UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarter ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission file number 0-23349
DISPATCH MANAGEMENT SERVICES CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3967426
(State of Incorporation) (I.R.S. Employer Identification No.)
1981 Marcus Ave., Suite C131
Lake Success, New York 11042 11042
(Address of principal executive offices) (Zip Code)
(516) 326-9810
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of August 3, 1999, there were 12,003,549 shares of Common Stock outstanding.
DISPATCH MANAGEMENT SERVICES CORP.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999
Consolidated Statements of Operations for the Three and Six Months ended
June 30, 1998 and 1999
Consolidated Statements of Cash Flows for the Six Months ended June 30,
1998 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K.
Signatures
Exhibit Index
2
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
ASSETS
Cash and cash equivalents ..................................................... $ 3,012 $ 2,745
Accounts receivable, less allowances of $4,416 and $2,391 .................... 36,416 31,094
Prepaid and other current assets .............................................. 1,890 2,673
Income tax receivable ......................................................... 2,784 1,184
--------- ---------
Total current assets ................................................ 44,102 37,696
Property and equipment, net ................................................... 8,851 8,183
Deferred financing costs, net ................................................. 1,501 715
Intangible assets, primarily goodwill, net of amortization of $3,186 and $5,801 154,923 159,648
Notes receivable .............................................................. 9,002 3,698
Other assets .................................................................. 1,031 853
Deferred income taxes ......................................................... 291 291
--------- ---------
Total assets ........................................................ $ 219,701 $ 211,084
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts ............................................................... $ 2,944 $ 252
Current portion of long-term debt ............................................. 900 3,600
Accounts payable .............................................................. 5,758 6,242
Accrued liabilities ........................................................... 13,356 11,333
Accrued payroll and related expenses .......................................... 5,527 4,708
Income tax payable ............................................................ 1,817 2,032
Capital lease obligations ..................................................... 886 704
Acquisition-related notes payable, current portion ............................ 7,207 7,399
--------- ---------
Total current liabilities ........................................... 38,395 36,270
Long-term debt ................................................................ 70,600 70,750
Acquisition-related notes payable ............................................. 5,337 2,691
Other long-term liabilities ................................................... 5,996 5,312
--------- ---------
Total liabilities ................................................... $ 120,328 $ 115,023
--------- ---------
Commitments and contingencies - (see footnotes)
Stockholders' equity
Common stock, $.01 par value, 100,000,000 shares authorized;
11,817,634 and 11,917,377 shares issued and outstanding ................... 118 119
Additional paid-in capital .................................................... 117,686 117,867
Value of stock to be issued ................................................... 3,197 1,846
Accumulated deficit ........................................................... (21,523) (23,008)
Accumulated other comprehensive loss .......................................... (105) (763)
--------- ---------
Total stockholders' equity .......................................... 99,373 96,061
--------- ---------
Total liabilities and stockholders' equity .......................... $ 219,701 $ 211,084
========= =========
The accompanying notes are an integral part of these financial statements.
3
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except for share amounts)
Three months ended Six months ended
------------------ ----------------
June 30, June 30,
-------- --------
1998 1999 1998 1999
------------ ------------ ------------ ------------
Net revenue .......................................... $ 51,053 $ 56,453 $ 75,369 $ 113,582
Cost of revenue ...................................... 30,965 34,102 45,994 69,517
------------ ------------ ------------ ------------
Gross profit ....................................... 20,088 22,351 29,375 44,065
Selling, general and administrative expenses ......... 14,595 17,347 22,125 36,142
Depreciation and amortization ........................ 1,182 2,168 1,888 4,115
------------ ------------ ------------ ------------
Income from operations ............................. 4,311 2,835 5,362 3,808
Interest expense ..................................... 436 1,827 664 3,584
Amortization and write-off of deferred financing costs -- 1,074 -- 1,185
Acquired in-process research and
development .......................................... -- -- 700 --
Other expense (income) ............................... 57 (2) 139 (6)
------------ ------------ ------------ ------------
Income (loss) before income tax provision ............ 3,818 (64) 3,859 (955)
Income tax provision ................................. 1,627 85 1,700 530
------------ ------------ ------------ ------------
Income (loss) before extraordinary item ............ 2,191 (149) 2,159 (1,485)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $384) ................ -- -- 713 --
------------ ------------ ------------ ------------
Net income (loss) .................................. $ 2,191 $ (149) $ 1,446 $ (1,485)
============ ============ ============ ============
Income (loss) per common share - basic
Income (loss) before extraordinary item $ 0.19 $ (0.01) $ 0.24 $ (0.12)
Extraordinary item -- -- (0.08) --
------------ ------------ ------------ ------------
Net income (loss) $ 0.19 $ (0.01) $ 0.16 $ (0.12)
------------ ------------ ------------ ------------
Income (loss) per common share - diluted
Income (loss) before extraordinary item $ 0.19 $ (0.01) $ 0.23 $ (0.12)
Extraordinary item -- -- (0.08) --
------------ ------------ ------------ ------------
Net income (loss) $ 0.19 $ (0.01) $ 0.15 $ (0.12)
------------ ------------ ------------ ------------
Weighted average shares
Common shares outstanding 11,545,545 11,917,100 9,175,915 11,919,252
------------ ------------ ------------ ------------
Adjusted common shares assuming dilution 11,839,348 11,917,100 9,354,963 11,919,252
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
4
DISPATCH MANAGEMENT SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six months ended
----------------
June 30,
--------
1998 1999
-------- --------
Cash flows from operating activities:
Net income (loss) ..................................................... $ 1,446 $ (1,485)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities ................................................
