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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 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)
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DELAWARE 86-0712225
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1431 GREENWAY DRIVE, SUITE 345, IRVING, TEXAS 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 756-8180
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on October 10, 2000 was approximately $15,948,000.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of October 10, 2000 was 10,206,817 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of the Form 10-K has been incorporated
by reference to the Registrant's definitive Proxy Statement on Schedule 14-A to
be filed with the Commission.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS......................................................... 1
ITEM 2. PROPERTIES....................................................... 10
ITEM 3. LEGAL PROCEEDINGS................................................ 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................. 13
ITEM 6. SELECTED FINANCIAL DATA.......................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...................................................... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 23
ITEM 11. EXECUTIVE COMPENSATION........................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................... 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K......................................................... 24
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PART I
Statements and information presented within this Annual Report on Form 10-K
for Dynamex Inc. (the "Company" and "Dynamex") contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements can be identified by the use
of predictive, future tense or forward-looking terminology, such as "believes,"
"anticipates," "expects," "estimates," "may," "will" or similar terms.
Forward-looking statements also include projections of financial performance,
statements regarding management's plans and objectives and statements concerning
any assumptions relating to the foregoing. Certain important factors which may
cause actual results to vary materially from these forward-looking statements
accompany such statements and appear elsewhere in this report, including without
limitation, the factors disclosed under "Risk Factors." All subsequent written
or oral forward-looking statements attributable to the Company or persons acting
on its behalf are expressly qualified by these factors.
ITEM 1. BUSINESS
GENERAL
Dynamex is a leading provider of same-day delivery and logistics services in
the United States and Canada. From its base as the largest nationwide same-day
transportation company in Canada, over the last four years Dynamex has
established a presence in 21 metropolitan markets in the United States and has
continued to expand its system in Canada. Through its network of branch offices,
the Company provides same-day, door-to-door delivery services utilizing its
ground couriers. For many of its inter-city deliveries, the Company uses third
party air or motor carriers in conjunction with its ground couriers to provide
same-day service. In addition to traditional on-demand delivery services, the
Company offers scheduled distribution services, which encompass recurring, often
daily, point-to-point deliveries or multiple destination deliveries that often
require intermediate handling. The Company also offers fleet and facilities
management services. These services include designing and managing systems to
maximize efficiencies in transporting, sorting and delivering customers'
products on a local and multi-city basis. With its fleet management service, the
Company manages and may provide a fleet of dedicated vehicles at single or
multiple customer sites. The Company's on-demand delivery capabilities are
available to supplement scheduled distribution arrangements or dedicated fleets
as needed. Facilities management services include the Company's operation and
management of a customer's mailroom.
The Company was organized under the laws of Delaware in 1992 as Parcelway
Systems Holding Corp. In May 1995, the Company acquired Dynamex Express and, in
July 1995, the Company changed its name to Dynamex Inc. At the time of its
acquisition by the Company, Dynamex Express had developed a national network of
20 locations across Canada and offered an array of services on a national,
multi-city and local basis. In December 1995, the Company acquired the on-demand
ground courier operations of Mayne Nickless, which had operations in eight U.S.
cities and two Canadian cities. In August 1996, in conjunction with the
Company's initial public offering (the "IPO") the Company acquired five same-day
delivery businesses in three U.S. and two Canadian cities (the "IPO
Acquisitions"). Subsequent to the IPO and through August 31, 1998 the Company
acquired 22 additional same-day delivery businesses in thirteen U.S. and three
Canadian cities. See "-- Recent Acquisitions."
INDUSTRY OVERVIEW
The delivery and logistics industry is large, highly fragmented and growing.
The industry is composed primarily of same-day, next-day and second-day service
providers. The Company primarily services the same-day, intra-city delivery
market. The same-day delivery and logistics industry in the U.S. and Canada
primarily consists of several thousand small, independent businesses serving
local markets and a small number of multi-location regional or national
operators. The Company believes that the same-day delivery and logistics
industry offers substantial consolidation opportunities as a result of industry
fragmentation and that there are significant operating benefits to large-scale
service providers. Relative to smaller operators in the industry, the Company
believes that national operators such as the Company benefit from several
competitive advantages including: national brand identity, professional
management, the ability to service national accounts and centralized
administrative and management information systems.
Management believes that the same-day delivery segment of the
transportation industry is benefiting from several recent trends. For example,
the trend toward outsourcing has resulted in numerous shippers turning to third
party providers for a range of services including same-day delivery and
management of in-house distribution. Many businesses that outsource their
distribution requirements prefer to purchase such services from one source that
can service multiple cities,
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thereby decreasing the number of vendors from which they purchase services.
Additionally, the growth of "just-in-time" inventory practices designed to
reduce inventory-carrying costs has increased the demand for the same-day
delivery of such inventory. Technological developments such as e-mail and
facsimile have increased the pace of business and other transactions, thereby
increasing demand for the same-day delivery of a wide array of items, ranging
from voluminous documents to critical manufacturing parts and medical devices.
Consequently, there has been increased demand for the same-day transportation of
items that are not suitable for fax or electronic transmission, but for which
there is an immediate need.
BUSINESS STRATEGY
The Company intends to expand its operations in the U.S. and Canada to
capitalize on the demand of local, regional and national businesses for
innovative same-day transportation solutions. The key elements of the Company's
business strategy are as follows:
Focus on Primary Services. The Company provides three primary services: (i)
same-day on-demand delivery services, (ii) same-day scheduled distribution
services and (iii) outsourcing services such as fleet management and facilities
management. The Company focuses its same-day on-demand delivery business on
transporting non-faxable, time sensitive items throughout metropolitan areas. By
delivering items of greater weight over longer distances and providing value
added on-demand services such as non-technical swap-out of failed equipment, the
Company expects to raise the yield per delivery relative to the yield generated
by delivering documents within a central business district. Additionally, the
Company intends to capitalize on the market trend towards outsourcing
transportation requirements by concentrating its logistics services in same-day
scheduled distribution and fleet management. The delivery transactions in a
fleet management and scheduled distribution program are recurring in nature,
thus creating the potential for long term customer relationships. Additionally,
these value added services are generally less vulnerable to price competition
than traditional on-demand delivery services.
Target National and Regional Accounts. The Company's sales force focuses on
pursuing and maintaining national and regional accounts. The Company anticipates
that its (i) existing multi-city network of locations combined with new
locations to be acquired, (ii) ability to offer value added services such as
fleet management to complement its basic same-day delivery services and (iii)
experienced, operations oriented management team and sales force, will create
further opportunities with many of its existing customers and attract new
national and regional accounts.
Create Strategic Alliances. By forming alliances with strategic partners
that offer services that complement those of the Company, the Company and its
partner can jointly market their services, thereby accessing one another's
customer base and providing such customers with a broader range of value added
services. For example, the Company has formed an alliance with Purolator, the
largest Canadian overnight courier company, whereby on an exclusive basis the
Company and Purolator provide one another with certain delivery services and
market one another's delivery services to their respective customers. See "--
Sales and Marketing."
SERVICES
The Company capitalizes on its routing, dispatch and vehicle and personnel
management expertise developed in the ground courier business to provide its
customers with a broad range of value added, same-day distribution services. By
creating innovative applications of its core services, the Company intends to
expand the market for its distribution services and increase the yield per
service provided.
Same-Day On-Demand Delivery. The Company provides same-day intra-city
on-demand delivery services whereby Company messengers or drivers respond to a
customer's request for immediate pick-up and delivery. The Company also provides
same-day inter-city delivery services by utilizing third party air or motor
carriers in conjunction with the Company's ground couriers. The Company focuses
on the delivery of non-faxable, time sensitive items throughout major
metropolitan areas rather than traditional downtown document delivery. By
delivering items of greater weight over longer distances and providing value
added on-demand services such as non-technical swap-out of failed equipment, the
Company expects to continue to raise the yield per delivery relative to the
yield generated from downtown document deliveries. For the fiscal years ended
July 31, 2000, 1999 and 1998, approximately 58%, 62% and 62%, respectively, of
the Company's revenues were generated from on-demand same-day delivery services.
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Same-Day Scheduled Distribution. The Company provides same-day scheduled
distribution services for time-sensitive local deliveries. Scheduled
distribution services include regularly scheduled deliveries made on a
point-to-point basis and deliveries that may require intermediate handling,
routing or sorting of items to be delivered to multiple locations. The Company's
on-demand delivery capabilities are available to supplement the scheduled
drivers as needed. A bulk shipment may be received at the Company's warehouse
where it is sub-divided into smaller bundles and sorted for delivery to
specified locations. Same-day scheduled distribution services are provided on
both a local and multi-city basis. For example, in the suburban Washington,
D.C./Baltimore area the Company provides scheduled, as well as on-demand,
delivery services for a group of local hospitals and medical laboratories,
transferring samples between these facilities. In Ontario, Canada, the Company
services the scheduled distribution requirements of a consortium of commercial
banks. These banks require regular pick-up of non-negotiable materials that are
then delivered by the Company on an intra- and inter-city basis. For the fiscal
years ended July 31, 2000, 1999 and 1998, approximately 19%, 12% and 13%,
respectively, of the Company's revenues were generated from same-day scheduled
distribution services.
Outsourcing Services. The Company's outsourcing services include fleet
management and mailroom or other facilities management, such as maintenance of
call centers for inventory tracking and delivery. With its outsourcing services,
the Company is able to apply its same-day delivery capability and logistics
experience to design and manage efficient delivery systems for its customers.
The outsourcing service offerings can expand along with the customer's needs.
Management believes that the trend toward outsourcing has resulted in many
customers reducing their reliance on in-house transportation departments and
increasing their use of third-party providers for a variety of delivery
services.
The largest component of the Company's outsourcing services is fleet
management. With its fleet management service, the Company provides
transportation services primarily for customers that previously managed such
operations in-house. This service is generally provided with a fleet of
dedicated vehicles that can range from passenger cars to tractor-trailers (or
any combination) and may display the customer's logo and colors. In addition,
the Company's on-demand delivery capability may supplement the dedicated fleet
as necessary, thereby allowing a smaller dedicated fleet to be maintained than
would otherwise be required. The Company's fleet management services include
designing and managing systems created to maximize efficiencies in transporting,
sorting and delivering customers' products on a local and multi-city basis.
Because the Company generally does not own vehicles but instead hires drivers
who do, the Company's fleet management solutions are not limited by the
Company's need to utilize its own fleet.
By outsourcing their fleet management, the Company's customers (i) utilize
the Company's distribution and route optimization experience to deliver their
products more efficiently, (ii) gain the flexibility to expand or contract fleet
size as necessary, and (iii) reduce the costs and administrative burden
associated with owning or leasing vehicles and hiring and managing
transportation employees. For example, the Company has configured and now
manages a distribution fleet for one of the largest distributors to drugstores
in Canada. For the fiscal years ended July 31, 2000, 1999 and 1998,
approximately 23%, 26% and 25%, respectively, of the Company's revenues were
generated from fleet management and other outsourcing services.
While the volume and profitability of each service provided varies
significantly from branch office to branch office, each of the Company's branch
offices generally offers the same core services. Factors, which impact the
business mix per branch, include customer base, competition, geographic
characteristics, available labor and general economic environment. The Company
can bundle its various delivery and logistics services to create customized
distribution solutions and, by doing so, seeks to become the single source for
its customers' distribution needs.
OPERATIONS
The Company's operations are divided into two U.S. regions and one Canadian
region, with each of the Company's approximately 40 branches assigned to the
appropriate region. Branch operations are locally managed with regional and
national oversight and support provided as necessary. A branch manager is
assigned to each branch office and is accountable for all aspects of such branch
operations including its profitability. Each branch manager reports to a
regional manager with similar responsibilities for all branches within his
region. Certain administrative and marketing functions may be centralized for
multiple branches in a given city or region. Dynamex believes that the strong
operational background of its senior management is important to building brand
identity throughout the United States while simultaneously overseeing and
encouraging individual managers to be successful in their local markets.
