<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-21057
DYNAMEX INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0712225
(State of incorporation) (I.R.S. Employer Identification No.)
1431 Greenway Drive 75038
Suite 345 (Zip Code)
Irving, Texas
(Address of principal executive offices)
Registrant's telephone number, including area code:
(972) 756-8180
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
---
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of June 28, 2000 was 10,206,817 shares.
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DYNAMEX INC.
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INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
IMPORTANT EXPLANATORY NOTE 2
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
January 31, 2000 (Unaudited) and July 31, 1999
Condensed Statements of Consolidated Operations 4
(Unaudited) Three and Six Months ended January 31,
2000 and 1999 (restated)
Condensed Statements of Consolidated Cash Flows (Unaudited) 5
Six Months ended January 31, 2000 and 1999 (restated)
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 6. Exhibits and Reports on Form 8-K. 20
</TABLE>
1
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DYNAMEX INC.
================================================================================
PART I. FINANCIAL STATEMENTS
IMPORTANT EXPLANATORY NOTE
As discussed in Note 2 of Notes to the Condensed Consolidated Financial
Statements of Dynamex Inc., the Company discovered unsupportable accounting
entries in the prior year during its review of the fiscal third quarter
financial statements ending April 30, 1999. The unsupportable accounting entries
related to the timing of the sale of an asset and the reduction in accruals for
workers' compensation and bad debts. On June 14, 1999, the Audit Committee of
the Company's Board of Directors formed a Special Committee of outside directors
to review the matter further. The Special Committee engaged the law firm of
Weil, Gotshal & Manges LLP ("Weil, Gotshal") to assist in connection with the
review. Weil, Gotshal engaged Deloitte & Touche LLP to assist in connection with
the review.
On September 17, 1999, the Special Committee of the Board of Directors announced
the results of its review. The Special Committee recommended to the Board of
Directors among other things, and the Board of Directors concurred, that the
reported financial results for fiscal years 1997 and 1998 and the first three
quarters of fiscal year 1999 be adjusted and restated. The adjustments resulted
from the improper application of generally accepted accounting principles to
purchase accounting, the improper deferral of expenses, the unsupported
accounting entries and the recognition of revenues prior to services being
rendered or before all contingencies were resolved.
As a result of the restatement, the Company was denied access to the
line-of-credit starting on September 16, 1999, the banks notified the Company on
November 9, 1999 that it was in default under the terms of the bank credit
agreement and the banks began charging the Company the default rate of interest
of prime plus 2.50% on March 20, 2000. On June 28, 2000, the Company amended its
bank credit agreement. Under the terms of the amended agreement, all prior
covenant violations were waived and the Company may borrow up to $51.7 million,
the amount currently outstanding (formerly $65 million) on a revolving basis
through July 31, 2001, at which time any amounts outstanding under the facility
are due. Interest on outstanding borrowings is payable monthly at the bank's
prime rate plus 2.00%. In addition, the Company is required to pay a commitment
fee of 0.375% for any unused amounts of the total commitment. See Note 4 of
Notes to Condensed Consolidated Financial Statements.
Due to the lack of audited financial statements, the American Stock Exchange
("AMEX") suspended trading in Dynamex Inc. stock effective September 16, 1999.
Trading remains suspended at this date. AMEX also notified the Company that it
shall have until June 30, 2000 to file, with the Securities and Exchange
Commission (the "Commission"), its Form 10-K for the fiscal years ending July
31, 1999, 1998 and 1997 and Form 10-Q for the first three quarters of the fiscal
year ending July 31, 2000, or be delisted from AMEX. The Company is prepared to
file all such documents on or before June 30, 2000.
As a result of additional analysis and review during the re-audit, certain
additional adjustments were identified that impacted the financial statements
for all fiscal quarters in the fiscal year ending July 31, 1999. These
adjustments related primarily to the reduction in the carrying value of
intangibles, an additional bad debt accrual, a valuation reserve related to
federal net operating losses in the U.S., a reduction in the value of fixed
assets and an additional accounts payable accrual.
This Form 10-Q includes in Item 1 such restated financial statements for the
three and six-month periods ended January 31, 1999 and other information
relating to such restated financial statements including, Management's
Discussion and Analysis of Financial Condition and Results of Operations (Item
2). Information regarding the effect of the restatement on Dynamex's results of
operations for the three and six-month periods ended January 31, 1999 are
included in Note 2 of Notes to Condensed Consolidated Financial Statements
included in Item 1.
2
<PAGE> 4
DYNAMEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
================================================================================
<TABLE>
<CAPTION>
January 31, July 31,
2000 1999
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 5,413 $ 2,933
Accounts receivable (net of allowance for doubtful accounts
of $1,657 and $1,320, respectively) 28,780 25,945
Prepaid and other current assets 1,701 2,488
Deferred income tax 2,103 2,148
-------- --------
TOTAL CURRENT ASSETS 37,997 33,514
Property and equipment - net 8,537 9,308
Intangibles - net 80,721 82,860
Deferred income taxes 2,832 2,899
Other assets 1,768 1,841
-------- --------
TOTAL ASSETS $131,855 $130,422
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT
Accounts payable trade $ 3,567 $ 6,349
Accrued liabilities 15,890 15,292
Income taxes payable -- 117
Current portion of long-term debt 406 427
-------- --------
TOTAL CURRENT LIABILITIES 19,863 22,185
Long-term debt 49,743 46,690
-------- --------
TOTAL LIABILITIES 69,606 68,875
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; $0.01 par value, 10,000 shares authorized;
none outstanding -- --
Common stock; $0.01 par value, 50,000 shares authorized;
10,207 and 10,207 outstanding, respectively 102 102
Receivable from stockholder (51) (102)
Additional paid-in capital 72,759 72,759
Retained earnings (10,149) (10,202)
Unrealized foreign currency translation adjustment (412) (1,010)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 62,249 61,547
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $131,855 $130,422
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
DYNAMEX INC.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(In thousands, except per share data)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, January 31,
------------------------ -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(restated) (restated)
<S> <C> <C> <C> <C>
Sales $ 61,778 $ 58,124 $ 124,501 $ 117,567
Cost of sales 41,919 39,966 84,216 80,092
--------- --------- --------- ---------
Gross profit 19,859 18,158 40,285 37,475
Selling, general and administrative expenses 16,403 18,292 32,436 33,047
Depreciation and amortization 2,301 2,306 4,619 4,634