Depreciation ........................................................ 721 1,500
Amortization of goodwill and other intangibles ...................... 1,167 2,615
Amortization and write-off of deferred financing costs .............. -- 1,185
Acquired in-process research and development ........................ 700 --
Extraordinary item .................................................. 713 --
Changes in operating assets and liabilities (net of assets acquired
and liabilities assumed in business combinations)
Accounts receivable ........................................... (5,799) 6,139
Prepaid expenses and other current assets ..................... (2,347) 215
Accounts payable and accrued liabilities ...................... 2,457 (5,235)
-------- --------
Net cash (used in) provided by operating activities (942) 4,934
-------- --------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired ....................... (85,415) (5,474)
Additions to property and equipment ................................... (3,071) (832)
-------- --------
Net cash used in investing activities (88,486) (6,306)
-------- --------
Cash flows from financing activities:
Proceeds from initial public offering, net ............................ 76,276 --
Proceeds from bank borrowings ......................................... 27,070 3,150
Payments on bank borrowings ........................................... -- (300)
Deferred financing costs .............................................. -- (399)
Principal payments on long and short-term obligations ................. (11,997) (688)
-------- --------
Net cash provided by financing activities 91,349 1,763
-------- --------
Effect of exchange rate changes on cash and cash equivalents ............ -- (658)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,921 (267)
Cash and cash equivalents, beginning of period .......................... 354 3,012
-------- --------
Cash and cash equivalents, end of period ................................ $ 2,275 $ 2,745
======== ========
The accompanying notes are an integral part of these financial statements.
5
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Financial Condition
In connection with the closing of the initial public offering (the
"Offering") of the common stock, $.01 par value (the "Common Stock"), of
Dispatch Management Services Corp. (the "Company" or "DMS") in February
1998, the Company acquired, in separate combination transactions (the
"Combinations"), 38 urgent, on-demand, point-to-point courier firms and
one software firm which was subsequently liquidated (each, a "Founding
Company," and collectively, the "Founding Companies").
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of the Company, the
Founding Companies and the other businesses acquired subsequent to the
Offering (the "Recent Acquisitions").
The interim financial statements have been prepared in accordance with the
instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of
Regulation S-X, and should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
Accordingly, significant accounting policies and other disclosures
normally provided have been omitted since such items are disclosed
therein. In the opinion of management, the information contained herein
reflects all adjustments (consisting of only normal recurring items)
considered necessary to make the consolidated financial position,
consolidated results of operations and cash flows for the interim periods
a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
During the first quarter of 1999, the Company notified its senior lenders
of an event of default in relation to certain financial covenants
described in the syndicated senior credit facility led by NationsBank,
N.A. Following this notification of default, the Company operated under a
forbearance agreement that deferred certain lender remedies pending a
restructuring of the senior credit facility. In April 1999, the Company
entered into a definitive Amended and Restated Credit Agreement with
NationsBank N.A. and a syndicate of senior lenders. The amended facility
had a maturity date of May 31, 2000, and provided for revised financial
covenants and other provisions. Effective August 2, 1999, the maturity of
this facility was extended to October 15, 2000. There can be no assurances
that the Company will be successful in negotiating further maturity date
extensions beyond October 15, 2000.
During the six months ended June 30, 1999, the senior management team has
established a number of strategic priorities designed to strengthen
operations, including i) an aggressive cost reduction program, ii) a focus
on receivables management and collection procedures, and iii)
implementation of a technology investment program designed to deliver
integrated operating systems, as well as enhanced cost control and
reporting mechanisms.
During the first six months of 1999, the Company also executed a number of
structural changes, including the appointment of four new independent
directors to the Company's Board and the creation of a United States
regional management team designed to oversee and support the 22
metropolitan operating centers.
The Company believes that the cumulative impact of such initiatives and
actions will provide the Company with sufficient cash flow to continue as
a going concern for the next twelve months. The Company's ability to
continue as a going concern is dependent upon; i) achieving and
maintaining cash flow from operations sufficient to satisfy its current
obligations, ii) complying with the financial covenants described in the
senior credit facility, and iii) negotiating further extensions of its
senior credit facility terms beyond its maturity date of October 15, 2000.
2. Initial Public Offering
6
On February 6, 1998, DMS completed the Offering of 6,000,000 shares of
Common Stock at $13.25 per share. In March 1998, the underwriters
exercised their over-allotment option to purchase an additional 900,000
shares of Common Stock at the initial public offering price. The total
proceeds from the Offering of the 6,900,000 shares of Common Stock, net of
underwriter commissions and offering costs, was $76.3 million.
The net proceeds were used primarily for the cash portion of the purchase
prices for the Founding Companies, for the early extinguishment of certain
note payable obligations of the Company which resulted in an extraordinary
loss of $0.7 million, and for the repayment of certain indebtedness of the
Founding Companies.
3. Business Combinations
On February 11, 1998, the Company acquired all of the outstanding Common
Stock and/or net assets of the Founding Companies simultaneously with the
closing of the Offering. The aggregate consideration for these
acquisitions included $62.7 million in cash, the issuance of 3,378,590
shares of Common Stock, and $4.6 million of notes payable.
During the period following the Offering to December 31, 1998, the Company
acquired an additional 28 messenger or same-day courier companies in the
United States, the United Kingdom, Australia and New Zealand. The
aggregate consideration for these acquisitions included $47.6 million in
cash, the issuance of 355,160 shares of Common Stock, $3.2 million in
value of stock to be issued, and $7.9 million of notes payable.
The acquisitions have been accounted for using the purchase method of
accounting. The consideration does not reflect certain additional
contingent consideration which may be issued pursuant to earn-out
arrangements included in the definitive agreements with the acquired
Companies.
During the six months ended June 30, 1999, goodwill associated with the
1998 acquisitions increased by $7.3 million, primarily due to contingent
consideration earned.