Same-Day On-Demand Delivery. Most branches have operations centers staffed
by dispatchers, as well as customer service representatives and operations
personnel. Incoming calls are received by trained customer service
representatives
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who utilize computer systems to provide the customer with a job-specific price
quote and to transmit the order to the appropriate dispatch location. Certain of
the Company's larger clients can access such software through electronic data
interface to enter dispatch requirements, page specific drivers, make inquiries
and receive billing information. A dispatcher coordinates shipments for delivery
within a specific time frame. Shipments are routed according to the type and
weight of the shipment, the geographic distance between the origin and
destination and the time allotted for the delivery. Coordination and deployment
of delivery personnel for on-demand deliveries is accomplished either through
communications systems linked to the Company's computers, through pagers or by
radio.
Same-Day Scheduled Distribution. A dispatcher coordinates and assigns
scheduled deliveries to the drivers and manages the delivery flow. In many
cases, certain drivers will handle a designated group of scheduled routes on a
recurring basis. Any intermediate handling required for a scheduled distribution
is conducted at the Company's warehouse or at a third party facility such as the
airport.
Outsourcing Services. The largest component of the Company's outsourcing
services is its fleet management. Fleet management services are coordinated by
the Company's logistics specialists who have experience in designing,
implementing and managing integrated networks for transportation services. Based
upon the specialist's analysis of a customer's fleet and distribution
requirements, the Company develops a plan to optimize fleet configuration and
route design. The Company provides the vehicles and drivers necessary to
implement the fleet management plan. Such vehicles and drivers are generally
dedicated to a particular customer and may display the customer's name and logo
on its vehicles. The Company can supplement these dedicated vehicles and drivers
with its on-demand capability as necessary.
Prices for the Company's services are determined at the branch level based
on the distance, weight and time-sensitivity of a particular delivery. The
Company generally enters into customer contracts for scheduled distribution, and
fleet and facilities management, which are generally terminable by such customer
upon notice generally ranging from 30 to 90 days. The Company does not typically
enter into contracts with its customers for on-demand delivery services.
Substantially all of the Dynamex drivers are owner-operators who provide
their own vehicles, pay all expenses of operating their vehicles and receive a
percentage of the delivery charge as compensation. Management believes that this
creates a higher degree of responsiveness on the part of its drivers as well as
significantly lowering the capital required to operate the business and reducing
the Company's fixed costs.
SALES AND MARKETING
The Company markets its services through a sales force comprised of national
and local sales representatives. The Company's national sales force, comprised
of approximately 5 persons, includes product specialists dedicated to specific
services, such as fleet management. Additionally, some of these specialists have
developed expertise in servicing certain industries such as banks and
telecommunications companies. As part of its overall marketing plan, the Company
intends to increase the number of national product and industry specialists.
Approximately 80 local employee sales representatives target business
opportunities from the branch offices and approximately 20 specialized sales
representatives contact existing customers to assess customer satisfaction and
requirements. The Company's sales force will seek to generate additional
business from existing local accounts, which often include large companies with
multiple locations. The expansion of the Company's national sales program and
continuing investment in technology to support its expanding operations have
been undertaken at a time when large companies are increasing their demand for
delivery providers who offer a range of delivery services at multiple locations.
The Company's local sales representatives make regular calls on existing and
potential customers to identify such customers' delivery and logistics needs.
The Company's national product and industry specialists augment the local
marketing efforts and seek new applications of the Company's primary services in
an effort to expand the demand for such services. Customer service
representatives on the local and national levels regularly communicate with
customers to monitor the quality of services and to quickly respond to customer
concerns. The Company maintains a database of its customers' service utilization
patterns and satisfaction level. This database is used by the Company's
specialized sales force to analyze opportunities and conduct performance audits.
Fostering strategic alliances with customers who offer services that
complement those of the Company is an important component of the Company's
marketing strategy. For example, under an agreement with Purolator, the Company
serves as Purolator's exclusive provider of same-day courier services, which
services are then marketed by Purolator to its customers. The Company also
provides Purolator with local and inter-city, same-day ground courier service
for misdirected Purolator
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shipments. Purolator, in turn, serves as the Company's exclusive provider of
overnight delivery services which services are marketed by the Company to its
customers. Purolator reports that it is the largest overnight courier in Canada
with approximately 12,000 employees who process over 2.5 million pieces each
week.
CUSTOMERS
The Company's target customer is a business that distributes time-sensitive,
non-faxable items that weigh from one to seventy pounds to multiple locations.
The primary industries served by the Company include financial services,
electronics, pharmaceuticals, medical laboratories and hospitals, auto parts,
legal services and Canadian governmental agencies. Management believes that for
the fiscal year ended July 31, 2000, no single industry accounted for more than
10% of the Company's annual revenues. A significant number of the Company's
customers are located in Canada. For the fiscal years ended July 31, 2000, 1999
and 1998, approximately 33%, 33% and 37% of the Company's revenues,
respectively, were generated in Canada. See Note 12 of Notes to Consolidated
Financial Statements for additional information concerning the Company's foreign
operations.
COMPETITION
The market for the Company's same-day delivery and logistics services has
been and is expected to remain highly competitive. The Company believes that the
principal competitive factors in the markets in which it competes are
reliability, quality, breadth of service and price.
Most of the Company's competitors in the same-day intra-city delivery market
are privately held companies that operate in only one location, with no one
competitor dominating the market. However, there is a trend toward industry
consolidation and companies with greater financial and other resources than the
Company that may not currently operate in the delivery and logistics business
may enter the industry to capitalize on such trend. Price competition for basic
delivery services is particularly intense.
The market for the Company's logistics services is also highly competitive,
and can be expected to become more competitive as additional companies seek to
capitalize on the growth in the industry. The Company's principal competitors
for such services are other delivery companies and in-house transportation
departments. The Company generally competes on the basis of its ability to
provide customized service regionally and nationally, which it believes is an
important advantage in this highly fragmented industry, and on the basis of
price.
The Company competes for acquisition candidates with other companies in the
industry and companies that may not currently operate in the industry but may
acquire and consolidate local courier businesses. Management believes that its
operating experience and its strategy to fully integrate each acquired company
by adding its core services and introducing national and multi-city marketing
will allow it to remain competitive in the acquisition market.
The Company's principal competitors for drivers are other delivery companies
within each market area and e-commerce companies. Management believes that its
method of driver compensation, which is based on a percentage of the delivery
charge, is attractive to drivers and helps the Company to recruit and retain
drivers.
RECENT ACQUISITIONS
Commencing with the IPO in August 1996 and continuing through September
1998, the Company acquired the following same-day delivery businesses
(collectively the "Acquisitions"):
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COMPANY SERVED OF ACQUISITION
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Action Delivery(1) Halifax, Nova Scotia August 16, 1996
Seidel Delivery(1) Columbus, Ohio August 16, 1996
Seko/Metro(1) Chicago, Illinois August 16, 1996
Southbank(1) New York, New York August 16, 1996
Zipper(1) Winnipeg, Manitoba August 16, 1996
Express It, Inc.(2) New York, New York October 1, 1996
Dollar Courier(2) San Diego, California October 18, 1996
Winged Foot Couriers, Inc.(2) New York, New York December 1, 1996
Boogey Transportation Limited(2) Saskatoon, Saskatchewan December 1, 1996
One Hour Delivery Services, Inc.(2) Dallas, Texas January 1, 1997
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Priority Parcel Express, Inc.(2) Dallas, Texas January 1, 1997
Max America Holdings, Inc.(2) Dallas, Texas January 1, 1997
Eagle Couriers, Inc.(2) Richmond, Virginia February 1, 1997
One Hour Courier Service, Inc.(2) Kansas City, Missouri March 1, 1997
Regina Mail Marketing, Inc.(2) Regina, Saskatchewan April 28, 1997
Road Runner Transportation, Inc.(2) Minneapolis/St. Paul, MN May 16, 1997
Central Delivery Service of Washington, Hartford, Connecticut August 16, 1997
Inc. (2 branches only)(3) Boston, Massachusetts
Road Management Systems, Inc. and certain Atlanta, Georgia September 26, 1997
related companies(3)
Nydex Companies(3) New York, New York October 1, 1997
Backstreet Couriers, Inc. and a related Memphis, Tennessee March 1, 1998
company(3)
U.S.C. Management Systems, Inc.(3) New York, New York March 23, 1998
Colorado Courier and Distribution, Inc.(3) Denver, Colorado March 31, 1998
Alpine Enterprises Ltd.(3) Winnipeg, Manitoba March 31, 1998
Rush Delivery Service(3) Kansas City, Missouri April 30, 1998
Cannonball, Inc.(3) Chicago, Illinois May 3, 1998
Facilities Management & Consulting Inc.(4) Chicago, Illinois August 4, 1998
Dash Courier(4) Washington, D.C. August 17, 1998
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(1) Collectively the "IPO Acquisitions."
(2) Collectively the "Fiscal 1997 Acquisitions."
(3) Collectively the "Fiscal 1998 Acquisitions."
(4) Collectively the "Fiscal 1999 Acquisitions."
The aggregate consideration paid by the Company for the Acquisitions
included cash paid of approximately $81.3 million and the issuance by the
Company of approximately $700,000 in promissory notes and approximately
1,499,000 shares of common stock. In addition, in certain instances, the Company
may pay additional cash consideration if such acquired businesses obtain certain
performance goals. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consideration paid by the Company for
the Acquisitions was determined through arms-length negotiations among the
Company and the representatives of the owners of these acquired companies. The
factors considered by the parties in determining the purchase price include,
among other things, the historical operating results and the future prospects of
the acquired companies.
Each of the Acquisitions has been accounted for using the purchase method of
accounting. Accordingly, each acquired company is included in the Company's
consolidated results of operations from the date of its respective acquisition.
REGULATION
The Company's business and operations are subject to various federal (U.S.
and Canadian), state, provincial and local regulations and, in many instances,
require permits and licenses from state authorities. The Company holds
nationwide general commodities authority from the Federal Highway Administration
of the U.S. Department of Transportation to transport certain property as a
motor carrier on an inter-state basis within the contiguous 48 states. Where
required, the Company holds statewide general commodities authority. The Company
holds permanent extra-provincial (and where required, intra-provincial)
operating authority in all Canadian provinces where the Company does business.
In connection with the operation of certain motor vehicles, the handling of
hazardous materials in its courier operations and other safety matters,
including insurance requirements, the Company is subject to regulation by the
United States Department of Transportation, the states and by the appropriate
Canadian federal and provincial regulations. The Company is also subject to
regulation by the Occupational Safety and Health Administration, provincial
occupational health and safety legislation and federal and provincial employment
laws respecting such matters as hours of work, driver logbooks and workers'
compensation. To the extent the Company holds licenses to operate two-way radios
to communicate with its fleet, the Federal Communications Commission regulates
the Company. The Company believes that it is in substantial compliance with all
of these regulations. The failure of the Company to comply with the applicable
regulations could result in substantial fines or possible revocations of one or
more of the Company's operating permits.
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SAFETY
From time to time, the Company's drivers are involved in accidents. The
Company carries liability insurance with a per claim and an aggregate limit of
$15.0 million. Owner-operators are required to maintain liability insurance of
at least the minimum amounts required by applicable state and 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. The Company reviews prospective drivers to
ensure that they have acceptable driving records. In addition, where required by
applicable law, the Company requires prospective drivers to take a physical
examination and to pass a drug test. Branch managers are responsible for
training drivers on any additional safety requirements as dictated by customer
specifications.
INTELLECTUAL PROPERTY
The Company has registered "DYNAMEX" and "DYNAMEX EXPRESS" as federal
trademarks in the Canadian Intellectual Office and has filed applications in the
U.S. Patents and Trademark's office for federal trademark registration of such
names. No assurance can be given that any such registration will be granted in
the U.S. or that if granted, such registration will be effective to prevent
others from using the trademark concurrently or preventing the Company from
using the trademark in certain locations.
