respectively. Related
depreciation expense aggregated $22, $33 and $91 for the years ended
September 30, 1994, 1995 and 1996, respectively.
F-145
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
6. Line of Credit
The Company maintains a $600 revolving line of credit with a financial
institution that expires on February 28, 1997. Pursuant to the terms of
the agreement, interest is payable monthly at the rate of prime plus 1.25%
(9.5% at December 31, 1996). The line of credit is secured by the
Company's accounts receivable and equipment, and is personally guaranteed
by the Company's shareholders. At September 30, 1996, the Company was in
violation of certain financial covenants of the agreement pertaining to
tangible net worth and leverage ratios. However, although the Company
continues to be in violation of certain financial covenants in the
agreement, subsequent to September 30, 1996, the line of credit agreement
was renewed with the financial institution such that it will currently
expire on February 28, 1998.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses comprised the following:
September 30,
---------------
1995 1996
Accounts payable, trade $ 95 $ 60
Accrued Wages 65 65
Income taxes payable 45 26
Accrued courier commissions 54
Other 7 25
------ ------
Total accounts payable and accrued expenses $ 266 $ 176
====== ======
8. Income Taxes
The provision for income taxes comprises:
Year Ended September 30,
------------------------
1994 1995 1996
Current tax expense $ 2 $ 60 $ 9
Deferred tax expense 28 (20) 29
------ ------ ------
Provision for income taxes $ 30 $ 40 $ 38
====== ====== ======
Deferred income tax assets and liabilities result from timing differences
in the recognition of revenue and expense for tax and financial reporting
purposes. Principally from the use of the accrual method of accounting for
financial reporting purposes and the cash basis of reporting for tax
purposes, the Company has recorded current deferred income tax liabilities
of $207 and $236 at September 30, 1995 and 1996, respectively.
F-146
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
8. Income Taxes (continued)
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
Year Ended September 30,
------------------------
1994 1995 1996
Taxes computed at federal statutory rate (35%) $ 25 $ 33 $ 31
State taxes (net of federal benefit) 1 8 2
Surcharge exemption -- (12) (8)
Non-deductible meals and entertainment -- 7 10
Non-deductible officers' life insurance -- 3 3
Other 4 1 --
------ ------ ------
Provision for income taxes $ 30 $ 40 $ 38
====== ====== ======
Effective tax rate 42% 42% 43%
====== ====== ======
9. Capital Leases
The Company has entered into lease agreements for the use of equipment
expiring at various times through 1999 that are accounted for as capital
leases. The future minimum lease payments under the capital lease
agreements are as follows:
For the year ending September 30,
1997 $ 44
1998 43
1999 41
2000 1
----
Minimum lease payments 129
Less: amount representing interest 23
----
Present value of minimum lease payments 106
Less: current portion of capital lease obligations 33
----
Long-term portion of capital lease obligations $ 73
====
Subsequent to September 30, 1996, the Company entered into agreements for
the lease of additional equipment that expire at various times through
1999. Pursuant to the terms of the agreements, the minimum lease payments
aggregate $142, including interest in the aggregate amount of $23.
F-147
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
10. Notes Payable
The Company has an equipment loan that bears interest at 9.75% and is
payable in 36 equal installments through October, 1999. The Company was in
violation of certain financial covenants of the loan agreement for the
years ended September 30, 1995 and 1996, accordingly, the entire liability
is classified as a current liability on the accompanying balance sheet.
The minimum principal payments due under the loan agreement for the fiscal
years ended September 30 are as follows:
For the year ending September 30,
1997 $ 24
1998 26
1999 26
2000 1
---
$ 77
===
11. Commitments
The Company has entered into agreements for the lease of certain office
equipment and office space which expire at various times through November
2006. Future minimum rental payments required under leases that have
noncancelable lease terms in excess of one year at September 30, 1996 are
as follows:
For the year ending September 30,
1997 $ 48
1998 56
1999 50
2000 42
2001 43
Thereafter 246
----
$485
===
Rental expense charged to operations was approximately $58, $70 and $60
for the years ended September 30, 1994, 1995 and 1996, respectively.
12. Employee benefit plan
The Company maintains a defined contribution plan covering substantially
all of its employees. The Plan is a qualified savings plan under the
provisions of Section 401(k) of the Internal Revenue Code and allows
eligible employees to defer up to 15% of their compensation subject to the
maximum allowable limit. The Company matches one-third of the employee
contribution up to the first 9%. Plan participants are immediately vested
100% in their contributions and vest at the rate of 20% per year in
employer contributions with full vesting occurring after five years of
service. Employer contributions aggregated $19, $20 and $22 for the years
ended September 30, 1994, 1995 and 1996, respectively.
13. Stock Option Agreement
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". This statement is effective for
F-148
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
fiscal years beginning after December 15, 1995 and sets forth standards
for accounting for stock-based compensation. SFAS 123 allows the use of
either a "fair value" based method of accounting or the "intrinsic value"
based method determined in accordance with Accounting Principles Board
(APB) Opinion No. 25. The Company will elect to account for stock-based
compensation in accordance with the "intrinsic value" method of APB
Opinion No. 25.
In May 1991, the Company granted one of its employees the right to
purchase up to 500 shares of the Company's common stock at an exercise
price of $60 per share. The option initially expired on October 1, 1996,
but was shortly thereafter extended to October 31, 1997 with no other
revisions to the terms of the agreement. The option was exercised
subsequent to June 30, 1997 and the Company issued 500 shares of its
common stock to the employee at a price of $60 per share. In accordance
with APB No. 25, the Company has not recognized compensation expense
related either to the original issuance of this option or to its extension
based on management's estimate of the fair value of the common stock. No
other stock options were granted, exercised, forfeited or expired during
the years ended September 30, 1994, 1995 and 1996.
14. Related Party Transactions
The Company has entered into an agreement with a stockholder whereby the
Company has the right to purchase 3,557 shares of the Company's common
stock from the shareholder at an aggregate purchase price of $190. Such
shares represent approximately 38% of the Company's outstanding common
stock at September 30, 1996. At September 30, 1995 and 1996, the Company
advanced to the shareholder amounts aggregating $135 related to the
contemplated purchase of the 3,557 shares. In August 1997, the Company
exercised its rights pursuant to the agreement and purchased the 3,557
shares of its common stock in exchange for $190, accordingly, such amounts
advanced to the stockholder have been classified as stockholders' equity
on the accompanying balance sheets.
At September 30, 1996, loan receivable-stockholder comprised of a
short-term loan made to the Company's Chief Executive Officer (the
"Executive") during the year ended September 30, 1996. Pursuant to the
terms of an agreement, such loan will be repaid to the Company as the
Executive's 1997 fiscal year compensation is earned and in no event will
the loan be repaid later than September 30, 1997.
Notes payable-stockholders at September 30, 1995 and 1996 aggregated $119
and $116, including accrued interest of $38 and $46, respectively, and
represent unsecured loans made to the Company by two of its shareholders.
The shareholder loans are subordinate to the Company's obligations under
its line of credit agreement. Interest is accrued at the rate of 12% per
annum. Related interest expense charged to operations amounted to $6, $8
and $8 for the years ended September 30, 1994, 1995 and 1996,
respectively.
The Company rents office space in Fairfax, Virginia, from HPHC Associates,
a partnership in which certain shareholders of the Company are partners.
The rental of this space is provided for on a month-to-month basis with no
lease commitment. For the years ending September 30, 1995 and 1996,
related expenses charged to operations aggregated approximately $20 and
$11.
F-149
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
15. Unaudited Subsequent Events
The Company and its stockholders have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which the
Company will merge with DMS. All outstanding shares of the Company will be
exchanged for cash and stock concurrent with the consummation of the
initial public offering of the common stock of DMS.
F-150
Report of Independent Accountants
To the Board of Directors and Shareholder of
MLQ Express, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of MLQ Express, Inc. at
February 28, 1996 and 1997 and the results of its operations and its cash flows
for the three years in the period ended February 28, 1997 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Atlanta, Georgia
August 27, 1997
F-151
MLQ EXPRESS, INC.
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
February 28, May 31,
1996 1997 1997
Assets
Current Asset
Cash and cash equivalents $ 1 $ 1 $ 5
Accounts receivable, net 504 763 610
Prepaid and other current assets 96 124 84
------ ------ ------
Total current assets 601 888 699
Property and equipment, net 138 133 149
Other assets 95 86 92
------ ------ ------
$ 834 $1,107 $ 940
====== ====== ======
Liabilities and stockholder's equity
Current liabilities
Line of credit $ 115 $ -- $ --
Current maturities long-term debt 65 -- --
Accounts payable 19 97 27
Accrued expenses 122 179 102
Note payable - related parties -- 394 275
Current maturities long-term debt - related parties 110 -- --
Deferred income taxes 86 118 114
------ ------ ------
Total current liabilites 517 788 518
Long-term debt, net of current maturities 48 -- --
Long-term debt - related parties, net of current maturities 30 -- --
------ ------ ------
Total liabilities 595 788 518
------ ------ ------
Commitments and contingent liabilities
Stockholder's Equity
Common stock, $1.00 par value; 10,000 shares
authorized; 150 shares issued outstanding -- -- --
Additional paid-in capital 18 18 18
Retained earnings 221 301 404
------ ------ ------
Total stockholder's equity 239 319 422
------ ------ ------
$ 834 $1,107 $ 940
====== ====== ======
See accompanying notes to financial statements.
F-152
MLQ EXPRESS, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three months ended
Year Ended February 28, May 31,
1995 1996 1997 1996 1997
Net sales $ 4,102 $ 4,053 $ 5,310 $ 1,179 $ 1,538
Cost of sales 2,372 2,430 3,296 708 909
------- ------- ------- ------- -------
Gross margin 1,730 1,623 2,014 471 629
Operating expenese 515 511 579 160 172
Sales and marketing 163 188 233 42 58
General and administrative expenses 1,124 853 991 205 257
Depreciation and amortization 88 91 94 24 18
------- ------- ------- ------- -------
Total expenses 1,890 1,643 1,897 431 505
------- ------- ------- ------- -------
Operating income (loss) (160) (20) 117 40 124
Other (income) expense
Interest expense 17 30 43 9 7
Other, net (52) (62) (38) (7) (13)
------- ------- ------- ------- -------
Income (loss) begore provision for income taxes (125) 12 112 38 130
Provision (benefit) for income taxes (6) 13 32 8 27
------- ------- ------- ------- -------
Net income (loss) $ (119) $ (1) $ 80 $ 30 $ 103
====== ======= ======= ======= =======
See accompanying notes to financial statements.
F-153
MLQ EXPRESS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except share amounts)
Additional Total
Common Stock Paid-in Retained Stockholder's
Shares Amount Capital Earnings Equity
Balance at February 28, 1994 150 $ - $ 18 $ 341 $ 359
Net loss - - - (119) (119)
--- ----- ---- ----- -----
Balance at February 28, 1995 150 - 18 222 240
Net loss - - - (1) (1)
--- ----- ---- ----- -----
Balance at February 28, 1996 150 - 18 221 239
Net income - - - 80 80
--- ----- ---- ----- -----
Balance at February 28, 1997 150 $ $ 18 $ 301 $ 319
=== ===== ==== ===== =====
Balance at February 28, 1997 150 $ - $ 18 $ 301 $ 319
Net income (unaudited) - - - 103 103
--- ----- ---- ----- -----
Balance at May 31, 1997 (unaudited) 150 $ - $ 18 $ 404 $ 422
=== ===== ==== ===== =====
See accompanying notes to financial statements.
F-154
MLQ EXPRESS, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three months ended
Year Ended February 28, May 31,
1995 1996 1997 1996 1997
Cash flows from operating activities
Net income (loss) $ (119) $ (1) $ 80 $ 30 $ 103
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 88 91 94 24 18
Changes in assets and liabilities
Accounts receivable (37) (17) (259) (110) 153
Prepaid and other current assets (9) (54) (28) (15) 40
Other assets (17) (22) (19) (6) (6)
Accounts payable 37 (22) 78 27 (70)
Accrued expenses -- (26) 57 21 (77)
Deferred income taxes (6) 13 32 8 (4)
------- ------- ------- ------- -------
Net cash provided (used) by
operating activities (63) (38) 35 (21) 157
------- ------- ------- ------- -------
Cash flows from investing activities
Purchases of property and equipment (102) (48) (61) (26) (34)
------- ------- ------- ------- -------
Net cash used for investing activities (102) (48) (61) (26) (34)
------- ------- ------- ------- -------
Cash flows from financing activities
(Increase) decrease in line of credit 85 30 (115) 35 --
Borrowings on notes payable 183 155 1,451 30 --
Payments on notes payable (135) (120) (1,310) (15) (119)
------- ------- ------- ------- -------
Net cash provided (used) by
financing activities 133 65 26 50 (119)
------- ------- ------- ------- -------
Net (decrease) increase in cash and equivalents (32) (21) -- 1 4
Cash and cash equivalents
at beginning of the period 54 22 1 1 1
------- ------- ------- ------- -------
Cash and cash equivalents at end of the period $ 22 $ 1 $ 1 $ 2 $ 5
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 8 $ 32 $ 45 $ 10 $ 7
Income taxes 57 44 -- -- --
See accompanying notes to financial statements.
F-155
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Description Of Business And Summary Of Significant Accounting Policies
Business organization
The Company, previously Morgan, Lee, Quail and Associates, Inc., was
incorporated October 25, 1982. MLQ Express, Inc. ("MLQ" or the "Company"),
a Georgia Corporation, was re-named on June 6, 1986. The Company is
organized into two divisions. The courier division provides same-day,
on-demand delivery services in the greater Atlanta metropolitan area. The
attorney services division provides court house research and process
services to Law Firms, financial institutions, and environmental Firms
throughout the nation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when services are provided to customers.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately
three months or less at date of purchase to be cash equivalents.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method and accelerated methods over the estimated useful
lives of the related assets (5 to 39 years).
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes payable and accrued expenses approximates fair
value because of the short maturity of these instruments. The estimated
fair value of long-term debt approximates its carrying value.
Additionally, interest rates on outstanding debt are at rates which
approximate market rates for debt with similar terms and average
maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
F-156
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Unaudited financial information
The interim financial data as of May 31, 1997 and for the three months
ended May 31, 1996 and 1997 is unaudited; however, in the opinion of the
Company, the interim data as of May 31, 1997 and for the three months ends
May 31, 1996 and 1997 includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for
the interim periods.
Intangible assets
Intangible assets represent the purchase price of acquired customer list.
Intangible assets are amortized on a straight-line basis over 60 months.
The customer list was acquired January 31, 1992 for $155. Accumulated
amortization amounted to $128 and $155 as of February 28, 1996 and 1997,
respectively.
Income taxes
The Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (SFAS 109).
2. Allowance For Doubtful Accounts
Changes in allowance for doubtful accounts are as follows:
Balance at Charged Balance
Beginning to at end
of Period Expense Write-offs of Period
Year ended February 28, 1995 $ -- $ 15 $ (7) $ 8
Year ended February 28, 1996 $ 8 $ 2 $ (2) $ 8
Year ended February 28, 1997 $ 8 $ 7 $ (4) $ 11
3. Property And Equipment
Property and equipment consists of the following:
February 28,
1996 1997
Equipment $ 222 $ 247
Furniture and fixture 134 146
Other 53 51
------ ------
409 444
Less accumulated depreciation (271) (311)
------ ------
$ 138 $ 133
====== ======
F-157
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Depreciation expense for the years ended February 28, 1995, 1996 and 1997
was approximately $57, $60 and $66, respectively.
4. Line Of Credit
The Company has a line of credit with a commercial bank with an available
limit of $150 which is due on demand, bears interest at prime and is
guaranteed by the sole stockholder. The line expires annually in May. As
of February 28, 1996, $115 was outstanding. There were no borrowings
outstanding as of February 28, 1997.
5. Accrued Expenses
Accrued expenses consist of the following:
February 28,
1996 1997
Payroll and payroll taxes $ 33 $ 56
Commissions 28 64
Profit sharing contribution 52 52
Other 9 7
----- -----
$ 122 $ 179
===== =====
6. Employee Benefits
The Company has a profit sharing plan for all employees who meet specified
age and service requirements. Total profit sharing expense amounted to
$49, $52 and $53 for the years ended February 28, 1995, 1996 and 1997,
respectively.
F-158
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
7. Income Taxes
A net operating loss of $125 was generated in 1995. The net operating loss
was used to offset against taxable income in 1996 and 1997, resulting in
no current income tax expense for those periods.
The provision for income taxes consist of:
Year Ended February 28,
-------------------------
1995 1996 1997
Current tax expense (benefit)
Federal $ -- $ -- $ --
State and local -- -- --
------ ------ ------
State and local -- -- --
Deferred tax expense (benefit) (6) 13 32
------ ------ ------
Provision for income taxes $ (6) $ 13 $ 32
====== ====== ======
Deferred taxes result from temporary differences in recognition of certain
items for federal income tax and financial reporting purposes. Deferred
tax liabilities are mainly attributable to the difference created due to
the Company's accrual method of financial reporting and cash basis method
of income tax filing.
8. Long-Term Debt
Long-term debt consists of the following:
February 28,
1996 1997
Term note payable to related party due August 1998;
with interest at prime due quarterly $ 30 $ --
Term note payable to related party due August 1997;
with interest at prime due maturity 60 --
Term note payable to related party due July 1996;
with interest at prime due maturity 50 --
Installment note payable due in annual installments
through December, 1998; with interest at prime
due quarterly 113 --
----- -----
253 --
Less current portion (175) --
----- -----
$ 78 $ --
===== =====
9. Related Party
The Company entered into a one year employment contract with its sole
stockholder, expiring July 31, 1998, that provides for a base salary and
benefits which approximates $200. The agreement includes non-compete
covenants. Additionally, the Company pays the premiums on a life insurance
policy for which
F-159
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
the sole stockholder is the beneficiary. Life insurance premiums paid by
the Company approximated $16, $11 and $19 for the years ended February 28,
1995, 1996 and 1997, respectively. The Company has prepaid lease payments
for a period of two years for an automobile used by the sole stockholder.
Lease expenses charged to operations approximates $7, $6 and $7 for the
years ended February 28, 1995, 1996 and 1997, respectively.
In 1996, the Company entered into a loan agreement (the "Agreement") with
its sole stockholder. The Agreement provided the funds to reduce all of
the Company's non-related party debt and for periodic borrowings for
working capital purposes. The Agreement bears interest at prime less 1/2
percent due quarterly, with the principal balance due on demand. The
outstanding balance at February 28, 1997 amounted to $394.