Acquisition Liabilities
In connection with completed acquisitions, the Company recorded
liabilities for employee severance and for operating lease payments as a
result of exit plans formulated as of the respective acquisition dates
(the "Acquisition Liabilities"). The severance accrual relates to the
involuntary termination of administrative and middle management personnel
from the integration of the acquired operations. The operating lease
payment accrual relates to equipment and facilities leases assumed by the
Company. Amounts accrued represent management's estimate of the cost to
exit the equipment and facilities leases.
The changes in the Acquisition Liabilities during the six month period
ended June 30, 1999 were as follows (dollars in thousands):
Severance Lease
Liability Liability Total
--------- --------- -----
Balance December 31, 1998 ...... $ 195 $ 666 $ 861
Additions ...................... -- 11 11
Utilization .................... (35) (117) (152)
----- ----- -----
Balance June 30, 1999 .......... $ 160 $ 560 $ 720
===== ===== =====
Pro Forma Financial Information
The following unaudited condensed pro forma financial information of the
Company for the six-month period ended June 30, 1998 includes the combined
operations of the Company, and the 1998 Acquisitions as if the Offering
and the
7
acquisitions had occurred on January 1, 1998 (dollars in thousands).
Six months ended
June 30, 1998
----------------
Net revenue $114,872
Income before extraordinary item $ 2,114
Per share data:
Income before extraordinary item - basic and diluted $ 0.18
The unaudited condensed pro forma financial information includes
adjustments to the Company's historical results of operations which
provide for reductions in salaries, bonuses and benefits payable or
provided to the acquired companies' managers to which they agreed
prospectively, incremental amortization of goodwill, reduction in royalty
payments made by certain Founding Companies in accordance with franchise
agreements that terminated as a result of the Combinations, income tax
adjustments, incremental interest expense associated with borrowings to
fund the acquisitions and the reduction in expense related to amounts
allocated to in-process research and development activities. This
summarized pro forma information may not be indicative of actual results
if the transactions had occurred on the dates indicated or of the results
which may be realized in the future.
4. Senior Credit Facility
In February 1998, the Company obtained a $25 million revolving line of
credit from NationsBank, N.A. pursuant to a credit agreement. Outstanding
principal balances under this line incurred interest at increments between
2.50% and 1.50% over the LIBOR rate, depending on the Company's ratio of
Funded Debt to EBITDA (as defined in the credit agreement).
In May 1998, NationsBank provided the Company an additional $10 million
short-term line of credit facility in anticipation of closing a syndicated
credit facility. The short-term line of credit facility was
cross-defaulted and cross-collateralized with the revolving line of credit
and matured in June 1998.
In June 1998, the Company entered into a credit agreement with NationsBank
N.A. as underwriter of a new $60 million senior credit facility. In August
1998, NationsBank led a syndication for a $105 million committed line of
credit with a group of senior lenders, including First Union National
Bank, BankBoston N.A., CIBC, Inc., and Fleet Bank N.A.
Subsequent to December 31, 1998, the Company notified the senior lenders
of an event of default in relation to certain financial covenants
described in the senior credit agreement. Following this notification of
default, the Company operated under a forbearance agreement that deferred
certain lender remedies pending a restructuring of the senior credit
facility. On April 8, 1999, the Company entered into a definitive Amended
and Restated Credit Agreement (the "Credit Agreement") with NationsBank
N.A. and a syndicate of senior lenders. The Credit Agreement provides a
revolving credit facility in an amount equal to the outstanding
indebtedness as of June 30, 1999 of $78.2 million, which includes a
sub-limit of $3.8 million for existing standby letters of credit. All
amounts drawn down under the line of credit must be repaid on October 15,
2000, with minimum principal payments of $0.3 million per quarter required
in 1999 and $1.5 million per quarter required in 2000.
Outstanding principal balances under the line of credit bear interest,
payable monthly, at increments between 1.75% and 4.00% over the LIBOR
rate, depending on the Company's ratio of Funded Debt to trailing quarter
annualized EBITDA (as defined in the Credit Agreement). The initial
pricing level between April 8, 1999 and June 30, 1999 will be at LIBOR +
4.00% (30 Day LIBOR at June 30, 1999 was 5.2%).
Borrowings under the line of credit are secured by a first lien on all of
the assets of the Company, including the shares of common stock of certain
of the Company's subsidiaries. The Company is required to maintain minimum
quarterly EBITDA targets through the maturity of the facility, provided
that for the last fiscal quarter of 1999, and for the fiscal
8
quarters of 2000, the EBITDA targets are modified such that the Company
can still meet the financial covenant criteria by maintaining a Funded
Debt to EBITDA ratio at no more than 3.0x (as defined in the Credit
Agreement).
Other financial covenants include: (i) maintenance of a monthly positive
pre-tax income on a consolidated basis after June 30, 1999 (adjusted for
certain non-cash gains and losses), (ii) maintenance of a collateral
coverage ratio whereby accounts receivable less than 60 days as a
proportion of the total outstanding under the revolving line of credit
cannot fall below levels ranging from 35% - 40%, and (iii) minimum
quarterly interest coverage ratio; defined as EBITDA as a ratio to cash
interest expense. The Credit Agreement prohibits (i) liens, pledges and
guarantees that can be granted by the Company, (ii) the declaration or
payment of cash dividends, and (iii) the sale of stock of the Company's
subsidiaries. The Credit Agreement also limits (i) the amount of
indebtedness the Company can incur, (ii) the amount of finance lease
commitments, and (iii) certain capital expenditures. Material acquisitions
and disposals of certain operations require approval by the lender. The
Credit Agreement contains customary representations and warranties,
covenants, defaults and conditions. The line of credit is intended to be
used for short-term working capital, and for the issuance of letters of
credit. The facility specifically allows for the payment of various
acquisition-related notes payable disclosed in the consolidated financial
statements related to the 1998 acquisitions.
