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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-21057
DYNAMEX INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0712225
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1431 GREENWAY DRIVE, SUITE 345, IRVING, TEXAS 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 September 16, 1999 was approximately $22,387,000.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of September 16, 1999 was 10,206,817 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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PART I
EXPLANATORY NOTE.................................................................... 1
ITEM 1. BUSINESS................................................................. 2
ITEM 2. PROPERTIES............................................................... 11
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.............................................................. 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................. 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................... 23
ITEM 11. EXECUTIVE COMPENSATION................................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................................. 28
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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.
EXPLANATORY NOTE
As discussed in Note 1 to the Consolidated Financial Statements of Dynamex
Inc., the Company discovered unsupportable accounting entries in the prior year
during its review of the fiscal third quarter financial statements ending April
30, 1999. The unsupportable accounting entries related to the timing of the
sale of an asset and the reduction in accruals for workers' compensation and
bad debts. On June 14, 1999, the Audit Committee of the Company's Board of
Directors formed a Special Committee of outside directors to review the matter
further. The Special Committee engaged the law firm of Weil, Gotshal & Manges
LLP ("Weil, Gotshal") to assist in connection with the review. Weil, Gotshal
engaged Deloitte & Touche LLP to assist in connection with the review.
On September 17, 1999, the Special Committee of the Board of Directors
announced the results of its review. The Special Committee recommended to the
Board of Directors among other things, and the Board of Directors concurred,
that the reported financial results for fiscal years 1997 and 1998 and the
first three quarters of fiscal year 1999 be adjusted and restated. The
adjustments resulted from the improper application of generally accepted
accounting principles to purchase accounting, the improper deferral of
expenses, the unsupported accounting entries and the recognition of revenues
prior to services being rendered or before all contingencies were resolved.
As a result of the restatement, the Company was denied access to the
line-of-credit starting on September 16, 1999, the banks notified the Company
on November 9, 1999 that it was in default under the terms of the bank credit
agreement and the banks began charging the Company the default rate of interest
of prime plus 2.50% on March 20, 2000. On June 28, 2000, the Company amended
its bank credit agreement. Under the terms of the amended agreement, all prior
covenant violations were waived and the Company may borrow up to $51.7 million,
the amount currently outstanding (formerly $65 million) on a revolving basis
through July 31, 2001, at which time any amounts outstanding under the facility
are due. Interest on outstanding borrowings is payable monthly at the bank's
prime rate plus 2.00%. In addition, the Company is required to pay a commitment
fee of 0.375% for any unused amounts of the total commitment. See Note 8 of
Notes to Consolidated Financial Statements.
Due to the lack of audited financial statements, the American Stock
Exchange ("AMEX") suspended trading in Dynamex Inc. stock effective September
16, 1999. Trading remains suspended at this date. AMEX also notified the
Company that it shall have until June 30, 2000 to file, with the Securities and
Exchange Commission (the "Commission"), its Form 10-K for the fiscal years
ending July 31, 1999, 1998 and 1997 and Form 10-Q for the first three quarters
of the fiscal year ending July 31, 2000, or be delisted from AMEX. The Company
is prepared to file all such documents on or before June 30, 2000.
As a result of additional analysis and review during the re-audit, certain
additional adjustments were identified that impacted the financial statements
for the years ended July 31, 1999, 1998 and 1997. These adjustments related
primarily to the reduction in the carrying value of intangibles, an additional
bad debt accrual, a valuation reserve related to federal net operating losses
in the U.S., a reduction in the value of fixed assets and an additional
accounts payable accrual.
This Form 10-K includes in Item 14 such restated financial statements for
the years ended July 31, 1998 and 1997, and other information relating to such
restated financial statements, including Selected Financial Data (Item 6) and
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7). Information regarding the effect of the restatement on
Dynamex's results of operations for the years ended July 31, 1998 and 1997 are
included in the Notes to Consolidated Financial Statements included in Item 14.
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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 September 30, 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, 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:
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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 compliment 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, 1999, 1998 and 1997, approximately 62%, 62% and 66%, respectively, of
the Company's revenues were generated from on-demand same-day delivery
services.
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, 1999, 1998 and 1997, approximately 12%, 13% 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
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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, 1999, 1998 and 1997,
approximately 26%, 25% and 21%, 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 three 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 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.
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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 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, 1999, 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, 1999, 1998 and 1997, approximately 32.6%, 36.6% and
51.8% of the Company's revenues, respectively, were generated in Canada. See
Note 14 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
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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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METROPOLITAN AREAS EFFECTIVE DATE
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
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
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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.
On September 23, 1998, the Company announced that it had entered into a
definitive agreement to acquire Q International Courier, Inc. ("Quick"), the
parent company of Quick International Courier. On January 15, 1999, Dynamex
Inc. announced that the Company and Quick mutually agreed to terminate the
agreement by which Dynamex would acquire Quick. Dynamex expensed $1.1 million
in costs associated with the Quick acquisition in the second quarter ended
January 31, 1999. See Note 1 of Notes to Consolidated Financial Statements.
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 Health and Safety 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.
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 June 1, 2000, the Company had approximately 2,950 employees, of whom
approximately 1,950 primarily were employed in various management, supervisory,
administrative, and other corporate positions and approximately 1,000 were
employed as drivers and messengers. Additionally at June 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."
7
<PAGE> 10
Of the approximately 5,000 drivers and messengers used by the Company as of
October 16, 1998, approximately 1,700 are located in Canada and approximately
3,300 are located in the U.S. Approximately 65% of the drivers and messengers
located in Canada 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.