10. Commitments And Contingent Liabilities
Operating Leases
The Company leases office space under an operating lease agreement and
certain operating equipment on a month to month basis. The office space
lease agreement includes a rental escalation clause which increases annual
rental by 3.5% over the previous years rent. Future minimum lease payments
required under the noncancelable lease terms at February 28, 1997 are as
follows:
Fiscal year
1998 $ 126
1999 138
2000 78
2001 10
2002 10
Thereafter 6
-----
$ 368
=====
Rental expense charged to operations was approximately $76, $73 and $99
for the years ended February 28, 1995, 1996 and 1997, respectively.
Employment agreements
The Company has employment agreements with certain officers which expire
at various dates through November 30, 1997. The agreements provide for
salary and payment of other benefits. The aggregate commitment for future
salaries at February 28, 1997 excluding other benefits was $320 (see note
9).
F-160
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
11. Concentrations Of Credit Risk
The Company markets and sells its products to a broad base of clients. One
of the Company's clients, Turner Properties, Inc., accounted for
approximately 19% of net sales for the year ended February 28, 1997. No
other clients constituted 10% or more of net sales.
12. Business Segment
Summarized data for the Company's courier division and attorney services
division are as follows:
Year Ended February 28,
1995 1996 1997
Revenues - unaffiliated customers
Courier division $ 3,528 $ 3,550 $ 4,823
Attorney service division $ 574 $ 503 $ 487
Operating income (loss)
Courier division $ (104) $ 32 $ 112
Attorney service division (56) (52) 5
Capital expenditures related to the above segments are not significant
Assets used in the above segments mainly consist of trade receivables.
13. Subsequent Events
The Company and its stockholder have entered into an agreement with
Dispatch Management Services Corp. ("DMS") pursuant to which the Company
will merge with DMS. All outstanding shares of the Company will be
exchanged for cash concurrent with the consummation of the initial public
offering of the common stock of DMS.
F-161
Report of Independent Accountants
To the Board of Directors and Stockholders of
American Eagle Endeavors, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
American Eagle Endeavors, Inc. and its subsidiaries at December 31, 1995 and
1996 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 6 to the
financial statements, the Company has negative working capital and has not
obtained a waiver with regard to its violations of certain bank covenants.
Alternative financing may be required if the financial institution decides to
act on its rights under default provisions of the loan agreement. The
uncertainties related to these matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plan in regard to
these matters are also described in Note 6. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Price Waterhouse LLP
Minneapolis, Minnesota
September 5, 1997
F-162
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, June 30,
----------------- -------
1995 1996 1997
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 61 $ 139 $ 295
Accounts receivable, net 903 843 675
Prepaid income taxes 34
Prepaid and other current assets 36 41 18
------- ------- -------
Total current assets 1,000 1,023 1,022
Notes receivable from officers 181 195
Other assets, net 9 14 14
Property and equipment, net 392 355 280
------- ------- -------
$ 1,401 $ 1,573 $ 1,511
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities
Bank line of credit $ 50 $ -- $ 350
Accounts payable 382 288 419
Accrued expenses 88 110 107
Current maturities of long-term debt 184 183 154
Current maturities of subordinated debt to stockholders 50 47 42
Accrued income taxes 3 240
------- ------- -------
Total current liabilities 757 868 1,072
Subordinated debt to stockholders 324 268 238
Long-term debt, less current maturities 196 50 13
Deferred income taxes 165 116 98
------- ------- -------
Total liabilities 1,442 1,302 1,421
Minority interest in subsidiary 16 29 16
Commitments and contingencies (note 12)
Stockholders' equity (accumulated deficit)
Common stock $0.01 par value; 10,000,000 shares
authorized; 10,500 shares issued and outstanding 1 1 1
Additional paid-in capital 156 156 156
Retained earnings (accumulated deficit) (214) 85 (83)
------- ------- -------
Total stockholders' equity (deficit) (57) 242 74
------- ------- -------
$ 1,401 $ 1,573 $ 1,511
======= ======= =======
See accompanying notes to financial statements.
F-163
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Six Months Ended
Years Ended December 31, June 30,
-------------------------------- --------------------
1994 1995 1996 1996 1997
(Unaudited)
Net sales $ 7,063 $ 8,573 $ 8,536 $ 4,296 $ 3,483
Cost of sales 4,453 5,420 5,293 2,712 2,330
-------- --------- --------- --------- ---------
Gross margin 2,610 3,153 3,243 1,584 1,153
Operating expenses
Sales and marketing 1,330 1,528 1,535 781 687
General and administrative expenses 756 890 940 419 662
Depreciation and amortization 187 165 174 87 83
-------- --------- --------- --------- ---------
Operating income (loss) 337 570 594 297 (279)
-------- --------- --------- --------- ---------
Other (income) expense
Interest expense 125 103 62 36 35
Minority interest in subsidiary net income 6 (12) 13 6 (13)
Other, net (4) 20 (3) (10)
-------- --------- --------- --------- ---------
Income (loss) before provision for income taxes 206 483 499 258 (291)
Benefit (provision) for income taxes (80) (190) (200) (105) 123
-------- --------- --------- --------- ---------
Net income (loss) $ 126 $ 293 $ 299 $ 153 $ (168)
======== ========= ========= ========= =========
See accompanying notes to financial statements.
F-164
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
Retained
Common Stock Additional Earnings
------------ Paid-in (Accumulated
Shares Amount Capital Deficit) Total
Balance at December 31, 1993 10,500 $ 1 $ 156 $ (592) $ (435)
Net income 126 126
Dividends paid (41) (41)
-------- ------- -------- ---------- --------
Balance at December 31, 1994 10,500 1 156 (507) (350)
Net income 293 293
-------- ------- -------- ---------- --------
Balance at December 31, 1995 10,500 1 156 (214) (57)
Net income 299 299
-------- ------- -------- ---------- --------
Balance at December 31, 1996 10,500 1 156 85 242
Net loss (unaudited) (168) (168)
-------- ------- -------- ---------- --------
Balance at June 30, 1997 (unaudited) 10,500 $ 1 $ 156 $ (83) $ 74
======== ======= ======== ========== ========
See accompanying notes to financial statements.
F-165
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended
Years Ended December 31, June 30,
--------------------------------- --------------------
1994 1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities
Net income (loss) $ 126 $ 293 $ 299 $ 153 $ (168)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities
Depreciation and amortization 187 165 174 87 83
Minority interest 6 (12) 13 6 (13)
Deferred taxes 76 165 (49) (165) (18)
Loss on disposal of fixed assets 3
Changes in assets and liabilities:
Accounts receivable (175) (94) 60 82 168
Prepaid and other assets 12 4 (10) 42 23
Accounts payable (91) 22 (94) (119) 131
Accrued expenses (28) (236) 22 (14) (3)
Income taxes payable 22 237 259 (274)
--------- --------- --------- --------- ---------
Net cash provided by (used for)
operating activities 116 329 652 331 (71)
--------- --------- --------- --------- ---------
Cash flows from investing activities
Increase in officer notes receivable (181) (180) (14)
Purchases of property and equipment, net (128) (44) (81) (13) (8)
--------- --------- --------- --------- ---------
Net cash used for investing activities (128) (44) (262) (193) (22)
--------- --------- --------- --------- ---------
Cash flows from financing activities
Increase (decrease) in line of credit, net 164 (364) (50) (50) 350
Payments on long-term debt, net (66) 95 (262) (146) (101)
Payment of dividends (41)
Net cash provided by (used for) --------- --------- --------- --------- ---------
financing activities 57 (269) (312) (196) 249
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and equivalents 45 16 78 (58) 156
Cash and equivalents at beginning of the period 45 61 61 139
--------- --------- --------- --------- ---------
Cash and equivalents at end of the period $ 45 $ 61 $ 139 $ 3 $ 295
========= ========= ========= ========= =========
Schedule of noncash investing and financing activities:
Property and equipment acquired under
capital lease agreements $ -- $ -- $ 56 $ -- $ --
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ -- $ 4 $ 10 $ 10 $ 170
Interest $ 122 $ 108 $ 65 $ 54 $ --
See accompanying notes to financial statements.
F-166
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
American Eagle Endeavors, Inc. and Subsidiaries (the "Company") is a
courier service and facilities traffic management firm. Primary offices
are located in Minneapolis, Minnesota and Phoenix, Arizona. The Company
offers traditional business courier services, such as on-call, same day,
and dock service, specialized transportation services tailored to
individual customer needs, and warehouse distribution services.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of American
Eagle Endeavors, Inc. and its majority-owned subsidiaries: American Eagle
Express, Inc. and American Eagle Express-Phoenix, Inc. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately
three months or less at date of purchase to be cash equivalents.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets. The estimated lives used for computing depreciation and
amortization are as follows:
Years
Transportation equipment 5 - 7
Equipment 5 - 7
Office furniture and fixtures 5 - 7
Leasehold improvements 4 - 5
Income taxes
Deferred income taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences, operating
loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the report amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
F-167
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/payable and accrued expenses
approximates fair value because of the short maturity of these
instruments. The estimated fair value of long-term debt and other
long-term liabilities approximates its carrying value. Additionally,
interest rates on outstanding debt are at rates which approximate market
rates for debt with similar terms and average maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
Unaudited interim financial data
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 is unaudited; however, in the opinion of
Management, the Company has made all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. Allowance for Doubtful Accounts
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses of Period Write-offs
Year ended December 31, 1994 $ 81 $ 20 $ (76) $ 25
Year ended December 31, 1995 $ 25 $ 38 $ (34) $ 29
Year ended December 31, 1996 $ 29 $ 40 $ (26) $ 43
F-168
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
4. Property and Equipment
Property and equipment consists of the following:
December 31,
--------------------
1995 1996
Equipment $ 389 $ 468
Furniture and fixture 327 332
Vehicles 75 128
Leasehold improvements 101 101
------- --------
892 1,029
Accumulated depreciation and amortization (500) (674)
------- --------
$ 392 $ 355
======= ========
Property and equipment above includes leased equipment with a cost of $88
and $144 and accumulated depreciation of $42 and $63 at December 31, 1995
and 1996 respectively. Depreciation expense for the years ended December
31, 1994, 1995 and 1996 was $159, $162 and $174, respectively.
5. Accrued Expenses
Accrued expenses comprised the following:
December 31,
--------------------
1995 1996
Payroll and payroll taxes $ 41 $ 41
Accrued vacation 27 24
Other 20 45
-------- -------
Total accrued liabilities $ 88 $ 110
======== =======
6. Note Payable to Bank
The Company has a financing agreement with a bank consisting of a $350
line of credit and a term loan (see Note 7). Outstanding borrowings bear
interest at the bank's prime lending rate plus 1.5 percent (9.75 percent
at December 31, 1996), are subject to borrowing base availability, are
secured by substantially all Company assets, and are guaranteed by the
Company's stockholders. Outstanding borrowings against the line of credit
were $0 and $50 at December 31, 1996 and 1995, respectively.
The financing agreement contains provisions requiring compliance with
several financial covenants. At December 31, 1996, the Company was in
violation of certain covenants. A waiver of these covenant violations has
not been obtained from the financing institution.
F-169
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
7. Long-Term Debt
Long-term debt consists of the following:
December 31,
----------------------
1995 1996
Term note payable to bank, secured by substantially all Company assets,
due in monthly installments of $10, plus interest at
the bank's prime lending rate plus 1.5%, to April 1998 $ 250 $ 160
9.75% capital lease obligation, due in installments of $1,
including interest to January 2002, secured by equipment 46
10% equipment financing note, due in installments of $1,
including interest to January 1999, secured by equipment 24 17
Other equipment financing notes, due in 1997 20 10
Other, paid in 1996 86
--------- --------
380 233
Less current maturities 184 183
--------- --------
$ 196 $ 50
========= ========
Approximate aggregate maturities of long-term debt as of December 31,
1996, are as follows:
Years Ending December 31:
1997 $ 183
1998 5
1999 8
2000 8
2001 9
Thereafter 10
-------
$ 233
=======
8. Subordinated Debt to Stockholders
Subordinated debt consists of the following:
December 31,
---------------------
1995 1996
6% stockholder note payable, due in semimonthly installments
of $2, including interest to August 2001, unsecured $ 269 $ 269
14% stockholder notes payable, due on or before September 1999,
unsecured 105 46
-------- --------
374 315
Less current maturities 50 47
-------- --------
$ 324 $ 268
======== ========
These notes payable are subordinated to borrowings under its bank
financing agreement which allows monthly payments of $5.
F-170
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
9. Minimum Lease Payments
The Company leases certain office space, computerized satellite vehicle
tracking systems, vehicles, and office equipment under leases expiring on
various dates through 2001. Future minimum lease payments required under
leases that have noncancelable lease terms in excess of one year at
December 31, 1996 are as follows:
Capital Operating Noncancellable
Fiscal Year Leases Leases Subleases
1997 $ 30 $ 431 $ (33)
1998 19 413 (33)
1999 11 399 (11)
2000 10 346
2001 10 83
Thereafter 11
Less interest portion 18
------- ------- --------
Net leases 73 $ 1,672 $ (77)
Less current portion 23 ======= ========
-------
$ 50
=======
Rental expense charged to operations was approximately $170, $208, and
$211, and rental income was approximately $0, $22, and $24 for the years
ended December 31, 1994, 1995, and 1996, respectively.
10. Income Taxes
The provision for income taxes comprises:
Year Ended December 31,
-----------------------
1994 1995 1996
Current tax expense
Federal $ 3 $ 6 $ 212
State and local 1 2 37
---- ---- -----
4 8 249
Utilization of net operating loss carryforward 99 147
Deferred tax expense (benefit) (23) 35 (49)
---- ---- -----
Provision for income taxes $ 80 $190 $ 200
==== ==== =====
F-171
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
Year Ended December 31,
-----------------------
1994 1995 1996
Taxes computed at federal statutory rate (35%) $ 72 $ 169 $175
State taxes (net of federal benefit) 10 50 25
Other (2) (29)
---- ----- ----
Provision for income taxes $ 80 $ 190 $200
==== ===== ====
Effective rate 39% 39% 40%
==== ===== ====
Temporary differences giving rise to the Company's deferred tax assets and
liabilities comprised the following:
December 31,
---------------
1995 1996
Deferred tax assets
Allowance for doubtful accounts $ 12 $ 43
Accrued liabilities 22 18
Other 11
----- -----
45 61
Deferred tax liabilities
Accrual to cash basis adjustment (210) (154)
Other (23)
----- -----
Net deferred tax liability $(165) $(116)
===== =====
11. Related Party Transactions
During 1996, note agreements were executed with two of the Company's
officers. The notes receivable bear interest at 5.5% and 6.25% annually,
and are payable in balloon payments in 1999. $181 of the notes remained
outstanding as of December 31, 1996.
Franchise fees of $40 were incurred in 1996 relative to the franchise
agreements described below.
12. Commitments and Contingencies
Franchise agreement
During 1996, the Company entered into five-year franchise agreements with
a national same-day service courier franchisor for both the Phoenix and
Minneapolis locations. The initial franchise fee was $20 for each location
and continuing management fees are 10% of applicable gross receipts, as
defined by the agreement. Subsequent to year end, the management fees were
reduced to 7.25% from 8.25%. The stockholders of the Company are also
minority stockholders in the franchisor. In addition, at December 31,
1996, the Company and one of its stockholders have guaranteed franchisor
debt obligations of $125 due in June 1997 and license payments totaling
approximately $1,806 payable through September 2007.
F-172
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
On September 16, 1997 the Company obtained a complete release from the
franchise agreement and all related commitments and contingencies other
than those related to the guaranteed debt obligations discussed above. In
exchange for this release the Company has agreed to release the franchisor
from all current or future claims against the franchisor and Company's
principal shareholders have forfeited their personal investments in the
franchisor. Based on the financial position of the franchisor, the
principal shareholders believe that the forfeited shares in the franchisor
have no value.
The franchiser is responsible for billing and collecting amounts from
customers approved by the Company and then submitting the receipts, less
the management fees, to the Company. Phoenix activated its franchise in
October and Minneapolis activated its franchise subsequent to year end.
Management fees paid to the franchisor totaled approximately $38 for the
year ended December 31, 1996. Also at year end, the gross receivable from
the franchisor relating to customer accounts was approximately $191.
13. Unaudited Subsequent Events
The Company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which the
Company will merge with DMS. All outstanding shares of the Company will be
exchanged for cash and common stock of DMS concurrent with the
consummation of the initial public offering of the common stock of DMS.
Additionally, all obligations guaranteed by the Company, as described in
Note 12, will be assumed by DMS upon consummation of the initial public
offering.
Effective upon completion of the merger with DMS as described above, a
subsidiary of the Company has agreed to redeem all of the shares
constituting a 20% minority interest in the subsidiary. Upon completion of
this redemption, American Eagle Endeavors, Inc. will own 100% of all
subsidiaries.
On September 5, 1997 the Company's principal shareholders have agreed to
assume all of the subordinated debt to stockholder in exchange for equal
release of amounts owed to the Company
F-173
Report of Independent Accountants
To the Board of Directors and Stockholders of
Kangaroo Express of Colorado Springs, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Kangaroo Express of Colorado
Springs, Inc. (the "Company") at December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Denver, Colorado
September 5, 1997
F-174
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
BALANCE SHEETS
(Dollars in Thousands, except per share amounts)
December 31, June 30,
--------------- 1997
1995 1996 (Unaudited)
Assets
Current assets
Cash $ 33 $ 29 $ 62
Accounts receivable 253 305 308
Prepaid and other current assets 3 23 11
----- ----- -----
Total current assets 289 357 381
Property and equipment, net 141 138 129
Notes receivable, employees 8 11 6
Deposits 7 5 3
----- ----- -----
$ 445 $ 511 $ 519
===== ===== =====
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 30 $ 16 $ 28
Accrued payroll 48 70 44
Accrued vehicle leasing 28 32 26
Current maturities long-term debt 44 36 29
----- ----- -----
Total current liabilities 150 154 127
Deferred rent 16 16
Other long-term liabilities 200 300 300
Long-term debt 77 63 52
----- ----- -----
Total liabilities 427 533 495
Commitments and contingencies
Stockholders' Equity
Common stock $.001 par value; 100 shares
authorized, issued and outstanding
Additional paid-in capital 109 109 109
Retained earnings (deficit) (91) (131) (85)
----- ----- -----
$ 445 $ 511 $ 519
===== ===== =====
See accompanying notes to financial statements.