The Company paid $1.5 million in financing fees during fiscal year 1998,
which were deferred and amortized over the term of the 1998 credit
facility. As a result of the Company entering into the Credit Agreement in
1999, the Company wrote-off $0.9 million of the fees associated with the
1998 credit facility. The Company amortized an additional $0.3 million of
the deferred financing fees during the six months ended June 30, 1999.
Interest expense incurred on the senior bank debt during the six months
ended June 30, 1999 amounted to $3.4 million.
5. Stockholders' Equity and Comprehensive Loss
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires the reporting and display of comprehensive
loss and its components in the financial statements.
SFAS No. 130 also requires the Company to classify items of other
comprehensive income or loss by their nature in financial statements.
Changes in stockholders' equity and comprehensive loss during the six
months ended June 30, 1999 were as follows (dollars in thousands):
Stockholders' Comprehensive
Equity Loss
------------- -------------
Stockholders' equity at December 31, 1998 $ 99,373
Comprehensive loss:
Net income (loss) (1,485) $ (1,485)
Common stock 1
Additional paid-in capital 181
Value of stock to be issued (1,351)
Foreign currency translation adjustment (658) (658)
-------- --------
Total (3,312) $ (2,143)
-------- --------
Stockholders' equity balance at June 30, 1999 $ 96,061
========
6. Earnings (loss) per Share
The following table sets forth the calculation of basic and diluted
earnings (loss) per share (dollars in thousands, except per share data):
9
Three months ended Six months ended
------------------ ----------------
June 30, June 30,
-------- --------
1998 1999 1998 1999
-------- -------- -------- --------
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 2,191 $ (149) $ 2,159 $ (1,485)
Extraordinary item-loss on early
Extinguishment of debt, net of income taxes -- -- 713 --
-------- -------- -------- --------
Net income (loss) $ 2,191 $ (149) $ 1,446 $ (1,485)
======== ======== ======== ========
Weighted average shares outstanding 11,546 11,917 9,176 11,919
======== ======== ======== ========
Income (loss) before extraordinary item $ 0.19 $ (0.01) $ 0.24 $ (0.12)
Extraordinary item-loss on early
Extinguishment of debt, net of income taxes -- -- (0.08) --
-------- -------- -------- --------
Net income (loss) per share $ 0.19 $ (0.01) $ 0.16 $ (0.12)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 2,191 $ (149) $ 2,159 $ (1,485)
Extraordinary item-loss on early
Extinguishment of debt, net of income taxes -- -- 713 --
-------- -------- -------- --------
Net income (loss) $ 2,191 $ (149) $ 1,446 $ (1,485)
======== ======== ======== ========
Weighted average shares outstanding 11,546 11,917 9,176 11,919
Potential common shares from stock options 293 -- 179 --
-------- -------- -------- --------
Total weighted average shares outstanding 11,839 11,917 9,355 11,919
======== ======== ======== ========
Income (loss)before extraordinary item $ 0.19 $ (0.01) $ 0.23 $ (0.12)
Extraordinary item-loss on early
extinguishment of debt, net of income taxes -- -- (0.08) --
-------- -------- -------- --------
Net income (loss) per share $ 0.19 $ (0.01) $ 0.15 $ (0.12)
======== ======== ======== ========
7. Litigation
Following the acquisition of certain of the Founding Companies, the
Company terminated a relationship with an equipment vendor due to repeated
and substantial problems with certain telecommunications and computer
equipment. In July 1998, the Company was served with a claim for unpaid
monthly fees due under the full term of each respective service agreement.
The Company is also involved in several acquisition-related disputes
concerning acquisition contract interpretation, non-compete enforcement,
and status of unregistered stock issued in connection with the Offering.
The Company has accrued approximately $5.3 million as an estimate of the
liability with respect to these cases at June 30, 1999.
The Company also becomes involved in various legal matters from time to
time, which it considers to be in the ordinary course of business. While
the Company is not currently able to determine the potential liability, if
any, related to such matters, the Company believes, after consulting with
legal counsel, that none of the matters, individually or in the aggregate,
will have a material adverse effect on its financial position, results of
operations or liquidity.
8. Segment Information
The Company's reportable segments are based on geographic area. The
Company evaluates the performance of its geographic areas based on
operating profit (loss) excluding interest expense, other income and
expense, the effects of non-recurring items, and income tax expense. The
following is a summary of local operations by geographic region for the
six months ended June 30, 1999 (dollars in thousands):
10
Six months ended United
June 30, 1999 United States Kingdom Australasia Total
------------- ------------- ------- ----------- -----
Net Revenue $ 65,757 39,221 8,604 $113,582
Operating income $ 275 3,077 456 $ 3,808
Identifiable assets $ 29,399 18,890 3,147 $ 51,436
Capital expenditures $ 366 358 108 $ 832
Depreciation $ 1,053 384 63 $ 1,500
Six months ended United
June 30, 1998 United States Kingdom Australasia Total
------------- ------------- ------- ----------- -----
Net Revenue $ 46,344 28,509 516 $ 75,369
Operating income $ 2,559 2,724 79 $ 5,362
Identifiable assets $ 48,282 17,947 297 $ 66,526
Capital expenditures $ 2,550 499 22 $ 3,071
Depreciation $ 543 160 18 $ 721
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Company's consolidated financial statements, including the
notes thereto, and the other financial information appearing elsewhere in this
report. Statements regarding future economic performance, management's plans and
objectives, and any statements concerning its assumptions related to the
foregoing contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute forward-looking statements.