EMPLOYEES
At September 1, 2000, the Company had approximately 2,800 employees, of whom
approximately 1,800 primarily were employed in various management, supervisory,
administrative, and other corporate positions and approximately 1,000 were
employed as drivers and messengers. Additionally at September 1, 2000, the
Company had contracts with approximately 4,000 independent owner-operator
drivers. Management believes that the Company's relationship with such employees
and independent owner-operators is good. See "Risk Factors -- Certain Tax
Matters Related to Drivers."
Of the approximately 5,000 drivers and messengers used by the Company as of
September 1, 2000, approximately 1,800 are located in Canada and approximately
3,200 are located in the U.S. Although the drivers and messengers located in
Canada are generally independent contractors, approximately 65% are represented
by major international labor unions. Management believes that the Company's
relationship with such unions is good. Unions represent none of the Company's
U.S. employees, drivers or messengers.
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.
7
<PAGE> 10
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 September 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 $15.0 million. Owner-operators are required to maintain liability
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
September 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."
8
<PAGE> 11
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 effect 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" and Note 12 of Notes to Consolidated
Financial Statements.
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 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. See "Business -- Regulation."
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.
9
<PAGE> 12
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.
ITEM 2. PROPERTIES
The Company leases facilities in 59 locations. These facilities are
principally used for operations and general and administrative functions. The
chart below summarizes the locations of facilities that the Company leases:
<TABLE>
<CAPTION>
NUMBER OF
LOCATION LEASED PROPERTIES
-----------------
<S> <C>
Canada
Alberta 4
British Columbia 3
Manitoba 2
Newfoundland 1
Nova Scotia 1
Ontario 7
Quebec 2
Saskatchewan 4
--
Canadian Total 24
U.S.
Arizona 1
California 3
Colorado 1
Connecticut 1
District of Columbia 1
Georgia 1
Illinois 3
Maryland 1
Massachusetts 1
Minnesota 1
Missouri 1
New York 8
North Carolina 1
Ohio 1
Pennsylvania 1
Texas 5
Virginia 3
Washington 1
--
U.S. Total 35
</TABLE>
The Company believes that its properties are well maintained, in good
condition and adequate for its present needs. The Company anticipates that
suitable additional or replacement space will be available when required. The
Company's facilities rental expense for the fiscal years ended July 31, 2000,
1999 and 1998 were approximately $4.5, $4.3 and $3.5 million, respectively. The
Company's principal executive offices are located in Irving, Texas. See Note 7
of Notes to the Consolidated Financial Statements for additional information.
10
<PAGE> 13
ITEM 3. 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 the
Company 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. In addition to the defendants named in the original complaints,
the amended complaint also named as defendants the underwriters of the Company's
May 1998 secondary offering of common stock, Schroder & Co., Inc., William Blair
& Company, and Hoak Breedlove Wesneski & Co. (the "Underwriter Defendants"). 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 amended 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 September 20, 2000, the Company, Richard McClelland, Robert Capps and the
Underwriter Defendants signed a memorandum of understanding setting forth the
terms of a proposed settlement of this action. Deloitte & Touche is not a party
to the memorandum of understanding. The proposed settlement provides that the
Company's primary directors and officers liability insurer, American Home
Insurance Company, will pay $2 million towards the settlement. In addition, the
Company will pay $1 million and contribute one million shares of common stock
towards the proposed settlement. The Company has also agreed to pay to the class
75% of any recoveries, after legal expenses and costs, from the Company's excess
insurer, Reliance Insurance Company, and former auditors, Deloitte & Touche LLP
and Deloitte & Touche. The settlement is conditioned upon, among other things,
execution of a definitive settlement agreement and related documents, the
provision of notice of the settlement of the Company's shareholders, and
approval of the settlement by the United States District Court for the Northern
District of Texas.
In accordance with applicable accounting standards, the company records a
charge reflecting contingent liabilities when management determines that a
material loss is "probable" and either "quantifiable" or "reasonably estimable."
As a result of the signing of the memorandum of understanding on September 20,
2000, the Company recorded a fourth quarter charge of $2.3 million in the fiscal
year ended July 31, 2000. The charge includes the value of one million shares of
the Company's common stock based on the closing price of the stock on September
20, 2000 ($1.3 million), plus $1 million cash. The cash is payable in two
installments, the first installment of $350,000 was paid on September 23, 2000
with the remaining $650,000 plus interest payable at least 10 business days
before the date scheduled by the court for the settlement fairness hearing. The
Company will deliver the one million shares of the Company's stock after the
effective date of the Settlement.
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
11
<PAGE> 14
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.
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 informal requests for information from the Staff of the
Commission for documents concerning the circumstances of the restatement of the
Company's prior period financial statements. The Company has cooperated with the
Commission and produced documents responsive to its requests.
The Company is also a party to various legal proceedings arising in the
ordinary course of its business. Management believes that the ultimate
resolution of these proceedings will not, in the aggregate, have a material
adverse effect on the financial condition, results of operations, or liquidity
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information -- The Company's common stock began trading on the AMEX
under the symbol "DDN" on May 17, 1999. Previously the Company's common stock
was traded over-the-counter on the NASDAQ National Market under the symbol
"DYMX" beginning on August 13, 1996. As a result of the Company's announcement
that financial statements for the years ended July 31, 1998 and 1997 would be
restated and should not be relied upon, the AMEX suspended trading in the
Company's common stock on September 16, 1999. The AMEX allowed trading in the
Company's common stock to resume on July 7, 2000. The following table summarizes
the high and low sale prices per share of common stock for the periods
indicated, as reported on the AMEX or NASDAQ National Market:
<TABLE>
<CAPTION>
BID
----------------------
FISCAL YEAR 1998 HIGH LOW
------- --------
<S> <C> <C>
First Quarter $ 11.000 $ 6.500
Second Quarter $ 11.625 $ 9.375
Third Quarter $ 13.625 $ 10.813
Fourth Quarter $ 13.875 $ 10.500
FISCAL 1999
First Quarter $ 11.000 $ 6.000
Second Quarter $ 6.063 $ 3.625
Third Quarter $ 4.063 $ 2.031
Fourth Quarter $ 3.500 $ 2.688
FISCAL 2000
First Quarter $ 3.375 $ 2.0625
Second Quarter $ -- $ --
Third Quarter $ -- $ --
Fourth Quarter $ 2.000 $ 1.125
</TABLE>
Holders -- As of October 10, 2000, the approximate number of holders of
record of common stock was 90.
Dividends -- The Company has not declared or paid any cash dividends on its
common stock since its inception. The Company intends to retain future earnings
for the operation and expansion of its business and does not anticipate paying
any cash dividend in the foreseeable future. In addition, the Company's Credit
Agreement restricts the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
13
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the three years ended
July 31, 2000 have been derived from the audited consolidated financial
statements of the Company appearing elsewhere herein. The following selected
historical financial data for the years ended July 31, 1997 and 1996 has been
derived from the consolidated financial statements of the Company not appearing
elsewhere herein. The selected financial data are qualified in the entirety, and
should be read in conjunction with the Company's consolidated financial
statements, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein. Selling, general and administrative expenses for the year ended July 31,
1999 include $2.5 million of costs related to the Special Committee process and
non-recurring audit fees, $1.4 million for the write-off of expenses associated
with the failed Q International and other acquisitions and $0.7 million for
severance and other restructuring costs.
<TABLE>
<CAPTION>
Years ending July 31,
=====================================================================
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Statement of Operations Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Sales $ 251,475 $ 239,631 $ 208,019 $ 132,587 $ 71,812
Cost of sales 171,675 163,156 140,037 88,342 50,018
--------- --------- --------- --------- ---------
Gross profit 79,800 76,475 67,982 44,245 21,794
Selling, general and administrative expenses 64,483 66,166 55,866 34,197 17,545
Depreciation and amortization (including
intangible impairment of $3,971 in 1999) 8,931 13,211 8,770 4,991 1,542
Provision for loss on settlement of
shareholder class action lawsuit 2,313 -- -- -- --
(Gain) loss on disposal of property and
equipment 97 205 (199) (57) --
--------- --------- --------- --------- ---------
Operating income (loss) 3,976 (3,107) 3,545 5,114 2,707
Interest expense, net 5,860 4,607 4,228 1,600 1,655
Other income, net (203) (35) -- -- --
--------- --------- --------- --------- ---------
Income (loss) before taxes (1,681) (7,679) (683) 3,514 1,052
Income taxes 1,718 (1,003) 935 1,825 176
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary item $ (3,399) $ (6,676) $ (1,618) $ 1,689 $ 876
========= ========= ========= ========= =========
Net income (loss) per common share, before
extraordinary item
basic $ (0.33) $ (0.66) $ (0.20) $ 0.25 $ 0.34
========= ========= ========= ========= =========
diluted $ (0.33) $ (0.66) $ (0.20) $ 0.25 $ 0.23
========= ========= ========= ========= =========
Common shares outstanding 10,207 10,099 7,937 6,670 2,543
Adjusted common shares 10,207 10,099 7,937 6,839 3,732
Other Data:
Earnings (loss) before interest, taxes,
depreciation and amortization(1) $ 12,907 $ 10,104 $ 12,315 $ 10,105 $ 4,249
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
July 31,
============================================================
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 11,022 $ 11,329 $ 15,402 $ 11,236 $ 4,086
Total assets 126,524 130,422 122,769 85,497 34,999
Long-term debt, excluding current portion 40,928 46,690 36,287 32,388 20,036
Stockholders' equity 58,410 61,547 67,959 38,948 6,158
</TABLE>
14
<PAGE> 17
1) EBITDA is defined as income excluding interest, taxes, depreciation and
amortization of goodwill and other assets (as presented on the face of the
income statement). EBITDA is supplementally presented because management
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 income or
cash flow data from the Company's financial statements, which have been
prepared in accordance with generally accepted accounting principles. Cash
flows provided by operating activities for the three years ended July 31,
2000 were $8,162, $9,017, and $5,361 respectively. Cash flows used in
investing activities for the three years ended July 31, 2000 were $3,185,
$17,204, and $39,000 respectively. Cash flows (used) provided by financing
activities for the three years ended July 31, 2000 were ($2,280), $9,979,
$34,210 respectively.
ITEM 7. 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 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 appear elsewhere in
this report, including without limitation, the factors disclosed under "Risk
Factors."
GENERAL
In May 1995, the Company acquired Dynamex Express, the ground courier
operations of Air Canada ("Dynamex Express"), which was led by Richard K.
McClelland, the Company's Chief Executive Officer, and which had a national
network of 20 locations across Canada. In December 1995, the Company acquired
the on-demand ground courier operations of Mayne Nickless Incorporated and Mayne
Nickless Canada Inc. (together, "Mayne Nickless") which had operations in eight
U.S. cities and two Canadian cities. In August 1996, the Company completed the
IPO Acquisitions and thereby acquired five same-day delivery businesses in three
U.S. and two Canadian cities. Subsequent to the IPO and through July 31, 1997,
the Company completed the Fiscal 1997 Acquisitions and thereby acquired an
additional 11 same-day delivery businesses in six U.S. and two Canadian cities.
Between August 1, 1997 and July 31, 1998, the Company completed the Fiscal 1998
Acquisitions, and thereby acquired nine same-day delivery businesses in eight
U.S. cities and one Canadian city. In August 1998, the Company acquired two
same-day delivery businesses in two U.S. cities. See "Business -- Recent
Acquisitions." Each of these acquisitions has been accounted for using the
purchase method of accounting. Accordingly, the Company's historical results of
operations reflect the results of acquired operations from the date of
acquisition. As a result of these various acquisitions, the historical operating
results of the Company for the periods presented are not necessarily comparable.
Sales consist primarily of charges to customers for individual delivery
services and weekly or monthly charges for recurring services, such as fleet
management. Sales are recognized when the service is performed. The yield
(revenue per transaction) for a particular service is dependent upon a number of
factors including size and weight of articles transported, distance transported,
special handling requirements, requested delivery time and local market
conditions. Generally, articles of greater weight transported over longer
distances and those that require special handling produce higher yields.