Highly Competitive Industry
The market for same-day delivery and logistics services has been and is
expected to remain highly competitive. Competition is often intense,
particularly for basic delivery services. High fragmentation and low barriers
to entry characterize the industry and there is a recent trend toward
consolidation. Other companies in the industry compete with the Company not
only for provision of services but also for acquisition candidates and
qualified drivers. Some of these companies have longer operating histories and
greater financial and other resources than the Company. Additionally, companies
that do not currently operate delivery and logistics businesses may enter the
industry in the future to capitalize on the consolidation trend. See "Business
-- Competition."
Claims Exposure
As of June 1, 2000, the Company utilized the services of approximately
5,000 drivers and messengers. From time to time such persons are involved in
accidents or other activities that may give rise to liability claims. The
Company currently carries liability insurance with a per claim and an aggregate
limit of $20.0 million. Owner-operators are required to maintain liability
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.
8
<PAGE> 11
Certain Tax Matters Related to Drivers
Substantially all of the Company's drivers own their own vehicles and as of
June 1, 2000, approximately 80% of these owner-operators were independent
contractors as opposed to employees of the Company. The Company does not pay or
withhold any federal, state or provincial employment tax with respect to or on
behalf of independent contractors. From time to time, taxing authorities in the
U.S. and Canada have sought to assert that independent owner-operators in the
transportation industry, including those utilized by the Company, are
employees, rather than independent contractors. The Company believes that the
independent owner-operators utilized by the Company are not employees under
existing interpretations of federal (U.S. and Canadian), state and provincial
laws. However, there can be no assurance that federal (U.S. and Canadian),
state or provincial authorities will not challenge this position, or that other
laws or regulations, including tax laws, or interpretations thereof, will not
change. If, as a result of any of the foregoing, the Company is required to pay
withholding taxes and pay for and administer added employee benefits to these
drivers, the Company's operating costs would increase. Additionally, if the
Company is required to pay back-up withholding with respect to amounts
previously paid to such drivers, it may also be required to pay penalties or be
subject to other liabilities as a result of incorrect classification of such
drivers. If the drivers are deemed to be employees rather than independent
contractors, then the Company may be required to increase their compensation
since they will no longer be receiving commission-based compensation. Any of
the foregoing circumstances could have a material adverse impact on the
Company's financial condition and results of operations, and/or to restate
financial information from prior periods. See "Business -- Services" and "--
Employees."
In addition to the drivers that are independent contractors, certain of the
Company's drivers are employed by the Company and own and operate their own
vehicles during the course of their employment. The Company reimburses these
employees for all or a portion of the operating costs of those vehicles. The
Company believes that these reimbursement arrangements do not represent
additional compensation to those employees. However, there can be no assurance
that federal (U.S. and Canadian), state or provincial taxing authorities will
not seek to recharacterize some or all of such payments as additional
compensation. If such amounts were so recharacterized, the Company would have
to pay additional employment related taxes on such amounts, and may also be
required to pay penalties, which could have an adverse impact on the Company's
financial condition and results of operations, and/or to restate financial
information from prior periods. See "Business -- Services" and "-- Employees."
Foreign Exchange
Significant portions of the Company's operations are conducted in Canada.
Exchange rate fluctuations between the U.S. and Canadian dollar result in
fluctuations in the amounts relating to the Canadian operations reported in the
Company's consolidated financial statements. The Canadian dollar is the
functional currency for the Company's Canadian operations; therefore, any
change in the exchange rate will 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 14 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.
9
<PAGE> 12
Risks Associated with the Local Delivery Industry; General Economic Conditions
The Company's revenues and earnings are especially sensitive to events that
affect the delivery services industry including extreme weather conditions,
economic factors affecting the Company's significant customers and shortages of
or disputes with labor, any of which could result in the Company's inability to
service its clients effectively or the inability of the Company to profitably
manage its operations. In addition, downturns in the level of general economic
activity and employment in the U.S. or Canada may negatively impact demand for
the Company's services.
Technological advances in the nature of facsimile and electronic mail have
affected the market for on-demand document delivery services. Although the
Company has shifted its focus to the distribution of non-faxable items and
logistics services, there can be no assurance that these or other technologies
will not have a material adverse effect on the Company's business, financial
condition and results of operations in the future.
Dependence on Availability of Qualified Courier Personnel
The Company is dependent upon its ability to attract, train and retain, as
employees or through independent contractor or other arrangements, qualified
courier personnel who possess the skills and experience necessary to meet the
needs of its operations. The Company competes in markets in which unemployment
is relatively low and the competition for couriers and other employees is
intense. The Company must continually evaluate, train and upgrade its pool of
available couriers to keep pace with demands for delivery services. There can
be no assurance that qualified courier personnel will continue to be available
in sufficient numbers and on terms acceptable to the Company. The inability to
attract and retain qualified courier personnel would have a material adverse
impact on the Company's business, financial condition and results of
operations.