Certain factors which may cause actual results to vary materially from these
forward-looking statements accompany such statements or are listed in "Factors
Affecting the Company's Prospects" set forth in the Company's annual report on
Form-10K for the fiscal year ended December 31, 1998.
11
Introduction
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto
appearing elsewhere herein.
Overview
The Company was formed in 1997 to create one of the largest providers of
point-to-point delivery services in the world. The Company focuses on
point-to-point delivery by foot, bicycle, motorcycle, car and truck and operates
in 22 of the largest metropolitan markets in the United States as well as the
United Kingdom, Australia and New Zealand.
Prior to the Initial Public Offering (the "Offering") on February 6, 1998, the
Company conducted no operations other than in connection with the Offering and
generated no revenues other than the receipt of licensing fees. Simultaneous
with the Offering, the Company acquired, in separate combination transactions,
38 urgent, on-demand, point-to-point courier firms and one software company
which was subsequently liquidated in 1998.
Results of Operations
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
---- ---- ---- ----
Net revenue 100.0% 100.0% 100.0% 100.0%
Costs of revenue 60.6 60.4 61.0 61.2
------ ------ ------ ------
Gross profit 39.4 39.6 39.0 38.8
Selling, general and
Administrative 28.6 30.7 29.4 31.8
Depreciation and amortization 2.3 3.9 2.5 3.6
------ ------ ------ ------
Operating income 8.4 5.0 7.1 3.4
Interest expense 0.8 3.2 0.9 3.2
Amortization and write-off of deferred financing costs -- 1.9 -- 1.0
Acquired in-process research and development -- -- 0.9 --
Other expense (income) 0.1 -- 0.2 --
------ ------ ------ ------
Income (loss) before income taxes and
and extraordinary item 7.5 (0.1) 5.1 (0.8)
Provision for income taxes 3.2 (0.2) 2.3 0.5
------ ------ ------ ------
Income (loss) before extraordinary item 4.3 (0.3) 2.9 (1.3)
====== ====== ====== ======
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
Net Revenue
Net revenue for the three months ended June 30, 1999 increased $5.4 million, or
10.6%, to $56.5 million from $51.1 million for the three months ended June 30,
1998. This increase was primarily due to acquisitions of 27 urgent, on-demand,
point-to-point courier firms that occurred at various dates since February 6,
1998. Excluding the effect of the acquisitions, net revenues from comparable
centers showed no increase at $51.1 million. These revenues were predominantly
earned from urgent delivery services throughout the United States, the United
Kingdom, and Australasia, generated as follows (dollars in thousands):
12
Three months ended Three months ended
June 30, 1998 June 30, 1999
------------- -------------
United States $30,235 59.2% $32,647 57.8%
United Kingdom 20,514 40.1 19,309 34.2
Australasia 304 0.7 4,497 8.0
------- ----- ------- -----
Total 51,053 100.0 56,453 100.0
Following certain acquisitions, the Company re-priced or ceased providing
certain services which failed to meet required margin criteria, or were not pure
urgent, point-to-point delivery services. There can be no assurance that any
such initiatives in the future will not have a material adverse effect on the
Company's business, financial condition or results of operations.
Cost of Revenue
Cost of revenue for the three months ended June 30, 1999 increased $3.1 million,
or 10.1%, to $34.1 million from $31.0 million for the three months ended June
30, 1998. This increase was primarily due to acquisitions of 27 urgent,
on-demand, point-to-point courier firms that occurred at various dates since
February 6, 1998. Expressed as a percentage of net revenue, cost of revenue for
the three months ended June 30, 1999 decreased to 60.4%, from 60.6% for the
three months ended June 30, 1998. Cost of revenue percentages in the United
States, the United Kingdom, and Australasia vary considerably as a result of
different compensation structures, the proportion of owner-operated vehicles,
the type of benefit plans, and the mix of business. For the three months ended
June 30, 1999, cost of revenue percentages for the United States, United Kingdom
and Australasia were 59.2%, 62.1%, and 62.0%, respectively, as compared to
58.1%, 64.4%, and 59.9%, respectively, for the comparable 1998 period. Cost of
revenue percentages were positively impacted during the 1999 period by the
benefits associated with the continued physical integration of a number of
previously independent courier fleets. As of June 30, 1999, the Company still
had a comprehensive courier fleet integration program remaining to execute. This
program is expected to be substantially completed during the balance of 1999.
Selling, General and Administrative Costs
Selling, general and administrative costs for the three months ended June 30,
1999 increased $2.7 million, or 18.9%, to $17.3 million from $14.6 million for
the three months ended June 30, 1998. This increase was primarily due to
acquisitions of 27 urgent, on-demand, point-to-point courier firms that occurred
at various dates since February 6, 1998, and to a lesser extent, investment in
technology programs designed to develop the next generation of the proprietary
operating system. Expressed as a percentage of net revenue, selling, general and
administrative costs for the three months ended June 30, 1999 increased to
30.7%, from 28.6% for the three months ended June 30, 1998. Selling, general and
administrative percentages in the United States (including corporate), the
United Kingdom, and Australasia vary considerably as a result of the degree of
physical integration, different compensation structures and the mix of business.
For the three months ended June 30, 1999, selling, general and administrative
percentages for the United States, United Kingdom, and Australasia were 31.8%,
29.0%, and 30.8%, respectively, as compared to 31.4%, 24.5%, and 24.8%,
respectively, for the comparable 1998 period.