Cost of sales consists of costs relating directly to performance of
services, including driver and messenger costs and third party delivery charges,
if any. Substantially all of the drivers used by the Company own their own
vehicles, and approximately 80% of these owner-operators are independent
contractors as opposed to employees of the Company. Drivers and messengers are
generally compensated based on a percentage of the delivery charge.
Consequently, the Company's driver and messenger costs are variable in nature.
To the extent that the drivers and messengers are employees of the Company,
employee benefit costs related to them, such as payroll taxes and insurance, are
also included in cost of sales.
Selling, general and administrative expenses include costs incurred at the
branch level related to taking orders and dispatching drivers and messengers, as
well as administrative costs related to such functions. Also included in
selling, general and administrative expenses are regional and corporate level
marketing and administrative costs and occupancy costs related to branch and
corporate locations.
15
<PAGE> 18
Generally, the Company's on-demand services provide higher gross profit
margins than do scheduled distribution or fleet management services because
driver compensation for on-demand services is generally lower as a percentage of
sales from such services. However, scheduled distribution and fleet management
services generally have fewer administrative requirements related to order
taking, dispatching drivers and billing. As a result of these variances, the
Company's margins are dependent in part on the mix of business for a particular
period.
As the Company has no significant investment in transportation equipment,
depreciation and amortization expense primarily relates to depreciation of
office, communication and computer equipment and the amortization of intangible
assets acquired in the Company's various acquisitions, each of which has been
accounted for using the purchase method of accounting.
A significant portion of the Company's revenues is generated in Canada. For
the fiscal years ended July 31, 2000, 1999 and 1998, approximately 33%, 33%,
and 37%, respectively, of the Company's revenues were generated in Canada. The
decrease in the proportion of revenues generated in Canada is attributable to
the high proportion of U.S. businesses acquired in the Acquisitions. Before
deduction of corporate costs, the majority of which are incurred in the U.S.,
the cost structure of the Company's operations in the U.S. and in Canada is very
similar. Consequently, when expressed as a percentage of U.S. or Canadian sales,
as appropriate, the operating profit generated in each such country (before
deduction of corporate costs) is not materially different.
In July 1998 the Company sold its Canadian Strategic Stocking business for
cash of approximately $670,000 and a note in the amount of $234,000. The note is
payable in installments of $134,000 on January 31, 1999; $100,000 on July 31,
1999. An additional $436,000 is contingently payable from 10% of the annual
revenues in excess of a specified base level over a five year period, from the
business sold. In connection with the sale, the Company entered into a services
agreement with the purchaser whereby the Company will provide transportation,
warehouse and inventory management and related services over a five-year period.
In addition the Company has agreed to reimburse the purchaser, during the term
of the services agreement, for certain promotional and employee-related
compensation related to the business and the services provided by the Company.
These costs are estimated to be approximately $150,000 to $130,000 annually. The
cash and non-contingent portion of the note in excess of the basis of the net
assets of the Canadian Strategic Stocking business, received upon closing the
transaction which amounts to approximately $900,000, was deferred at July 31,
1998. This deferred revenue will be recognized over future periods as services
are provided under the services agreement. In the fiscal years ended July 31,
2000 and 1999, the Company recognized $415,000 and $485,000 of the deferred
gain, respectively and earned $264,000 and $172,000 of contingent payments,
respectively.
The conversion rate between the U.S. dollar and Canadian dollar increased
during the fiscal year ending July 31, 2000 as compared to July 31, 1999. The
conversion rate had declined in the fiscal year ending July 31, 1999 compared to
the fiscal year ended July 31, 1998. As the Canadian dollar is the functional
currency for the Company's Canadian operations, these changes in the exchange
rate have effected the Company's reported revenues. The effect of these changes
on the Company's net loss for the fiscal years ended July 31, 2000, 1999 and
1998 has not been significant, although there can be no assurance that
fluctuations in such currency exchange rate will not, in the future, have a
material adverse effect on the Company's business, financial condition or
results of operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from
the Company's consolidated statement of operations, expressed as a percentage of
sales. The following table excludes $2.3 million related to the settlement of
the shareholder class-action lawsuit for the period ended July 31, 2000 and $4.6
million of unusual and non-recurring selling, general and administrative
expenses for the year ended July 31, 1999 ($2.5 million for the Special
Committee process and non-recurring audit fees, $1.4 million for the write-off
of expenses associated with the failed Q International and other acquisitions
and $0.7 million for severance and other restructuring costs). The table also
excludes an impairment of intangibles of $4.0 million from depreciation and
amortization for the year ended July 31, 1999.
16
<PAGE> 19
<TABLE>
<CAPTION>
Years ending July 31,
==============================
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
(a) (a)
Sales 100.0% 100.0% 100.0%
Cost of Sales 68.3% 68.1% 67.3%
------ ------ ------
Gross profit 31.7% 31.9% 32.7%
Selling, general and administrative expenses 25.6% 25.7% 26.9%
Depreciation and amortization 3.6% 3.9% 4.2%
(Gain) loss on disposal of property 0.0% 0.1% (0.1)%
------ ------ ------
Operating income 2.5% 2.2% 1.7%
Interest expense 2.3% 1.9% 2.0%
------ ------ ------
Income (loss) before taxes 0.2% 0.3% (0.3)%
====== ====== ======
</TABLE>
(a) Excludes the litigation settlement and non-recurring and unusual
charges and adjustments described in the paragraph above.
YEAR ENDED JULY 31, 2000 COMPARED TO YEAR ENDED JULY 31, 1999
The net loss for the year ended July 31, 2000 was $3.4 million compared to a
net loss of $6.7 million for the year ended July 31, 1999. The results for 2000
include a provision for the tentative settlement of the shareholder class-action
lawsuit of $2.3 million. The results for 1999 were also negatively impacted by
non-recurring and unusual charges and adjustments. Selling, general and
administrative costs include non-recurring audit fees of approximately $2.1
million related to the 1999 audit and the re-audit and restatement of the
results for the years ended July 31, 1998 and 1997, professional fees in support
of the Special Committee review of $0.4 million, $1.4 million for the write-off
of costs associated with the failed Q International and other acquisitions, and
$0.7 million for severance and other restructuring costs. In addition, the
Company reduced the carrying value of goodwill and covenants not-to-compete for
its Dallas, Texas and Hartford, Connecticut operations in the fourth quarter of
1999 by $4 million. The Company also provided a 100% valuation allowance of
approximately $2.4 million and $0.9 million for federal net operating losses and
the shareholder class action lawsuit settlement incurred in the fiscal years
ended July 31, 2000 and 1999, respectively. The following discussion and
analysis excludes the aforementioned non-recurring and unusual charges and
adjustments in this paragraph.
Sales for the year ended July 31, 2000 increased 4.9% to $251 million from
$240 million from the prior year. Sales for 2000 were negatively impacted in
three locations. In Hartford, Connecticut the Company exited an unprofitable
line-of-business in fiscal year 1999. At the Dallas, Texas branch location, the
combination of additional competition and the problems encountered in the
conversion of the two existing legacy customer order processing systems to the
standard COPS system and combining two business units resulted in a significant
sales decline for this branch. In the Prairie region of Canada (Alberta and
Saskatchewan provinces), the Company lost a major contract when the customer
decided to do the work in-house. Excluding these operations, revenue growth
would have been 7.1%. Management believes sales growth for the fiscal year 2001
will be negatively impacted because the Company has elected to exit
approximately $4.0 million annually of marginally profitable business in several
locations in Canada.
Cost of sales increased approximately $8.5 million or 5.2% to $172 million
in 2000 from $163 million in 1999. Cost of sales, as a percentage of sales,
increased from 68.1% in the 1999 fiscal year to 68.3% in fiscal year 2000. The
increase in this percentage primarily results from the change in business mix
from 1999 to 2000. Historically, cost of sales for on-demand revenues are lower
than the costs associated with other types of business. On-demand sales were
approximately 62% of total sales in fiscal year 1999 compared to 58% in fiscal
year 2000. This decline can be attributed somewhat to the impact of e-mail on
same-day deliveries and to the Company's sales effort to increase other types of
business. Management believes that cost of sales, as a percentage of sales, will
remain or be slightly above its current level in fiscal year 2001.
Selling, general and administrative (SG&A) costs were $64 million for the
fiscal year ended July 31, 2000 compared to $62 million (excluding $4.6 million
in unusual charges and adjustments described above) for the year ended July 31,
1999. As a percentage of sales, SG&A costs were 25.6% in 2000 compared to 25.7%
in 1999. Included in the year 2000, are non-recurring costs of $0.6 million for
temporary accounting assistance required to complete the 1999 fiscal year audit
and the
17
<PAGE> 20
re-audit of the 1998 and 1997 fiscal years. In addition, the fiscal year ended
July 31, 2000 includes $0.4 million in legal costs associated with the
shareholder lawsuit. The Company recently announced a tentative settlement of
the lawsuit. Management expects legal costs associated with the shareholder
lawsuit in fiscal year 2001 to be substantially less than the amounts incurred
in fiscal year 2000. The Company has recently initiated a new sales program
aimed specifically at national accounts. In this regard, the Company will
increase the number of sales personnel to implement this program. In addition, a
number of initiatives are currently in process to streamline administrative
processes and to reduce general and administrative costs. Management expects
SG&A costs to remain at or be slightly below their current level as a percentage
of sales in the 2001 fiscal year.
Depreciation and amortization was $8.9 million in the fiscal year ended July
31, 2000 compared to $9.2 million in the fiscal year ended July 31, 1999, after
adjustment for the $4.0 million reduction in the carrying value of goodwill and
intangibles described above. As a percentage of sales, depreciation and
amortization was 3.6% in 2000 versus 3.9% in 1999. Management expects
depreciation and amortization to continue to decline in fiscal year 2001 both as
a percentage of sales and dollar amount due primarily to the reduction in
amortization of covenants-not-to compete. The covenants are amortized over a
three-year period and substantially all covenants will be fully amortized by the
end of the second quarter of fiscal year 2001.
Interest expense increased $1.3 million or 27% in the fiscal year ended July
31, 2000 compared to the same period in 1999. The higher interest expense in
2000 resulted from higher interest rates in reaction to the increases imposed by
the Federal Reserve Board during the year, the additional financing costs
associated with amending and extending the bank credit agreement terms and the
imposition by the banks of the default rate of interest in the fourth quarter of
2000.
YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998
The net loss for the year ended July 31, 1999 was $6.7 million versus a net
loss of $1.6 million for the year ended July 31, 1998. The results for 1999
include non-recurring and unusual charges and adjustments. Selling, general and
administrative costs include non-recurring audit fees of approximately $2.1
million related to the 1999 audit and the re-audit and restatement of the
results for the years ended July 31, 1998 and 1997, professional fees in support
of the Special Committee review of $0.4 million, $1.4 million for the write-off
of costs associated with the failed Q International and other acquisitions, and
$0.7 million for severance and other restructuring costs. In addition, the
Company reduced the carrying value of goodwill and covenants not-to-compete for
its Dallas, Texas and Hartford, Connecticut operations in the fourth quarter of
1999 by $4 million. The Company also provided a 100% valuation allowance of
approximately $0.9 million for federal net operating losses incurred in 1999
compared to $1.1 million for federal net operating losses incurred in 1998. The
following discussion and analysis excludes the aforementioned non-recurring and
unusual charges and adjustments in this paragraph.
Sales for the year ended July 31,1999 increased approximately $32 million or
15.2%, to $240 million from $208 million for the year ended July 31, 1998.
Approximately $30 million of the increase was from the 1998 and 1999
Acquisitions with the remainder from increased sales from the Company's existing
operations. The decline in the conversion rate between the U.S. dollar and the
Canadian dollar had the effect of decreasing 1999 sales by some $4.5 million had
the conversion rate been the same as in 1998. Sales from branches operating
throughout both periods increased 1.7% in 1999 compared to 1998. Excluding the
impact of the change in the exchange rate between the U.S. and Canadian dollar,
the increase in sales from branches operating throughout both periods was 3.5%.