Loss on disposal of property and equipment 1 79 55 114
--------- --------- --------- ---------
Operating income 1,154 (2,519) 3,175 (320)
Interest expense 1,242 1,332 2,399 2,275
--------- --------- --------- ---------
Income (loss) before taxes (88) (3,851) 776 (2,595)
Income tax expense (benefit) 264 (1,107) 723 (28)
--------- --------- --------- ---------
Net income (loss) $ (352) $ (2,744) $ 53 $ (2,567)
========= ========= ========= =========
Earnings (loss) per common share - basic: $ (0.03) $ (0.27) $ 0.01 $ (0.25)
========= ========= ========= =========
Earnings (loss) per common share - assuming dilution: $ (0.03) $ (0.27) $ 0.01 $ (0.25)
========= ========= ========= =========
Weighted average shares:
Common shares outstanding 10,207 10,069 10,207 10,069
Adjusted common shares - assuming
exercise of stock options 10,207 10,069 10,207 10,069
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
DYNAMEX INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
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<TABLE>
<CAPTION>
Six months ended
January 31,
----------------------
2000 1999
-------- --------
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 53 $ (2,567)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,886 1,850
Amortization of intangible assets 2,733 2,784
Loss on fixed asset disposals 55 114
Deferred income taxes 112 (1,001)
Changes in current operating assets and liabilities:
Accounts receivable (2,835) (2,128)
Prepaids and other assets 787 (956)
Accounts payable and accrued liabilities (1,252) 2,866
-------- --------
Net cash provided by operating activities 1,539 962
-------- --------
INVESTING ACTIVITIES
Payments for acquisitions (240) (11,125)
Purchase of property and equipment (2,138) (2,652)
-------- --------
Net cash used in investing activities (2,378) (13,777)
-------- --------
FINANCING ACTIVITIES
Principal payments on long-term debt (168) (229)
Net borrowings under line of credit 3,200 13,000
Proceeds from shareholder's note 51 51
Other assets and deferred offering costs 73 241
-------- --------
Net cash provided by financing activities 3,156 13,063
-------- --------
-------- --------
EFFECT OF EXCHANGE RATES ON CASH 163 (133)
-------- --------
NET INCREASE (DECREASE) IN CASH 2,480 115
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,933 1,361
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,413 $ 1,476
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Cash paid for interest $ 1,861 $ 1,680
======== ========
Cash paid for taxes $ 902 $ 1,814
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
In conjunction with the acquisitions described, liabilities were assumed as
follows:
Fair value of assets acquired $ 240 $ 11,215
Cash paid (240) (11,125)
-------- --------
Liabilities assumed $ -- $ 90
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 7
DYNAMEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
1. BASIS OF PRESENTATION
Dynamex Inc. (the "Company" and "Dynamex") provides same-day delivery and
logistics services in the United States and Canada. The Company's primary
services are (i) same-day, on-demand delivery, (ii) scheduled distribution and
(iii) fleet management.
The consolidated financial statements include the accounts of Dynamex Inc. and
its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated. All dollar amounts in the financial
statements and notes to the financial statements are stated in thousands of
dollars unless otherwise indicated.
The operating subsidiaries of the Company, with country of incorporation, are as
follows:
o Dynamex Operations East Inc. (U.S.)
o Dynamex Operations West Inc. (U.S.)
o Dynamex Dedicated Fleet Services, Inc. (U.S.)
o Dynamex Canada Inc (Canada)
o Alpine Enterprises Ltd. (Canada)
o Roadrunner Transportation, Inc. (U.S.)
o New York Document Exchange Corp. (U.S.)
o Cannonball, Inc. (U.S.)
o USC Management Systems, Inc. (U.S.)
The accompanying interim financial statements are unaudited. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes the disclosures included herein are adequate to
make the information presented not misleading. The results of the interim
periods presented are not necessarily indicative of results to be expected for
the full fiscal year, and should be read in conjunction with the Company's
audited financial statements for the fiscal year ended July 31, 1999.
The accompanying interim financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position at January 31, 2000, the
results of its operations for the three and six-month periods ended January 31,
2000 and 1999 (restated) and its cash flows for the six month periods ended
January 31, 2000 and 1999 (restated).
2. RESTATEMENT
The Company discovered unsupportable accounting entries in the prior year during
its review of the fiscal third quarter financial statements ending April 30,
1999. The unsupportable accounting entries related to the timing of the sale of
an asset and the reduction in accruals for workers' compensation and bad debts.
On June 14, 1999, the Audit Committee of the Company's Board of Directors formed
a Special Committee of outside directors to review the matter further. The
Special Committee engaged the law firm of Weil, Gotshal & Manges LLP ("Weil,
Gotshal") to assist in connection with the review. Weil, Gotshal engaged
Deloitte & Touche LLP to assist in connection with the review.
On September 17, 1999, the Special Committee of the Board of Directors announced
the results of its review. The Special Committee recommended to the Board of
Directors, among other things, and the Board of Directors concurred, that the
reported financial results for fiscal years 1997 and 1998 and the first three
quarters of fiscal year 1999 be adjusted and restated. The adjustments resulted
from the improper application of generally accepted accounting principles to
purchase accounting, the improper deferral of expenses, the unsupported
accounting entries and the recognition of revenues prior to services being
rendered or before all contingencies were resolved.
As a result of the restatement, the Company was denied access to the
line-of-credit starting on September 16, 1999, the banks notified the Company on
November 9, 1999 that it was in default under the terms of the bank credit
agreement and the banks began charging the Company the default rate of interest
of prime plus 2.50% on March 20, 2000. On June 28, 2000, the Company amended its
bank credit agreement. Under the terms of the amended agreement, all prior
covenant violations were waived and the Company may borrow up to $51.7 million,
the amount currently outstanding (formerly $65 million) on a revolving basis
through July 31, 2001, at which time any amounts outstanding under the facility
are due.
6
<PAGE> 8
DYNAMEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
Interest on outstanding borrowings is payable monthly at the bank's prime rate
plus 2.00%. In addition, the Company is required to pay a commitment fee of
0.375% for any unused amounts of the total commitment. See Note 4 of Notes to
Condensed Consolidated Financial Statements.
Due to the lack of audited financial statements, the American Stock Exchange
("AMEX") suspended trading in Dynamex Inc. stock effective September 16, 1999.
Trading remains suspended at this date. AMEX also notified the Company that it
shall have until June 30, 2000 to file, with the Securities and Exchange
Commission (the "Commission"), its Form 10-K for the fiscal years ending July
31, 1999, 1998 and 1997 and Form 10-Q for the first three quarters of the fiscal
year ending July 31, 2000, or be delisted from AMEX.