Interest Expense and Deferred Financing Costs
Interest expense for the three months ended June 30, 1999 was $1.8 million, or
3.2% of the Company's net revenues. This represents an increase of $1.4 million
over the same period in 1998. The increase was primarily due to higher average
principal balances outstanding. Interest expense included interest on senior
debt, acquired debt, acquisition-related debt, and capital lease obligations, as
well as bank charges. Interest rates on the senior credit facility ranged from
9.0% to 9.2% during the three months ended June 30, 1999, compared with 6.2% to
7.1% for the three months ended June 30, 1998. As a result of the Company
entering into the Amended and Restated Credit Agreement (the "Credit Agreement")
in 1999, the Company wrote off $0.9 million of the fees associated with the
preceding credit facility. The Company amortized an additional $0.2 million of
the deferred financing fees during the three months ended June 30, 1999.
Interest expense incurred on the senior bank debt during the three months ended
June 30, 1999 amounted to $1.7 million.
13
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
Net Revenue
Net revenue for the six months ended June 30, 1999 increased $38.2 million, or
50.7%, to $113.6 million from $75.4 million for the six months ended June 30,
1998. This increase was primarily due to acquisitions of 27 urgent, on-demand,
point-to-point courier firms that occurred at various dates since February 6,
1998. Excluding the effect of the acquisitions, net revenues from comparable
centers increased $2.0 million, or 2.7%. These revenues were predominantly
earned from Point-to-Point delivery services throughout the United States, the
United Kingdom, and Australasia, generated as follows (dollars in thousands):
Six months ended Six months ended
June 30, 1998 June 30, 1999
United States $ 46,344 61.5% $ 65,757 57.9%
United Kingdom 28,509 37.8 39,221 34.5
Australasia 516 0.7 8,604 7.6
-------- ----- -------- -----
Total 75,369 100.0 113,582 100.0
Cost of Revenue
Cost of revenue for the six months ended June 30, 1999 increased $23.5 million,
or 51.1%, to $69.5 million from $46.0 million for the six months ended June 30,
1998. This increase was primarily due to acquisitions of 27 urgent, on-demand,
point-to-point courier firms that occurred at various dates since February 6,
1998. Expressed as a percentage of net revenue, cost of revenue for the six
months ended June 30, 1999 increased to 61.2%, from 61.0% for the six months
ended June 30, 1998. Cost of revenue percentages in the United States, the
United Kingdom, and Australasia vary considerably as a result of different
compensation structures, the proportion of owner-operated vehicles, the type of
benefit plans, and the mix of business. For the six months ended June 30, 1999,
cost of revenue percentages for the United States, United Kingdom and
Australasia were 60.0%, 62.9%, and 62.4%, respectively, as compared to 58.8%,
64.6%, and 59.9%, respectively, for the comparable 1998 period.
Selling, General and Administrative Costs
Selling, general and administrative costs for the six months ended June 30, 1999
increased $14.0 million, or 63.4%, to $36.1 million from $22.1 million for the
six months ended June 30, 1998. This increase was primarily due to acquisitions
of 27 urgent, on-demand, point-to-point courier firms that occurred at various
dates since February 6, 1998, and to a lesser extent, investment in technology
programs designed to develop the next generation of the proprietary operating
system. Expressed as a percentage of net revenue, selling, general and
administrative costs for the six months ended June 30, 1999 increased to 31.8%,
from 29.4% for the six months ended June 30, 1998. Selling, general and
administrative percentages in the United States (including corporate), the
United Kingdom, and Australasia vary considerably as a result of the degree of
physical integration, different compensation structures and the mix of business.
For the six months ended June 30, 1999, selling, general and administrative
percentages for the United States, United Kingdom, and Australasia were 34.4%,
27.8%, and 30.4%, respectively, as compared to 32.7%, 24.0%, and 24.8%,
respectively, for the comparable 1998 period.
Interest Expense and Deferred Financing Costs
Interest expense for the six months ended June 30, 1999 was $3.6 million, or
3.2% of the Company's net revenues. This represents an increase of $2.9 million
over the same period in 1998. The increase was primarily due to higher average
principal balances outstanding. Interest expense included interest on senior
debt, acquired debt, acquisition-related debt, and capital lease obligations, as
well as bank charges. Interest rates on the senior credit facility ranged from
6.9% to 9.2% during the six months ended June 30, 1999, compared with 6.2% to
7.1% for the six months ended June 30, 1998. As a result of the Company entering
into the Amended and Restated Credit Agreement (the "Credit Agreement") in 1999,
14
the Company wrote off $0.9 million of the fees associated with the preceding
credit facility. The Company amortized an additional $0.3 million of the
deferred financing fees during the six months ended June 30, 1999. Interest
expense incurred on the senior bank debt during the six months ended June 30,
1999 amounted to $3.4 million.
Liquidity and Capital Resources
The Company is a holding company that conducts all of its operations through its
wholly-owned subsidiaries. Accordingly, the Company's principal sources of
liquidity are the cash flow of its subsidiaries, and cash available, if any,
from its credit facility.
At June 30, 1999, the Company had $2.7 million in cash and cash equivalents,
$74.3 million of senior bank debt, and $10.1 million of short and long-term
acquisition-related debt. Net cash provided from operating activities for the
six months ended June 30, 1999 was $4.9 million. Net cash used in investing
activities and provided by financing activities was $6.3 million and $1.8
million, respectively, for the six months ended June 30, 1999.
On February 11, 1998, the Company acquired all of the outstanding common stock
and/or net assets of the Founding Companies simultaneously with the closing of
the Offering. The aggregate consideration for these acquisitions included
approximately $62.7 million in cash, the issuance of 3,378,590 shares of common
stock, and $4.6 million of notes payable. The cash portion of these acquisitions
was funded through the proceeds of the Offering.