Cost of sales increased approximately $23 million or 16.5% to $163 million
in 1999 from $140 million in 1998. The increase primarily relates to the 1998
and 1999 Acquisitions, an increase in the provision for bad debts from 0.3% of
sales in 1998 to 0.8% in 1999 and an increase in the percentage of scheduled and
distribution and outsourcing revenues that have a higher cost of sales than
on-demand. The increase in bad debts in 1999 primarily relates to the Dallas,
Texas and Hartford, Connecticut operations. Management believes that future bad
debts will be in the 0.3% to 0.5% of total sales range. As the Company pursues
new opportunities with national accounts, management anticipates that on-demand
revenues will decrease as a percentage of total sales, and therefore that cost
of sales will increase as a percentage of total sales.
Selling, general and administrative costs increased $8.3 million to $64
million in the year ended July 31,1999 from $56 million for the same period in
1998. The increase results from the 1998 and 1999 Acquisitions and the
additional costs associated with building and installing a wide-area network,
the conversion of the customer order processing and dispatching system to a
common platform and the audit, professional and legal fees described above. The
Company will
18
<PAGE> 21
continue to incur additional costs to complete the conversion to a common
platform and to convert the Company's payroll, human resources and financial and
accounting systems to Oracle at an estimated cost of approximately $0.5 million
that will be financed from internally generated cash flows. In addition, the
Company will incur legal costs related to the class action lawsuit.
Depreciation and amortization increased $470,000 or 5.4% primarily due to
the amortization of the value of goodwill and covenants not-to-compete
associated with the 1998 and 1999 Acquisitions. Excluding future acquisitions,
if any, management anticipates that depreciation and amortization will decrease
in fiscal year 2000 and future years due primarily to a reduction in the
amortization of covenants not-to-compete that are fully amortized over three
years.
Interest expense for the year ended July 31, 1999 increased $379,000, or
8.9%, to $4.6 million from $4.2 million for the year ended July 31, 1998
primarily the result of additional borrowings required to finance the Fiscal
1999 Acquisitions and the Fiscal 1998 Acquisitions and the 1999 earn-out
payments.
LIQUIDITY AND CAPITAL RESOURCES.
In fiscal year ended July 31, 2000, the Company's capital needs arose
primarily from its capital expenditures and working capital needs. There were no
acquisitions made in fiscal year 2000. In the fiscal years ended July 31, 1999
and 1998, the Company's capital needs arose primarily from its acquisition
program.
During the fiscal year ended July 31, 1999, the Company completed two
acquisitions for aggregate consideration of approximately $1.8 million. 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 factors. In conjunction with the
acquisitions, the Company issued 119,850 shares of common stock and paid
approximately $12 million in cash during the fiscal year ended July 31, 1999 as
additional consideration.
During the year ended July 31, 1998, the Company completed nine acquisitions
for aggregate consideration of approximately $34 million, consisting of $33
million in cash and the issuance of approximately 114,000 shares of common
stock. The cash portion of the consideration for the acquisitions consummated
after July 31, 1997 was provided by borrowings under the Credit Facility. In
conjunction with the acquisitions, the Company paid approximately $3 million in
cash during the fiscal year ended July 31, 1998 as additional consideration.
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 factors. The estimated maximum amount
of additional consideration payable, if all performance goals are met, is
approximately $5 million payable in cash at July 31, 2000. At July 31, 2000, the
amount of earned but unpaid additional consideration was $1.2 million. The
Company is in the process of negotiating payment schedules with the former
owners. The unpaid balances accrue interest at a rate of 10% per annum. The
Company expects to pay the remaining liability in the next two fiscal years.
In May 1998, the Company completed a follow-on offering of 2.5 million
shares of common stock. Net proceeds to the Company, after deducting
underwriters discount and offering costs, amounted to approximately $30 million,
all of which was used to reduce amounts outstanding under the Credit Facility.
In conjunction with the follow-on offering, the Company amended the Credit
Facility to provide for total borrowings of up to $115 million, of which $36
million was outstanding as of July 31, 1998.
Effective July 31, 2000, the Company amended its bank credit agreement.
Under the terms of the amended agreement, the facility was extended through
November 30, 2001 and split into an amortizing term loan of $32.2 million and a
revolving credit facility of $19.5 million. The revolving credit facility will
be governed by an eligible accounts receivable borrowing base agreement, defined
as 80% of accounts receivable less than 60 days past due. Required principal
payments on the amortizing term loan consist of $794 on November 15, 2000 and
quarterly payments of $875 commencing January 31, 2001 until July 31, 2001 and
then $1.375 million quarterly until maturity, at which time any amounts
outstanding under the facility are due. Interest on outstanding borrowings is
payable monthly at prime or LIBOR, plus an applicable margin. The applicable
margins for prime range from 0.0% to 1.0%, and for LIBOR from 3.0% to 4.0%, and
are based on the ratio of the Company's funded debt to cash flow, both as
defined in the agreement. In addition, the company is required to pay a
commitment fee of 0.375% for any unused amounts of the revolving credit
facility. At July 31, 2000, the weighted-average
19
<PAGE> 22
interest rate for all outstanding borrowings was approximately 11.50%.See Note 6
of Notes to Consolidated Financial Statements.
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 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%.
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. Effective September 7, 2000 the Company entered into a new
interest rate protection arrangement on $24 million of the borrowings under the
Credit Agreement. The interest rate on $24 million has been fixed at 9.79%, plus
the applicable margin. This hedging arrangement matures on July 31, 2001.
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. See Note 6 of Notes to Consolidated Financial Statements and "Risk
Factors -- Acquisition Strategy; Possible Need for Additional Financing."
During the fiscal years ended July 31, 2000, 1999 and 1998, the Company
spent approximately $2.7 million, $3.4 million and $3.8 million, respectively,
on capital expenditures, which expenditures primarily related to improvements in
infrastructure and technology to support the Company's expanding operations.
Management expects the amount of capital expenditures for these purposes in
future years to be comparable to the expenditures made in the year ended July
31, 2000. 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's expansion of its national marketing program consists
primarily of increased hiring and salary expenditures related to additional
product specialists. These marketing expenditures have not, nor does management
expect that in the future they will have, a significant impact on the Company's
liquidity. See "Business -- Sales and Marketing."
The Company's cash flow provided by operations for the fiscal years ended
July 31, 2000, 1999 and 1998 were approximately $8.2 million, $9.0 and $5.4
million, respectively. Consequently, increases in working capital and purchases
of property and equipment during such periods were financed entirely by
internally generated cash flow.
Management expects that its future capital requirements will generally be
met from internally generated cash flow. The Company's access to other sources
of capital, such as additional bank borrowings and the issuance of debt
securities, is affected by, among other things, general market conditions
affecting the availability of such capital. 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. 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 may be unable to implement successfully its
acquisition strategy.
The Company is a defendant in a class action lawsuit. On September 20, 2000,
the Company announced that it has reached an agreement in principle setting
forth the essential terms of a settlement of the pending litigation (See Note 7
of Notes to Consolidated Financial Statements). Among other things, the Company
agreed to pay $1 million in cash, $350,000 to be paid within three days and
$650,000 ten days prior to the date scheduled for the settlement hearing. The
Company intends to fund its portion of the cash settlement from internally
generated funds and to the extent necessary, borrowings under the bank credit
agreement.
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
20
<PAGE> 23
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.
DEFERRED TAXES
The Company has incurred taxable net operating losses in the United States
of $4,410,000, $2,622,000 and $3,197,000 for the years ended July 31, 2000, 1999
and 1998, respectively. In addition, the Company has generated unused foreign
tax credits related to its Canadian operations of $520,000. The Company has
established 100% valuation allowances in accordance with the provisions of SFAS
No. 109 for U.S. operating losses and foreign tax credits not currently
deductible. The Company has also established an 100% valuation allowance of
$829,000 for the tax benefits of the class action lawsuit settlement that the
Company believes, is more likely than not, not to be realized. The Company
continually reviews the adequacy of the valuation allowance and releases the
allowance, when it is determined that it is more likely than not that the
benefits will be realized. The remaining deferred tax assets represent
deductions for financial statement purposes that will reduce future taxable
income.
INFLATION
The Company does not believe that inflation has had a material effect on the
Company's results of operations nor does it believe it will do so in the
foreseeable future. However, there can be no assurance the Company's business
will not be affected by inflation in the future.
FINANCIAL CONDITION
The Company believes its financial condition remains strong and that it has
the financial resources necessary to meet its needs. Cash provided by operating
activities and the Company's credit facility should be sufficient to meet the
Company's operational needs, however, the Company may require additional
financing to pay future earn-out payments to the owners of acquired businesses.
ACCOUNTING PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Management does not believe this will have a material effect on
operations. Implementation of this standard has recently been delayed by the
FASB for a 12-month period through the issuance of SFAS No. 138, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133". SFAS No. 137 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000.
"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:
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.
21
<PAGE> 24
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 final outcome of the Shareholder class action lawsuit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 versus a 10%
decrease in the exchange rate. Based on this model, a 10% decrease would result
in a decrease in revenue of $8.3 million and a decrease in net income of $.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 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. Effective September 7, 2000 the Company entered into a new
interest rate protection arrangement on $24 million of the borrowings under the
Credit Agreement. The interest rate on $24 million has been fixed at 9.79%, plus
the applicable margin. 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 $.2 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
22
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Directors and Executive
Officers" in the company's definitive proxy statement to be filed in connection
with the 2000 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Directors and Executive
Officers" in the company's definitive proxy statement to be filed in connection
with the 2000 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Beneficial Ownership of Common
Stock" in the company's definitive proxy statement to be filed in connection
with the 2000 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended July 31, 2000, the Company paid $120,000 to a
company affiliated with Kenneth Bishop, a director of the Company, for rent on
certain properties owned by such company. Rent payments for these properties are
$10,000 per month.
The Company has loaned one of its officers $204,000 in connection with the
exercise of certain stock options at the time of the follow-on public offering.
The principal amount of this loan is due in eight quarterly installments
beginning August 31, 1998, of $25,500 plus accrued interest which accrues on the
aggregate unpaid amount at the prime rate published by the Company's primary
lenders. During 2000, the officer repaid the remaining $102,000 of the loan
principal plus accrued interest.
23
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Consolidated Financial Statements on page F-1.
(a) (2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been
omitted.
(a) (3) Exhibits
Reference is made to the Exhibit Index on page E-1 for a list of all
exhibits filed as a part of this report.
(b) Reports on Form 8-K
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.)
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.,
A Delaware corporation
By: /s/ Ray E. Schmitz
-----------------------------------------
Ray E. Schmitz Vice-President, Controller
and Chief Accounting Officer
Dated: October 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below be the following persons of the registrant and in
the capacities indicated on October 27, 2000.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ RICHARD K. McCLELLAND Chairman of the Board, Chief Executive
-----------------------------------
Richard K. McClelland Officer, President and Director
(Principal Executive Officer)
/s/ Ray E. Schmitz Vice President, Controller and Chief
-----------------------------------
Ray E. Schmitz Accounting Officer
/s/ WAYNE KERN Director
-----------------------------------
Wayne Kern
/s/ STEPHEN P. SMILEY Director
-----------------------------------
Stephen P. Smiley
/s/ BRIAN J. HUGHES Director
-----------------------------------
Brian J. Hughes
/s/ KENNETH H. BISHOP Director
-----------------------------------
Kenneth H. Bishop
</TABLE>
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DYNAMEX INC.
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets, July 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the fiscal years ended
July 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended
July 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the fiscal years ended
July 31, 2000, 1999 and 1998 F-6
Notes to the Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Dynamex Inc.