As a result of additional analysis and review during the re-audit, certain
additional adjustments were identified that impacted the financial statements
for all fiscal quarters in the fiscal year ending July 31, 1999. These
adjustments related primarily to the reduction in the carrying value of
intangibles, an additional bad debt accrual, a valuation reserve related to
federal net operating losses in the U.S., a reduction in the value of fixed
assets and an additional accounts payable accrual.
A summary of the effect of the restatement on the Consolidated Statement of
Operations for the three and six months ended January 31, 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, 1999 January 31, 1999
As
Previously As Previously
Reported As Restated Reported As Restated
---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Sales $ 57,760 $ 58,124 $ 117,228 $ 117,567
Cost of Sales 39,746 39,966 79,575 80,092
Selling, general and administrative expenses 17,06 18,292 32,306 33,047
Depreciation and amortization 1,863 2,306 3,694 4,634
Unusual items 1,733 -- 1,733 --
Loss on disposal of property and equipment -- 79 -- 114
Operating income (loss) (2,649) (2,519) (80) (320)
Interest expense 1,232 1,332 2,175 2,275
Net income before taxes (3,881) (3,851) (2,255) (2,595)
Income tax expense (benefit) (1,580) (1,107) (901) (28)
Net (loss) $ (2,301) $ (2,744) $ (1,354) $ (2,567)
</TABLE>
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and six months ended January 31, 2000
were $(105) and $651 respectively, compared to $(2.7) million and $(2.6) million
for the same periods ended January 31, 1999. The two components of comprehensive
income are net income (loss) and foreign currency translation adjustments.
4. BANK CREDIT AGREEMENT
As a result of the restatement, the Company was denied access to the
line-of-credit starting on September 16, 1999, the banks notified the Company on
November 9, 1999 that it was in default under the terms of the bank credit
agreement and the banks began charging the Company the default rate of interest
of prime plus 2.50% on March 20, 2000. On June 28, 2000, the Company amended its
bank credit agreement. Under the terms of the amended agreement, all prior
covenant violations were waived and the Company may borrow up to $51.7 million,
the amount currently outstanding (formerly $65 million) on a revolving basis
through July 31, 2001, at which time any amounts outstanding under the facility
are due. Interest on outstanding borrowings is payable monthly at the bank's
prime rate plus 2.00%. In addition, the Company is required to pay a commitment
fee of 0.375% for any unused amounts of the total commitment
7
<PAGE> 9
DYNAMEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
Effective as of January 31, 1999, the Company completed the second amendment to
the Second Amended and Restated Credit Agreement. Under the terms of the second
amendment, the Company could borrow up to $65 million on a revolving basis
through May 1, 2001, at which time any amounts outstanding under the facility
are due. Interest on outstanding borrowings was payable quarterly at prime plus
.50% or various other interest rate elections based on LIBOR plus an applicable
margin. The applicable margins ranged from 1.50% to 3.25% and were based on the
ratio of the Company's funded debt to cash flow, both as defined in the
agreement. In addition, the Company was required to pay a commitment fee of
0.25% of any unused amounts of the total commitment. At January 31,2000, the
weighted average interest rate for the then outstanding borrowings under the
credit agreement was 8.75%.
Borrowings under the agreement are secured by all of the Company's assets in the
United States and by 65% of the stock of the Company's Canadian subsidiary. The
agreement contains restrictions on the payment of dividends, incurring
additional debt, capital expenditures and investments by the Company. In
addition, the Company is required to maintain certain financial ratios related
to minimum amounts of stockholders' equity, fixed charges to cash flow and
funded debt to cash flow, all as defined in the agreement. The agreement also
requires the Company to obtain the consent of the lender for additional
acquisitions in certain instances.
The Company has entered into interest rate protection agreements on a portion of
the borrowings under the revolving credit facility. Through an interest rate
swap, the interest rate on $15 million of outstanding debt has been fixed at
6.26%, plus the applicable margin, and a collar of between 5.50% and 6.50%, plus
the applicable margin, has been placed on $9 million of outstanding debt. Both
of these hedging agreements have three-year terms and expire on August 31, 2000.
The total cost of these agreements was approximately $65 and is being amortized
to interest expense over the term of the agreements. The counter party to these
agreements is a major financial institution with which the Company also has
other financial relationships. The Company believes that the risk of loss due to
nonperformance by the counter party to these agreements is remote and, in any
event, the amount of such loss would be immaterial to the Company's results of
operations.
5. ACQUISITIONS
In connection with certain acquisitions, the Company agreed to pay the sellers
additional consideration if the acquired operations meet certain performance
goals. During the six months ended January 31, 2000, the Company paid $240 of
such additional consideration.
6. CONTINGENCIES
In November and December 1998, two class action lawsuits were filed in the
United States District Court for the Northern District of Texas, naming the
Company, Richard K. McClelland, the Company's Chief Executive Officer, and
Robert P. Capps, the Company's former Chief Financial Officer, as defendants.
The lawsuits arise from the Company's November 2, 1998, announcement that it was
(i) revising its results of operations for the year ended July 31, 1998 from
that which had been previously announced on September 16, 1998 and (ii)
restating its results of operations for the third quarter of fiscal 1998 from
that which had been previously reported. On February 5, 1999, the Court entered
an Order consolidating the actions and approved the selection of three law firms
as co-lead counsel. A consolidated and amended complaint was filed on March 22,
1999. On May 6, 1999, defendants filed a motion to dismiss the consolidated and
amended complaint in its entirety.
On June 14, 1999, the Company issued a press release announcing that the Audit
Committee of the Board of Directors had formed a Special Committee of outside
directors to review potentially unsupportable accounting entries for the third
and fourth quarters of fiscal 1998. On September 17, 1999 the Company issued a
press release announcing that the Special Committee had completed its review of
the Company's financial reporting and that the Company would restate its
previously reported financial results for the fiscal years 1997 and 1998 and the
first three quarters of the fiscal year 1999.
On October 14, 1999, pursuant to a stipulation of the parties, plaintiffs filed
a second amended class action complaint that added allegations relating to the
information disclosed in the Company's June 14 and September 17, 1999 press
releases. In addition to the defendants named in the original complaint, the
Second Amended Class Action Complaint named Deloitte & Touche and Deloitte &
Touche LLP (the Court subsequently dismissed Deloitte & Touche LLP without
prejudice pursuant to the stipulation of the parties). The Second Amended Class
Action Complaint alleges that the defendants issued a series of materially false
and misleading statements and omitted material facts concerning the Company's
financial condition and business operations. The lawsuit alleges violations of
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek
8
<PAGE> 10
DYNAMEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
unspecified damages on behalf of all other purchasers of the Company's common
stock during the period of September 18, 1997 through and including September
17, 1999.