Volatility of Stock Price
Prices for the Company's common stock will be determined in the marketplace
and may be influenced by many factors, including the depth and liquidity of the
market for the common stock, investor perception of the Company and general
economic and market conditions. Variations in the Company's operating results,
general trends in the industry and other factors could cause the market price
of the common stock to fluctuate significantly. In addition, general trends and
developments in the industry, government regulation and other factors could
have a significant impact on the price of the common stock. The stock market
has, on occasion, experienced extreme price and volume fluctuations that have
often particularly affected market prices for smaller companies and that often
have been unrelated or disproportionate to the operating performance of the
affected companies, and the price of the common stock could be affected by such
fluctuations. Furthermore, the American Stock Exchange suspended trading in the
Company's common stock on September 16, 1999. Trading remains suspended at this
date. AMEX also notified the Company that it shall have until June 30, 2000 to
file with the Commission, its Form 10-K for the fiscal years ended July 31,
1999, 1998 and 1997, and Forms 10-Q for the first three quarters of fiscal year
2000, or be delisted from AMEX. The ability of the Company to retain its
listing status on AMEX and to resume trading in the Company's common stock will
likely impact prices for the common stock.
10
<PAGE> 13
ITEM 2. PROPERTIES
The Company leases facilities in 67 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 PROPERTIES
---------------------- ----------
<S> <C>
CANADA
Alberta 4
British Columbia 6
Manitoba 2
Newfoundland 1
Nova Scotia 1
Ontario 7
Quebec 2
Saskatchewan 4
--
Canadian Total 27
==
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 2
New Jersey 2
New York 9
North Carolina 2
Ohio 1
Pennsylvania 1
Tennessee 1
Texas 3
Virginia 4
Washington 1
--
U.S. Total 40
==
</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, 1999,
1998 and 1997 were approximately $4,345,000, $3,482,000 and $2,056,000,
respectively. The Company's principal executive offices are located in Irving,
Texas. See Note 9 of Notes to the Consolidated Financial Statements for
additional information.
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 it
was (i) revising its results of operations for the year ended July 31, 1998
from that which had been previously announced on September 16, 1998 and (ii)
restating its results of operations for the third quarter of fiscal 1998 from
that which had been previously reported. On February 5, 1999, the Court entered
an Order consolidating the actions and approved the selection of three law
firms as co-lead counsel. A consolidated and amended complaint was filed on
March 22, 1999. On May 6, 1999, defendants filed a motion to dismiss the
consolidated and amended complaint in its entirety.
On June 14, 1999, the Company issued a press release announcing that the
Audit Committee of the Board of Directors had formed a Special Committee of
outside directors to review potentially unsupportable accounting entries for
the third and fourth quarters of fiscal 1998. On September 17, 1999 the Company
issued a press release announcing that the Special Committee had completed its
review of the Company's financial reporting and that the Company would among
other
11
<PAGE> 14
things, 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, which added allegations relating
to information disclosed in the Company's June 14 and September 1999 press
releases. In addition to the defendants named in the original complaint, the
Second Amended Class Action Complaint named Deloitte & Touche and Deloitte &
Touche LLP (the Court subsequently dismissed Deloitte & Touche LLP without
prejudice pursuant to the stipulation of the parties). The Second Amended Class
Action Complaint alleges that the defendants issued a series of materially
false and misleading statements and omitted material facts concerning the
Company's financial condition and business operations. The lawsuit alleges
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs
seek unspecified damages on behalf of all other purchasers of the Company's
common stock during the period of September 18, 1997 through and including
September 17, 1999.
On December 8, 1999, Dynamex moved to dismiss the complaint in its entirety
on the grounds that plaintiffs' complaint fails to meet the required pleading
standards and that the claims are deficient as a matter of law. Briefing of the
motion was completed on June 1, 2000, and the motion is now awaiting
disposition. At this date, no class has been certified nor has any discovery
commenced. The Company is unable to determine the likely outcome of this matter
or to reasonably estimate the amount of loss with respect to this matter.
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 SEC apprised
of its inquiry and the restatement process. The Company has received an
informal request for information from the Staff of the Commission for documents
concerning the circumstances of the proposed restatement of the Company's prior
period financial statements. The Company has cooperated with the Commission and
produced documents responsive to its request.
At this time management is unable to determine the likely outcome of this
matter or to reasonably estimate the amount of loss with respect to this
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on February 17, 1999.
The following matters were submitted to a vote of shareholders of the Company's
common stock with the results indicated below:
ELECTION OF DIRECTORS:
<TABLE>
<CAPTION>
Nominee For Against Withheld
<S> <C> <C> <C>
Richard K. McClelland 6,271,062 - 19,100
James M. Hoak, Jr.(1) 6,271,062 - 19,100
Stephen P. Smiley 6,271,062 - 19,100
Wayne Kern 6,280,912 - 9,250
Brian J. Hughes 6,280,912 - 9,250
Kenneth H. Bishop 6,271,062 - 19,100
</TABLE>
(1) Mr. Hoak resigned from the Board on June 14, 1999.
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. Trading remains suspended at this
date. AMEX also notified the Company that it shall have until June 30, 2000 to
file with the Commission its Form 10-K for the fiscal years ended July 31,
1999, 1998 and 1997, and Forms 10-Q for the fist three quarters of fiscal year
2000, or be delisted from AMEX. The Company is prepared to file all such
documents with the Commission on or before June 30, 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>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1997
First Quarter (from August 13, 1996) $ 11.750 $ 8.000
Second Quarter 11.625 8.375
Third Quarter 13.125 5.750
Fourth Quarter 8.875 5.750
FISCAL 1998
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
</TABLE>
Holders -- As of September 16, 1999, the approximate number of holders of
record of common stock was 100.
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".
Recent Sales of Unregistered Securities -- In May 1999, the Company issued
119,850 shares of common stock to the owners of Road Management Systems, Inc.
as partial consideration for the acquisition of such delivery company.