We have audited the accompanying consolidated balance sheets of Dynamex Inc. as
of July 31, 2000 and 1999 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended July 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dynamex Inc. as of
July 31, 2000 and 1999 and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 2000 in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
----------------------------
BDO SEIDMAN, LLP
Dallas, Texas
October 18, 2000
F-2
<PAGE> 30
DYNAMEX INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 2000 AND 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 5,600 $ 2,933
Accounts receivable (net of allowance for doubtful accounts of $940
and $1,320, respectively) 26,887 25,945
Prepaid and other current assets 2,890 2,488
Deferred income taxes 1,518 2,148
--------- ---------
Total current assets 36,895 33,514
PROPERTY AND EQUIPMENT - net 7,225 9,308
INTANGIBLES - net 78,230 82,860
DEFERRED INCOME TAXES 3,273 2,899
OTHER 901 1,841
--------- ---------
Total assets $ 126,524 $ 130,422
--------- ---------
LIABILITIES STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,517 $ 6,349
Accrued liabilities 16,445 15,292
Income taxes payable 182 117
Current portion of long-term debt 3,729 427
--------- ---------
Total current liabilities 25,873 22,185
LONG-TERM DEBT 40,928 46,690
OTHER LIABILITIES 1,313 --
--------- ---------
Total liabilities 68,114 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 shares outstanding, respectively 102 102
Additional paid-in capital 72,759 72,759
Retained deficit (13,601) (10,202)
Receivable from stockholder -- (102)
Accumulated other comprehensive loss:
Cumulative translation adjustment (850) (1,010)
--------- ---------
Total stockholders' equity 58,410 61,547
--------- ---------
Total liabilities and stockholders' equity $ 126,524 $ 130,422
--------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 31
DYNAMEX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 2000, 1999 AND 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Sales $ 251,475 $ 239,631 $ 208,019
Cost of Sales 171,675 163,156 140,037
--------- --------- ---------
Gross Profit 79,800 76,475 67,982
Costs and Expenses:
Selling, general and administrative expenses 64,483 66,166 55,866
Depreciation and amortization (including 1999 intangible impairment
of $3,971) 8,931 13,211 8,770
Provision for settlement of shareholder litigation 2,313 -- --
(Gain) Loss on disposal of property and equipment 97 205 (199)
--------- --------- ---------
Total 75,824 79,582 64,437
--------- --------- ---------
Operating Income (Loss)) 3,976 (3,107) 3,545
Interest Expense 5,860 4,607 4,228
Other Income, net (203) (35) --
--------- --------- ---------
Loss before income taxes (1,681) (7,679) (683)
Income taxes 1,718 (1,003) 935
--------- --------- ---------
Net loss $ (3,399) $ (6,676) $ (1,618)
--------- --------- ---------
Net loss per common share - basic and diluted $ (0.33) $ (0.66) $ (0.20)
--------- --------- ---------
Weighted average shares outstanding 10,207 10,099 7,937
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<PAGE> 32
DYNAMEX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 2000, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK RECEIVABLE ADDITIONAL OTHER
------------------- FROM PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT STOCKHOLDER CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
-------- -------- ----------- ---------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1997 7,338 $ 73 $ -- $ 40,967 $ (1,908) $ (184) $ 38,948
Sale of common stock in connection with
Acquisitions 2,500 25 -- 29,780 -- -- 29,805
Issuance of common stock in connection with
Acquisitions 114 1 -- 1,133 -- -- 1,134
Issuance of common stock on exercise of stock
Options 117 2 (204) 427 -- -- 225
Unrealized foreign currency translation
Adjustment -- -- -- -- -- (535) (535)
Net loss -- -- -- -- (1,618) -- (1,618)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT JULY 31, 1998 10,069 101 (204) 72,307 (3,526) (719) 67,959
Issuance of common stock in connection with
Acquisitions 120 1 -- 394 -- -- 395
Issuance of common stock on exercise of stock
Options 18 -- -- 58 -- -- 58
Payments by shareholder -- -- 102 -- -- -- 102
Unrealized foreign currency translation
Adjustment -- -- -- -- -- (291) (291)
Net loss -- -- -- -- (6,676) (6,676)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT JULY 31, 1999 10,207 102 (102) 72,759 (10,202) (1,010) 61,547
-------- -------- -------- -------- -------- -------- --------
Payments by shareholder -- -- 102 -- -- -- 102
Unrealized foreign currency translation
Adjustment -- -- -- -- -- 160 160
Net loss -- -- -- -- (3,399) -- (3,399)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT JULY 31, 2000 10,207 $ 102 $ -- $ 72,759 $(13,601) $ (850) $ 58,410
-------- -------- -------- -------- -------- -------- --------
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE> 33
DYNAMEX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 2000, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (3,399) $ (6,676) $ (1,618)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,600 3,067 3,133
Amortization and write-down of goodwill and other intangibles 5,331 10,144 5,637
Provision for losses on accounts receivable 1,119 2,109 632
Deferred income taxes 256 (2,824) (1,416)
(Gain) loss on disposal of property and equipment 97 205 (199)
Provision for settlement of shareholder litigation 2,313 -- --
Changes in assets and liabilities:
Accounts receivable (2,061) (1,330) (613)
Prepaids and other current assets 582 2,329 (1,655)
Accounts payable and accrued liabilities 324 1,993 1,460
-------- -------- --------
Net cash provided by operating activities 8,162 9,017 5,361
-------- -------- --------
INVESTING ACTIVITIES
Payments for acquisitions (555) (14,055) (35,925)
Purchase of property and equipment (2,707) (3,432) (3,820)
Net proceeds from disposal of property and equipment 77 283 745
-------- -------- --------
Net cash used in investing activities (3,185) (17,204) (39,000)
-------- -------- --------
FINANCING ACTIVITIES
Principal payments on long-term debt (360) (627) (740)
Net borrowings under line of credit (2,100) 10,680 4,163
Proceeds from issuance of long-term debt -- -- 55
Proceeds from shareholder receivable 102 102 --
Net proceeds from sale of common stock -- 58 30,030
Other assets and deferred financing fees 78 (234) 702
-------- -------- --------
Net cash (used) provided by financing activities (2,280) 9,979 34,210
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (30) (220) (536)
-------- -------- --------
NET INCREASE IN CASH 2,667 1,572 35
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,933 1,361 1,326
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,600 $ 2,933 $ 1,361
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 4,215 $ 3,952 $ 3,557
Cash paid for taxes 1,650 2,436 5,773
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Assets acquired, liabilities assumed and consideration paid for
acquisitions were as follows:
Fair value of net assets acquired $ 894 $ 15,330 $ 37,059
Issuance of common stock -- (395) (1,134)
Payable to former owners (339) (880) --
-------- -------- --------
$ 555 $ 14,055 $ 35,925
-------- -------- --------
</TABLE>
See accompanying notes to the consolidated financial statements
F-6
<PAGE> 34
DYNAMEX INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Dynamex Inc. (the "Company" or "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 and distribution and (iii) fleet management.
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.)
Principles of consolidation - 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.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
balance sheet dates and the reported amounts of revenues and expenses.
Actual results may differ from such estimates. The Company reviews all
significant estimates affecting the financial statements on a recurring
basis and records the effect of any necessary adjustments prior to their
issuance.
Property and equipment - Property and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets for financial reporting purposes and principally on accelerated
methods for tax purposes. Leasehold improvements are depreciated using the
straight-line method over their estimated useful lives or the lease term,
whichever is shorter. Ordinary maintenance and repairs are charged to
operations. Expenditures that extend the physical or economic life of
property and equipment are capitalized. The estimated useful lives of
property and equipment are as follows:
<TABLE>
<S> <C>
Leasehold Improvements 5 years
Equipment 3-7 years
Furniture 5 years
Vehicles 3-12 years
Other 4 years
</TABLE>
Business and credit concentrations - Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
temporary cash investments and trade receivables. The Company places its
temporary cash investments with high-credit, quality financial institutions.
The Company's customers are not concentrated in any specific geographic
region or industry. No single customer accounted for a significant amount of
the Company's sales and there were no significant accounts receivable from a
single customer. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
F-7
<PAGE> 35
Intangibles - Intangibles arise from acquisitions accounted for as purchased
business combinations and include goodwill, covenants not-to-compete and
other identifiable intangibles. Goodwill represents the excess purchase
price over all tangible and identifiable intangible net assets acquired.
Intangible assets are being amortized over periods ranging from 3 to 25
years. On a periodic basis or as business conditions change, the Company
compares the carrying value of intangible assets to estimated future
undiscounted net cash flows from the acquired businesses. Should the net
book value of the intangible asset exceed future net cash flows, the
carrying value of the intangible asset is adjusted to equal the value of
discounted future net revenues. In the fourth quarter 1999, the Company
adjusted the carrying value of intangible assets associated with its Dallas
and Hartford operations by $3,971 with a corresponding charge to
amortization expense. Total amortization expense was $5,331, $10,144 and
$5,637 for the years ended July 31, 2000, 1999 and 1998, respectively.
Revenue recognition - Revenue and direct expenses are recognized when
services are rendered to customers.
Cash and cash equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Financial instruments - Carrying values of cash and cash equivalents,
accounts receivable, accounts payable and current portion of long-term debt
approximate fair value due to the short-term maturities of these assets and
liabilities. Long-term debt consists primarily of variable rate borrowings
under the bank credit agreement. The carrying value of these borrowings
approximates fair value.
The Company utilizes derivative financial instruments, including interest
rate swaps and caps, to reduce interest rate fluctuation risk. Amounts paid
or received by the Company under these agreements are recorded as an
adjustment to interest expense, as realized, or over the term of the related
instrument, as appropriate. Fair value of these instruments is determined
based on estimated settlement costs using current interest rates. The
Company does not hold or issue derivative financial instruments for
speculative or trading purposes. In the event that a derivative financial
instrument were terminated prior to its contractual maturity, it is the
Company's policy to recognize the resulting gain or loss over the shorter of
the remaining original contract life of the derivative financial instrument
or the remaining term of the underlying hedged debt agreement.
Financing Costs - During the fiscal years ended July 31, 2000, 1999 and
1998, the Company incurred $445, $325 and $919, respectively of costs
incurred in connection with debt financings and amendments (See Note 6).
These costs are being amortized over the terms of the respective financings
and are included in interest expense. The amounts of amortization and the
write-off of previous deferred financing costs were $650 in 2000, $730 in
1999 and $675 in 1998.
Income taxes - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets
and liabilities for financial and income tax reporting. The net deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Stock-based compensation - Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation," (SFAS 123) encourages but
does not require companies to record compensation cost for stock based
employee compensation plans at fair value. In accordance with SFAS 123, the
Company has elected to continue to account for stock based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock. (See Note 11 of Notes to the Consolidated Financial
Statements)
Earnings (loss) per share - Basic net income (loss) per common share is
based on the weighted average number of common shares outstanding during the
period. Diluted net income is based on the weighted average common shares
outstanding and all dilutive potential common shares outstanding during the
period. Diluted earnings per share reflect the potential dilution that could
occur if outstanding stock options and warrants were exercised, that would
then share in the earnings of the Company. Outstanding stock options and
warrants issued by the Company represent the only dilutive effect reflected
in diluted weighted average shares.
F-8
<PAGE> 36
Foreign currency translation -Assets and liabilities in foreign currencies
are translated into U.S. dollars at the rates in effect at the balance sheet
date. Revenues and expenses are translated at average rates for the year.
The net exchange differences resulting from these translations are recorded
in stockholders' equity. Where amounts denominated in a foreign currency are
converted into dollars by remittance or repayment, the realized exchange
differences are included in operations.
New accounting pronouncements - In July 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. Management does not believe this will have a material effect on
operations. Implementation of this standard has recently been delayed by the
FASB for a 12-month period through the issuance of SFAS No. 138, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". SFAS No. 138 is effective for all
fiscal years beginning after June 15, 2000.
Comprehensive Income (Loss) - Comprehensive income (loss) consists of net
income and unrealized gains and losses on foreign currency translation.