On December 8, 1999, Dynamex moved to dismiss the complaint in its entirety on
the grounds that plaintiffs' complaint fails to meet the required pleading
standards and that the claims are deficient as a matter of law. Briefing of the
motion was completed on June 1, 2000, and the motion is now awaiting
disposition. At this date, no class has been certified nor has any discovery
commenced.
On April 10, 2000, Reliance Insurance Company filed a notice of action in the
Superior Court of Justice in Ontario, Canada, seeking a declaratory judgment
that defendants in the shareholder class action are not entitled to
reimbursement under the Reliance insurance policy for losses incurred in
connection with that action. The Reliance policy provides $3 million in excess
coverage to supplement the $2 million in coverage provided to the Company
pursuant to the underlying policy issued by American Home Assurance Company.
At this time management is unable to determine the likely outcome of this matter
or to reasonably estimate the amount of loss with respect to this matter.
The Special Committee of the Board of Directors has kept the Securities and
Exchange Commission apprised of its inquiry and the restatement process. The
Company has received an informal request for information from the Staff of the
Commission for documents concerning the circumstances of the proposed
restatement of the Company's prior period financial statements. The Company has
cooperated with the Commission and produced documents responsive to its request.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
This discussion contains forward-looking statements which involve
assumptions regarding Company operations and future prospects. Although the
Company believes its expectations are based on reasonable assumptions, such
statements are subject to risk and uncertainty, including, among other things,
statements with respect to the outcome of the Special Committee's review,
acquisition strategy, competition, foreign exchange, and risks associated with
the local delivery industry. These and other risks are mentioned from time to
time in the Company's filings with the Securities and Exchange Commission.
Caution should be taken that these factors could cause the actual results to
differ from those stated or implied in this and other Company communications.
GENERAL
The Company is a leading provider of same-day delivery and logistics services in
the United States and Canada. Through internal growth and acquisitions, the
Company has built a national network of same-day delivery and logistics systems
in Canada and has established operations in 21 U.S. metropolitan areas. The
Company completed its initial public offering ("IPO") in August 1996 and
concurrently completed the acquisition of five same-day transportation
companies. Subsequent to the IPO and through January 31, 2000, the Company
completed 22 acquisitions at various dates. All of these acquisitions have been
accounted for using the purchase method of accounting. Accordingly, the results
of the acquired operations are included in the Company's consolidated results of
operations from the date of acquisition. As a result of the effect of these
various acquisitions, the historical operating results of the Company for a
given period are not necessarily comparable to prior or subsequent periods.
As discussed in Note 2 of Notes to the Condensed Consolidated Financial
Statements of Dynamex Inc., the Company discovered unsupportable accounting
entries in the prior year during its review of the fiscal third quarter
financial statements ending April 30, 1999. The unsupportable accounting entries
related to the timing of the sale of an asset and the reduction in accruals for
workers' compensation and bad debts. On June 14, 1999, the Audit Committee of
the Company's Board of Directors formed a Special Committee of outside directors
to review the matter further. The Special Committee engaged the law firm of
Weil, Gotshal & Manges LLP ("Weil, Gotshal") to assist in connection with the
review. Weil, Gotshal engaged Deloitte & Touche LLP to assist in connection with
the review.
On September 17, 1999, the Special Committee of the Board of Directors announced
the results of its review. The Special Committee recommended to the Board of
Directors among other things, and the Board of Directors concurred, that the
reported financial results for fiscal years 1997 and 1998 and the first three
quarters of fiscal year 1999 be adjusted and restated. The adjustments resulted
from the improper application of generally accepted accounting principles to
purchase accounting, the improper deferral of expenses, the unsupported
accounting entries and the recognition of revenues prior to services being
rendered or before all contingencies were resolved.
Due to the lack of audited financial statements, the American Stock Exchange
("AMEX") suspended trading in Dynamex Inc. stock effective September 16, 1999.
Trading remains suspended at this date. AMEX also notified the Company that it
shall have until June 30, 2000 to file, with the Securities and Exchange
Commission (the "Commission"), its Form 10-K for the fiscal years ending July
31, 1999, 1998 and 1997 and Form 10-Q's for the first three quarters of the
fiscal year ending July 31, 2000, or be delisted from AMEX.
As a result of additional analysis and review during the re-audit, certain
additional adjustments were identified that impacted the financial statements
for all fiscal quarters in the fiscal year ending July 31, 1999. These
adjustments related primarily to the reduction in the carrying value of
intangibles, an additional bad debt accrual, a valuation reserve related to
federal net operating losses in the U.S., a reduction in the value of fixed
assets and an additional accounts payable accrual.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's condensed statements of consolidated operations, expressed as a
percentage of sales. The following table excludes $2.1million of unusual and
non-recurring selling, general and administrative expenses for both the three
months and six months ended January 31, 1999, respectively. ($1.4 million for
the failed Q International and other acquisitions, non-recurring audit fees of
$0.4 million and $0.3 million for severance and other restructuring costs.)
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, January 31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(restated) (restated)
(1) (1)
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 67.8% 68.8% 67.6% 68.1%
---------- ---------- ---------- ----------
Gross profit 32.2% 31.2% 32.4% 31.9%
Selling, general and
administrative expenses 26.6% 27.8% 26.1% 26.3%
Depreciation and amortization 3.7% 4.0% 3.7% 3.9%
Loss on disposal of assets 0.0% 0.1% 0.0% 0.1%
---------- ---------- ---------- ----------
Operating income (loss) 1.9% (0.7)% 2.6% (1.6)%
Interest expense 2.0% 2.3% 1.9% 1.9%
---------- ---------- ---------- ----------
Income (loss) before taxes (0.1)% (3.0)% 0.7% (0.3)%
========== ========== ========== ==========
</TABLE>
(1) Excludes non-recurring and unusual charges and adjustments described in the
paragraph above
THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1999.
The net loss for the three months January 31, 2000 was $352,000 compared to $2.7
million in the same period last year. The results for 1999 include $2.1 million
of unusual and non-recurring charges and adjustments consisting of $1.4 million
for the failed Q International and other acquisitions, unusual accounting and
tax fees of $0.4 million and $0.3 million for severance and other restructuring
costs. The following comparisons of fiscal year 2000 to fiscal year 1999 results
exclude the unusual and non-recurring adjustments referred to above.