F-175
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Six months ended
Years ended December 31, June 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
(Unaudited)
Net sales $ 1,680 $ 2,032 $ 2,650 $ 1,336 $ 1,380
Cost of sales 1,130 1,387 1,878 923 949
------- ------- ------- ------- -------
Gross margin 550 645 772 413 431
Operating expenses 328 394 405 189 220
Sales and marketing 18 17 27 14 10
General and administrative expenses 213 211 265 133 94
Depreciation and amortization 41 42 50 17 25
------- ------- ------- ------- -------
Operating income (loss) (50) (19) 25 60 82
------- ------- ------- ------- -------
Other (income) expense
Interest expense 17 12 10 5 4
Other, net (8) (2) (2) (2) (3)
------- ------- ------- ------- -------
Net income (loss) $ (59) $ (29) $ 17 $ 57 $ 81
======= ======= ======= ======= =======
Unaudited pro forma information:
Pro forma net income (loss) before
provision for income taxes $ (51) $ (29) $ 17 $ 57 $ 81
Provision (benefit) for income taxes (22) (11) 6 21 30
------- ------- ------- ------- -------
Pro forma net income (loss) (see Note 2) $ (39) $ (18) $ 11 $ 36 $ 51
======= ======= ======= ======= =======
See accompanying notes to financial statements.
F-176
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Common stock Additional Retained Total
------------------ paid-in earnings shareholders'
Shares Amount capital (deficit) equity
Balance at December 31, 1993 100 $ -- $ 109 $ 22 $ 131
Net loss (59) (59)
----- ----- ----- ----- -----
Balance at December 31, 1994 100 109 (37) 72
Net loss (29) (29)
Owner's withdrawal (25) (25)
----- ----- ----- ----- -----
Balance at December 31, 1995 100 109 (91) 18
Net income 17 17
Owners' withdrawal (57) (57)
----- ----- ----- ----- -----
Balance at December 31, 1996 100 109 (131) (22)
Net income (unaudited) 81 81
Owners' withdrawal (unaudited) (35) (35)
----- ----- ----- ----- -----
Balance at June 30, 1997 (unaudited) 100 $ -- $ 109 $ (85) $ 24
===== ===== ===== ===== =====
See accompanying notes to financial statements.
F-177
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six months ended
Years Ended December 31, June 30,
------------------------- ----------------
1994 1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities
Net income (loss) $ (59) $ (29) $ 17 $ 57 $ 81
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 41 42 50 17 25
Gain on sale of property and equipment (5)
Changes in assets and liabilities:
Accounts receivable (69) (42) (52) (13) (3)
Prepaid expenses (28) 32 (20) 13
Other assets 29 (5) 1 3 1
Accounts payable (5) 17 (14) 1 12
Accrued payroll 10 11 22 1 (26)
Accrued vehicle leasing 8 11 4 1 (6)
Other long-term liabilities 100 100 100 50
Deferred rent 16 9
----- ----- ----- ----- -----
Net cash provided by operating activities 22 137 124 126 97
----- ----- ----- ----- -----
Cash flows from investing activities
Purchases of property and equipment (90) (59) (48) (47) (16)
Proceeds from sale of property and equipment 26 18
Increase in notes receivable, employees (4) (5) (4)
Proceeds from notes receivable, employees 12 3 4 4
----- ----- ----- ----- -----
Net cash used for investing activities (52) (42) (49) (51) (12)
----- ----- ----- ----- -----
Cash flows from financing activities
Proceeds from long-term debt 86 57 22 20
Principal payments on long-term debt (64) (97) (44) (23) (17)
Owners withdrawal (25) (57) (47) (35)
----- ----- ----- ----- -----
Net cash provided by (used for)
financing activities 22 (65) (79) (50) (52)
----- ----- ----- ----- -----
Net (decrease) increase in cash (8) 30 (4) 25 33
Cash at beginning of the period 11 3 33 33 29
----- ----- ----- ----- -----
Cash at end of the period $ 3 $ 33 $ 29 $ 58 $ 62
===== ===== ===== ===== =====
Supplemental disclosures of cash flow information:
Interest paid $ 17 $ 12 $ 10 $ 5 $ 4
Supplemental schedule of noncash investing and financing activities:
The Company sold fixed assets in exchange for notes receivable as follows:
Cost of assets sold $ 17 $ -- $ 25 $ 25 $ --
Accumulated depreciation on assets sold $ 14 $ -- $ 25 $ 25 $ --
Related notes receivable $ 8 $ -- $ 2 $ 2 $ --
See accompanying notes to financial statements.
F-178
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
Kangaroo Express (the "Company") provides same-day, on-demand delivery
services in the Colorado Springs and Denver metropolitan areas.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets (5 years).
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/payable and accrued expenses
approximates fair value because of the short maturity of these
instruments. The estimated fair value of long-term debt and other
long-term liabilities approximates its carrying value. Additionally,
interest rates on outstanding debt are at rates which approximate market
rates for debt with similar terms and average maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
Income taxes
The Company has elected to be treated as a S-Corporation for federal and
state income taxes and, accordingly, any liability for income taxes are
the direct responsibility of the stockholder.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At December 31, 1996,
the financial reporting bases of the Company's net assets are less than
the tax reporting bases by approximately $230.
The unaudited pro forma tax information included in the Statement of
Operations is presented in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as if the
Company had been subject to federal and state income taxes for the entire
periods presented.
F-179
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (continued)
Unaudited interim financial statements
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. Property and Equipment
Property and equipment consists of the following:
December 31,
----------------
1995 1996
Equipment $ 36 $ 43
Furniture and fixture 37 38
Vehicles 187 187
Leasehold improvements 16
----- -----
260 284
Accumulated depreciation and amortization (119) (146)
----- -----
$ 141 $ 138
===== =====
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
was approximately $41, $42 and $50, respectively.
4. Long-Term Debt
Notes payable outstanding consists of the following:
December 31,
------------
1995 1996
Due March 24, 1996, bearing interest at 9.5%,
secured by a 1992 Toyota truck $ 1 $--
Due March 12, 1997, bearing interest at 7.5%,
secured by a 1992 Mitsubishi truck 8 1
Due February 18,1997, bearing interest at 7.59%,
secured by a 1993 Ford Escort 4 1
Due October 15, 1996, bearing interest at 8.5%,
secured by a 1993 Chevy Van 4
Due October 15, 1996, bearing interest at 8.5%,
secured by a 1993 Chevy Astro Van 4
Due February 4, 1999, bearing interest at 1.5%
over prime rate, secured by A/R and equipment 19 12
Due September 25, 1998, bearing interest at 8%,
secured by a 1994 Chevy Van 12 7
Due September 25, 1998, bearing interest at 8%,
secured by a 1994 Chevy Astro Van 12 7
Due May 9, 2000, bearing interest at 8.45%,
secured by a 1995 Chevy Van 20 16
F-180
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Due December 14, 2000, bearing interest at 8.5%,
secured by a 1995 GMC Truck 37 32
Due April 1, 2001, bearing interest at 8.5%,
secured by a 1994 GMC Van 18
Due July 1, 1997, bearing interest at 9.5%,
secured by a 1987 Toyota Truck 5
----- -----
Total 121 99
Less current portion (44) (36)
----- -----
$ 77 $ 63
===== =====
The above term loans were due to various banks.
On July 1, 1995, the Company entered into a credit agreement with a bank
for a $50 revolving line of credit. The line of credit bears interest at
the bank's prime rate plus 1.5%. This line of credit was replaced by a
similar $75 revolving line of credit, maturing on July 1, 1996. This line
of credit bears interest at the bank's prime rate plus 1% and was renewed
through July 1, 1997. The line is secured by all accounts receivable,
vehicles and computer systems. As of December 31, 1995 and 1996, no
balance was outstanding on this line of credit. On August 1, 1997 the
Company renewed their line of credit, increasing its borrowing capacity to
$100, bearing interest of 9.5% and a maturity date of August 1, 1998.
Maturities of long-term debt as of December 31, 1996 are summarized as
follows:
Fiscal year
1997 $ 36
1998 28
1999 19
2000 14
2001 2
-----
$ 99
=====
5. Operating Leases
The Company leases certain office equipment under operating leases
expiring on various dates through 2001. Future minimum lease payments
required under leases that have noncancelable lease terms in excess of one
year at December 31, 1996 are summarized as follows:
Fiscal year
1997 $ 63
1998 42
1999 27
2000 27
2001 5
-----
$ 164
=====
Rental expense charged to operations was approximately $15, $20 and $74
for the years ended December 31, 1994, 1995 and 1996, respectively.
6. Related Party Transactions
F-181
KANGAROO EXPRESS OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
In 1994, the Company paid consulting fees of $24 to a company controlled
by a related party. In 1995, the Company paid off a note payable due to
shareholder in the amount of $35.
7. Unaudited Subsequent Events
The company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which the
Company will merge with DMS. All outstanding shares of the Company will be
exchanged for cash and shares of DMS common stock concurrent with the
consummation of the initial public offering of the common stock of DMS.
F-182
Report of Independent Accountants
To the Board of Directors and Stockholders of
Transpeed Courier Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Transpeed Courier Services, Inc.
(the "Company") at December 31, 1995 and 1996, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Denver, Colorado
September 5, 1997
F-183
TRANSPEED COURIER SERVICES, INC.
BALANCE SHEETS
(Dollars in Thousands)
December 31, June 30,
1995 1996 1997
---- ---- ----
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 1 $ 47 $ 17
Accounts receivable, net of allowance for
doubtful accounts of $1 169 144 132
Prepaid and other current assets 31 40 17
---- ---- ----
Total current assets 201 231 166
Property and equipment, net 84 95 78
Other non-current assets 19 15
Goodwill and intangibles, net 46 34 29
---- ---- ----
$331 $379 $288
==== ==== ====
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $100 $120 $114
Accounts payable 33 30 36
Accrued liabilities 36 47 60
Current maturities long-term debt 53 67 40
---- ---- ----
Total current liabilities 222 264 250
Long-term debt 30 26 28
---- ---- ----
Total liabilities 252 290 278
Commitments and contingencies
Stockholders' Equity
Common stock no par value; 40,000 shares
authorized; 32,000 issued and outstanding
Additional paid-in capital 1 1 1
Retained earnings 78 88 9
---- ---- ----
$331 $379 $288
==== ==== ====
See accompanying notes to financial statements.
F-184
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Years ended Six months ended
December 31, June 30,
----------------- ----------------
1995 1996 1996 1997
(Unaudited)
Net sales $ 1,100 $ 1,247 $ 593 $ 543
Cost of sales 746 764 378 339
------- ------- ------- -------
Gross margin 354 483 215 204
Operating expenses 214 298 139 202
Sales and marketing 46 58 26 24
General and administrative expenses 59 58 25 30
Depreciation and amortization 31 36 18 27
------- ------- ------- -------
Operating income (loss) 4 33 7 (79)
------- ------- ------- -------
Other (income) expense
Interest expense 15 19 8 11
Other, net 8 4 3 (11)
------- ------- ------- -------
Net income (loss) $ (19) $ 10 $ (4) $ (79)
======= ======= ======= =======
Unaudited pro forma information:
Pro forma net income (loss) before
provision for income taxes $ (19) $ 10 $ (4) $ (79)
Provision (benefit) for income taxes (3) 2 (1) (7)
------- ------- ------- -------
Pro forma net income (loss) $ (16) $ 8 $ (3) $ (72)
======= ======= ======= =======
See accompanying notes to financial statements.
F-185
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Common stock Additional
----------------- paid-in Retained
Shares Amount capital earnings Total
Balance at December 31, 1994 32,000 $ -- $ 1 $ 103 $ 104
Net loss (19) (19)
Owners withdrawals (6) (6)
------- ------- ------- ------- -------
Balance at December 31, 1995 32,000 1 78 79
Net income 10 10
------- ------- ------- ------- -------
Balance at December 31, 1996 32,000 1 88 89
Net (loss) (unaudited) (79)
------- ------- ------- ------- -------
Balance at June 30, 1997 (unaudited) 32,000 $ -- $ 1 $ 9 $ 10
======= ======= ======= ======= =======
See accompanying notes to financial statements.
F-186
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year ended Six months ended
December 31, June 30,
------------ ----------------
1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities
Net income (loss) $ (19) $ 10 $ (4) $ (79)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 31 36 18 27
Loss on sale of property and equipment 6 1
Changes in assets and liabilities net of effects of
the purchase of Maxwell Express Courier
Accounts receivable (78) 25 34 12
Prepaid expenses and other current assets (14) (9) 15 23
Accounts payable 25 (3) 10 6
Accrued liabilities 22 11 (12) 13
Other non-current assets (19) (10) 4
----- ----- ----- -----
Net cash provided by (used for) operating activities (33) 57 51 7
----- ----- ----- -----
Cash flows from investing activities
Purchases of property and equipment (57) (41) (2) (6)
Payment for purchase of Maxwell Express Courier,
net of cash acquired (28)
----- ----- ----- -----
Net cash used for investing activities (85) (41) (2) (6)
----- ----- ----- -----
Cash flows from financing activities
Increase (decrease) in line of credit 89 20 20 (5)
Proceeds from long-term debt 65 67 15
Principal payments on long-term debt (39) (57) (41) (41)
----- ----- ----- -----
Net cash provided by (used for) financing
activities 115 30 (21) (31)
----- ----- ----- -----
Net (decrease) increase in cash and cash equivalents (3) 46 28 (30)
Cash and cash equivalents at beginning of the period 4 1 1 47
----- ----- ----- -----
Cash and cash equivalents at end of the period $ 1 $ 47 $ 29 $ 17
===== ===== ===== =====
Supplemental disclosures of cash flow information:
Interest paid $ 14 $ 18 $ 8 $ 12
Supplemental schedule of noncash investing and financing activities:
The Company purchased Maxwell Express Courier in 1995 for $28. In conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 48
Cash paid 28
-----
Liabilities assumed $ 20
=====
See accompanying notes to financial statements.
F-187
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
Transpeed Courier Services, Inc., d/b/a 1-800-Courier "Denver", (the
"Company') is a full service courier company providing transportation of
time sensitive shipments between points in Colorado and national same-day
air courier service.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately
three months or less at date of purchase to be cash equivalents.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets ( 3 to 7 years).
Intangible assets
Intangible assets consists primarily of goodwill, a non-compete agreement,
trade names and customer lists, which are being amortized on a
straight-line basis over 5 years. The carrying value of the intangible
assets are assessed for the recoverability of management based on an
analysis of undiscounted expected future cash flows. The Company believes
that there has been no impairment thereof as of December 31, 1996.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable and accrued expenses approximates fair value because of
the short maturity of these instruments. The estimated fair value of
long-term debt approximates its carrying value. Additionally, interest
rates on outstanding debt are at rates which approximate market rates for
debt with similar terms and average maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collaterized and accordingly, the Company
performs ongoing credit evaluations of its customers to reduce the risk of
loss.
F-188
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (continued)
Income taxes
The Company has elected to be treated as a S-Corporation for federal and
state income taxes and, accordingly, any liability for income taxes are
the direct responsibility of the stockholders.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At December 31, 1996,
the financial reporting bases of the Company's net assets exceeds the tax
reporting bases by approximately $124.
The unaudited pro forma tax information included in the Statements of
Operations is presented in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as if the
Company had been subject to federal and state income taxes for the entire
periods presented.
Unaudited Interim Financial Statements
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. Property and Equipment
Property and equipment consists of the following:
December 31,
---------------
1995 1996
Computers and equipment $ 48 $ 49
Furniture and fixture 9 9
Vehicles 75 103
----- -----
132 161
Accumulated depreciation and amortization (48) (66)
----- -----
$ 84 $ 95
===== =====
Depreciation expense for the years ended December 31, 1995 and 1996 was
approximately $22 and $24, respectively.
4. Acquisition of Maxwell Courier Express
On June 12, 1995, the Company acquired substantially all of the assets of
Maxwell Courier Express in exchange for total consideration of $48
consisting of cash and promissory notes. The acquisition was accounted for
using the purchase method and the excess of cost over fair value of the
asset acquired of $20 was allocated to goodwill, which is being amortized
on a straight-line basis over 5 years. The fair value of the acquired
assets and liabilities at the acquisition date are as follows:
Equipment $ 8
Non-compete agreement 20
Goodwill 20
------
$ 48
======
F-189
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
5. Intangible Assets
Intangible assets consists of the following:
December 31,
-----------------
1995 1996
Goodwill $ 22 $ 22
Non-compete agreement 20 20
Customer list 18 18
Trade names 5 5
---- ----
65 65
Accumulated amortization (19) (31)
---- ----
$ 46 $ 34
==== ====
Amortization expense for the years ended December 31, 1995 and 1996 was
approximately $9 and $12, respectively.
6. Accrued Liabilities
Accrued liabilities comprised the following:
December 31,
-----------------
1995 1996
Payroll and payroll taxes $ 28 $ 33
Other 8 14
---- ----
$ 36 $ 47
==== ====
7. Long-Term Debt
Long-term debt outstanding consists of the following:
December 31,
------------
1995 1996
Notes payable to banks:
Due in monthly installments through December 29,
1996, bearing interest at 9.75%, secured by vehicle $ 2 $ --
Due in monthly installments through February 24,
1997, bearing interest at 11%, secured by vehicle 1
Due in monthly installments through February 24,
1997, bearing interest at 9.5%, secured by radios 5 2
Due in monthly installments through March 24,
1998, bearing interest at 11%, secured by equipment 16 9
F-190
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
December 31,
------------
1995 1996
Notes payable to banks (continued):
Due in monthly installments though May 2, 1998,
bearing interest at 11%, secured by vehicle 13 9
Due in monthly installments through October 31,
1999, bearing interest at 10%, secured by vehicles 20
Due in monthly installments through November 26,
1999, bearing interest at 10%, secured by vehicle 6
Notes payable to corporations and individuals:
Due December 31, 1996, bearing interest at 10% 4
Due in monthly installments through June 1, 1998,
bearing interest at 10% 17 11
Due in monthly installments through September 9,
1997 at December 31, 1996 and August 9, 1996
at December 31, 1995, bearing interest at 9.5% 25 36
---- ----
Total 83 93
Less current portion (53) (67)
---- ----
$ 30 $ 26
==== ====
In October 1995, the Company entered into a credit agreement with a bank
for a $150 revolving line of credit. The line of credit bears interest at
the banks prime rate plus 1% (actual rate of 10.25% at December 31, 1995)
and matures on October 30, 1996. This line of credit was replaced with a
similar $150 revolving line of credit with an interest rate of 10% and
maturity date of November 18, 1997. Both lines of credit were secured by
all accounts receivable and equipment. As of December 31, 1995 and 1996
the balance outstanding on the line of credit was $100 and $120,
respectively.