Balance sheet accounts of foreign operations are translated using the
year-end exchange rate, and income statement accounts are translated on a
monthly basis using the average exchange rate for the period. Unrealized
gains and losses on foreign currency translation adjustments are recorded in
shareholders' equity as other comprehensive income. At July 31, 2000, 1999
and 1998, the company recorded comprehensive income (loss) from foreign
currency translation as follows:
<TABLE>
<CAPTION>
JULY 31,
---------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net income (loss) $(3,399) $(6,676) $(1,618)
Change in comprehensive income (loss) 160 (291) (535)
------- ------- -------
Comprehensive income (loss) $(3,329) $(6,967) $(2,153)
------- ------- -------
</TABLE>
Reclassification - Certain reclassifications have been made to conform prior
year data with the current presentation.
2. ACQUISITIONS
During the fiscal year ended July 31, 1999, the Company acquired two
same-day delivery businesses in two U.S. cities for approximately $1.8
million in cash.
During the fiscal year ended July 31, 1998, the Company acquired nine
same-day delivery businesses in eight U.S. cities and one Canadian city for
approximately $36 million in cash and the issuance of approximately 114,000
shares of common stock valued at $1.1 million at the date of issuance.
In connection with certain acquisitions, the Company agreed to pay the
sellers additional consideration if the acquired operations meet certain
performance goals. The estimated maximum amount of additional consideration
payable at July 31, 2000, if all performance goals are met, is approximately
$5 million, all of which is payable in cash. These payments of additional
consideration, if required, are to be made on specified dates through
October 2000, and generally commence at the end of the twelve-month period
following the completion of the relevant acquisition.
Each of these acquisitions has been accounted for using the purchase method
of accounting and the results of operations of these companies have been
included in these financial statements from the date of acquisition. The
aggregate acquisition cost was allocated to the net assets of the companies
acquired based upon their respective fair market values, with the excess
recorded as goodwill. The following unaudited pro forma combined results of
operations for the years ended July 31, 1999 and 1998, are presented as if
the acquisitions had occurred as of August 1, 1996.
F-9
<PAGE> 37
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------
1999 1998
--------- ---------
PRO FORMA PRO FORMA
--------- ---------
<S> <C> <C>
Sales $ 239,835 $ 233,312
--------- ---------
Income (loss) before extraordinary item $ (6,669) $ (294)
--------- ---------
Net income (loss) $ (6,669) $ (294)
--------- ---------
Per share -- assuming dilution:
Income (loss) before extraordinary item $ (0.66) $ (0.04)
Net income (loss) $ (0.66) $ (0.04)
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of what the actual results of operations of the Company would have been had
the acquisition occurred at the beginning of the periods presented, nor do
they purport to be indicative of the future results of operations of the
Company.
The Company has recorded the fair value of net assets acquired as shown
below:
<TABLE>
<CAPTION>
JULY 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Accounts receivable $ 88 $ 5,905
Property and equipment 23 1,708
Other assets 2 481
Intangibles 14,427 32,288
Liabilities assumed (90) (3,323)
-------- --------
Net assets acquired $ 14,450 $ 37,059
-------- --------
</TABLE>
Consideration for these transactions consisted of the following:
<TABLE>
<CAPTION>
JULY 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Cash paid, net of cash acquired $14,055 $35,925
Issuance of common stock 395 1,134
------- -------
Total consideration $14,450 $37,059
------- -------
</TABLE>
3. SALE OF ASSETS
In July 1998 the Company sold its Canadian Strategic Stocking business for
cash of approximately $670 and a note in the amount of $234. The note was
payable in installments of $134 on January 31, 1999 and $100 on July 31,
1999. An additional amount of $436 is contingently payable from 10% of the
annual revenues in excess of a specified base level over a five-year period
from the date the business sold. The Company earned and was paid
approximately $172 of the contingent payable in the year ended July 31,
1999. In connection with the sale, the Company entered into a services
agreement with the purchaser whereby the Company will provide
transportation, warehouse and inventory management and related services over
a five year period. In addition the Company has agreed to reimburse the
purchaser, during the term of the services agreement, for certain
promotional and employee-related compensation related to the business and
the services provided by the Company. These costs are estimated to amount to
approximately $130 annually. The cash and non-contingent portion of the note
in excess of the basis of the net assets of the Canadian Strategic Stocking
business, received upon closing the transaction which amounts to
approximately $900, has been deferred and is included in accrued liabilities
at July 31, 1998. This deferred revenue will be recognized over future
periods as services are provided under the services agreement. During the
fiscal year ended July 31, 1999, the Company recognized $485 of the deferred
gain.
F-10
<PAGE> 38
4. INTANGIBLES
Intangibles from the Company's various acquisitions consist of the
following:
<TABLE>
<CAPTION>
JULY 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Goodwill $ 88,647 $ 88,105
Trademarks and covenants not-to-compete 10,251 10,074
-------- --------
98,898 98,179
Less accumulated amortization (20,668) (15,319)
-------- --------
Intangibles-- net $ 78,230 $ 82,860
-------- --------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Equipment $ 16,558 $ 15,304
Furniture 1,780 1,575
Vehicles 1,342 1,599
Leasehold improvements 3,042 2,205
Other -- 980
-------- --------
22,722 21,663
Less accumulated deprecation (15,497) (12,355)
-------- --------
Property and equipment-- net $ 7,225 $ 9,308
-------- --------
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Bank credit agreement (a) $ 44,100 $ 46,200
Seller financing notes and other (b) 137 271
Capital lease obligations (Note 7) 420 646
-------- --------
44,657 47,117
Less current portion (3,729) (427)
-------- --------
Long-term debt $ 40,928 $ 46,690
-------- --------
</TABLE>
a) Bank Credit Agreement
Effective July 31, 2000, the Company amended its bank credit agreement.
Under the terms of the amended agreement, the facility was extended through
November 30, 2001 and split into an amortizing term loan of $32.2 million
and a revolving credit facility of $19.5 million. The revolving credit
facility will be governed by an eligible accounts receivable borrowing base
agreement, defined as 80% of accounts receivable less than 60 days past due.
Required principal payments on the amortizing term loan consist of $794 on
November 15, 2000 and quarterly payments of $875 commencing January 31, 2001
until July 31, 2001 and then $1.375 million quarterly until maturity, at
which time any amounts outstanding under the facility are due. Interest on
outstanding borrowings is payable monthly at prime or LIBOR, plus an
applicable margin. The applicable margins for prime range from 0.0% to 1.0%,
and for LIBOR from 3.0% to 4.0%, and are based on the ratio of the Company's
funded debt to cash flow, both as defined in the agreement. In addition, the
company is required to pay a commitment fee of 0.375% for any unused amounts
of the revolving credit facility. At July 31, 2000, the weighted-average
interest rate for all outstanding borrowings was approximately 11.50%.
F-11
<PAGE> 39
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 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.
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, and to reduce the amortizing term
loan principal at the end of each quarter beginning July 31, 2001, by the
amount of excess 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.
At July 31, 2000, the Company had unpaid settlements of approximately $26
related to the interest rate swap. The fair value of this agreement at July
31, 2000 and 1999 was a receivable of $32 and a liability of approximately
$64.
b) Seller Financing Notes and Other
In connection with various acquisitions (see Note 2) the Company issued
various notes to the sellers of those businesses. These notes bear interest
at varying rates based primarily on the prime interest rate.
Scheduled principal payments in each of the next five years and thereafter
on long-term debt and capital lease obligations are as follows:
<TABLE>
<S> <C>
2001 $ 3,729
2002 40,923
2003 5
2004 --
2005 --
Thereafter --
-------
$44,657
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain equipment under properties and non-cancelable
lease agreements, which expire at various dates.
At July 31, 2000, minimum annual lease payments for such leases are as
follows:
F-12
<PAGE> 40
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
2001 $ 295 $ 4,185
2002 176 3,397
2003 4 2,574
2004 -- 1,688
2005 -- 701
Thereafter -- 805
-------- --------
475 13,350
Less amount representing interest (55) --
-------- --------
Net present value of future minimum lease payments $ 420 $ 13,350
-------- --------
</TABLE>
Rent expense related to operating leases amounted to approximately $6,131,
$5,756, and $5,058 for the years ended July 31, 2000, 1999 and 1998,
respectively.
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 the Company 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. In addition
to the defendants named in the original complaints, the amended complaint
also named as defendants the underwriters of the Company's May 1998
secondary offering of common stock, Schroder & Co., Inc., William Blair &
Company, and Hoak Breedlove Wesneski & Co. (the "Underwriter Defendants").
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 amended
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 September 20, 2000, the Company, Richard McClelland, Robert Capps and the
Underwriter Defendants signed a memorandum of understanding setting forth
the terms of a proposed settlement of this action. Deloitte & Touche is not
a party to the memorandum of understanding. The proposed settlement provides
that the Company's primary directors and officers liability insurer,
American Home Insurance Company, will pay $2 million towards the settlement.
In addition, the Company will pay $1 million and contribute one million
shares of common stock towards the proposed settlement. The Company has also
agreed to pay to the class 75% of any recoveries, after legal expenses and
costs, from the Company's excess insurer, Reliance Insurance Company, and
former auditors, Deloitte & Touche LLP and Deloitte & Touche. The settlement
is conditioned upon, among other things, execution of a definitive
settlement agreement and related documents, the provision of notice of the
settlement of the Company's shareholders, and approval of the settlement by
the United States District Court for the Northern District of Texas.
F-13
<PAGE> 41
In accordance with applicable accounting standards, the company records a
charge reflecting contingent liabilities when management determines that a
material loss is "probable" and either "quantifiable" or "reasonably
estimable." As a result of the signing of the memorandum of understanding on
September 20, 2000, the Company recorded a fourth quarter charge of $2.3
million in the fiscal year ended July 31, 2000. The charge includes the
value of one million shares of the Company's common stock based on the
closing price of the stock on September 20, 2000 ($1.3 million recorded as
Other Liabilities), plus $1 million cash which is recorded in Accrued
Liabilities. The cash is payable in two installments, the first installment
of $350,000 was paid on September 23, 2000 with the remaining $650,000 plus
interest payable at least 10 business days before the date scheduled by the
court for the settlement fairness hearing. The Company will deliver the one
million shares of the Company's stock after the effective date of the
Settlement.
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.
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 informal requests for information from the Staff of the
Commission for documents concerning the circumstances of the restatement of
the Company's prior period financial statements. The Company has cooperated
with the Commission and produced documents responsive to its requests.
The Company is also a party to various legal proceedings arising in the
ordinary course of its business. Management believes that the ultimate
resolution of these proceedings will not, in the aggregate, have a material
adverse effect on the financial condition, results of operations, or
liquidity of the Company.