Sales for the three months ended January 31, 2000 increased $3.7 million, or
6.3%, to $62 million from $58 million for the same period ended in 1999. The
increase in the conversion rate between the U.S. dollar and the Canadian dollar
had the effect of increasing 2000 sales by some $0.9 million had the conversion
rate been the same as in 1999. Same branch sales (revenue per day for operations
owned during both periods) increased 4.9% for the three months ended January 31,
2000 compared to the same period ended in 1999. Excluding the impact of the
change in the exchange rate between the U.S. and Canadian dollar, the increase
in same branch sales was 3.3%.
Cost of sales for the three months ended January 31, 2000 increased $2.0
million, or 4.9%, to $42 million from $40 million for the same period ended in
1999. Cost of sales, as a percentage of sales for the three months ended January
31,2000 decreased to 67.8% from 68.8% for the same period ended in 1999. This
decrease is attributable to a change in product mix and a reduction in bad debt
expense in 2000 versus 1999. The higher bad debt costs in 1999 primarily are
attributable to two locations, Hartford, Connecticut and Dallas, Texas.
Excluding the unusual and non-recurring charges and adjustments noted above,
selling, general and administrative ("SG & A") expenses for the three months
ended January 31, 2000 increased approximately $0.2, or 1.5%, to $16.4 million
from $16.2 million for the same period ended in 1999. As a percentage of sales,
SG & A expenses decreased to 26.6% for the three months ended January 31, 2000
compared to 27.8% for the same period ended in 1999. This increase in total
dollars is attributable to several factors. The Company has invested heavily in
technology in building its infrastructure. The
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Company is converting to a common operating platform for customer order
processing and dispatching with a web-based transportation management solution
and is upgrading its financial accounting and reporting capabilities through
conversion to Oracle based financials. As a result, the Company's base level of
information processing costs has increased. Also, the Company had non-recurring
temporary costs of approximately $250,000 to assist in the audit process and for
systems conversion assistance in the three months ended January 31, 2000. In
addition, the increase in the foreign exchange rate for the Canadian dollar
resulted in additional SG & A costs of approximately $142,000.
Depreciation and amortization for the three months ended January 31, 2000 was
unchanged from the same period in 1999. As individual covenants not-to-compete
become fully amortized after three years, and most of the Company's acquisitions
occurred in fiscal years 1996 through 1998, depreciation and amortization will
decline beginning in the third quarter of 2000.
Interest expense in 2000 decreased $90,000 or 6.8% to $1.2 million from $1.3
million in 1999 and as a percentage of sales, to 2.0% from 2.3%. Interest
expense in 1999 includes approximately $0.3 million of deferred financing costs
that were expensed when the Company amended its bank credit agreement in January
1999. The increase in 2000 over 1999, adjusted for deferred financing costs, is
due to both higher debt and a higher interest rate.
SIX MONTHS ENDED JANUARY 31, 2000 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1999.
Net income for the six months ended January 31, 2000 was $53,000 compared to a
net loss of $2.6 million for the same period in 1999. The results for 1999
include approximately $2.1 million in unusual and non-recurring selling, general
and administrative expenses ($1.4 million for the failed Q International and
other acquisitions, $0.4 million for non-recurring audit and tax fees and $0.3
million for severance and related restructuring costs). The following
comparisons of 2000 to 1999 results exclude the unusual and non-recurring
adjustments referred to above.
Sales in for the six months ended January 31, 2000 increased $6.9 million, or
5.9%, to $125 million from $118 million for the same period ended in 1999. The
increase in the conversion rate between the U.S. dollar and the Canadian dollar
had the effect of increasing sales for the six months ended January 31, 2000 by
some $1.6 million had the conversion rate been the same as in 1999. Same branch
sales increased 5.2% for the six months ended January 31, 2000. Excluding the
impact of the change in the exchange rate between the U.S. and Canadian dollar,
the increase in sales was 3.9%.
Cost of sales for the six months ended January 31, 2000 increased $4.1 million,
or 5.1%, to $84 million from $80 million for the same period ended in 1999. Cost
of sales, as a percentage of sales for the six months ended January 31,2000
decreased to 67.6% from 68.1% for the same period ended in 1999. This decrease
is attributable to a change in product mix and a reduction in bad debt expense
in 2000 versus 1999. The higher bad debt costs in 1999 primarily are
attributable to two locations, Hartford, Connecticut and Dallas, Texas.
Excluding the unusual and non-recurring charges and adjustments referred to
above, selling, general and administrative expenses for the six months ended
January 31, 2000 increased $1.5 million, or 4.9%, to $32 million from $31
million compared to the same period ended in 1999. As a percentage of sales, SG
& A expenses decreased to 26.1% in 2000 compared to 26.3% in 1999. This increase
in total dollars in SG & A expenses in 2000 is attributable to several factors.
The Company has invested heavily in technology in building its infrastructure.
The Company is converting to a common operating platform for customer order
processing and dispatching with a web-based transportation management solution
and is upgrading its financial accounting and reporting capabilities through
conversion to Oracle based financials. As a result, the Company's base level of
information processing costs has increased. Also the Company had non-recurring
temporary costs of approximately $300,000 related to temporary help during the
audit process and for systems conversion assistance in the six months ended
January 31, 2000.
Depreciation and amortization for the six months ended January 31, 2000 was
unchanged when compared to the same period ended in 1999. As a percentage of
sales, depreciation and amortization decreased to 3.7% from 3.9%. As individual
covenants not-to-compete become fully amortized after three years, and most of
the Company's acquisitions occurred in fiscal years 1996 through 1998,
depreciation and amortization will decline beginning in the third quarter of
2000.
Interest expense increased $0.1 million for the six months ended January 31,
2000 compared to same period ended in 1999. Interest expense in 1999 includes
approximately $0.3 million of deferred financing costs that were expensed when
the Company amended its bank credit agreement in January 1999. The increase in
2000 over 1999, adjusted for deferred financing costs, is due to both higher
debt and a higher interest rate.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.5 million for the six months
ended January 31, 2000 versus $1.0 million provided by operating activities for
the same period ended in 1999. Adjusting for the unusual and non-recurring
charges and adjustments, net cash provided would have been $3.1 million in 1999.
An increase in current operating assets and liabilities accounts for the
difference in 2000 versus 1999.