Maturities of long-term debt as of December 31, 1996 are summarized as
follows:
Fiscal Year
1997 $ 67
1998 18
1999 8
----
$ 93
====
On August 1, 1997, the Company borrowed $50 from a bank. The note matures
on November 22, 1997, bears interest at the bank's prime rate plus 2.5%,
and is collateralized by a stockholder's home.
F-191
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
8. Operating Leases
The Company leases certain office equipment under operating leases
expiring on various dates through 2000. Future minimum lease payments
required under leases that have noncancelable lease terms in excess of one
year at December 31, 1996 are as follows:
Fiscal year
1997 $ 81
1998 54
1999 49
2000 49
----
$233
====
Rental expense charged to operations was approximately $26 for the years
ended December 31, 1995 and 1996.
9. Subsequent Event
The company and its stockholders have entered into a definitive agreement
with DMS Corporation ("DMS") pursuant to which the Company will merge with
DMS. All outstanding shares of the Company will be exchanged for cash and
common stock of DMS concurrent with the consummation of an initial public
offering of the common stock of DMS.
F-192
Report of Independent Accountants
To the Board of Directors and Shareholders
of National Messenger, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of National Messenger,
Inc. at November 30, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Los Angeles, California
September 4, 1997
F-193
NATIONAL MESSENGER, INC.
BALANCE SHEETS
(Dollars in Thousands)
November 30, May 31,
------------ ----------
1995 1996 1997
(Unaudited)
Assets
Current assets
Cash $ 103 $ 90 $ 58
Accounts receivable, net of allowance
for doubtful accounts of $8, $22, and $23 205 309 320
Prepaid and other current assets 5 4 4
----- ----- -----
Total current assets 313 403 382
Property and equipment, net 3 50 47
----- ----- -----
$ 316 $ 453 $ 429
===== ===== =====
Liabilities and shareholders' equity (deficit)
Current liabilities
Accrued compensation $ 49 $ 67 $ 29
Advances from shareholders 70 70 70
----- ----- -----
Total current liabilities 119 137 99
----- ----- -----
Other long-term liabilities 200 300 300
----- ----- -----
Commitments
Shareholders' equity (deficit)
Common stock without par value; 100,000 shares
authorized; 1,800 shares issued and outstanding 2 2 2
Retained earnings (deficit) (5) 14 28
----- ----- -----
Total shareholders' equity (deficit) (3) 16 30
----- ----- -----
$ 316 $ 453 $ 429
===== ===== =====
See accompanying notes to financial statements.
F-194
NATIONAL MESSENGER, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Year ended Six months ended
November 30, May 31,
-------------- ----------------
1995 1996 1996 1997
(Unaudited)
Net sales $1,728 $2,413 $1,123 $1,255
Cost of sales 1,029 1,446 719 749
------ ------ ------ ------
Gross margin 699 967 404 506
Operating expenses 123 154 74 77
Selling and marketing expenses 72 86 42 43
General and administrative expenses 321 454 219 185
Depreciation and amortization 7 13 7 17
------ ------ ------ ------
Income before provision for income taxes 176 260 62 184
Provision for income taxes 4 5 1 3
------ ------ ------ ------
Net income $ 172 $ 255 $ 61 $ 181
====== ====== ====== ======
Unaudited pro forma information (Note 2)
Income before provision for
income taxes 176 260 62 184
Pro forma provision for income taxes 70 104 25 74
------ ------ ------ ------
Pro forma net income $ 106 $ 156 $ 37 $ 110
====== ====== ====== ======
See accompanying notes to financial statements.
F-195
NATIONAL MESSENGER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
Common Retained
stock earnings
Shares Amount (deficit) Total
Balances at December 1, 1994 1,800 $ 2 $ 23 $ 25
Net income 172 172
Dividends paid (200) (200)
------ ------ ------ ------
Balances at November 30, 1995 1,800 2 (5) (3)
Net income 255 255
Dividends paid (236) (236)
------ ------ ------ ------
Balances at November 30, 1996 1,800 2 14 16
Net income (unaudited) 181 181
Dividends paid (unaudited) (167) (167)
------ ------ ------ ------
Balances at May 31, 1997 (Unaudited) 1,800 $ 2 $ 28 $ 30
====== ====== ====== ======
See accompanying notes to financial statements.
F-196
NATIONAL MESSENGER, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year ended Six months ended
November 30, May 31,
------------- ----------------
1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities
Net income $ 172 $ 255 $ 61 $ 181
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7 13 7 17
Provision for (recovery of) doubtful accounts 8 14 (1) 1
Changes in assets and liabilities
Accounts receivable (44) (118) -- (12)
Prepaid expenses and other current assets (5) 1 1 --
Other long-term liabilities 100 100 50 --
Accrued compensation 15 18 -- (38)
----- ----- ----- -----
Net cash provided by operating activities 253 283 118 149
----- ----- ----- -----
Cash flows used in investing activities
Purchases of property and equipment (3) (60) (48) (14)
----- ----- ----- -----
Cash flows used in financing activities
Dividends paid (200) (236) (115) (167)
----- ----- ----- -----
Net increase (decrease) in cash 50 (13) (45) (32)
Cash at beginning of the period 53 103 103 90
----- ----- ----- -----
Cash at end of the period $ 103 $ 90 $ 58 $ 58
===== ===== ===== =====
See accompanying notes to financial statements.
F-197
NATIONAL MESSENGER, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
National Messenger, Inc. (the "Company") primarily provides same-day
pick-up and delivery services of documents and parcels to customers
throughout Southern California. The Company's operations are conducted
from its headquarters located in Costa Mesa, California and a branch
facility located in Ontario, California.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the related assets
(5 years).
Fair value of financial instruments
The carrying amount of cash, accounts receivable and accrued expenses
approximates fair value because of the short maturity of these
instruments. The fair value of advances from shareholders is not
determinable due to their related party nature.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss. Such losses have historically been immaterial and within
management expectations.
Changes in allowance for doubtful accounts consist of the following:
Balance at November 30, 1994 $ --
Charge to costs and expenses 8
------
Balance at November 30, 1995 8
Charge to costs and expenses 14
------
Balance at November 30, 1996 $ 22
======
F-198
NATIONAL MESSENGER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (continued)
Income taxes
The Company has elected to be treated as a cash basis S-Corporation for
federal and state income tax purposes, and, accordingly, any liabilities
for federal income taxes are the direct responsibility of the
shareholders. The Company is only subject to California state income taxes
at a rate of 1.5 percent on taxable income.
The unaudited pro forma income tax information included in the Statements
of Operations is presented in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as if the
Company had been subject to federal and state income taxes for all periods
presented.
Unaudited interim financial statements
The interim financial data as of May 31, 1997 and for the six months ended
May 31, 1996 and 1997 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. Property and Equipment
Property and equipment, net consist of the following:
November 30,
-------------------
1995 1996
Furniture and fixtures $ 5 $ 5
Machinery and equipment 37 97
Vehicles 16 16
----- -----
58 118
Accumulated depreciation (55) (68)
----- -----
$ 3 $ 50
===== =====
4. Commitments
The Company leases its facilities under operating leases expiring on
various dates through 1998. Future minimum lease payments required under
leases that have noncancelable lease terms in excess of one year at
November 30, 1996 are as follows:
Fiscal year
1997 $ 37
1998 19
-----
$ 56
=====
Rental expense charged to operations was approximately $41 and $28 for the
years ended November 30, 1996 and 1995, respectively.
5. Related Party Transactions
The Company has non-interest bearing advances from shareholders totaling
$70 at November 30, 1996 and 1995. These advances are repayable upon
demand.
F-199
NATIONAL MESSENGER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
6. Unaudited Subsequent Events
The Company and its shareholders have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which DMS will
acquire certain assets and assume certain liabilities of the Company. The
acquired assets and assumed liabilities will be exchanged for cash and
shares of DMS common stock concurrent with the consummation of the initial
public offering of the common stock of DMS.
F-200
Report of Independent Accountants
To the Board of Directors and Shareholders
of Profall, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Profall, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Los Angeles, California
September 15, 1997
F-201
PROFALL, INC.
BALANCE SHEETS
(Dollars in Thousands)
December 31, June 30,
-------------- -----------
1995 1996 1997
(Unaudited)
Assets
Current assets:
Cash $ 1 $ -- $ 69
Accounts receivable 85 142 171
Prepaid and other current assets 5 3 2
----- ----- -----
Total current assets 91 145 242
Property and equipment, net 72 89 71
----- ----- -----
$ 163 $ 234 $ 313
===== ===== =====
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 38 $ 53 $ 38
Accrued compensation 33 46 39
Payables to affiliate 26 54 68
Notes payable 132 120 171
Advances from shareholders 293 303 303
Advances from affiliate 28 48 35
----- ----- -----
Total current liabilities 550 624 654
----- ----- -----
Commitments (Note 5)
Shareholders' equity (deficit):
Common stock, without par value; 1,000,000
shares authorized; 2,000 shares issued
and outstanding 10 10 10
Additional paid-in capital 21 46 59
Accumulated deficit (418) (446) (410)
----- ----- -----
Total shareholders' equity (deficit) (387) (390) (341)
----- ----- -----
$ 163 $ 234 $ 313
===== ===== =====
See accompanying notes to financial statements.
F-202
PROFALL, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Years ended Six months ended
December 31, June 30,
----------------- ----------------
1995 1996 1996 1997
(Unaudited)
Net sales $ 993 $ 1,212 $ 533 $ 807
Cost of sales 588 687 325 405
------- ------- ------- -------
Gross margin 405 525 208 402
Operating expenses 215 271 124 158
General and administrative expenses 361 298 169 215
Depreciation and amortization 14 23 9 18
------- ------- ------- -------
Operating (loss) income (185) (67) (94) 11
------- ------- ------- -------
Other (income) expense
Interest expense 21 25 12 13
Other, net (42) (64) (37) (39)
------- ------- ------- -------
(Loss) income before provision for
income taxes (164) (28) (69) 37
Provision for income taxes -- -- -- 1
------- ------- ------- -------
Net (loss) income $ (164) $ (28) $ (69) $ 36
======= ======= ======= =======
Unaudited pro forma information (Note 2):
(Loss) income before provision
for income taxes (164) (28) (69) 37
Pro forma provision for income taxes -- -- -- 15
------- ------- ------- -------
Pro forma net (loss) income $ (164) $ (28) $ (69) $ 22
======= ======= ======= =======
See accompanying notes to financial statements.
F-203
PROFALL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
Common Additional
Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balances at December 31, 1994 2,000 $ 10 $ -- $ (254) $ (244)
Net loss (164) (164)
Imputed interest on advances
from shareholders 21 21
------ ------ ------ ------ ------
Balances at December 31, 1995 2,000 10 21 (418) (387)
Net loss (28) (28)
Imputed interest on advances
from shareholders 25 25
------ ------ ------ ------ ------
Balances at December 31, 1996 2,000 10 46 (446) (390)
Net income (unaudited) 36 36
Imputed interest on advances
from shareholders (unaudited) 13 13
------ ------ ------ ------ ------
Balances at June 30, 1997 (Unaudited) 2,000 $ 10 $ 59 $ (410) $ (341)
====== ====== ====== ======= =======
See accompanying notes to financial statements.
F-204
PROFALL, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year ended Six months ended
December 31, June 30,
------------- ----------------
1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities:
Net (loss) income $(164) $ (28) $ (69) $ 36
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 14 23 9 18
Imputed interest on advances from shareholders 21 25 12 13
Changes in assets and liabilities:
Accounts receivable (13) (57) (26) (29)
Prepaid and other current assets (5) 2 1 1
Accounts payable 15 15 26 (15)
Accrued compensation 16 13 46 (7)
Payables to affiliate 22 28 14 14
----- ----- ----- -----
Net cash (used in) provided by operating activities (94) 21 13 31
----- ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment (25) (40) (40) --
----- ----- ----- -----
Cash flows from financing activities:
Advances from shareholders 85 10 10 --
Advances from affiliate 28 20 20 --
Proceeds from notes payable -- -- -- 150
Repayments to affiliate -- -- -- (13)
Repayments of notes payable -- (12) (4) (99)
----- ----- ----- -----
Net cash provided by financing activities 113 18 26 38
----- ----- ----- -----
Net increase (decrease) in cash (6) (1) (1) 69
Cash at beginning of the period 7 1 1 --
----- ----- ----- -----
Cash at end of the period $ 1 $ -- $ -- $ 69
===== ===== ===== =====
See accompanying notes to financial statements.
F-205
PROFALL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
Profall, Inc. (dba 1-800 Courier) (the "Company") primarily provides
same-day pick-up and delivery services of documents and parcels to
customers throughout Southern California. The Company's operations are
conducted from its headquarters located in Santa Fe Springs, California.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets (5 years).
Fair value of financial instruments
The carrying amount of cash, accounts receivable and payable, accrued
expenses and debt approximates fair value because of the short maturity of
these instruments. The fair value of advances from shareholders and
affiliates is not determinable due to their related party nature.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. One customer accounted for $154 of net sales in 1996. Accounts
receivable related to this customer totaled $24 at December 31, 1996.
Receivables are not collateralized and accordingly, the Company performs
ongoing credit evaluations of its customers to reduce the risk of loss.
Such losses have historically been immaterial and within management
expectations.
Income taxes
The Company has elected to be treated as a cash basis S-Corporation for
federal and state income tax purposes, and, accordingly, any liabilities
for federal income taxes are the direct responsibility of the
shareholders. The Company is only subject to California state income taxes
at a rate of 1.5 percent on taxable income.
The unaudited pro forma income tax information included in the Statements
of Operations is presented in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as if the
Company had been subject to federal and state income taxes for all periods
presented.
F-206
PROFALL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (continued)
Unaudited Interim Financial Statements
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. Property and Equipment
Property and equipment, net consist of the following:
December 31,
------------------
1995 1996
Vehicles $ 93 $ 133
Accumulated depreciation (21) (44)
----- -----
$ 72 $ 89
===== =====
4. Notes Payable
Notes payable consist of the following:
December 31,
------------------
1995 1996
Note payable secured by a vehicle;
payments, including interest at 9%
per annum, are due monthly through
November, 1998 $ 23 $ 16
Note payable to franchisor substantially
repaid with proceeds from loan
obtained from a bank subsequent
to December 31, 1996 (see below) 109 104
----- -----
$ 132 $ 120
===== =====
Subsequent to December 31, 1996, the Company obtained a loan and an
available line of credit from a bank, each in the amount of $150. The loan
and the line of credit are payable on demand. The loan provides for sixty
equal, monthly principal payments with interest at 2.5% above the bank's
base rate, as defined (totaling 11% per annum at May 27, 1997). The line
of credit expires in May 1998 and borrowings thereunder bear interest at
2.0% above the banks base rate (totaling 10.5% per annum at May 27, 1997).
The loan and the line of credit are guaranteed by the shareholders of the
Company. As of June 30, 1997, the Company had not drawn on the line of
credit.
5. Commitments
The Company operates under a franchise agreement with Express-It Courier
Systems, Inc. The agreement is effective for an initial term of five years
expiring in September 1999 during which the Company can only terminate the
agreement with the consent of the franchiser. The Company has the right to
renew the franchise for two successive five year periods.
Pursuant to the terms of the agreement, the franchiser provides continuing
services including billings and collections, customer service and
training. The Company was required to remit fees for such
F-207
PROFALL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
services ranging from 14% to 19% and 10% to 14% of gross receipts, as
defined, in 1995 and 1996, respectively. Subsequent to December 31, 1996
the fees for such services range from 8% to 10% of gross receipts, as
defined. Under this agreement the Company paid $183 and $143 in 1995 and
1996, respectively. These amounts are included in general and
administrative expenses in the accompanying financial statements.
The Company leases certain equipment under noncancelable lease
obligations. Total rental expense under such operating leases was
approximately $0 and $40 in 1995 and 1996, respectively. Minimum rental
payments at December 31, 1996 under noncancelable operating leases that
have initial or remaining lease terms in excess of one year are as
follows:
1997 $62
1998 63
1999 63
2000 20
---
208
===
6. Related Party Transactions
The Company has non-interest bearing advances from shareholders and an
affiliate at December 31, 1995 and 1996 totaling $321 and $351,
respectively. Interest has been imputed at prevailing market rates
aggregating $21 and $25 for the years ended December 31, 1995 and 1996,
respectively.
The Company's operations are conducted from within a facility leased and
occupied by an affiliate. No formal sublease agreement exists. Charges for
rent expense are based on occupied space and aggregated $21 and $23 for
the years ended December 31, 1995 and 1996, respectively. These charges
have been provided for in general and administrative expenses and included
in payables to affiliate in the accompanying financial statements.
Sales to an affiliate of the Company totaled $21 and $53 in 1995 and 1996,
respectively. Accounts receivable from such affiliate aggregated $3 and $6
at December 31, 1995 and 1996, respectively.
7. Unaudited Subsequent Events
The Company and its shareholders have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which DMS will
acquire certain assets and assume certain liabilities of the Company. The
acquired assets and assumed liabilities will be exchanged for cash and
shares of DMS common stock concurrent with the consummation of the initial
public offering of the common stock of DMS.
Upon consummation of the merger described above, the Company's franchise
agreement outlined in Note 5 will be terminated.
F-208
Report of Independent Accountants
To the Board of Directors and Stockholder of
A & W Couriers, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders'equity and of cash flows present fairly, in all
material respects, the financial position of A&W Couriers, Inc. at December 31,
1995 and 1996 and the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Austin, Texas
September 12, 1997
F-209
A&W COURIERS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
1995 1996 1997
---- ---- ----
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 97 $131 $178
Investments 21 21 20
Accounts receivable, less allowances for 141 148 157
doubtful accounts of $30
Prepaid and other current assets 29 29 21
---- ---- ----
Total current assets 288 329 376
Property and equipment, net 33 21 52
Other assets 7 10 10
---- ---- ----
$328 $360 $438
==== ==== ====
Liabilities and Stockholders'Equity
Current liabilities
Accounts payable and accrued expenses $ 33 $ 36 $ 43
Accrued commissions - related parties 171 211 227
---- ---- ----
Total current liabilities 204 247 270
Commitments and contingencies
Stockholders'equity:
Common stock $1.00 par value; 40,000 shares
authorized; 2,632 shares issued and outstanding 3 3 3
Additional paid-in capital 58 58 58
Retained earnings 63 52 107
---- ---- ----
124 113 168
---- ---- ----
$328 $360 $438
==== ==== ====
See accompanying notes to financial statements.