13
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the three years ended
July 31, 1999 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, 1996 and 1995 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,
------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(restated) (restated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 239,631 $ 208,019 $ 132,587 $ 71,812 $ 21,032
Cost of sales 163,156 140,037 88,342 50,018 14,336
--------- --------- --------- --------- ---------
Gross profit 76,475 67,982 44,245 21,794 6,696
Selling, general and administrative expenses 66,166 55,866 34,197 17,545 7,225
Depreciation and amortization (including
intangible impairment of $3,971 in 1999) 13,211 8,770 4,991 1,542 690
(Gain) loss on disposal of property and equipment 205 (199) (57) -- --
--------- --------- --------- --------- ---------
Operating income (loss) (3,107) 3,545 5,114 2,707 (1,219)
Interest expense, net 4,572 4,228 1,600 1,655 403
--------- --------- --------- --------- ---------
Income (loss) before taxes (7,679) (683) 3,514 1,052 (1,622)
Income taxes (1,003) 935 1,825 176 3
--------- --------- --------- --------- ---------
Net income (loss), before extraordinary item $ (6,676) $ (1,618) $ 1,689 $ 876 $ (1,625)
========= ========= ========= ========= =========
Net income (loss) per common share, before
extraordinary item
-- basic $ (0.66) $ (0.20) $ 0.25 $ 0.34 $ (1.90)
========= ========= ========= ========= =========
-- assuming dilution $ (0.66) $ (0.20) $ 0.25 $ 0.23 $ (1.90)
========= ========= ========= ========= =========
Common shares outstanding 10,099 7,937 6,670 2,543 855
Adjusted common shares 10,099 7,937 6,839 3,732 855
Other Data:
Cash dividends declared per common share $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Earnings (loss) before interest, taxes,
depreciation and amortization(1) $ 10,104 $ 12,315 $ 10,105 $ 4,249 $ (529)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JULY 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(IN THOUSANDS)
(restated) (restated)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 11,329 $ 15,402 $ 11,236 $ 4,086 $ 1,484
Total assets 130,422 122,769 85,497 34,999 17,194
Long-term debt, excluding current portion 46,690 36,287 32,388 20,036 5,924
Stockholders' equity 61,547 67,959 38,948 6,158 4,650
</TABLE>
(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,
1999 were $9,017, $5,361, and $2,527 respectively. Cash flows used in
investing activities for the three years ended July 31, 1999 were $17,204,
$39,000 and $33,452 respectively. Cash flows provided by financing
activities for the three years ended July 31, 1999 were $9,979, $34,210 and
$30,571 respectively.
14
<PAGE> 17
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 September
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.
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. The Company expects to
continue to make acquisitions and anticipates that such acquisitions will be
accounted for using the purchase method of accounting. As a consequence, it is
likely that in the future the Company will incur additional expense from
amortization of acquired intangible assets, including goodwill.
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<PAGE> 18
A significant portion of the Company's revenues is generated in Canada. For
the fiscal years ended July 31, 1999, 1998 and 1997, approximately 32.6%,
36.6%, and 51.8%, 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 year ended July 31, 1999, the Company recognized $485,000 of the
deferred gain and earned and received an additional $172,000 of contingent
payments.
The conversion rate between the U.S. dollar and Canadian dollar declined
during the fiscal year ending July 31, 1999 as compared to July 31, 1998. The
conversion rate also had declined in the fiscal year ending July 31, 1998
compared to the fiscal year ended July 31, 1997. As the Canadian dollar is the
functional currency for the Company's Canadian operations, this decline has had
a negative effect on the Company's reported revenues. The effect of this
decline on the Company's net income for the fiscal years ended July 31, 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 $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.
<TABLE>
<CAPTION>
YEARS ENDING JULY 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(a) (restated) (restated)
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 68.1% 67.3% 66.6%
---------- ---------- ----------
Gross profit 31.9% 32.7% 33.4%
Selling, general and administrative expenses 25.7% 26.9% 25.8%
Depreciation and amortization 3.9% 4.2% 3.7%
(Gain) loss on disposal of property 0.1% (0.1)% --%
---------- ---------- ----------
Operating income 2.2% 1.7% 3.9%
Interest expense 1.9% 2.0% 1.2%
---------- ---------- ----------
Income (loss) before taxes 0.3% (0.3)% 2.7%
========== ========== ==========
</TABLE>
(a) Excludes non-recurring and unusual charges and adjustments described in
the paragraph above.
YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998
The net loss for the year ended July 31, 1999 was $6,676,000 versus a net
loss of $1,618,000 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 $400,000, $1.4 million for the
write-off of costs associated with the failed Q International and other
acquisitions,
16
<PAGE> 19
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 some $4 million. The Company also provided a 100% valuation allowance
of approximately $930,000 for federal net operating losses incurred in 1999
compared to $1,146,000 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 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 $344,000, or
8.1%, 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.
FISCAL YEAR ENDED JULY 31, 1998 COMPARED TO FISCAL YEAR ENDED JULY 31, 1997
Sales for the year ended July 31, 1998 increased $75 million, or 56.9%, to
$208 million from $133 million for the year ended July 31, 1997 primarily due
to the Fiscal 1997 Acquisitions and the Fiscal 1998 Acquisitions, as well as
increased sales from the Company's existing operations. Due to a decline in the
conversion rate between the U.S. dollar and the Canadian dollar, the Company's
reported sales for the year ended July 31, 1998 were approximately $3.8 million
less than would have been reported for such period had the conversion rate been
the same as in the year ended July 31, 1997.