The Company's capital needs arise primarily from capital expenditures and the
payment of contingent consideration for past acquisitions, as well as, working
capital needs. In connection with certain acquisitions, the Company agreed to
pay the sellers additional consideration if the acquired operations meet certain
performance goals. The Company paid approximately $240,000 to former owners of
previously acquired companies as additional purchase consideration during the
six months ended January 31, 1999.
At January 31, 2000 the maximum amount of additional consideration payable, if
all performance goals are met, is approximately $6 million. These payments of
additional consideration are to be made on specified dates through October 2000.
Management intends to fund the cash portion of this additional consideration
with internally generated cash flow and, to the extent necessary, with
borrowings under the credit facility.
Capital expenditures for the six months ended January 31, 2000 were
approximately $2.1 million., down approximately $0.5 million from 1999. These
expenditures primarily related normal replacements and improvements in
infrastructure and technology to support the Company's expanding operations.
Management expects capital expenditures to be in the $2 million to $3 million
range for the foreseeable future. The Company does not have significant capital
expenditure requirements to replace or expand the number of vehicles used in its
operations because substantially all of its drivers are owner-operators who
provide their own vehicles.
The Company has entered into interest rate protection arrangements on a portion
of the borrowings under the Credit Facility. The interest rate on $15 million of
outstanding debt has been fixed at 6.26%, plus the applicable margin, and a
collar of between 5.50% and 6.50%, plus the applicable margin, has been placed
on $9 million of outstanding debt. These hedging arrangements mature on August
31, 2000. At the present time, the Company has no plans to replace the hedges
when they expire. Amounts outstanding under the Credit Facility are secured by
all of the Company's U.S. assets and 65% of the stock of its Canadian
subsidiary. The Credit Facility also contains restrictions on the payment of
dividends, incurring additional debt, capital expenditures and investments by
the Company as well as requiring the Company to maintain certain financial
ratios. Generally, the Company must obtain the lenders' consent to consummate
any acquisition.
The Company's EBITDA (Earnings before interest, taxes, depreciation and
amortization) increased to approximately $3.5 million for the three months ended
January 31, 2000 from $1.9 million for the three months ended January 31, 1999
(excluding the unusual and non-recurring charges and adjustments). For the six
months ended January 31, 2000 the Company's EBITDA increased $3.5 million or
81.9% to $7.8 million compared to approximately $6.4 million for the six months
ended January 31, 1999 (excluding the unusual and non-recurring charges and
adjustments). Management has included EBITDA in its discussion herein as a
measure of liquidity because it believes that it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness, maintain
current operating levels of fixed assets and acquire additional operations and
businesses. EBITDA should not be considered as a substitute for statement of
operations or cash flow data from the Company's financial statements, which have
been prepared in accordance with generally accepted accounting principles. In
addition, the Company's working capital as of January 31, 2000 increased to
approximately $18 million from approximately $12 million as of July 31, 1999.
Management expects that the Company's capital requirements will be met from
internally generated cash flow.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
YEAR 2000 COMPLIANCE
The Company did not experience any significant malfunctions or errors in its
operating or business systems as a result of the Year 2000. Based upon
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the Year 2000. It is possible the
full impact of the date change has not been fully recognized. However, the
Company believes any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively affected if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The Company
is not aware of any significant Year 2000 or similar problems that have arisen
for its customers and suppliers.
The Company has not, nor does it expect to, incur any material costs associated
with the Year 2000.
INFLATION
Company does not believe that inflation has had a material effect on the
Company's results of operations nor does it believe it will do so in the
foreseeable future. However, there can be no assurance the Company's business
will not be affected by inflation in the future.
RISK FACTORS
In addition to other information in this report, the following 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 following risk factors and elsewhere in this
report.
ACQUISITION STRATEGY; POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company completed its last acquisition in August 1998. Currently, there
are no pending nor are there any contemplated acquisitions. Should the Company
pursue acquisitions in the future, the Company may be required to incur
additional debt, issue additional securities that may potentially result in
dilution to current holders and also may result in increased goodwill,
intangible assets and amortization expense. Additionally, the Company must
obtain the consent of its primary lenders to consummate any acquisition. There
can be no assurance that the Company's primary lenders will consent to such
acquisitions or that if additional financing is necessary, it can be obtained on
terms the Company deems acceptable. As a result, the Company might be unable to
successfully implement its acquisition strategy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
LIMITED COMBINED OPERATING HISTORY
Recent acquisitions have greatly expanded the size and scope of the
operations of the Company. 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. There
can be no assurance that the Company will be able to profitably manage recently
acquired companies or successfully integrate their operations into the Company.
HIGHLY COMPETITIVE INDUSTRy
The market for same-day delivery and logistics services has been and is
expected to remain highly competitive. Competition is often intense,
particularly for basic delivery services. High fragmentation and low barriers to
entry characterize the industry and there is a recent trend toward
consolidation. Other companies in the industry compete with the Company not only
for provision of services but also for acquisition candidates and qualified
drivers. Some of these companies have longer operating histories and greater
financial and other resources than the Company. Additionally, companies that do
not currently operate delivery and logistics businesses may enter the industry
in the future to capitalize on the consolidation trend. See "Business --
Competition."
CLAIMS EXPOSURE
As of June 1, 2000, the Company utilized the services of approximately 5,000
drivers and messengers. From time to time such persons are involved in accidents
or other activities that may give rise to liability claims. The Company
currently carries liability insurance with a per claim and an aggregate limit of
$20.0 million. Owner-operators are required to maintain liability
14
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
insurance of at least the minimum amounts required by applicable state or
provincial law (generally such minimum requirements range from $35,000 to
$75,000). The Company also has insurance policies covering property and
fiduciary trust liability, which coverage includes all drivers and messengers.
There can be no assurance that claims against the Company, whether under the
liability insurance or the surety bonds, will not exceed the applicable amount
of coverage, that the Company's insurer will be solvent at the time of
settlement of an insured claim, or that the Company will be able to obtain
insurance at acceptable levels and costs in the future. If the Company were to
experience a material increase in the frequency or severity of accidents,
liability claims, workers' compensation claims or unfavorable resolutions of
claims, the Company's business, financial condition and results of operations
could be materially adversely affected. In addition, significant increases in
insurance costs could reduce the Company's profitability.