F-210
A&W COURIERS, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Year Ended December 31, Six Months Ended June 30,
----------------------- -------------------------
1995 1996 1996 1997
------- ------- ------- -------
(Unaudited)
Net sales $ 1,461 $ 1,560 $ 783 $ 841
Cost of sales 893 940 469 485
------- ------- ------- -------
Gross margin 568 620 314 356
Selling, general and administrative
expenses
Operating expenses 198 228 123 129
Sales and marketing 127 102 48 44
General expenses 323 289 133 115
Depreciation 11 10 5 4
------- ------- ------- -------
659 629 309 292
------- ------- ------- -------
Operating income (loss) (91) (9) 5 64
Interest income 4 4 2 2
Other income (expense) 15 (2) 2 2
------- ------- ------- -------
Income before provision for income taxes (72) (7) 9 68
Income tax expense 3 4 -- 13
------- ------- ------- -------
Net income (loss) $ (75) $ (11) $ 9 $ 55
======= ======= ======= =======
See accompanying notes to financial statements.
F-211
A&W COURIERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Additional
Common stock paid-in Retained
Shares Amount capital earnings Total
Balance at December 31, 1994 3 $ 3 $ 58 $138 $199
Net loss (75) (75)
---- ---- ---- ---- ----
Balance at December 31, 1995 3 3 58 63 124
Net loss (11) (11)
---- ---- ---- ---- ----
Balance at December 31, 1996 3 3 58 52 113
Net income (unaudited) 55 55
---- ---- ---- ---- ----
Balance at June 30, 1997 (unaudited) 3 $ 3 $ 58 $107 $168
==== ==== ==== ==== ====
See accompanying notes to financial statements.
F-212
A&W COURIER, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31, Six Months Ended June 30,
----------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (75) $ (11) $ 9 $ 55
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities
Depreciation 11 10 5 4
Loss on disposal of equipment -- 2 -- --
Unrealized gain on short-term
investments (2) -- (4) --
Changes in assets and liabilities:
Accounts receivable (24) (7) (32) (9)
Prepaid and other current assets -- -- (2) 10
Other assets (4) (3) (2) --
Accounts payable (5) 2 1 (3)
Accrued expenses 52 41 19 25
----- ----- ----- -----
Net cash provided by (used for)
operating activities (47) 34 (6) 82
----- ----- ----- -----
Cash flows from investing activities
Purchases of property and equipment (13) -- -- (35)
----- ----- ----- -----
Net cash used for investing
activities (13) -- -- (35)
----- ----- ----- -----
Net increase (decrease) in cash and
equivalents (60) 34 (6) 47
Cash and equivalents at beginning of period 157 97 97 131
----- ----- ----- -----
Cash and equivalents at end of period $ 97 $ 131 $ 91 $ 178
----- ----- ----- -----
Supplemental disclosures of cash paid
for income taxes $ -- $ 3 $ 3 $ 4
----- ----- ----- -----
See accompanying notes to financial statements.
F-213
F-214
A&W COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
A&W Couriers, Inc. (the "Company") provides same-day, on-demand delivery
services in the Houston, Texas metropolitan area.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately
three months or less at date of purchase to be cash equivalents.
Investments
Investments consist of equity securities and corporate bonds. Under the
Provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Company classifies its investments as trading securities with unrealized
gains and losses included in earnings. Unrealized gains of $5 and $- are
included in the statement of operations for the years ended December 31,
1995 and 1996, respectively.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the related assets,
generally five years.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable and accrued expenses approximates fair value because of
the short maturity of these instruments.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
Income taxes
The Company is a C-Corporation for federal and state income tax purposes.
The Company accounts for income taxes using the asset and liability method
under the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (FAS 109). Under FAS 109, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Additionally, the effect
on deferred taxes of a change in tax rates is recognized in earnings in
the period that includes the enactment date.
F-215
A&W COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Unaudited interim financial statements
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. Prepaid and Other Current Assets
Prepaid and other current assets comprised the following:
December 31, June 30,
1995 1996 1997
---- ---- ----
(unaudited)
Prepaid expenses $ 26 $ 28 $ 18
Other 3 1 3
---- ---- ----
$ 29 $ 29 $ 21
==== ==== ====
4. Property and Equipment
Property and equipment consisted of the following:
December 31, June 30,
1995 1996 1997
---- ---- ----
(unaudited)
Equipment $ 43 $ 43 $ 78
Furniture and fixtures 12 12 12
Vehicles 26 23 23
---- ---- ----
81 78 113
Accumulated depreciation 48 57 61
---- ---- ----
$ 33 $ 21 $ 52
==== ==== ====
5. Accrued Expenses
Accrued expenses comprised the following:
December 31, June 30,
1995 1996 1997
---- ---- ----
(unaudited)
Payroll and payroll taxes $ 18 $ 16 $ 17
Accrued commissions - other 8 11 11
Other 7 9 15
---- ---- ----
Total accrued expenses $ 33 $ 36 $ 43
==== ==== ====
F-216
6. Income Taxes
The provision for income taxes is comprised of current Federal income tax
expense of $3 and $3 for the years ended December 31, 1995 and 1996,
respectively.
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
Six Months ended
Year Ended December 31, June 30,
1995 1996 1997
---- ---- ----------------
(unaudited)
Taxes computed at federal statutory rate (15%) $ (11) $ (1) $ 10
Change in valuation allowance 13 3 3
Other 1 1 --
----- ----- -----
$ 3 $ 3 $ 13
----- ----- -----
Effective rate 4% 43% 19%
===== ===== =====
Temporary differences giving rise to the Company's deferred tax assets
comprised the following:
December 31, June 30,
1995 1996 1997
---- ------------ --------
unaudited)
Deferred tax assets
Accounts receivable allowances $ 5 $ 5 $ 4
Accrued liabilities 30 36 39
Other 6 3 3
---- ---- ----
41 44 46
Deferred tax liabilities - prepaid expenses (4) (4) (3)
---- ---- ----
37 40 43
Less valuation allowance (37) (40) (43)
---- ---- ----
$ -- $ -- $ --
==== ==== ====
A valuation allowance has been provided based on management's assessment
of the ultimate realization of the deferred tax assets.
F-217
7. Related Party Transactions
At December 31, 1995 and 1996, the Company had commissions payable to
current and former shareholders of the Company of $171 and $211,
respectively. Commissions are generally calculated as 4% of revenue and
are payable on demand.
8. Commitments and Contingencies
The Company leases certain office equipment under operating leases
expiring on various dates through 2001. Future minimum lease payments
required under leases that have noncancelable lease terms in excess of one
year at December 31, 1996 are as follows:
Fiscal year
1997 $ 28
1998 28
1999 28
2000 30
2001 10
-----
$ 124
=====
Rental expense charged to operations was approximately $24 and $26 for the
years ended December 1, 1995 and 1996, respectively.
The Company is, from time to time, a party to litigation arising in the
normal course of business, most of which involve claims for personal
injury and property damage incurred in connection with its operations.
Management believes that none of these actions will have a material
adverse impact on the financial position, results of operations or cash
flows of the Company.
9. Unaudited Subsequent Event
The Company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which DMS will
acquire the outstanding shares of the Company. The acquired shares will be
exchanged for cash and shares of DMS common stock concurrent with the
consummation of the initial public offering of the common stock of DMS.
F-218
Report of Independent Accountants
To the Board of Directors and
Shareholders of Fleetfoot Max, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Fleetfoot Max, Inc.
at August 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended August 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Seattle, Washington
October 7, 1997
F-219
FLEETFOOT MAX, INC.
BALANCE SHEETS
(Dollars in Thousands)
August 31,
----------------
1996 1997
Assets
Current assets:
Cash and cash equivalents $ 26 $ 40
Accounts receivable, net 249 295
Prepaid assets 19 3
----- -----
Total current assets 294 338
Property and equipment, net 107 103
Deferred tax asset 61 14
Investments 20
Deposits 27 27
----- -----
Total assets $ 489 $ 502
===== =====
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 7 $ 12
Accrued expenses 106 127
Notes payable 4
Current maturities long-term debt 192 176
Current portion of capital lease obligation 13 6
----- -----
Total current liabilities 322 321
Long-term debt, net of current maturities 236 149
Capital lease obligation, net of current portion 22
----- -----
Total liabilities 558 492
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity (deficit):
Common stock, par value $0.05 per share;
500,000,000 shares authorized; 1,000,000
shares issued and 212,857 shares outstanding 50 50
Additional paid-in capital 33 33
Retained earnings (accumulated deficit) (26) 53
----- -----
57 136
Less: common stock in treasury at cost
(787,143 shares) (126) (126)
----- -----
Total shareholders' equity (deficit) (69) 10
----- -----
Total liabilities and shareholders'
equity (deficit) $ 489 $ 502
===== =====
See accompanying notes to financial statements.
F-220
FLEETFOOT MAX, INC.
STATEMENT OF OPERATIONS
(Dollars in Thousands)
Years ended August 31,
-----------------------------
1995 1996 1997
Net sales $ 1,702 $ 2,042 $ 2,427
Cost of sales 1,015 1,220 1,557
------- ------- -------
Gross margin 687 822 870
Operating expenses 306 351 380
Sales and marketing 21 20 23
General and administrative 259 257 279
Depreciation and amortization 64 53 52
------- ------- -------
Operating income 37 141 136
Other (income) expense
Interest expense 72 59 54
Other, net (11) (18) (44)
------- ------- -------
Income (loss) before provision for
income taxes (24) 100 126
Provision for (benefit attributable to)
income taxes (61) 47
------- ------- -------
Net income (loss) $ (24) $ 161 $ 79
======= ======= =======
See accompanying notes to financial statements.
F-221
FLEETFOOT MAX, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
Retained
Capital Earnings Treasury Total
Common Stock In Excess (Accumulated Common Equity
Shares Par Value of Par Deficit) Stock (Deficit)
August 31, 1994 1,000 $ 50 $ 33 $ (163) $ (126) $ (206)
Net loss (24) (24)
------ ------ ------ ------ ------ ------
Balances at,
August 31, 1995 1,000 50 33 (187) (126) (230)
Net income 161 161
------ ------ ------ ------ ------ ------
Balances at,
August 31, 1996 1,000 50 33 (26) (126) (69)
Net income 79 79
------ ------ ------ ------ ------ ------
Balances at,
August, 1997 1,000 $ 50 $ 33 $ 53 $ (126) $ 10
====== ====== ====== ====== ====== ======
See accompanying notes to financial statements.
F-222
FLEETFOOT MAX, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years ended August 31,
-----------------------
1995 1996 1997
Cash flows from operating activities:
Net income (loss) $ (24) $ 161 $ 79
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating
activities:
Depreciation and amortization 64 53 52
(Gain) loss on sale of property and equipment (10) (1) 4
Changes in assets and liabilities:
Accounts receivable (61) (27) (46)
Prepaid assets (3) 16
Deposits (2) (6)
Accounts payable (6) 5
Accrued expenses 13 5 21
Deferred tax asset (61) 47
----- ----- -----
Net cash provided by (used for)
operating activities (20) 115 178
----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment (6) (21) (24)
Investments (20)
Proceeds from sale of assets 12 2 2
----- ----- -----
Net cash provided by (used for)
investing activities 6 (19) (42)
----- ----- -----
Cash flows from financing activities:
Repayment of notes payable (7) (4)
Repayment of long-term liabilities (47) (53) (103)
Repayment of capital lease obligations (2) (15) (15)
----- ----- -----
Net cash used for financing activities (49) (75) (122)
----- ----- -----
Net increase (decrease) in cash and equivalents (63) 21 14
Cash and equivalents at beginning of the period 68 5 26
----- ----- -----
Cash and equivalents at end of the period $ 5 $ 26 $ 40
===== ===== =====
Supplemental schedule of noncash investing and financing activities
Property and equipment acquired under
capital lease $ 30 $ -- $ 30
===== ===== =====
Interest paid $ 72 $ 58 $ 51
===== ===== =====
See accompanying notes to financial statements.
F-223
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
Fleetfoot Max, Inc. (the "Company") was incorporated in 1980 under the
laws of the state of Washington. The Company provides same day, on demand
delivery services in the Seattle Commercial Zone which extends from
Everett to Tacoma and all of the eastern communities of King County.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately
three months or less at date of purchase to be cash equivalents.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets (5 to 7 years). Capital leases are stated at the present value of
the future minimum lease payments and amortized over the life of the
lease. Capital lease amortization is included in depreciation expense.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/payable and accrued expenses
approximates fair value because of the short maturity of these
instruments. The estimated fair value of long-term debt and other
long-term liabilities approximates its carrying value. Additionally,
interest rates on outstanding debt are at rates which approximate market
rates for debt with similar terms and average maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss.
Income taxes
The Company is a C-Corporation for federal income tax purposes. The
Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes".
Deferred tax assets and liabilities arise primarily as a result of net
operating loss carry-forwards and differences in the method of accounting
for depreciation.
F-224
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
2. Summary of Significant Accounting Policies (continued)
Earnings per share
Information regarding earnings per share has not been provided because the
capital structure is not indicative of the capital structure subsequent to
the agreement with Dispatch Management Services Corp. ("DMS") as further
discussed in Note 11.
3. Allowance for Doubtful Accounts
Balance at Balance
Beginning at end
of Period Write-offs of Period
--------- ---------- ---------
Year ended August 31, 1995 ..... $ 9 $ 11 $ 12
Year ended August 31, 1996 ..... $ 12 $ 12 $ 13
Year ended August 31, 1997 ..... $ 13 $ 2 $ 15
4. Property and Equipment
Property and equipment consists of the following:
August 31,
-------------------
1996 1997
Equipment $ 162 $ 183
Furniture and fixtures 12 5
Vehicles 123 64
Leasehold improvements 54 63
------- -------
351 315
Accumulated depreciation and amortization (244) (212)
------- --------
$ 107 $ 103
======= =======
Depreciation expense for the years ended August 31, 1995, 1996, and 1997
was approximately $64, $53 and $52, respectively.
Equipment includes the cost of equipment of $30 held by the Company under
capital lease agreements described in Note 6 for both years ending August
31, 1996 and 1997. The accumulated amortization relating to these assets
aggregated $18 and $0, respectively, at August 31, 1996 and 1997.
F-225
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
5. Accrued Expenses
Accrued expenses comprised the following:
August 31,
-------------------
1996 1997
Payroll and payroll taxes $ 66 $ 85
Deferred salaries 22 22
Other 18 20
------- -------
Total accrued expenses $ 106 $ 127
======= =======
6. Leases
The Company leases certain office space under operating lease agreements
and certain office equipment under capital and operating leases expiring
on various dates through 1999. Future minimum lease payments required
under leases that have noncancelable lease terms in excess of one year at
August 31, 1997 are as follows:
Capital Operating
Fiscal year Leases Leases
------- ---------
1998 $ 10 $ 108
1999 10 87
2000 10 25
2001 6
---- ------
Total minimum lease payments 36 $ 220
======
Amount representing interest 8
----
Present value of net minimum payments 28
Current portion 6
----
$ 22
====
Rental expense attributed to office space was approximately $45, $42 and
$43 for the years ended August 31, 1995, 1996 and 1997, respectively.
F-226
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
7. Long-term Debt
Debt is summarized as follows:
August 31,
-------------------
1996 1997
Government agency note $ 178 $ 143
Convertible debentures with majority
shareholder and other related parties 150 115
Unsecured promissory note with majority
shareholder 70 58
Other subordinated notes 30 9
------- -------
428 325
Less: current portion (192) (176)
------- -------
$ 236 $ 149
======= =======
On January 14, 1994, the Company received a U.S. Small Business
Administration Note of $250. The note accrues interest at the prime rate
plus 2.75% per annum which was 11.0% and 11.25% at August 31, 1996, and
1997, respectively. Interest is accrued, due and payable monthly, in
installments, including principal, until December 14, 2000. The note is
collateralized by all properties acquired with the proceeds of this loan
and certain vehicles and equipment.
Convertible debentures were issued to the majority shareholder of the
Company and other related parties between July 31, 1990 and March 10,
1993. The holder of the note has the option at any time to convert the
principal amount outstanding into common shares of the Company at a
conversion price of $2.50 for one common share. The debenture notes accrue
interest at 15% per annum and interest is accrued, due and payable
monthly. The Company is obligated to repay the principal five years from
the date of agreements. Principle may be prepaid, in whole or in part, at
any time, without penalty. As of August 31, 1997, $115 of the debentures
were past due and continued accruing interest per the existing terms of
the note. In September 1997, Fleetfoot Max's President converted $110 of
convertible debentures into 44,000 shares of Fleetfoot Max, Inc. common
stock.
On March 5, 1991, the Company entered into a $115 promissory note
agreement with the majority shareholder of the Company. The note accrues
interest at a rate of 12% per annum. Principal and interest are payable in
monthly installments of $2 until March 2001.
Other subordinated notes consist of a leasehold improvement loan and
miscellaneous vehicle loans. The loans accrue interest at rates between
7.25% and 10% and mature on multiple dates between fiscal 1995 and fiscal
1998.
F-227
7. Long-term Debt (continued)
Fixed and determinable maturities of long-term debt at August 31, 1997 are
as follows:
Year ending August 31,
1998 $ 176
1999 58
2000 65
2001 26
------
$ 325
======
8. Income Taxes
The provision for income taxes comprised the following:
Year ended August 31,
-------------------------------
1995 1996 1997
Current tax expense (benefit) $ (9) $ 38 $ 45
Deferred tax expense (benefit) (1) (7) 2
Change in valuation allowance 10 (92)
------- ----- ------
Provision for (benefit attributable
to) income taxes $ -- $ (61) $ 47
======= ===== ======
Temporary differences giving rise to the Company's deferred tax assets and
liabilities comprised the following:
August 31,
-------------------
1996 1997
Net operating loss $ 50 $ 5
Depreciation and amortization 4 1
A/R reserve and accrued liabilities 7 8
----- -----
Net deferred tax asset $ 61 $ 14
===== =====
At August 31, 1997, the Company has a net operating loss carry-forward of
approximately $13 which will expire in the year 2014, if not previously
utilized. Should certain changes in the Company's ownership occur, there
could be a limitation on the utilization of its net operating loss.