During the period following the Offering to December 31, 1998, the Company
acquired an additional 28 messenger or same-day courier companies in the United
States, the United Kingdom, and Australasia. The aggregate consideration for
these acquisitions included approximately $47.6 million in cash, the issuance of
355,160 shares of common stock, $3.2 million in value of stock to be issued, and
approximately $7.9 million of notes payable. Subsequent to December 31, 1998,
the Company converted $2.0 million of the stock consideration payable to cash
consideration payable. The cash portion of the consideration for the
acquisitions consummated after the Offering was provided by borrowings under the
Company's credit facility.
In addition, in connection with certain acquisitions, the Company agreed to pay
the sellers additional consideration if the acquired operations meet certain
performance goals related to their earnings before interest, taxes, depreciation
and amortization, as adjusted for certain other financial related matters. The
estimated maximum amount of additional consideration payable, if all of the
performance goals are met, is approximately $9.0 million, of which $3.2 million
is payable in cash and $5.8 million is payable in shares of the Company's common
stock. These payments of additional consideration are to be made on specified
dates through December 31, 2000. Management intends to fund the cash portion of
this additional consideration with internally generated cash flow.
Capital expenditures totaled approximately $0.8 million in the six months ended
June 30, 1999, primarily for office and computer equipment. The Company expects
to make additional capital expenditures of approximately $1.0 million during
1999 to upgrade certain components of its management and financial reporting
systems and to install an internal computer intranet network and communications
system integrating the metropolitan operating centers. In addition, application
of DMS operating practices requires investment in existing operating centers.
Management presently anticipates that such additional capital expenditures will
total approximately $4.3 million over the next two years, including
approximately $1.8 million of computer equipment, $1.3 million of communications
equipment, and $1.2 million of leasehold improvements. However, no assurance can
be made with respect to the actual timing and amount of such expenditures.
Senior Credit Facility
In June 1998, the Company entered into a credit agreement with NationsBank N.A.
as underwriter of a new $60 million senior credit facility. In August 1998,
NationsBank led a syndication for a $105 million committed line of credit with a
group of senior lenders, including First Union National Bank, BankBoston N.A.,
CIBC, Inc., and Fleet Bank N.A.
15
Subsequent to December 31, 1998, the Company notified the senior lenders of an
event of default in relation to certain financial covenants described in the
senior credit agreement. Following this notification of default, the Company
operated under a forebearance agreement that deferred certain lender remedies
pending a restructuring of the senior credit facility. On April 8, 1999, the
Company entered into a credit agreement with NationsBank N.A. and a syndicate of
senior lenders. The Credit Agreement provides a revolving credit facility equal
to the outstanding indebtedness as of June 30, 1999 of $78.2 million, which
includes a sub-limit of $3.8 million for existing standby letters of credit. All
amounts drawn down under the line of credit must be repaid on October 15, 2000,
with minimum principal payments of $0.3 million per quarter required in 1999 and
$1.5 million per quarter required in 2000.
Outstanding principal balances under the line of credit bear interest, payable
monthly, at increments between 1.75% and 4.00% over the LIBOR rate, depending on
the Company's ratio of Funded Debt to trailing quarter annualized EBITDA (as
defined in the Credit Agreement). The initial pricing level between April 8,
1999 and June 30, 1999 will be at LIBOR + 4.00% (30 Day LIBOR at June 30, 1999
was 5.2%).
Borrowings under the line of credit are collateralized by a first lien on all of
the assets of the Company, including the shares of common stock of certain of
the Company's subsidiaries. The Company is required to maintain minimum absolute
quarterly EBITDA targets through the maturity of the facility, provided that for
the last fiscal quarter of 1999, and for the fiscal quarters of 2000, the
absolute EBITDA targets are modified such that the Company can still meet the
financial covenant criteria by maintaining a Funded Debt to EBITDA ratio at no
more than 3.0x (as defined in the Credit Agreement).
Other financial covenants include: (i) maintenance of a positive monthly pre-tax
income on a consolidated basis after June 30, 1999 (adjusted for certain
non-cash gains and losses), (ii) maintenance of a collateral coverage ratio
whereby accounts receivable less than 60 days as a proportion of the total
outstanding under the revolving line of credit cannot fall below levels ranging
from 35% - 40%, and (iii) minimum quarterly interest coverage ratio; defined as
EBITDA as a ratio to cash interest expense. The Credit Agreement prohibits (i)
liens, pledges and guarantees that can be granted by the Company, (ii) the
declaration or payment of cash dividends, and (iii) the sale of stock of the
Company's subsidiaries. The Credit Agreement also limits (i) the amount of
indebtedness the Company can incur, (ii) the amount of finance lease
commitments, and (iii) certain capital expenditures. Material acquisitions and
disposals of certain operations require approval by the lender. The Credit
Agreement contains customary representations and warranties, covenants, defaults
and conditions. The line of credit is intended to be used for short-term working
capital, and for the issuance of letters of credit. The facility specifically
allows for the payment of various acquisition-related notes payable disclosed in
the consolidated financial statements related to the 1998 acquisitions.
Pursuant to the establishment of the April 8, 1999 Credit Agreement, the Company
wrote off $0.9 million of deferred financing fees related to the preceding
Credit Facility dated June 11, 1998, in the second quarter of 1999.
The Company believes that cash flow from operations will be sufficient to fund
the Company's operations and the revised acquisition-related notes payable
repayment schedule for the next twelve months. The Company's ability to continue
as a going concern is dependent upon, i) achieving and maintaining cash flow
from operations sufficient to satisfy its current obligations, ii) complying
with the financial covenants described in the Credit Agreement, and iii)
negotiating further extensions of the Credit Agreement beyond its maturity date
of October 15, 2000. Given the current Credit Agreement restrictions, the
Company is unlikely to pursue further acquisition opportunities during the next
12 to 18 months.