CERTAIN TAX MATTERS RELATED TO DRIVERS
Substantially all of the Company's drivers own their own vehicles and as of
June 1, 2000, approximately 80% of these owner-operators were independent
contractors as opposed to employees of the Company. The Company does not pay or
withhold any federal, state or provincial employment tax with respect to or on
behalf of independent contractors. From time to time, taxing authorities in the
U.S. and Canada have sought to assert that independent owner-operators in the
transportation industry, including those utilized by the Company, are employees,
rather than independent contractors. The Company believes that the independent
owner-operators utilized by the Company are not employees under existing
interpretations of federal (U.S. and Canadian), state and provincial laws.
However, there can be no assurance that federal (U.S. and Canadian), state or
provincial 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
withholding taxes, and pay for and administer added employee benefits to these
drivers, the Company's operating costs would increase. Additionally, if the
Company is required to pay back-up withholding with respect to amounts
previously paid to such drivers, it may also be required to pay penalties or be
subject to other liabilities as a result of incorrect classification of such
drivers. If the drivers are deemed to be employees rather than independent
contractors, then the Company may be required to increase their compensation
since they will no longer be receiving commission-based compensation. Any of the
foregoing circumstances could have a material adverse impact on the Company's
financial condition and results of operations, and/or to restate financial
information from prior periods. See "Business -- Services" and "-- Employees."
In addition to the drivers that are independent contractors, certain of the
Company's drivers are employed by the Company and own and operate their own
vehicles during the course of their employment. The Company reimburses these
employees for all or a portion of the operating costs of those vehicles. The
Company believes that these reimbursement arrangements do not represent
additional compensation to those employees. However, there can be no assurance
that federal (U.S. and Canadian), state or provincial taxing authorities will
not seek to recharacterize some or all of such payments as additional
compensation. If such amounts were so recharacterized, the Company would have to
pay additional employment related taxes on such amounts, and may also be
required to pay penalties, which could have an adverse impact on the Company's
financial condition and results of operations, and/or to restate financial
information from prior periods. See "Business -- Services" and "-- Employees."
FOREIGN EXCHANGE
Significant portions of the Company's operations are conducted in Canada.
Exchange rate fluctuations between the U.S. and Canadian dollar result in
fluctuations in the amounts relating to the Canadian operations reported in the
Company's consolidated financial statements. The Canadian dollar is the
functional currency for the Company's Canadian operations; therefore, any change
in the exchange rate will affect the Company's reported revenues for such
period. The Company historically has not entered into hedging transactions with
respect to its foreign currency exposure, but may do so in the future. There can
be no assurance that fluctuations in foreign currency exchange rates will not
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
PERMITS AND LICENSING
Although recent legislation has significantly deregulated certain aspects of
the transportation industry, the Company's delivery operations are still subject
to various federal (U.S. and Canadian), state, provincial and local laws,
ordinances and regulations that in many instances require certificates, permits
and licenses. Failure by the Company to maintain required certificates, permits
or licenses, or to comply with applicable laws, ordinances or regulations could
result in substantial fines or possible revocation of the Company's authority to
conduct certain of its operations. Furthermore, delays in obtaining
15
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
approvals for the transfer or grant of certificates, permits or licenses, or
failure to obtain such approvals, could impede the implementation of the
Company's acquisition program.
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the skills, experience and
performance of certain key members of its management. The loss of the services
of any of these key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success and plans for growth also depend on its ability to attract, train
and retain skilled personnel in all areas of its business. There is strong
competition for skilled personnel in the same-day delivery and logistics
businesses.
RISKS ASSOCIATED WITH THE LOCAL 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 and shortages of
or disputes with labor, any of which could result in the Company's inability to
service its clients effectively or the inability of the Company to profitably
manage its operations. In addition, downturns in the level of general economic
activity and employment in the U.S. or Canada may negatively impact demand for
the Company's services.
Technological advances in the nature of facsimile and electronic mail have
affected the market for on-demand document delivery services. Although the
Company has shifted its focus to the distribution of non-faxable items and
logistics services, there can be no assurance that these or other technologies
will not have a material adverse effect on the Company's business, financial
condition and results of operations in the future.
DEPENDENCE ON AVAILABILITY OF QUALIFIED COURIER PERSONNEL
The Company is dependent upon its ability to attract, train and retain, as
employees or through independent contractor or other arrangements, qualified
courier personnel 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.
VOLATILITY OF STOCK PRICE
Prices for the Company's common stock will be determined in the marketplace
and may be influenced by many factors, including the depth and liquidity of the
market for the common stock, investor perception of the Company and general
economic and market conditions. Variations in the Company's operating results,
general trends in the industry and other factors could cause the market price of
the common stock to fluctuate significantly. In addition, general trends and
developments in the industry, government regulation and other factors could have
a significant impact on the price of the common stock. The stock market has, on
occasion, experienced extreme price and volume fluctuations that have often
particularly affected market prices for smaller companies and that often have
been unrelated or disproportionate to the operating performance of the affected
companies, and the price of the common stock could be affected by such
fluctuations. Furthermore, the American Stock Exchange suspended trading in the
Company's common stock on September 16, 1999. Trading remains suspended at this
date. AMEX also notified the Company that it shall have until June 30, 2000 to
file with the Commission, its Form 10-K for the fiscal years ended July 31,
1999, 1998 and 1997, and Forms 10-Q for the first three quarters of fiscal year
2000, or be delisted from AMEX. The ability of the Company to retain its listing
status on AMEX and to resume trading in the Company's common stock will likely
impact prices for the common stock.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT:
With the exception of historical information, the matters discussed in this
report are "forward looking statements" as that term is defined in Section 21E
of the Securities Exchange Act of 1934.
While the Company believes its strategic plan is on target and the business
outlook remains strong, several important factors have been identified, which
could cause actual results to differ materially from those predicted. By way of
example:
16
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
o The competitive nature of the same-day delivery business .
o The ability of the Company to attract and retain qualified courier personnel
as well as retain key management personnel.
o A change in the current tax status of courier drivers from independent
contractor drivers to employees or a change in the treatment of the
reimbursement of vehicle operating costs to employee drivers.
o A significant reduction in the exchange rate between the Canadian dollar and
the U.S. dollar.
o Failure of the Company to maintain required certificates, permits or
licenses, or to comply with applicable laws, ordinances or regulations could
result in substantial fines or possible revocation of the Company's
authority to conduct certain of its operations.
o The ability of the Company to obtain adequate financing.
o The ability of the Company to pass on fuel cost increases to customers to
maintain profit margins and the quality of driver pay.
o The loss of quality drivers to e-commerce companies.
o The outcome of the Shareholder class action lawsuit.