The effective income tax rate varies from the statutory tax rate for the
year ended August 31, 1996 primarily due to the Company eliminating the
previously recorded valuation allowance for deferred tax assets based
management's assessment of the likelihood of realizing such deferred tax
assets.
F-228
9. Related Party Transactions
In 1991, the Company entered into a royalty agreement with ABC Messengers,
an unrelated party. On November 29, 1993, Fleetfoot Max's President and
General Manager purchased the royalty contract from ABC Messengers.
Pursuant to the agreement the President and General Manager of Fleetfoot
Max, Inc. received a monthly royalty of 10 - 16% of sales related to ABC
Messengers' customer base for the remaining period of the outstanding
contract. Amounts paid under the royalty agreement to the related parties
were $54, $54 and $5 for the years ending August 31, 1995, 1996 and 1997,
respectively. The agreement expired in September 1996.
10. Litigation
Certain pending litigation relating to matters that are in the ordinary
course of the Company's business activities are not expected to have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
11. Unaudited Subsequent Events
The Company and its shareholder have entered into a definitive agreement
with Dispatch Management Services Corp. pursuant to which the Company will
merge with DMS. All outstanding shares of the Company will be exchanged
for cash and shares of DMS common stock concurrent with the consummation
of the initial public offering of the common stock of DMS.
F-229
Report of Independent Accountants
To the Stockholder of Expressit Couriers, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders'equity and of cash flows present fairly,
in all material respects, the financial position of Expressit Couriers, Inc.
(the "Company") at December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Detroit, Michigan
September 5, 1997
F-230
EXPRESSIT COURIERS, INC.
BALANCE SHEETS
(Dollars in Thousands)
December 31,
------------- June 30,
1995 1996 1997
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2 $ 1 $ 22
Accounts receivable, net 170 94 88
Prepaid and other current assets 18 15 24
---- ---- ----
Total current assets 190 110 134
Property and equipment, net 170 111 77
Stockholder receivable 38 61 66
Initial franchise fee 18
---- ---- ----
$398 $282 $295
==== ==== ====
Liabilities and Stockholders'Equity
Current liabilities:
Line of credit $ 67 $ 61 $ 58
Accounts payable 112 118 110
Accrued expenses 22 30 26
Current maturities long-term debt 61 45 20
---- ---- ----
Total current liabilities 262 254 214
Long-term debt 56 11
---- ---- ----
Total liabilities 318 265 214
Commitments and contingencies
Stockholders'Equity
Common stock; no par value; 15,000 shares
authorized; 1,000 issued and outstanding 1 1 1
Retained earnings 79 16 80
---- ---- ----
$398 $282 $295
==== ==== ====
See accompanying notes to financial statements.
F-231
EXPRESSIT COURIERS, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Six months ended
Year ended December 31, June 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
(Unaudited)
Net sales $ 2,173 $ 1,703 $ 1,343 $ 696 $ 717
Cost of sales 1,408 1,135 897 461 436
------- ------- ------- ------- -------
Gross margin 765 568 446 235 281
Operating expenses 303 210 231 137 76
Sales and marketing expenses 84 61 27 5 17
General and administrative expenses 393 223 177 79 96
Depreciation and amortization 25 41 44 22 19
------- ------- ------- ------- -------
Operating income (loss) (40) 33 (33) (8) 73
------- ------- ------- ------- -------
Other income (expense)
Interest expense (17) (12) (16) (9) (5)
Other, net 15 (14) (2) (4)
------- ------- ------- ------- -------
Net income (loss) $ (57) $ 36 $ (63) $ (19) $ 64
======= ======= ======= ======= =======
Unaudited pro forma information:
Pro forma net income (loss) before provision
for income taxes $ (57) $ 36 $ (63) $ (19) $ 64
Benefit (provision) for income taxes 20 (16) 24 7 (25)
------- ------- ------- ------- -------
Pro forma net income (loss) (see Note 2) $ (37) $ 20 $ (39) $ (12) $ 39
======= ======= ======= ======= =======
See accompanying notes to financial statements.
F-232
EXPRESSIT COURIERS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands, except share amounts)
Common Stock Total
------------------------ Retained Stockholder's
Shares Amount Earnings Equity
Balance at December 31, 1993 1,000 $ 1 $ 100 $ 101
Net (loss) (57) (57)
------ ------ ------ ------
Balance at December 31, 1994 1,000 1 43 44
Net income 36 36
------ ------ ------ ------
Balance at December 31, 1995 1,000 1 79 80
Net (loss) (63) (63)
------ ------ ------ ------
Balance at December 31, 1996 1,000 $ 1 $ 16 $ 17
====== ====== ====== ======
Net income (unaudited) 64 64
------ ------ ------ ------
Balance at June 30, 1997 (unaudited) 1,000 $ 1 $ 80 $ 81
====== ====== ====== ======
See accompanying notes to financial statements.
F-233
EXPRESSIT COURIERS, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six months ended
Year ended December 31, June 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (57) $ 36 $ (63) $ (19) $ 64
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization 25 41 44 22 19
(Gain)/loss on sale of property and equipment (15) 14 2 4
Changes in assets and liabilities:
Accounts receivable (13) 10 76 48 6
Prepaid and other current assets 21 9 3 (4) (9)
Stockholder receivable (11) (26) (23) (19) (5)
Accounts payable 36 49 6 (4) (8)
Accrued expenses (28) (39) 8 9 (4)
----- ----- ----- ----- -----
Net cash provided by (used for)
operating activities (27) 65 65 35 67
----- ----- ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment (120) (84) (4) (3)
Purchase of franchise (20)
Proceeds from sale of property 27 5 5 16
----- ----- ----- ----- -----
Net cash used for investing activities (120) (57) 1 5 (7)
----- ----- ----- ----- -----
Cash flows from financing activities:
Increase (decrease) in line of credit 19 (1) (6) (3) (3)
Payments on long-term debt (43) (54) (63) (37) (36)
Proceeds from borrowings 143 43 2
----- ----- ----- ----- -----
Net cash provided by (used for)
financing activities 119 (12) (67) (40) (39)
----- ----- ----- ----- -----
Net increase (decrease) in cash and equivalents: (28) (4) (1) 21
Cash and equivalents at beginning of the period 34 6 2 2 1
----- ----- ----- ----- -----
Cash and equivalents at end of the period $ 6 $ 2 $ 1 $ 2 $ 22
===== ===== ===== ===== =====
Cash paid for interest $ 17 $ 12 $ 16 $ 9 $ 5
===== ===== ===== ===== =====
See accompanying notes to financial statements.
F-234
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
Expressit Couriers, Inc. (the Company) provides same-day, on-demand
delivery services in the Boston, Massachusetts metropolitan area. In
September 1996, the Company entered into a franchise agreement with
800-Courier, Inc. using the name and business system of 800-Courier, Inc.
Under the franchise agreement, the Company pays a fee of 8-1/4% of the
Company's gross courier receipts to 800-Courier, Inc. In 1997, the Company
paid an initial franchise fee of $20. Additionally, 1996 franchise fees
approximated $28.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets.
Initial franchise fee
Amortized using the straight-line method over five years.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts
receivable/payable and accrued expenses approximates fair value because of
the short maturity of these instruments. The estimated fair value of
long-term debt approximates its carrying value as interest rates on
outstanding debt are at rates which approximate market rates for debt with
similar terms and average maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collaterized and accordingly, the Company
performs ongoing credit evaluations of its customers to reduce the risk of
loss.
Approximately 33% of 1996 net sales were from three customers; at December
31,1996, approximately 33% of accounts receivable were from these
customers.
Income taxes
The Company has elected to have its income taxed under Section 1362 of the
Internal Revenue Code (the Subchapter S Corporation Election) which
provides that, in lieu of federal corporate income taxes, the shareholder
is taxed on the Company's income.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At December 31, 1996,
the carrying amounts of the Company's net assets exceeds the tax bases by
approximately $21.
F-235
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
The unaudited pro forma income tax information included in the Statement
of Operations is presented in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as if the
Company had been subject to federal and state income taxes for the entire
periods presented.
Unaudited Interim Financial data
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of
normal recurring items, necessary for a fair statement of the results for
the interim periods.
3. Accounts Receivable
Accounts Receivable comprised the following:
December 31
------------------
1995 1996
Accounts receivable, trade $ 178 $ 102
Allowance for doubtful accounts (8) (8)
------ -----
$ 170 $ 94
====== =====
Allowance for doubtful accounts comprised the following:
Balance at Charged to Balance at
beginning costs and end of
of period expenses Write-offs period
Year ended December 31, 1994 $ 6 $ 4 $ - $ 10
Year ended December 31, 1995 $ 10 $ 2 $ (4) $ 8
Year ended December 31, 1996 $ 8 $ 8 $ (8) $ 8
4. Prepaid and Other Current Assets
Prepaid and other current assets comprised the following:
December 31
1995 1996
Prepaid insurance $ 7 8
Security deposits 9 5
Other 2 2
------- ------
$ 18 15
======= ======
F-236
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
5. Property and Equipment
Property and equipment comprised the following:
Estimated December 31
useful life 1995 1996
Radio equipment 5 years $ 66 $ 66
Office equipment 7 years 30 35
Vehicles 5 years 154 121
Other 39 years 6 6
------- -------
256 228
Accumulated depreciation and amortization (86) (117)
------- -------
$ 170 $ 111
======= =======
Vehicles with an aggregate cost and accumulated depreciation of $71 and
$21, respectively, in 1995 and $57 and $29, respectively, in 1996, are
recorded under capital leases.
6. Accrued Expenses
Accrued expenses comprised the following:
December 31
1995 1996
Payroll and payroll taxes $ 14 $ 23
Other 8 7
------- -------
Total accrued expenses $ 22 $ 30
======= =======
7. Long-Term Debt
Long-term debt comprised the following:
December 31
1995 1996
Bank line of credit $ 67 $ 61
Bank term loan 28 11
Notes payable 42 28
Capital lease obligations 47 17
------- -------
Total 184 117
Less - current portion 128 106
------- -------
Long-term debt $ 56 $ 11
======= =======
The Bank line of credit is payable on demand and provides for maximum
borrowings of $75. Interest accrues at the bank's prime rate plus 1.75%
(10.0% at December 31, 1996).
The Bank term loan is secured by all the assets of the Company and
guaranteed by the stockholder of the Company. The loan is payable through
August 1997 in monthly principal payments of $1 plus interest at the
bank's prime rate plus 2% (10.25% at December 31, 1996).
F-237
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Notes payable are secured by certain vehicles. The notes are payable in
monthly aggregate principal amounts of $1 plus interest 8.5% through
August 1998.
The Company leases certain equipment under arrangements which have been
classified as capital leases. The leases have minimum monthly payments of
$2 and are secured by certain equipment utilized in the business. The
leases are further guaranteed by the shareholder of the Company.
Aggregate annual payments on long-term debt are: 1997 - $106; 1998 - $11.
At the end of the lease terms, the Company has the option to purchase the
vehicles under capital lease arrangements for minor amounts.
8. Operating Leases
The Company leases certain premium seating at a Boston sports arena under
a license agreement expiring on September 30, 2004. Future minimum license
and ticket fee payments required under the agreement are as follows:
Fiscal year
1997 $ 22
1998 23
1999 23
2000 23
2001 through 2004 73
-----
$ 164
=====
Rental expense was approximately $22 for the years ended December 31,
1994, 1995 and 1996.
9. Related Party Transactions
The Company leases office space from a realty trust where the stockholder
of the Company is the beneficiary. The lease expires on July 31, 1998 with
an option to renew for one year. Rent expenses related to this lease
agreement approximated $13 in 1994, 1995 and 1996.
Included in accounts receivable is $38 and $61 in 1995 and 1996,
respectively, receivable from the stockholder of the Company. There are no
formal repayment terms.
10. Commitments and Contingencies
The Company was self-insured for workers' compensation insurance for the
periods September 22, 1995 to December 27, 1995 and June 29, 1996 through
December 2, 1996. In the opinion of the Company, the liability, if any,
arising from workers' compensation claims relating to these periods will
not have a material effect on the Company's financial position or the
results of its operations.
There are pending actions and contingencies arising out of the ordinary
conduct of business. In the opinion of the Company, the liability, if any,
arising from these actions will not have a material effect on the
Company's financial position or the results of its operations.
11. Subsequent Event (Unaudited)
The company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corp. (DMS) pursuant to which the
Company will merge with DMS. All outstanding shares of the Company will be
F-238
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
exchanged for cash concurrent with the consummation of the initial public
offering of the common stock of DMS.
F-239
Report of Independent Accountants
To the Stockholders of
Express Enterprise, Inc. - Ground Operations
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity, and of cash flows present
fairly, in all material respects, the financial position of the Ground
Operations of Express Enterprise, Inc (the Company), at December 31, 1995 and
1996, and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Detroit, Michigan
September 4, 1997
F-240
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
BALANCE SHEETS
(Dollars in Thousands)
December 31,
------------------ June 30,
1995 1996 1997
(Unaudited)
Assets
Current assets
Cash $ -- $ 13 $ --
Accounts receivable, net 74 90 158
Accrued Income 10
---- ---- ----
Total current assets 84 103 158
Property and equipment, net 55 61 42
Deposits 14 14 14
Amount receivable from an affiliate 101 131 111
---- ---- ----
$254 $309 $325
==== ==== ====
Liabilities and Stockholders' Equity
Current liabilities
Book overdraft $ 13 $ -- $ 50
Accounts payable 42 44 47
Accrued expenses 63 80 31
Current maturities of long-term debt
and capital lease obligations 43 46 40
---- ---- ----
Total current liabilities 161 170 168
Long-term debt, net of current portion 56 60 48
Capital lease obligation, net of current portion 6 24 22
---- ---- ----
Total liabilities 223 254 238
Commitments and contingencies
Stockholders' equity
Common stock; $1.0 par value; 50,000 shares
authorized;
1,000 shares issued and outstanding 1 1 1
Retained earnings - Ground Operations 30 54 86
---- ---- ----
31 55 87
---- ---- ----
$254 $309 $325
==== ==== ====
See accompanying notes to financial statements.
F-241
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
Year ended Six months ended
December 31, June 30,
-------------------- ----------------
1995 1996 1996 1997
(Unaudited)
Net sales $ 1,344 $1,612 $815 $993
Cost of sales 812 986 518 617
------- ------ ---- ----
Gross margin 532 626 297 376
Operating expenses 202 246 130 155
Sales and marketing 30 16 10 14
General and administrative expenses 238 277 99 143
Depreciation 53 47 26 24
------- ------ ---- ----
523 586 265 336
------- ------ ---- ----
Operating income 9 40 32 40
Other (income) expense
Interest expense 16 16 8 8
Gain on sale of fixed assets (3)
------- ------ ---- ----
Net (loss) income $ (4) $ 24 $ 24 $ 32
======= ====== ==== ====
Unaudited pro forma information
Pro forma net income before provision for income tax $ (4) $ 24 $ 24 $ 32
Provision for income taxes 8 8 11
------- ------ ---- ----
Pro forma net (loss) income $ (4) $ 16 $ 16 $ 21
======= ====== ==== ====
See accompanying notes to financial statements.
F-242
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Retained
Common stock earnings -
----------------- Ground
Shares Amount Operations Total
Balance at December 31, 1994 1,000 $ 1 $ 34 $ 35
Net loss (4) (4)
----- ----- ------ ------
Balance at December 31, 1995 1,000 1 30 31
Net income 24 24
----- ----- ------ ------
Balance at December 31, 1996 1,000 1 54 55
Net income (unaudited) 32 32
----- ----- ------ ------
Balance at June 30, 1997 (unaudited) 1,000 $ 1 $ 86 $ 87
===== ===== ====== ======
See accompanying notes to financial statements.
F-243
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year ended Six months ended
December 31, June 30,
--------------- ----------------
1995 1996 1996 1997
(Unaudited)
Cash flows from operating activities
Net (loss) income $ (4) $ 24 $ 24 $ 32
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities
Depreciation 53 47 26 24
Changes in assets and liabilities:
Accounts receivable (14) (16) (44) (68)
Other current assets (10) 10 10 --
Accounts payable and overdraft 37 (11) 35 53
Accrued expenses 63 17 (24) (49)
Amount receivable from affiliate (61) (30) 24 20
Other assets (2)
---- ---- ---- ----
Net cash provided by (used in) operating
activities 62 41 51 12
---- ---- ---- ----
Cash flows from investing activities
Purchases of equipment (35) (53) (22) (5)
---- ---- ---- ----
Net cash used for investing activities (35) (53) (22) (5)
---- ---- ---- ----
Cash flows from financing activities
Proceeds from long-term loans 32 50
Repayment of long-term loans (56) (60) (22) (11)
Proceeds from capital lease obligation 46
Repayment of capital lease obligation (4) (11) (7) (9)
---- ---- ---- ----
Net cash provided by (used for) financing
activities (28) 25 (29) (20)
---- ---- ---- ----
Net (decrease) increase in cash (1) 13 -- (13)
Cash at beginning of
the period 1 -- -- 13
---- ---- ---- ----
Cash at the end of the period $ -- $ 13 $ -- $ --
==== ==== ==== ====
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 16 $ 16 $ 8 $ 8
==== ==== ==== ====
See accompanying notes to financial statements.
F-244
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Business Organization
Express Enterprise, Inc., operates business as Express Messenger Services,
Inc., (the Company) provides same-day, on-demand delivery and logistics
services in the Detroit, Michigan metropolitan area.
2. Summary of Significant Accounting Policies
Basis of presentation
Effective January 1, 1997, the Company transferred its air operations to
another affiliate, Express Core, Inc. As a result of this transfer, all
the related assets and liabilities of the air operations were transferred
at net book value. These financial statements have been prepared on a
carve-out basis and exclude the air operations for all periods presented.
Transactions between the ground operations and the air operations are
herein referred to as "related party" transactions.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized when packages are delivered to the customer.
Property and equipment
Vehicles, equipment under capital lease, leasehold improvements and
equipment are carried at cost. Depreciation is provided using the
accelerated method over the estimated useful lives of the related assets
(generally five years). Assets subject to capital leases are amortized
using the accelerated method over the estimated useful lives, or over the
terms of the leases, if shorter.