Cost of sales for the year ended July 31, 1998 increased $52 million, or
58.5%, to $140 million from $88 million for the year ended July 31, 1997,
primarily due to the Fiscal 1997 Acquisitions and the Fiscal 1998 Acquisitions.
As a percentage of sales, such costs increased to 67.3% from 66.6%. This
increase reflects the generally lower gross profit associated with certain
services, specifically outsourcing or fleet management services and scheduled
distribution services. Due in part to the Company's acquisition of the Nydex
Companies in October 1997, these lower gross margin services comprised an
increased proportion of the Company's business in the year ended July 31, 1998
relative to the year ended July 31, 1997.
Selling, general and administrative expenses for the year ended July 31,
1998 increased $22 million, or 63.4%, to $56 million from $34 million for the
year ended July 31, 1997, primarily reflecting the expenses of the acquired
operations and increased spending for marketing, technology and administrative
support. As a percentage of sales, selling, general and
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<PAGE> 20
administrative expenses increased to 26.9% from 25.8%, which reflects the
additional costs noted above. Also, selling, general and administrative expenses
for the year ended July 31, 1998 include approximately $0.5 million in payments
to former owners of acquired businesses pursuant to settlement of employment
agreements.
Depreciation and amortization for the year ended July 31, 1998 increased
$3.8 million, or 75.7%, to $8.8 million from $5.0 million in the year ended
July 31, 1997 and, as a percentage of sales, increased to 4.2% from 3.7%. These
increases primarily resulted from depreciation and amortization of assets
acquired in the Fiscal 1997 Acquisitions and the Fiscal 1998 Acquisitions.
Interest expense for the year ended July 31, 1998 increased $2.6 million,
or 164.3%, to $4.2 million from $1.6 million for the year ended July 31, 1997
primarily as a result of the additional borrowings required to finance the
Fiscal 1997 Acquisitions and the Fiscal 1998 Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's capital needs arose primarily from its acquisition program
and, to a lesser extent, its capital expenditures and working capital needs.
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.
During the fiscal year ended July 31, 1997, the Company completed 16
acquisitions for aggregate consideration of approximately $43 million. Of this
aggregate consideration, approximately $11 million was paid by the issuance of
approximately 1,265,000 shares of the Company's common stock to the sellers of
the acquired businesses, approximately $700,000 was paid with promissory notes
issued by the Company to the sellers and approximately $31 million was paid in
cash. In August 1996, the Company completed its IPO and received net proceeds
of approximately $21 million. Of these proceeds, $7 million was utilized to pay
the cash portion of the consideration for the IPO Acquisitions and the balance
of $14 million was used to retire outstanding debt. The balance of the cash
consideration paid for the acquisitions completed during the fiscal year ended
July 31, 1997 was provided by cash flow from operations and proceeds from the
Credit Facility.
In addition, in connection with certain acquisitions, the Company agreed to
pay the sellers additional consideration if the acquired operations meet
certain performance goals related to their earnings before interest, taxes,
depreciation and amortization, as adjusted for certain factors. The estimated
maximum amount of additional consideration payable, if all performance goals
are met, is approximately $5.6 million payable in cash at July 31, 1999. These
payments of additional consideration 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. Management intends to
fund the cash portion of this additional consideration with internally
generated cash flow and, to the extent necessary, with borrowings under the
Credit Facility.
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.
As a result of the restatement, the Company was denied access to the
line-of-credit starting on September 16, 1999, the banks notified the Company
on November 9, 1999 that it was in default under the terms of the bank credit
agreement and the banks began charging the Company the default rate of interest
of prime plus 2.50% on March 20, 2000. On June 28, 2000, the Company amended
its bank credit agreement. Under the terms of the amended agreement, all prior
covenant
18
<PAGE> 21
violations were waived and the Company may borrow up to $51.7 million, the
amount currently outstanding (formerly $65 million) on a revolving basis
through July 31, 2001, at which time any amounts outstanding under the facility
are due. Interest on outstanding borrowings is payable monthly at the bank's
prime rate plus 2.00%. In addition, the Company is required to pay a commitment
fee of 0.375% for any unused amounts of the total commitment. The Company
intends to refinance or restructure the outstanding bank line of credit prior
to July 31, 2000. At July 31, 1999, the weighted average interest rate for all
outstanding borrowings was approximately 8.38%. See Note 8 of Notes to
Consolidated Financial Statements.
The Company has entered into interest rate protection arrangements on a
portion of the borrowings under the Credit Facility. The interest rate on $15
million of outstanding debt has been fixed at 6.26%, plus the applicable
margin, and a collar of between 5.50% and 6.50%, plus the applicable margin,
has been placed on $9 million of outstanding debt. These hedging arrangements
mature on August 31, 2000. At the present time, the Company has no plans to
replace the hedges when they expire. Amounts outstanding under the Credit
Facility are secured by all of the Company's U.S. assets and 65% of the stock
of its Canadian subsidiary. The Credit Facility also contains restrictions on
the payment of dividends, incurring additional debt, capital expenditures and
investments by the Company as well as requiring the Company to maintain certain
financial ratios. Generally, the Company must obtain the lenders' consent to
consummate any acquisition. See Note 8 of Notes to Consolidated Financial
Statements and "Risk Factors -- Acquisition Strategy; Possible Need for
Additional Financing."