17
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
FOREIGN EXCHANGE EXPOSURE
Significant portions of the Company's operations are conducted in Canada.
Exchange rate fluctuations between the U.S. and Canadian dollar result in
fluctuations in the amounts relating to the Canadian operations reported in the
Company's consolidated financial statements. The Company historically has not
entered into hedging transactions with respect to its foreign currency exposure,
but may do so in the future.
The sensitivity analysis model used by the Company for foreign exchange exposure
compares the revenue and net income figures from Canadian operations, over the
previous four quarters at the actual exchange rate, to a 10% decrease in the
exchange rate. Based on this model, a 10% decrease would result in a decrease in
revenue of $8.2 million and a decrease in net income of $0.2 million over this
period. There can be no assurances that the above projected exchange rate
decrease will materialize. Fluctuations of exchange rates are beyond the control
of the Company's management.
INTEREST RATE EXPOSURE
The Company has entered into interest rate protection agreements on a portion of
the borrowings under its revolving credit facility. Through an interest rate
swap, the interest rate on $15 million of outstanding debt has been fixed at
6.26%, plus the applicable margin, and a collar of between 5.50% and 6.50%, plus
applicable margin, has been placed on $9 million of outstanding debt. Both of
these hedging agreements have three-year terms and expire on August 31, 2000. At
the present time, the Company has no plans to replace the hedges when they
expire. The Company does not hold or issue derivative financial instruments for
speculative or trading purposes.
The sensitivity analysis model used by the Company for interest rate exposure
compares interest expense fluctuations over a one-year period based on current
debt levels and current interest rates versus current debt levels at current
interest rates with a 10% increase. Based on this model, a 10% increase would
result in an increase in interest expense of $0.5 million. There can be no
assurances that the above projected interest rate increase will materialize.
Fluctuations of interest rates are beyond the control of the Company's
management.
18
<PAGE> 20
PART II. OTHER INFORMATION
================================================================================
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In November and December 1998, two class action lawsuits were filed in the
United States District Court for the Northern District of Texas, naming the
Company, Richard K. McClelland, the Company's Chief Executive Officer, and
Robert P. Capps, the Company's former Chief Financial Officer, as defendants.
The lawsuits arise from the Company's November 2, 1998, announcement that it was
(i) revising its results of operations for the year ended July 31, 1998 from
that which had been previously announced on September 16, 1998 and (ii)
restating its results of operations for the third quarter of fiscal 1998 from
that which had been previously reported. On February 5, 1999, the Court entered
an Order consolidating the actions and approved the selection of three law firms
as co-lead counsel. A consolidated and amended complaint was filed on March 22,
1999. On May 6, 1999, defendants filed a motion to dismiss the consolidated and
amended complaint in its entirety.
On June 14, 1999, the Company issued a press release announcing that the Audit
Committee of the Board of Directors had formed a Special Committee of outside
directors to review potentially unsupportable accounting entries for the third
and fourth quarters of fiscal 1998. On September 17, 1999 the Company issued a
press release announcing that the Special Committee had completed its review of
the Company's financial reporting and that the Company would restate its
previously reported financial results for the fiscal years 1997 and 1998, the
first three quarters of the fiscal year 1998 and the first three quarters of the
fiscal year 1999.
On October 14, 1999, pursuant to a stipulation of the parties, plaintiffs filed
a second amended class action complaint. In addition to the defendants named in
the original complaint, the Second Amended Class Action Complaint named Deloitte
& Touche and Deloitte & Touche LLP (the Court subsequently dismissed Deloitte &
Touche LLP without prejudice pursuant to the stipulation of the parties). The
Second Amended Class Action Complaint alleges that the defendants issued a
series of materially false and misleading statements and omitted material facts
concerning the Company's financial condition and business operations. The
lawsuit alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act
of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The
plaintiffs seek unspecified damages on behalf of all other purchasers of the
Company's common stock during the period of September 18, 1997 through and
including September 17, 1999.
On December 8, 1999, Dynamex moved to dismiss the complaint in its entirety on
the grounds that plaintiffs' complaint fails to meet the required pleading
standards and that the claims are deficient as a matter of law. Briefing of the
motion was completed on June 1, 2000, and the motion is now awaiting
disposition. At this date, no class has been certified nor has any discovery
commenced
On April 10, 2000, Reliance Insurance Company filed a notice of action in the
Superior Court of Justice in Ontario, Canada, seeking a declaratory judgment
that defendants in the shareholder class action are not entitled to
reimbursement under the Reliance insurance policy for losses incurred in
connection with that action. The Reliance policy provides $3 million in excess
coverage to supplement the $2 million in coverage provided to the Company
pursuant to the underlying policy issued by American Home Assurance Company.
At this time management is unable to determine the likely outcome of this matter
or to reasonably estimate the amount of loss with respect to this matter.
The Special Committee of the Board of Directors has kept the SEC apprised of its
inquiry and the restatement process. The Company has received an informal
request for information from the Staff of the Commission for documents
concerning the circumstances of the proposed restatement of the Company's prior
period financial statements. The Company has cooperated with the Commission and
produced documents responsive to its request.
19
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11.1 Calculation of Net Income Per Common Share
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
(b) Reports on Form 8-K:
Current Report on Form 8-K dated June 17, 1999. (News
release dated June 15, 1999 announcing that prior years
accounting to be reviewed by Special Committee of Board of
Directors.)
Current Report on Form 8-K dated September 21, 1999. (News
release dated September 17, 1999 announcing the results of
the Special Committee, the restatement of prior periods
and a halt in trading in the Company's common stock by the
American Stock Exchange.)
Current Report on Form 8-K dated December 30, 1999. (News
release announcing delay in filing Form 10-K for year
ended July 31, 1999 and preliminary first quarter 2000
results.)
Current Report on Form 8-K dated March 7,2000. (News
release announcing the resignation of Deloitte & Touche
LLP as the Company's independent auditors.)
Current Report on Form 8-K dated April 24, 2000. (News
release announcing the appointment of BDO Seidman, LLP as
the Company's independent auditors.)
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<PAGE> 22
SIGNATURE
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.
DYNAMEX INC.
Dated: June 29, 2000 by /s/ Richard K. McClelland
--------------------------------------
Richard K. McClelland
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Dated: June 29, 2000 by /s/ Ray E. Schmitz
--------------------------------------
Ray E. Schmitz
Vice President - Controller
(Principal Accounting Officer)
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11.1 Calculation of Net Income Per Common Share
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
</TABLE>