Impact of Year 2000
The Year 2000 issue refers to the impact on information technology and
non-information technology systems, including codes embedded in chips and other
hardware devices, of date-related issues including the identification of a year
by two digits and not four so that a date using "00" would be recognized as the
year "1900" rather than "2000". This date related problem could result in system
failures, miscalculations or errors causing disruptions of operations or other
business problems, including, among others, a temporary inability to process
transactions, send invoices or engage in normal business activities.
16
The Company has identified operating and software issues to address Year 2000
readiness in its internal systems and with its customers and suppliers. The
Company is addressing its most critical internal systems first, including the
Company's proprietary capture and dispatch system ("KIWI"), and targets to have
them Year 2000 compliant by September 30, 1999. The Company is also addressing
all major categories of information technology and non-information technology
systems in use by the Company, including customer service, dispatch and finance.
The Company plans to use both internal and external resources to reprogram and
test the software for Year 2000 modifications. The cost of this and all other
efforts to achieve Year 2000 compliance is estimated to be less than $1.0
million. To date, the Company's expenses have been mostly limited to internal
costs. The amount of external expenditures for Year 2000 compliance for the six
months ended June 30, 1999 was $0.5 million. The Company has not separately
tracked internal costs, which were primarily associated with payroll costs. The
Company expects future costs to be funded by internally generated funds. The
Company has begun to communicate with its major customers, suppliers and
financial institutions to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
The feedback from some of the Company's major suppliers and customers contacted
confirmed that they anticipate being Year 2000 compliant on or before December
31, 1999.
The Company currently expects that the Year 2000 issue will not pose significant
operational problems. However, delays in the implementation of Year 2000
compliant systems, a failure to identify all of the Year 2000 dependencies in
the Company's systems and in the systems of its suppliers, customers and
financial institutions, or a failure of such third parties to adequately address
their respective Year 2000 issues could have a material adverse effect on the
Company's business, financial condition and results of operations. Therefore,
the Company has developed contingency plans with respect to possible problems it
has already identified, and expects to continue to develop contingency plans, as
the testing and implementation phases near completion, for continuing operations
in the event such problems arise. However, there can be no assurance that such
contingency plans will be sufficient to handle all of the problems, which may
arise.
FACTORS AFFECTING THE COMPANY'S PROSPECTS
In addition to other information in this report, certain risk factors should be
considered carefully in evaluating the Company and its business. This report
contains forward-looking statements, which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the Annual Report on Form 10-K for the year ended December 31, 1998 and
elsewhere in this report.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risk, i.e. the risk of loss arising from
adverse changes in interest rates and foreign currency exchange rates.
Interest Rate Exposure
17
The Company has not entered into interest rate protection agreements on
borrowings under its Credit Agreement, but may do so in the future. A one
percent change in interest rates on variable rate debt would increase interest
expense by $0.7 million per annum based upon the variable rate debt outstanding
at June 30, 1999.
Foreign Exchange Exposure
Significant portions of the Company's operations are conducted in Australia, New
Zealand and the United Kingdom. Exchange rate fluctuations between the US
dollar/Australian dollar, US dollar/New Zealand dollar and US dollar/pound
sterling result in fluctuations in the amounts relating to the Australian, New
Zealand, and United Kingdom operations reported in the Company's consolidated
financial statements.
The Company has not entered into hedging transactions with respect to its
foreign currency exposure, but may do so in the future.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual stockholders meeting was held on June 8, 1999. Holders on the record
date for the annual meeting of 11,921,404 shares of Common Stock were entitled
to cast one vote per share on each matter presented at the meeting.
The agenda items received the following votes:
1. Approval of amendment to Article Sixth of the Company's Amended and Restated
Certificate of Incorporation (the "Charter") to clarify the designation of the
terms of the classes of directors. The amendment was not approved pursuant to
the following vote:
For Against Abstain Broker non-votes
--- ------- ------- ----------------
3,580,018 535,875 28,180 3,728,193
2. Election of Directors. The nominees for Director were elected pursuant to the
following vote:
18
Nominee For Authority Withheld
------- --- ------------------
Edward N. Allen 7,894,964 118,683
Thomas J. Saporito 7,894,564 119,083
D. Keith Cobb 7,876,097 137,550
Michael Fiorito 7,869,401 144,246
3. Approval of amendment of the Charter to add a new Article Tenth to provide
for stockholder action by unanimous written consent. The amendment was not
approved pursuant to the following vote:
For Against Abstain Broker non-votes
--- ------- ------- ----------------
3,421,954 619,926 35,340 3,795,046
4. Approval of amendment to 1997 Stock Incentive Plan, as amended, to increase
the number of shares of Common Stock available for issuance under the plan from
1,350,000 shares to 2,000,000 shares. The amendment was approved pursuant to the
following vote:
For Against Abstain Broker non-votes
--- ------- ------- ----------------
3,578,920 464,493 33,807 3,795,046
5. Ratification of the appointment of the Company's independent accountants for
the fiscal year ending December 31, 1999. The appointment was ratified by the
following vote:
For Against Abstain Broker non-votes
--- ------- ------- ----------------
7,715,322 129,592 27,352 0
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 1997 Stock Incentive plan, as amended.
27.1 Financial data schedule.
b) Reports on Form-8K.
On July 29, 1999, the Company filed a Form 8-K reporting a change in independent
accountants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISPATCH MANAGEMENT SERVICES CORP.
Date: August 5, 1999 By: /s/ Marko Bogoievski
---------------------------
Marko Bogoievski
Chief Financial Officer
19
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.1 1997 Stock Incentive Plan, as amended
27.1 Financial data schedule
20