During the fiscal years ended July 31, 1999, 1998 and 1997, the Company
spent approximately $3.4 million, $3.8 million and $2.2 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, 1999. 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, 1999, 1998 and 1997 were approximately $9.0 million, $5.4 and $2.5
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 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 not 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. See Item 3 Legal
Proceedings and Note 9 of Notes to Consolidated Financial Statements for
further information. At this time management is unable to determine the likely
outcome of this matter or to reasonably estimate the amount of loss with
respect to this matter.
YEAR 2000 COMPLIANCE
The Company did not experience any significant malfunctions or errors in
its operating or business systems as a result of the Year 2000. Based upon
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the Year 2000. It is possible the
full impact of the date change has not been fully recognized. However, the
Company believes any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively affected if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The
Company is not aware of any significant Year 2000 or similar problems that have
arisen for its customers and suppliers.
The Company has not, nor does it expect to, incur any material costs
associated with the Year 2000.
19
<PAGE> 22
DEFERRED TAXES
The Company has incurred taxable net operating losses in the United States
of $2,622,000, $3,197,000 and $333,000 for the years ended July 31, 1999, 1998
and 1997, respectively. In addition, the Company has generated unused foreign
tax credits related to its Canadian operations of $442,000. 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 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. 137, "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.
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.
20
<PAGE> 23
o The loss of quality drivers to e-commerce companies.
o The 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 $7.8 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 agreements on a
portion of the borrowings under its revolving credit facility. Through an
interest rate swap, the interest rate on $15 million of outstanding debt has
been fixed at 6.26%, plus the applicable margin, and a collar of between 5.50%
and 6.50%, plus applicable margin, has been placed on $9 million of outstanding
debt. Both of these hedging agreements have three-year terms and expire on
August 31, 2000. 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
On February 29, 2000, Deloitte & Touche LLP ("D&T") delivered a letter to
the Registrant that stated the client-auditor relationship between Dynamex Inc.
and Deloitte & Touche LLP has ceased.
The reports of D&T on the consolidated financial statements of the
Registrant for the fiscal years ended July 31, 1998 and July 31, 1997 did not
contain any adverse opinion or disclaimer of opinion nor were such reports
qualified or modified as to uncertainty, audit scope or accounting principles.
As discussed below, On September 17, 1999, the Registrant announced that the
previously issued 1997 and 1998 annual financial statements and the auditors'
reports thereon should not be relied upon.
In connection with the audits of the Registrant's consolidated financial
statements for the fiscal years ended July 31, 1999, 1998 and 1997 and during
the subsequent unaudited interim periods since the most recently ended fiscal
year, there were no disagreements with D&T on matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of D&T, would have caused D&T to
make reference to the matter in their report other than as follows:
In connection with the audit of the Registrant's consolidated financial
statements for the fiscal year ended July 31, 1998, D&T reported to the
Registrant's Audit Committee the following disagreements between D&T and the
Registrant, each of
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<PAGE> 24
which were satisfactorily resolved before D&T issued an unqualified opinion
with respect to the Registrant's financial statements:
o D&T disagreed with the Registrant's view that a gain should be
recognized immediately on the sale of the Registrant's Canadian
strategic stocking location services division.
o D&T disagreed with the adequacy of Registrant's allowance for doubtful
accounts.
o D&T disagreed with the Registrant's accounting for the settlement of
certain employment obligations as additional purchase consideration.
o D&T disagreed with the Registrant's accounting for certain vehicle
rental costs recorded as additional purchase consideration for an
acquired entity.
In late November 1998, D&T apprised a member of the Audit Committee and the
Chief Financial Officer of the Registrant of certain material weaknesses in
internal control noted during the audit of the financial statements of the
Registrant for the fiscal year ended July 31, 1998 by providing them a draft of
a letter communicating internal control related matters ("Management Letter").
D&T subsequently delivered to the Audit Committee its Management Letter and a
letter addressing required communications with the Audit Committee identifying
significant deficiencies that could adversely affect the Registrant's ability
to record, process, summarize, and report financial data consistent with the
assertions of management in the financial statements. The material weaknesses
in internal control included the following: (1) Inadequate overall internal
control design; (2) absence of appropriate reviews and approvals of
transactions, accounting entries, or systems output; (3) inadequate procedures
for appropriately assessing and applying accounting principles; (4) inadequate
provisions for the safeguarding of assets; (5) failure to perform tasks that
are part of a sound system of internal control, such as preparation of timely
account reconciliations; and, (6) absence of a sufficient level of control
consciousness within the organization. On January 25, 1999 the Chief Financial
Officer and the Controller of the Registrant resigned.
On January 25, 1999 the Registrant appointed a new Vice President and
Controller and a new Vice President Finance. The Audit Committee instructed the
new financial management team to address the weaknesses noted by D&T in their
Management Letter and to implement appropriate internal controls. On February
1, 1999, D&T was engaged, among other things, to assist the Registrant with
analyzing its core financial processes, identifying improvement opportunities
and developing an achievable implementation plan.
At the April 27, 1999 Audit Committee meeting, the D&T Management Letter,
the findings and recommendations from the special engagement described above
and Management's progress in addressing internal control weaknesses were
discussed. D&T indicated verbally that based on its discussions with certain
members of management, the Registrant appeared to be making progress on those
matters outlined in the Management Letter.