Fair value of financial instruments
The carrying amount of cash, accounts receivable/payable, and accrued
expenses approximates fair value because of the short maturity of these
instruments. The estimated fair value of long-term debt and capital lease
obligations approximates its carrying value. Additionally, interest rates
on outstanding debt are at rates which approximate market rates for debt
with similar terms and average maturities.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Company performs ongoing credit evaluations of its customers to reduce the
risk of loss. In 1995 and 1996, the Company's two largest customers
accounted for approximately 25% of sales.
Income taxes
The Company files consolidated federal and state income returns for both
ground and air operations. As discussed in Note 2, the unaudited pro forma
income tax information included in the Statement of Operations is
presented in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", as if the Company's ground
operations had been individually subject to Federal and State income taxes
for the entire periods presented.
F-245
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
There are differences between the financial statement carrying amounts and
the tax bases of existing asset and liabilities. At December 31, 1995 and
1996, the tax basis of the Company's net assets exceed the financial
reporting bases by approximately $24 and $12, respectively.
Unaudited Interim Financial Statements
The interim financial data as of June 30, 1997 and for the six months
ended June 30, 1996 and June 30, 1997, is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments,
consisting only or normal recurring adjustments, necessary for a fair
statement of the results for the interim periods.
3. Allowance for Doubtful Accounts
Balance at Charged to Balance
beginning costs and at end
of period expenses Write-offs of period
Year ended December 31, 1995 $ -- $ -- $ -- $ --
Year ended December 31, 1996 $ -- $ 10 $ -- $ 10
4. Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------------
1995 1996
Leasehold improvement $ 3 $ 3
Furniture and equipment 77 65
Vehicles 210 69
Equipment under capital lease 7 58
--------- ---------
297 195
Accumulated depreciation and amortization (242) (134)
--------- ---------
$ 55 $ 61
========= ==========
Depreciation expense for the years ended December 31, 1995 and 1996 was
approximately $53 and $47, respectively.
As of December 31, 1996, vehicles amounting to approximately $80 and
equipment under capital leases of approximately $58 are secured as a
collateral for long-term debt and capital lease obligations of the
Company.
F-246
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
5. Accrued Expenses
Accrued expenses comprised the following:
December 31,
1995 1996
Payroll and payroll taxes $ 60 $ 75
Accrued vacation 3 2
Other 3
----- -----
Total accrued liabilities $ 63 $ 80
===== =====
6. Operating Leases
The Company leases all of its employees, including the officers of the
Company, from a staffing corporation based in Chicago, Illinois. The
expenses related to the employees, including fringe benefits and payable
taxes, for the years ended December 31, 1995 and 1996 was approximately
$389 and $528, respectively.
The Company leases various vehicles and equipment under operating lease
agreements. Rent expense related to these leases for the years ended
December 31, 1995 and 1996 was $38 and $84, respectively.
The Company leases its facility in Romulus, Michigan, under a
noncancellable operating lease. The agreement provides for minimum lease
payments and additional rentals based upon common area expenses. The lease
contains renewal as well as purchase operations. Rent expense related to
the lease for the years ended December 31, 1995 and 1996 was $67 and $67,
respectively.
Minimum lease payments for the fiscal years ending December 31:
1997 $ 112
1998 48
-----
$ 160
=====
F-247
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
7. Long-Term Debt
The Company's long-term debt consists of the following:
December 31,
------------------
1995 1996
Installment note due in monthly installments of $814,
which includes interest at 10%, expiring February 2001 $ 32 $ 38
Installment note due in monthly installments of $308,
which includes interest at 16%, expiring February 1997 4 1
Installment note due in monthly installments of $451,
which includes interest at 7.5%, expiring June 1998 12 8
Installment note due in monthly installments of $411,
which includes interest at 9.5%, expiring April 1998 10 7
Installment note due in monthly installments of $194,
which includes interest at 7.75%, expiring April 1999 6 5
Installment note due in monthly installments of $511,
which includes interest at 7.75%, expiring October 1998 21 16
Installment note due in monthly installments of $394,
which includes interest at 10.7%, expiring November 1999 4 12
Installment note payable on a vehicle, monthly payments
are $407, includes interest at 14%, expiring June 1996 3
Installment note due in monthly installments of $309,
which includes interest at 7.4%, expiring April 1997 4 1
Installment note payable on vehicle, monthly payments
are $234, including interest at 11.5%, expiring June 1998 2
------ ------
Total long-term debt 98 88
Less - current portion of long-term debt 42 28
------ ------
$ 56 $ 60
====== ======
The following is a summary of principal maturities of long-term debt as of
December 31, 1996:
1997 $ 28
1998 22
1999 18
2000 10
2001 10
------
$ 88
======
Interest expense on the long-term debt for the period ended December 31,
1996 and 1995 was $16 and $16, respectively.
F-248
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
8. Capital Lease Obligations
The Company has acquired various equipment under the provisions of capital
lease agreements. These lease obligations consist of:
December 31,
---------------------
1995 1996
Capital lease obligation due in monthly installments
of $143, payable through June 1997 $ 3 $ 1
Capital lease obligation, due in monthly installments
of $194, payable through December 1997 4 2
Capital lease obligation, due in monthly installments
of $313, payable through May 1999 10
Capital lease obligation due in monthly installments
of $697, payable through September 1998 15
Capital lease obligation due in monthly installments
of $837, payable through April 1999 24
-------- --------
Total minimum lease payments 7 52
Amount representing interest 10
-------- --------
Present value of net minimum lease payment 7 42
Less current maturities 1 18
-------- --------
$ 6 $ 24
======== ========
The following is a summary of future minimum lease payments due under
capital lease arrangements as of December 31, 1996:
1997 $ 18
1998 18
1999 6
--------
$ 42
========
9. Related Party Transactions
The Company incurs common overhead costs for ground and air divisions.
These costs have been allocated to respective divisions based upon revenue
generated by each division and estimate of time spent by the employees on
each division. Management of the Company believes the current allocation
method of allocating common overhead is reasonable. Overhead costs
allocated to air divisions for the period ended December 31, 1995 and 1996
was approximately $27 and $104 respectively. At December 31, 1995 and
1996, the Company had receivable from the air division of the Company of
$101 and $131, respectively. This receivable is receivable on demand and
does not accrue interest.
10. Commitments and Contingencies
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of business, most of which involve claims for personal
injury and property damage incurred in connection with its obligation.
Management believes that none of these actions will have a material impact
on the Company's financial position, results of operations, or cash flows.
F-249
EXPRESS ENTERPRISE, INC. - GROUND OPERATIONS
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
11. Subsequent Events (Unaudited)
The Company and its stockholders have entered into a definitive agreement
with Dispatch Management Services Corp. (DMS) pursuant to which DMS Corp.
will acquire certain assets and assume certain liabilities of the Company.
The acquired assets and assumed liabilities will be exchanged for cash and
shares of DMS Corp. common stock concurrent with the consummation of the
initial public offering of the common stock of DMS Corp.
F-250
Report of Independent Auditors
The Stockholder
RJK Enterprises Inc. (D.B.A. Deadline Express)
We have audited the accompanying balance sheet of RJK Enterprises Inc.
(the "Company"), as of December 31, 1996, and the related statements of
operations and accumulated deficit and cash flows for the period from March 6,
1996 to December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects the financial position of RJK Enterprises Inc. at
December 31, 1996 and the results of its operations and its cash flows for the
period from March 6, 1996 to December 31, 1996 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
August 20, 1997
F-251
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
BALANCE SHEETS
December June 30,
31, 1996 1997
-------------------------------
(Unaudited)
Assets
Current assets:
Accounts receivable $ 127,270 $ 119,297
Prepaid expenses and other current assets 2,502 6,306
Due from officer 10,000 10,000
-------------------------------
Total current assets 139,772 135,603
Furniture and fixtures, at cost 11,000 11,000
Accumulated depreciation (1,572) (2,358)
-------------------------------
Net furniture and fixtures 9,428 8,642
Other assets 4,000 4,000
-------------------------------
$ 153,200 $ 148,245
===============================
Liabilities and stockholder's deficit
Current liabilities:
Accounts payable and accrued expenses $ 61,155 $ 65,149
Management services (Note 3) 25,434 28,977
-------------------------------
Total current liabilities 86,589 94,126
Loans payable to stockholder (Note 2) 67,000 67,000
Common stock, no par value, 1000 shares authorized, issued and 1,000 1,000
outstanding
Accumulated deficit (1,389) (13,881)
-------------------------------
Net stockholder's deficit (389) (12,881)
-------------------------------
$ 153,200 $ 148,245
===============================
See accompanying notes to financial statements.
F-252
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Period from
Period from March 6,
March 6, 1996 to Six months ended
1996 to December June 30, June 30,
31, 1996 1996 1997
-------------------------------------------------------
(Unaudited) (Unaudited)
Revenue from courier services $ 1,177,265 $ 486,562 $ 622,213
-------------------------------------------------------
Management services (Note 3) 753,446 297,926 393,206
Selling, general and administrative expenses 429,617 180,204 282,510
-------------------------------------------------------
1,183,063 478,130 675,716
-------------------------------------------------------
Operating income (loss) (5,798) 8,432 (53,503)
Other income (Note 4) 4,409 - 41,011
-------------------------------------------------------
Net income (loss) (1,389) 8,432 (12,492)
Accumulated deficit at beginning of period - - (1,389)
-------------------------------------------------------
Accumulated deficit at end of period $ (1,389) $ 8,432 $ (13,881)
=======================================================
See accompanying notes to financial statements.
F-253
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
STATEMENTS OF CASH FLOWS
Period from Period from
March 6, 1996 to March 6, 1996 Six months ended
December 31, 1996 to June 30, 1996 June 30, 1997
------------------------------------------------------
(Unaudited) (Unaudited)
Operating activities
Net loss $ (1,389) $ 8,432 $ (12,492)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 1,572 629 786
Changes in operating assets and liabilities net of effect
of acquisition of JRED Enterprises, Inc. in 1996 (Note 1):
Accounts receivable (5,050) (53,585) 7,973
Prepaid expenses and other current assets (2,502) - (3,804)
Due from officer (10,000) - -
Accounts payable and accrued expenses (84,302) (3,440) 3,994
Management services 25,434 - 3,543
-----------------------------------------------------
Net cash used in operating activities (76,237) (47,964) -
Investing activities
Cash acquired (Note 1) 8,237 8,237 -
-----------------------------------------------------
Net cash provided by investing activities 8,237 8,237 -
Financing activities
Issuance of common stock 1,000 1,000 -
Net increase in loans payable to stockholder 67,000 67,000 -
-----------------------------------------------------
Net cash provided by financing activities 68,000 68,000 -
-----------------------------------------------------
Net increase in cash and cash equivalents - 28,273 -
Cash and cash equivalents at beginning of period - - -
-----------------------------------------------------
Cash and cash equivalents at end of period $ - $ 28,273 $ -
=====================================================
See accompanying notes to financial statements.
F-254
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
NOTES TO FINANCIAL STATEMENTS
Periods from March 6, 1996 to December 31, 1996 and from March 6, 1996
to June 30, 1996 and for the Six Months ended June 30, 1997
(Information as of June 30, 1997 and for the Period from March 6, 1996
to June 30, 1996 and for the Six Months ended June 30, 1997 is unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization
RJK Enterprises Inc. "D.B.A. Deadline Express" (the "Company") was
incorporated on March 6, 1996 in the State of Illinois. The Company
operates as a courier service covering the Chicago area. Effective March 8,
1996, the Company acquired certain assets and liabilities of JRED
Enterprises, Inc. "D.B.A. Deadline Express" pursuant to an assignment for
the benefit of the creditors of JRED Enterprises, Inc. "D.B.A. Deadline
Express". The assets acquired and liabilities assumed were as follows:
Assets:
Cash $ 8,237
Accounts receivable 122,220
Furniture and fixtures 11,000
Deposit and other assets 4,000
------------
$ 145,457
============
Liabilities:
Accounts payable and accrued expenses $ 145,457
============
Summary of Significant Accounting Policies
Depreciation
Depreciation of furniture and fixtures is provided for on an accelerated
method over the estimated useful lives (five years) of the assets.
Revenue Recognition
Courier services revenues are recognized in the period in which they are
earned.
Cash Equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
Income Taxes
The Company operates under the provisions of Subchapter S of the Internal
Revenue Code and, consequently, in not subject to federal income tax;
rather the stockholder is liable for individual income taxes on his share
of taxable income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Unaudited Information
The unaudited financial statements as of June 30, 1997, for the period from
March 6, 1996 to June 30, 1996 and for the six months ended June 30, 1997
reflect adjustments, all of which are of a normal recurring nature, which
are, in the opinion of management, necessary to a fair presentation. The
results for the interim periods presented are not necessarily indicative of
full year results.
F-255
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Loans Payable to Stockholder
Loans payable to stockholder consist of amounts due to the Company's
stockholder. Such loans are interest-free and are not payable prior to
September 8, 1998.
3. Management Services
The Company has an agreement with Union Services of Chicago Inc. ("USC") (a
company owned by an officer of the Company). Under the terms of this
agreement, USC provides various services including the administration and
payment of wages, payroll taxes and workers' compensation. USC is
compensated for such services based on a formula, as defined. The agreement
has no defined term and will continue until terminated with 30 days notice
by either party.
4. Commitments and Contingencies
Lease Commitments
Office space is leased under an operating lease expiring on August 31,
1997. The leases provides for minimum monthly rent of $2,525, plus expense
escalations.
Rent expense amounted to approximately $2,600 per month. Other income
primarily represents rental income from the sub-leasing of a portion of the
office space on a month-to-month basis.
F-256
- - - - --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in the
Prospectus in connection with the offer made in the Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or by any of the Underwriters. The Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than the shares of Common Stock offered by the Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
Common Stock by anyone in any jurisdiction in which such an offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of the Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
Until ______________, 1997, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
----------
Table of Contents Page
----
Prospectus Summary .............................
Risk Factors ...................................
The Company ....................................
Use of Proceeds ................................
Dividend Policy ................................
Capitalization .................................
Dilution .......................................
Selected Pro Forma Combined ....................
Founding Companies' Financial Data ............
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .....................
Business .......................................
Management .....................................
Certain Transactions ...........................
Principal Stockholders .........................
Description of Capital Stock ...................
Shares Eligible for Future Sale ................
Underwriting ...................................
Legal Matters ..................................
Experts ........................................
Additional Information .........................
Index to Financial Statements .................. F-1
- - - - --------------------------------------------------------------------------------
[ ] Shares
Dispatch Management
Services Corp.
Common Stock
----------
PROSPECTUS
----------
Prudential Securities Incorporated
November __, 1997
- - - - --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
SEC Registration Fee .................. $24,394
NASD Filing Fee ....................... 9,000
Nasdaq National Market Listing Fee ....
Accounting Fees and Expenses ..........
Legal Fees and Expenses ...............
Printing Expenses .....................
Transfer Agent's Fees .................
Miscellaneous .........................
-------
Total .............................. $
=======
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL") empowers a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee
or agent and shall inure to the benefit of such person's heirs, executors and
administrators; and empowers the corporation to purchase and maintain insurance
on behalf of a director or officer of the corporation against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not eliminate
or limit the liability of a director: (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from
which the director derived an improper personal benefit.
Article Eighth of the Company's Certificate of Incorporation, as amended,
states that:
"No director of the corporation shall be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit."
In addition, Article VIII of the Company's Bylaws further provides that
the Company shall indemnify its officers and directors against any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative brought by any party,
the Company or on behalf of the Company by reason of the fact that they are an
officer or director of the Company, or servicing at request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. Such expenses may be advanced by the Company
upon receipt of an undertaking by the officer or director to repay such amount
if it is determined that they are not entitled to indemnification. The Company
will continue to provide such indemnification to any person who has ceased to be
an officer or director of the Company.
The Company intends to enter into indemnification agreements with each of
its executive officers and directors which indemnifies such person to the
fullest extent permitted by its Certificate of Incorporation, its Bylaws and the
DGCL. The Company also intends to obtain directors and officers liability
insurance.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the past three years that were not registered under the
Securities Act.
(a) The Company was incorporated in September 1997. The Company is the
successor in interest by merger to Dispatch Management Services, LLC ("DMS
LLC"), a Nevada limited liability company that was formed in November 1996 to
pursue a consolidation of the courier industry. Prior to the merger of DMS LLC
into the Company, DMS LLC issued membership interests to certain employees and
third-party investors of DMS LLC. The Company is also the successor in interest
by merger of Kiwi Express Software, L.L.C., a Delaware limited liability company
that provides software and operations systems to courier firms, including ______
Founding Companies. The offer and sale of these membership interests and shares
of DMS LLC
and Kiwi Express was exempt from registration under the Securities Act of 1933
in reliance on Section 4(2) thereof because the offers and sales were made to
sophisticated investors who had access to information about the Company and were
able to bear the risk of loss of their investment.
(b) During the [third] quarter of 1997, [_______] shares of Common Stock
were issued to persons who will become officers, directors, key employees or
holders of more than 5% of the stock of the Company at a per share price of
$[________]. The offers and sales of these shares were exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) thereof because the
offers and sales were made to sophisticated investors or executive officers or
directors of the Company who had access to the information about the Company and
were able to bear the risk of loss of their investment.
Although the issuances of Common Stock to senior executives and to former
stockholders of the Founding Companies may be integrated among themselves, in
reliance on the safe harbor provided by Rule 152 under the Securities Act of
1933 for transactions not involving any public offering even if the issuer
subsequently files a registration statement, such Common Stock should not be
integrated with the issuance of Common Stock in the registered public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
- - - - -------
*1.1 -- Form of Underwriting Agreement.
2.1 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., Early Bird Courier Service, LLC and Total
Management, LLC and Michael Fiorito.
2.2 -- Agreement, dated as of September 15, 1997, by and among Dispatch
Management Services Corp., Aero Special Delivery Service, Inc. and
Jeanne Sparks.
2.3 -- Agreement, dated as of September 30, 1997, by and among Dispatch
Management Services Corp., Bullit Courier Services, Inc. and Theo
Nicholoudis.
2.4 -- Agreement, dated as of September 16, 1997, by and among Dispatch
Management Services Corp., Security Business Services, Ltd., James
Brett Greenbury, Kelly Donovan, Scawton Limited, Lyon-Hurwell Limited,
Arazan Limited and Foreign & Colonial Enterprise Trust plc.