8. INCOME TAXES
The United States and Canadian components of income (loss) before income
taxes from continuing operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Canada $ 3,299 $ 3,149 $ 3,826
United States (4,980) (10,828) (4,509)
-------- -------- --------
$ (1,681) $ (7,679) $ (683)
</TABLE>
The provision for income tax consisted of the following:
<TABLE>
<S> <C> <C> <C>
Current tax expense:
Canada $ 1,546 $ 1,489 $ 1,600
U.S -- -- --
------- ------- -------
Total current tax expense $ 1,546 $ 1,489 $ 1,600
------- ------- -------
Deferred tax expense (benefit):
Canada $ 87 $ 107 $ 389
U.S 85 (2,599) (1,054)
------- ------- -------
Total deferred tax expense (benefit) $ 172 $(2,492) $ (665)
------- ------- -------
Total income tax provision (benefit) $ 1,718 $(1,003) $ 935
------- ------- -------
</TABLE>
Differences between financial accounting principles and tax laws cause
differences between the bases of certain assets and liabilities for
financial reporting purposes and tax purposes. The tax effects of these
differences, to the extent they are temporary, are recorded as deferred tax
assets and liabilities under SFAS 109 and consisted of the following
components (in thousands):
F-14
<PAGE> 42
<TABLE>
<CAPTION>
JULY 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts $ 304 $ 512
Fixed assets 130 29
Amortization of intangibles 2,628 1,363
Accrued vacation 359 252
Accrued Liabilities & other 855 1,374
Write-down of intangible assets -- 1,424
Provision for settlement of shareholder litigation 829
Charitable contribution carryover 25 10
Foreign tax credit carryforward 520 442
State net operating loss carryforwards 1,145 768
Federal net operating loss carryforwards 3,764 2,261
-------- --------
Total deferred tax benefits 10,559 8,435
Less valuation allowance (5,113) (2,703)
-------- --------
Net deferred tax asset 5,446 5,732
Deferred tax liabilities:
Fixed assets 655 685
-------- --------
Total deferred tax liabilities 655 685
-------- --------
Net deferred tax asset $ 4,791 $ 5,047
-------- --------
Financial Statements:
Current deferred tax assets $ 1,518 $ 2,148
-------- --------
Non-current deferred tax assets $ 3,273 $ 2,899
-------- --------
</TABLE>
The Company has established valuation allowances in accordance with the
provisions of SFAS No. 109. The valuation allowances primarily relate to
U.S. operating losses not currently deductible and foreign tax credits. The
Company continually reviews the adequacy of the valuation allowances and
releases the allowances when it is determined that it is more likely than
not that the benefits will be realized.
The Company has a federal net operating loss carryforward of $10,499, $6,152
and $3,530 for the three years ended July 31, 1999, 1998, and 1997,
respectively. This carryforward is available to offset future United States
federal taxable income. The net operating losses expire as follows: $333 in
the year 2009, $3,197 in the year 2013, $2,622 in the year 2019 and $4,347
in the year 2020.
The Company has not provided for U.S. Federal and foreign withholding taxes
on the foreign subsidiaries' undistributed earnings as of July 31, 2000.
Such earnings are intended to be reinvested indefinitely.
The differences in income tax provided and the amounts determined by
applying the statutory rate to income before income taxes result from the
following:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Income taxes at statutory rate $ (572) $(2,611) $ (232)
Effect on taxes resulting from:
State taxes (118) (541) (225)
Foreign 330 315 383
Increase in valuation allowance 2,409 930 1,139
Other (including permanent differences) (331) 904 (130)
------- ------- -------
$ 1,718 $(1,003) $ 935
------- ------- -------
</TABLE>
9. RELATED PARTY TRANSACTIONS
A firm related to a former member of the Company's board of directors has
provided investment-banking services to the Company. Amounts paid by the
Company for such services during the years ended July 31, 2000, 1999 and
1998 amounted to none, none, and $458, respectively. The Company leases
facilities from an officer
F-15
<PAGE> 43
and from a member of the Company's board of directors. During the years
ended July 31, 2000, 1999 and 1998, the Company paid approximately $120,
$120 and $256, respectively, in rent to these parties in aggregate.
The Company has loaned to one of its officers $204 in connection with the
exercise of certain stock options at the time of the follow-on public
offering. The principal amount of this loan is due in eight quarterly
installments beginning August 31, 1998, of $26 plus accrued interest which
accrues on the aggregate unpaid amount at the prime rate published by the
Company's primary lenders. During the fiscal year ended July 31, 2000, the
officer repaid the remaining $102 of the loan principal plus accrued
interest.
10. STOCKHOLDERS' EQUITY
In May 1998, the Company completed a follow-on offering of 2,500,000 shares
of common stock. Net proceeds to the Company, after deducting underwriters
discount and offering costs, amounted to approximately $30 million, all of
which was used to reduce amounts outstanding under the Credit Facility.
On August 16, 1996, the Company completed an initial public offering of
2,600,000 shares of common stock. On September 10, 1996, the underwriters
exercised their over-allotment option to purchase an additional 390,000
shares of common stock. Net proceeds to the Company, after deducting
underwriters discount and offering costs, amounted to approximately $21
million, all of which was used to reduce outstanding debt and fund certain
acquisitions.
On June 3, 1996, the Company restated its certificate of incorporation to
increase the authorized capital stock to 50,000,000 shares of $0.01 par
value common stock and to 10,000,000 shares of $0.01 par value preferred
stock. The Company then effected a common stock split in the form of a
dividend where it distributed three shares of common stock for every common
share outstanding. The effect of the dividend was to increase the number of
common shares outstanding from 635,865 to 2,543,460.
Rights Agreement
The Board of Directors of the Company approved a Rights Agreement, which is
designed to protect stockholders should the Company become the target of
coercive and unfair takeover tactics. Pursuant to the Rights Agreement, the
Board of Directors declared a dividend of one preferred stock purchase right
(a "Right") for each outstanding share of common stock. Each Right entitles
the registered holder to purchase from the Company one one-hundredth of a
share of the Series A Preferred Stock, at a price of $45.00 per one
one-hundredth of a share of Series A Preferred Stock, subject to possible
adjustment.
11. STOCK OPTION PLAN
Effective June 5, 1996, the Company's stockholders approved the Amended and
Restated 1996 Stock Option Plan (the "Option Plan"). The Option Plan has
been subsequently amended to increase the maximum aggregate amount of common
stock with respect to which options may be granted to 1,000,000 shares. The
Option Plan provides for the granting of both incentive stock options and
non-qualified stock options. In addition, the Option Plan provides for the
granting of restricted stock, which may include, without limitation,
restrictions on the right to vote such shares and restrictions on the right
to receive dividends on such shares. The exercise price of all options
granted under the Option Plan may not be less than the fair market value of
the underlying common stock on the date of grant option. Generally, the
options vest and become exercisable ratably over a five-year period,
commencing one year after the grant date.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options and, accordingly, no compensation cost has
been recognized for stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant
date for its stock options consistent with the method set forth under SFAS
No. 123, the Company's net earnings would have been reduced to the pro forma
amounts indicated below:
F-16
<PAGE> 44
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net income (in thousands):
As reported $ (3,399) $ (6,676) $ (1,618)
Pro forma $ (3,764) $ (6,868) $ (2,219)
Earnings per share -- assuming dilution:
As reported $ (0.33) $ (0.66) $ (0.20)
Pro forma $ (0.37) $ (0.68) $ (0.28)
</TABLE>
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998 respectively: dividend
yield of 0% for all years; expected volatility of 73%, 72% and 66%;
risk-free interest rate of 4.31%, 5.53%, and 5.92%; and expected lives of an
average of 10 years for all years. The weighted average fair value of
options granted during 2000, 1999 and 1998 was $1.32, $3.91 and $8.27,
respectively.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Number of shares under option:
Outstanding at beginning of year 734,220 501,477 471,384
Granted 185,000 374,000 148,000
Exercised -- (17,477) (117,907)
Canceled (104,890) (123,780) --
--------- --------- ---------
Outstanding at end of year 814,330 734,220 501,477
--------- --------- ---------
Exercisable at end of year 288,572 177,044 116,800
--------- --------- ---------
Weighted average exercise price:
Granted $ 1.687 $ 4.828 $ 10.164
Exercised -- 3.235 3.650
Canceled 5.543 9.706 --
Outstanding at end of year 5.195 6.129 7.886
Exercisable at end of year 6.657 7.124 6.414
--------- --------- ---------
</TABLE>
The following table summarizes information about stock options outstanding
at July 31, 2000:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF REMAINING LIFE WEIGHTED AVERAGE
SHARES (IN YEARS) EXERCISE PRICE
--------- ---------------- ----------------
<S> <C> <C>
129,000 9.9 $ 1.438
50,000 9.4 $ 2.188
190,800 8.8 $ 2.250
6,000 9.1 $ 2.875
79,000 4.9 $ 4.250
6,000 7.1 $ 7.250
178,500 6.1 $ 8.000
15,000 8.1 $ 10.000
110,030 7.6 $ 10.375
50,000 7.9 $ 11.875
------- ---- --------
814,330 7.79 $ 5.195
</TABLE>
12. SEGMENT INFORMATION
Dynamex Inc. operates in one reportable business segment, same-day delivery
services. The Company evaluates the performance of its geographic regions,
United States and Canada, based upon operating income (loss) before unusual
and non-recurring items. The following table summarizes selected financial
information for the United States and Canada for the years ended July 31,
2000, 1999 and 1998:
F-17
<PAGE> 45
<TABLE>
<CAPTION>
United
States Canada Total
--------- --------- ---------
<S> <C> <C> <C>
2000
Sales $ 168,437 $ 83,038 $ 251,475
Operating income (loss) (977) 4,953 3,976
Identifiable assets 109,256 17,268 126,524
Capital expenditures 2,471 236 2,707
Depreciation and amortization 2,835 765 3,600
Amortization of intangibles 4,822 509 5,331
1999
Sales $ 161,515 $ 78,116 $ 239,631
Operating income (loss) (7,254) 4,147 (3,107)
Identifiable assets 108,724 21,698 130,422
Capital expenditures 2,909 523 3,432
Depreciation and amortization 2,186 881 3,067
Amortization of intangibles 9,635 509 10,144
1998
Sales 131,901 76,118 208,019
Operating income (1,328) 4,873 3,545
Identifiable assets 103,648 19,121 122,769
Capital expenditures 3,102 718 3,820
Depreciation and amortization 2,323 810 3,133
Amortization of intangibles 5,083 554 5,637
</TABLE>
F-18
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1(2) -- Restated Certificate of Incorporation of Dynamex Inc.
3.2(3) -- Bylaws, as amended and restated, of Dynamex Inc.
4.1(2) -- Rights Agreement between Dynamex Inc. and Harris Trust and Savings Bank,
dated July 5, 1996.
10.1(4) -- Amendment No. 2 to Employment Agreement of Richard K. McClelland.
10.2(3) -- Dynamex Inc. Amended and Restated 1996 Stock Option Plan.
10.3(2) -- Marketing and Transportation Services Agreement, between Purolator
Courier Ltd. and Parcelway Courier Systems Canada Ltd., dated November
20, 1995.
10.4(2) -- Form of Indemnity Agreements with Executive Officers and Directors.
10.5(3) -- Second Amended and Restated Credit Agreement by and among the Company
and NationsBank of Texas, N.A., as agent for the lenders named therein,
dated August 26, 1997.
10.6(5) -- First Amendment to Second Amended and Restated Credit Agreement by and
among the Company and NationsBank of Texas, N.A., as agent for the
lenders named therein, dated May 5, 1998.
10.7(6) -- Second Amendment to Second Amended and Restated Credit Agreement
by and among the Company and Nationsbank of Texas, N.A., as agent
for the lenders therein, dated January 31, 1999
10.8(6) -- Third Amendment to Second Amended and Restated Credit Agreement by and
among the Company and Nationsbank of Texas, N.A., as
agent for the lenders therein, dated June 28, 2000.
10.8(1) -- Fourth Amendment to Second Amended and Restated Credit Agreement by and
among the Company and Nationsbank of Texas, N.A., as
agent for the lenders therein, dated October 30, 2000.
11.1(1) -- Statement regarding computation of earnings (loss) per share.
21.1(1) -- Subsidiaries of the Registrant.
23.1(1) -- Consent of BDO Seidman, LLP.
27.1(1) -- Financial Data Schedule.
</TABLE>
----------
(1) Filed herewith.
(2) Filed as an exhibit to the registrant's Registration Statement on Form S-1
(File No. 333-05293), and incorporated herein by reference.
(3) Filed as an exhibit to the registrant's annual report on Form 10-K for the
fiscal year ended July 31, 1997, and incorporated herein by reference.
(4) Filed as an exhibit to Registration Statement on Form S-1 (File No.
333-49603), and incorporated herein by reference.
(5) Filed as an exhibit to the registrant's annual report on Form 10-K for the
fiscal year ended July 31, 1998, and incorporated herein by reference.
(6) Filed as an exhibit to the registrant's annual report on Form 10-K for the
fiscal year ended July 31, 1999, and incorporated herein by reference.
E-1