On June 14, 1999, the Registrant announced that it had discovered
potentially unsupportable accounting entries in the third quarter 1998. The
Audit Committee of the Board of Directors formed a Special Committee of outside
directors to review the matter further. The Special Committee engaged the law
firm of Weil, Gotshal & Manges LLP to assist in the review. Weil, Gotshal &
Manges LLP engaged D&T to assist in connection with the review. D&T suspended
all audit work related to the Registrant pending the results of the review by
the Special Committee. On September 17, 1999, the Registrant announced the
results of the review of the Special Committee. The Registrant indicated that
it would restate its previously reported financial results for fiscal years
1997 and 1998, and the first three quarters of fiscal year 1999. The Registrant
also stated that the previously issued 1997 and 1998 annual financial
statements and the independent auditors' reports thereon, as well as the
interim financial statements for 1997, 1998 and 1999, should not be relied
upon.
By letter dated September 16, 1999, D&T was engaged to perform the audits
of Registrant's restated financial statements for the years ended July 31, 1998
and 1997, subject to the terms and conditions therein. D&T verbally advised the
Registrant that, due to the results of the Special Committee's review, the
scope of the audits would be significantly expanded and that D&T would be
unwilling to rely on the representations of prior financial management. D&T
also advised the Registrant that subject to the same terms and conditions, it
would accept an engagement to continue as auditor for the fiscal year ended
July 31, 1999. Subsequent to September 16, 1999, D&T verbally advised the
Registrant that the documentary evidence then available to D&T was not
sufficient to complete its audits and requested additional documentation. The
Registrant made all reasonable efforts to respond to those requests. On
February 29, 2000, D&T advised the Registrant that it was resigning due to the
lack of sufficient evidential matter to render an opinion on the financial
statements of the Registrant.
22
<PAGE> 25
On April 17, 2000, the Registrant retained the accounting firm of BDO
Seidman, LLP to audit and report on the Registrant's consolidated balance sheet
as of July 31, 1999 and the restated consolidated balance sheet as of July 31,
1998 and the related consolidated statements of income, stockholders' equity
and cash flows for the year ended July 31, 1999 and the restated consolidated
statements of income, stockholders' equity and cash flows for the years ended
July 31, 1998 and 1997. BDO Seidman, LLP will also audit the Registrant's
consolidated financial statements for the fiscal year ending July 31, 2000. The
Registrant's Board of Directors approved this action upon the recommendation of
its Audit Committee.
During the two year period ended July 31, 1999 and through the date of this
filing, the Registrant did not consult with BDO Seidman, LLP regarding either
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the financial statements of the Registrant. In addition, the Registrant did not
consult with BDO Seidman, LLP regarding any matter that was the subject of a
disagreement or a reportable event within the meaning of Item 304 of the
Securities and Exchange Commission's Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A brief description of each director and executive officer of the Company
is provided below. Directors hold office until the next annual meeting of the
stockholders or until their successors are elected and qualified.
Richard K. McClelland, 48, became the President, Chief Executive Officer
and a director of the Company in May 1995 upon the closing of the Company's
acquisition of Dynamex Express (the ground courier division of Air Canada),
where he also served as President since 1988. He was elected as Chairman of the
Board of the Company in February 1996. Prior to joining Dynamex Express in
1986, Mr. McClelland held a number of advisory and management positions with
the Irving Group, Purolator Courier Ltd. and Sunbury Transport Ltd., where he
was engaged in the domestic and international same-day air, overnight air, and
trucking businesses.
Kenneth H. Bishop, 62, has served as a director of the Company since August
1996. From 1974 to August 1996, Mr. Bishop was President and General Manager of
Zipper Transportation Services, Ltd. and a related company (together "Zipper")
which operated a same-day delivery business in Winnipeg, Manitoba. The Company
acquired Zipper in August 1996. See "Certain Transactions".
Brian J. Hughes, 38, has served as a director of the Company since May
1995. Mr. Hughes has served as the Vice President -- Investments of Guidant
Mutual Insurance Company since September 1992. From 1986 to 1992, Mr. Hughes
served as Assistant Vice President -- Investments at Boatmen's National Bank.
Wayne Kern, 67, has served as a director of the Company since February
1996. Mr. Kern served as Senior Vice President and Secretary of Heritage Media
Corporation from 1987 through August 1997. From 1991 to 1995, Mr. Kern also
served as Executive Vice President of Crown Media, Inc. From 1979 to 1991, Mr.
Kern served as the Executive or Senior Vice President, General Counsel and
Secretary of Heritage Communications, Inc. See "Certain Transactions".
Jeffrey N. MacDowell, 35, was elected as the Vice President - Finance and
Corporate Development in January 1999. He joined the Company in August of 1998
as Managing Director - Corporate Development. Prior to joining the Company, Mr.
MacDowell was Vice President of RentX Industries, Inc. from 1996 to 1998. From
1991 to 1996, Mr. MacDowell was a Vice President at Banque Paribas.
Ray E. Schmitz, 54, joined the Company and was elected Vice President -
Controller in January 1999. Prior to joining the Company, Mr. Schmitz was Vice
President - Controller of EEX Corporation from 1997 to 1999. Previous to that
he was Assistant Controller of ENSERCH Corporation and Controller of Enserch
Exploration, Inc., a subsidiary of ENSERCH Corporation and predecessor to EEX
Corporation, from 1984 to 1996.