2.5 -- Agreement, dated as of September 11, 1997, by and among Dispatch
Management Services Corp., American Eagle Endeavors, Inc., Barry
Anderson, Cheryl O'Toole and Lawrence O'Toole.
*2.6 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., Atlantic Freight Systems, Inc., Thomas
Bartley and Perry Barbonuolo.
2.7 -- Agreement, dated as of September 10, 1997, by and among Dispatch
Management Services Corp., Express It Couriers, Inc. and James M.
Shaughnessy.
2.8 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., Washington Express Services, Inc., Gilbert
D. Carpel, Michael D. Holder, Michael K. Miller and Peter Butler.
2.9 -- Agreement, dated as of September 26, 1997, by and among Dispatch
Management Services Corp., MLQ Express, Inc. and John W. Wilcox, Jr.
2.10 -- Agreement, dated as of September 19, 1997, by and among Dispatch
Management Services Corp., Time Couriers, LLC, Tom Cromwell, William
Knipman, Michael Stone, Peter Begley, Thomas Hagerty, Kimberly Cilley,
Christopher Hart, and DMS Subsidiary Number _____.
2.11 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., Eveready Express Corp., Marlene R. Spirt and
Mary B. Spirt.
2.12 -- Agreement, dated as of September 14, 1997, by and among Dispatch
Management Services Corp., Kangaroo Express of Colorado Springs, Inc.
and Doris Orner.
2.13 -- Agreement, dated as of September 10, 1997, by and among Dispatch
Management Services Corp., National Messenger, Inc., Robert D. Swineford
and Steven B. Swineford.
2.14 -- Agreement, dated as of September 10, 1997, by and among Dispatch
Management Services Corp., Fleetfoot Max, Inc., Gary Brose, The King
Company, KPM, Helen King, Robert Lewis, Jim Brose, Barbara Lawrence,
Robert L. King, John Sangster, Patsy Sangster, PB Securities for the
benefit of Robert L. King, PB Securities for the benefit of Helen King,
Gordon Lawrence, Pat Lawrence, Melissa Lawrence, K. Lawrence and
Creative Consulting Corp.
2.15 -- Agreement, dated as of September 12, 1991, by and among Dispatch
Management Services Corp., Profall, Inc., Thomas Westfall, Alyson
Westfall, David Prosser, Adrienne Prosser and DMS Subsidiary Number
_____.
2.16 -- Agreement, dated as of September 11, 1997, by and among Dispatch
Management Services Corp., Express Enterprises, Inc., Paul J. Alberts
and Donald E. Stoelt.
2.17 -- Agreement, dated as of October 23, 1997, by and among Dispatch
Management Services Corp., A & W Couriers, inc. and Joan Levy.
2.18 -- Agreement, dated as of October 10, 1997, by and among Dispatch
Management Services Corp., Express It, Inc., and Dave Clancy.
2.19 -- Agreement, dated as of September 18, 1997, by and among Dispatch
Management Services Corp., Deadline Acquisition Corp, Edward V
Blanchard, Jr., Melba Anne Hill and Scott T. Milakovich.
2.20 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., Kiwicorp Limited, Lynette Williams, Tom
Finlay and DMS Subsidiary Number ____.
2.21 -- Agreement, dated as of September 10, 1997, by and among Dispatch
Management Services Corp., Transpeed Courier Services, Inc., Richard A.
Folkman, Stacey J. Folkman, Trey Lewis and Evelyn R. Folkman.
2.22 -- Agreement, dated as of September 15, 1997, by and among Dispatch
Management Services Corp., Clover Supply Inc., and John J. Walker.
2.23 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., S Car Go Courier, Inc. and Michael Cowles.
2.24 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., Christian Delivery & Chair Service, Inc., Leo
J. Gould and DMS Subsidiary Number ______.
2.25 -- Agreement, dated as of October 9, 1997, by and among Dispatch Management
Services Corp., Striders Courier, Inc., Tammy K. Patterson and Merlene
Y. Mores.
2.26 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp. and Gregory Austin, trading as Battery Point
Messengers.
2.27 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., Christopher Grealish, Inc. and Christopher
Grealish.
2.28 -- Agreement, dated as of September 17, 1997, by and among Dispatch
Management Services Corp., United Messengers, Inc. and Maria Kennedy.
2.29 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., Christopher Neal and DMS Subsidiary Number
_______.
2.30 -- Agreement, dated as of October 4, 1997, by and among Dispatch Management
Services Corp, TimeCycle Couriers, Inc., Eric D. Nordberg and Jeffrey
Appeltans.
2.31 -- Agreement, dated as of September 10, 1997, by and among Dispatch
Management Services Corp., Rocket Courier Services, Inc., Sean Leonce,
Grace Leonce and Samer Hassan.
2.32 -- Agreement, dated as of September 14, 1997, by and among Dispatch
Management Services Corp. and Michael Studebaker.
2.33 -- Agreement, dated as of September 10, 1997, by and among Dispatch
Management Services Corp., Delivery Incorporated and Gary Brose.
2.34 -- Agreement, dated as of September 12, 1997, by and among Dispatch
Management Services Corp., AFS Courier Systems, Inc. and Frank L.
Mullins.
2.35 -- Share Purchase Agreement, dated as of August 20, 1997, by and among
Dispatch Management Services LLC, Alice Rebecca Clark, Roy Clark,
Trustees of the Roy Clark (Life Interest) Settlement 1997, Trustees of
the Alice Rebecca Clark (Discretionary) Settlement 1997, Matthew Clark,
Simon Clark and Brookside Systems and Programming Limited.
2.36 -- Agreement, dated as of October 6, 1997, by and among Dispatch Management
Services Corp., Bridge Wharf Investments Limited and Riverbank Limited.
2.37 -- Brand Manager Agreement, dated as of September 14, 1997, between
Dispatch Management Services Corp. and Barry Anderson (Minneapolis).
2.38 -- Brand Manager Agreement, dated as of September 12, 1997, between
Dispatch Management Services Corp. and Frank L. Mullins.
2.39 -- Brand Manager Agreement, dated as of September 25, 1997, between
Dispatch Management Services Corp. and Leo J. Gould and Jodi Gould.
2.40 -- Brand Manager Agreement, dated as of [_________], between Dispatch
Management Services Corp. and John J. Walker.
2.41 -- Brand Manager Agreement, dated as of [_________], between Dispatch
Management Services Corp. and Dave Clancy.
2.42 -- Brand Manager Agreement, dated as of [_________] between Dispatch
Management Services Corp. and Allen Orner.
2.43 -- Brand Manager Agreement, dated as of September 12, 1997, between
Dispatch Management Services Corp. and Kiwicorp Limited.
2.44 -- Brand Manager Agreement, dated as of October 9, 1997, between Dispatch
Management Services Corp. and Tammy K. Patterson and Merlene Y. Flores.
2.45 -- Brand Manager Agreement, dated as of October 8, 1997, between Dispatch
Management Services Corp. and Tom Cromwell and Peter Begley.
2.46 -- Brand Manager Agreement, dated as of [_________], between Dispatch
Management Services Corp. and Jeff Appeltans and Eric D. Nordberg.
2.47 -- Brand Manager Agreement, dated as of [_________], between Dispatch
Management Services Corp. and Marla Kennedy.
2.48 -- Brand Manager Agreement, dated as of September 10, 1997, between
Dispatch Management Services Corp. and James Michael Shaughnessy.
2.49 -- Brand Manager Agreement, dated as of September __, 1997, between
Dispatch Management Services Corp. and Barry Anderson (Phoenix).
2.50 -- Brand Manager Agreement, dated as of [_________], between Dispatch
Management Services Corp. and Joan Levy.
2.51 -- Brand Manager Agreement, dated as of September 21, 1997, between
Dispatch Management Services Corp. and Christopher Neal.
2.52 -- Brand Manager Agreement, dated as of September 12, 1997, between
Dispatch Management Services Corp., Leon Spirt and Jack Spirt.
2.53 -- Brand Manager Agreement, dated as of September 12, 1997, between
Dispatch Management Services Corp. and Dispatch Management Services
Corp. of the National Capital Area, Inc.
2.54 -- Brand Manager Agreement, dated as of September 15, 1997, between
Dispatch Management Services Corp. and The Delivery Company Limited.
3.1 -- Form of Certificate of Incorporation.
3.2 -- Amended and Restated Bylaws.
*4.1 -- Specimen Common Stock Certificate.
*5.1 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to the
legality of the securities being registered.
*10.1 -- Form of Officer and Director Indemnification Agreement.
*10.2 -- Form of Employment Agreement.
*10.3 -- Form of Non-Competition Agreement.
*10.4 -- 1997 Stock Incentive Plan.
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 5.1).
23.2 -- Consent of Price Waterhouse.
23.3 -- Consent of Ernst & Young LLP.
23.4 -- Consents to Become Directors.
24.1 -- Powers of Attorney (included in signature page).
27 -- Financial Data Schedule.
- - - - ----------
* To be filed by amendment. All other exhibits are filed herewith.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus flied by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 10th day of November, 1997.
DISPATCH MANAGEMENT SERVICES CORP.
By: /s/ Linda M. Jenkinson
-----------------------------------
Linda M. Jenkinson
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the persons whose name and
signature appears below constitutes and appoints Linda M. Jenkinson, R. Gregory
Kidd and Marko Bogoievski each of them, his or her true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and any and all Registration Statements filed
pursuant to Rule 462 under the Securities Act, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his or her substitute or substitutes may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
DISPATCH MANAGEMENT SERVICES CORP.
Signature Title Date
- - - - --------- ----- ----
/s/ Linda M. Jenkinson Chief Executive Officer
- - - - --------------------------- and Director November 10, 1997
Linda M. Jenkinson
Chief Executive Officer
/s/ R. Gregory Kidd Chairman
- - - - --------------------------- November 10, 1997
R. Gregory Kidd
Chairman
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
*1.1 Form of Underwriting Agreement.
2.1 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Early Bird Courier
Service, LLC and Total Management, LLC and Michael Fiorito.
2.2 Agreement, dated as of September 15, 1997, by and among
Dispatch Management Services Corp., Aero Special Delivery
Service, Inc. and Jeanne Sparks.
2.3 Agreement, dated as of September 30, 1997, by and among
Dispatch Management Services Corp., Bullit Courier Services,
Inc. and Theo Nicholoudis.
2.4 Agreement, dated as of September 16, 1997, by and among
Dispatch Management Services Corp., Security Business
Services, Ltd., James Brett Greenbury, Kelly Donovan, Scawton
Limited, Lyon-Hurwell Limited, Arazan Limited and Foreign &
Colonial Enterprise Trust plc.
2.5 Agreement, dated as of September 11, 1997, by and among
Dispatch Management Services Corp., American Eagle Endeavors,
Inc., Barry Anderson, Cheryl O'Toole and Lawrence O'Toole.
*2.6 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Atlantic Freight Systems,
Inc., Thomas Bartley and Perry Barbonuolo.
2.7 Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Express It Couriers, Inc.
and James M. Shaughnessy.
2.8 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Washington Express
Services, Inc., Gilbert D. Carpel, Michael D. Holder, Michael
K. Miller and Peter Butler.
2.9 Agreement, dated as of September 26, 1997, by and among
Dispatch Management Services Corp., MLQ Express, Inc. and John
W. Wilcox, Jr.
2.10 Agreement, dated as of September 19, 1997, by and among
Dispatch Management Services Corp., Time Couriers, LLC, Tom
Cromwell, William Knipman, Michael Stone, Peter Begley, Thomas
Hagerty, Kimberly Cilley, Christopher Hart, and DMS Subsidiary
Number _____.
2.11 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Eveready Express Corp.,
Marlene R. Spirt and Mary B. Spirt.
2.12 Agreement, dated as of September 14, 1997, by and among
Dispatch Management Services Corp., Kangaroo Express of
Colorado Springs, Inc. and Doris Orner.
2.13 Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., National Messenger, Inc.,
Robert D. Swineford and Steven B. Swineford.
2.14 Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Fleetfoot Max, Inc., Gary
Brose, The King Company, KPM, Helen King, Robert Lewis, Jim
Brose, Barbara Lawrence, Robert L. King, John Sangster, Patsy
Sangster, PB Securities for the benefit of Robert L. King, PB
Securities for the benefit of Helen King, Gordon Lawrence, Pat
Lawrence, Melissa Lawrence, K. Lawrence and Creative
Consulting Corp.
2.15 Agreement, dated as of September 12, 1991, by and among
Dispatch Management Services Corp., Profall, Inc., Thomas
Westfall, Alyson Westfall, David Prosser, Adrienne Prosser and
DMS Subsidiary Number _____.
2.16 Agreement, dated as of September 11, 1997, by and among
Dispatch Management Services Corp., Express Enterprises, Inc.,
Paul J. Alberts and Donald E. Stoelt.
2.17 Agreement, dated as of October 23, 1997, by and among Dispatch
Management Services Corp., A & W Couriers, inc. and Joan Levy.
2.18 Agreement, dated as of October 10, 1997, by and among Dispatch
Management Services Corp., Express It, Inc., and Dave Clancy.
2.19 Agreement, dated as of September 18, 1997, by and among
Dispatch Management Services Corp., Deadline Acquisition Corp,
Edward V Blanchard, Jr., Melba Anne Hill and Scott T.
Milakovich.
2.20 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Kiwicorp Limited, Lynette
Williams, Tom Finlay and DMS Subsidiary Number ____.
2.21 Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Transpeed Courier
Services, Inc., Richard A. Folkman, Stacey J. Folkman, Trey
Lewis and Evelyn R. Folkman.
2.22 Agreement, dated as of September 15, 1997, by and among
Dispatch Management Services Corp., Clover Supply Inc., and
John J. Walker.
2.23 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., S Car Go Courier, Inc. and
Michael Cowles.
2.24 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Christian Delivery & Chair
Service, Inc., Leo J. Gould and DMS Subsidiary Number ______.
2.25 Agreement, dated as of October 9, 1997, by and among Dispatch
Management Services Corp., Striders Courier, Inc., Tammy K.
Patterson and Merlene Y. Mores.
2.26 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp. and Gregory Austin, trading
as Battery Point Messengers.
2.27 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Christopher Grealish, Inc.
and Christopher Grealish.
2.28 Agreement, dated as of September 17, 1997, by and among
Dispatch Management Services Corp., United Messengers, Inc.
and Maria Kennedy.
2.29 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., Christopher Neal and DMS
Subsidiary Number _______.
2.30 Agreement, dated as of October 4, 1997, by and among Dispatch
Management Services Corp, TimeCycle Couriers, Inc., Eric D.
Nordberg and Jeffrey Appeltans.
2.31 Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Rocket Courier Services,
Inc., Sean Leonce, Grace Leonce and Samer Hassan.
2.32 Agreement, dated as of September 14, 1997, by and among
Dispatch Management Services Corp. and Michael Studebaker.
2.33 Agreement, dated as of September 10, 1997, by and among
Dispatch Management Services Corp., Delivery Incorporated and
Gary Brose.
2.34 Agreement, dated as of September 12, 1997, by and among
Dispatch Management Services Corp., AFS Courier Systems, Inc.
and Frank L. Mullins.
2.35 Share Purchase Agreement, dated as of August 20, 1997, by and
among Dispatch Management Services LLC, Alice Rebecca Clark,
Roy Clark, Trustees of the Roy Clark (Life Interest)
Settlement 1997, Trustees of the Alice Rebecca Clark
(Discretionary) Settlement 1997, Matthew Clark, Simon Clark
and Brookside Systems and Programming Limited.
2.36 Agreement, dated as of October 6, 1997, by and among Dispatch
Management Services Corp., Bridge Wharf Investments Limited
and Riverbank Limited.
2.37 Brand Manager Agreement, dated as of September 14, 1997,
between Dispatch Management Services Corp. and Barry Anderson
(Minneapolis).
2.38 Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp. and Frank L.
Mullins.
2.39 Brand Manager Agreement, dated as of September 25, 1997,
between Dispatch Management Services Corp. and Leo J. Gould
and Jodi Gould.
2.40 Brand Manager Agreement, dated as of [_________], between
Dispatch Management Services Corp. and John J. Walker.
2.41 Brand Manager Agreement, dated as of [_________], between
Dispatch Management Services Corp. and Dave Clancy.
2.42 Brand Manager Agreement, dated as of [_________] between
Dispatch Management Services Corp. and Allen Orner.
2.43 Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp. and Kiwicorp
Limited.
2.44 Brand Manager Agreement, dated as of October 9, 1997, between
Dispatch Management Services Corp. and Tammy K. Patterson and
Merlene Y. Flores.
2.45 Brand Manager Agreement, dated as of October 8, 1997, between
Dispatch Management Services Corp. and Tom Cromwell and Peter
Begley.
2.46 Brand Manager Agreement, dated as of [_________], between
Dispatch Management Services Corp. and Jeff Appeltans and Eric
D. Nordberg.
2.47 Brand Manager Agreement, dated as of [_________], between
Dispatch Management Services Corp. and Marla Kennedy.
2.48 Brand Manager Agreement, dated as of September 10, 1997,
between Dispatch Management Services Corp. and James Michael
Shaughnessy.
2.49 Brand Manager Agreement, dated as of September __, 1997,
between Dispatch Management Services Corp. and Barry Anderson
(Phoenix).
2.50 Brand Manager Agreement, dated as of [_________], between
Dispatch Management Services Corp. and Joan Levy.
2.51 Brand Manager Agreement, dated as of September 21, 1997,
between Dispatch Management Services Corp. and Christopher
Neal.
2.52 Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp., Leon Spirt and
Jack Spirt.
2.53 Brand Manager Agreement, dated as of September 12, 1997,
between Dispatch Management Services Corp. and Dispatch
Management Services Corp. of the National Capital Area, Inc.
2.54 Brand Manager Agreement, dated as of September 15, 1997,
between Dispatch Management Services Corp. and The Delivery
Company Limited.
3.1 Form of Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
*4.1 Specimen Common Stock Certificate.
*5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to the
legality of the securities being registered.
*10.1 Form of Officer and Director Indemnification Agreement.
*10.2 Form of Employment Agreement.
*10.3 Form of Non-Competition Agreement.
*10.4 1997 Stock Incentive Plan.
*23.1 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included
in Exhibit 5.1).
23.2 Consent of Price Waterhouse.
23.3 Consent of Ernst & Young LLP.
23.4 Consents to Become Directors.
24.1 Powers of Attorney (included in signature page).
27 Financial Data Schedule.
- - - - ----------
* To be filed by amendment. All other exhibits are filed herewith.