Stephen P. Smiley, 50, has served as a director of the Company since 1993
and was a Vice President of the Company from December 1995 through February
1996. Mr. Smiley was President of Hoak Capital Corporation from 1991 through
February 1996. Mr. Smiley joined Hunt Financial Corporation (a private
investment company) as Executive Vice President in February 1996, and was
appointed President in January 1997. Mr. Smiley is also a director of Ergo
Science Corporation (a biopharmaceutical company).
23
<PAGE> 26
Mr. James H. Wicker, III, 30, was elected Vice President - Information
Systems in January 1999. Mr. Wicker joined the Company as Director, Information
Technology in April 1998. Prior to joining the Company, Mr. Wicker held the
position of Director of Information Services at Heritage Media Corporation from
March 1997 to April 1998. Previous to that he was Director of Information
Services of Denton County from February 1988 to March 1997.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the total annual
compensation paid or accrued by the Company to or for the account of the Chief
Executive Officer and the other top four most highly compensated executive
officers of the Company (collectively the "Named Executives") whose total
salary and bonus for the fiscal year ended July 31, 1999 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
----------------
Annual Compensation Securities
--------------------------------------------- Underlying
Name and Principal Position Year Salary($) Bonus($) Options
--------------------------- -------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Richard K. McClelland 1999 240,204 113,877 50,000
President and Chief Executive Officer 1998 220,000 19,890 65,000
1997 200,000 120,000 99,000
Robert Capps(1) 1999 195,123 -- --
Executive Vice President and 1998 161,349 -- 35,000
Chief Financial Officer 1997 141,950 54,250 46,000
Robert Dobrient(2) 1999 137,179 18,750 25,000
Vice President 1998 111,346 -- --
Jeffrey N. MacDowell(3) 1999 117,084 -- 40,000
Vice President - Finance and
Corporate Development
Ray E. Schmitz(4) 1999 66,000 -- 25,000
Vice President - Controller and
Chief Accounting Officer
James H. Wicker, III(5) 1999 129,461 5,600 32,000
Vice President - Information Services
</TABLE>
----------
(1) Robert P. Capps was initially employed as an executive officer of the
Company in February 1996. Mr. Capps resigned from the Company in January
1999.
(2) Robert Dobrient was initially elected as an executive officer of the
Company in September 1997. Mr. Dobrient resigned from the Company in
October 1999.
(3) Jeffrey N. MacDowell was initially elected an officer of the Company in
January 1999.
(4) Ray E. Schmitz was initially elected an officer of the Company in January
1999.
(5) James H. Wicker, III was initially elected an officer of the Company in
January 1999.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into an employment agreement with Mr. McClelland
which provides for the payment of a base salary in the annual amount of
$250,000, participation in an executive bonus plan, an auto allowance of
Canadian $900 per month and participation in other employee benefit plans. The
agreement also provides that upon Mr. McClelland's exercise of certain stock
options to purchase 48,000 shares of common stock, that were exercised on May
16, 1998, the Company shall pay Mr. McClelland a bonus equal to the exercise
price multiplied by the number of shares to be purchased by virtue of such
exercise. Unless terminated earlier, the employment agreement shall continue
until May 31, 2001, upon which date such agreement will be automatically
extended for successive one-year renewal terms unless notice is given
24
<PAGE> 27
upon the terms provided in such agreement. Additionally, upon a sale or
transfer of substantially all of the assets of the Company or certain other
events that constitute a change of control of the Company, including the
acquisition by a stockholder, other than certain named stockholders, of
securities representing 15% of the votes that may be cast for director
elections, the Company shall continue to pay Mr. McClelland the compensation
set forth in such agreement for the greater of two years from the date of such
change of control or the remainder of the agreement term. During the term of
the employment agreement and pursuant to such agreement, Mr. McClelland shall
be a member of the Board of Directors of the Company.
1996 STOCK OPTION PLAN
The following table sets forth information regarding the grant of stock
options under the Company's Amended and Restated 1996 Stock Option Plan
("Option Plan") during fiscal 1999 to the Named Executives:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------
% of Total Potential
Number of Options/ Realized Value at Assumed
Securities SARs Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation for
Options/ Employees Or Base Option Term
SARs in Fiscal Price Expiration ------------------------------
Granted(#) Year ($/Share) Date 5%($) 10%($)
-------------- ------------ ------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard K. McClelland 50,000 13.4% $2.250 7-Apr-09 $70,760 $179,250
Robert Capps -- -- -- -- --
Robert Dobrient 25,000 6.7% $2.250 7-Apr-09 $35,380 $ 89,625
Jeffrey N. MacDowell 15,000 4.0% $10.000 6-Aug-08 $94,350 $239,055
25,000 6.7% $2.250 7-Apr-09 $35,380 $ 89,625
Ray E. Schmitz 25,000 6.7% $2.250 7-Apr-09 $35,380 $ 89,625
James H. Wicker, III 7,000 1.9% $10.375 5-Aug-08 $45,675 $115,738
25,000 6.7% $2.250 7-Apr-09 $35,380 $ 89,625
</TABLE>
The following table sets forth information with respect to shares exercised
during the fiscal year 1999 by the Named Executives and information with
respect to options to purchase shares of the Company's common stock granted
under the Option Plan to the Named Executives and held by them at July 31,
1999:
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired FY-End FY-End
on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
---------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Richard K. McClelland -- -- 96,600/269,000 --/--
Robert P. Capps -- -- 25,400/81,000 --/--
Robert Dobrient -- -- --/25,000 --/--
Jeffrey N. MacDowell -- -- --/40,000 --/--
Ray E. Schmitz -- -- --/25,000 --/--
James H. Wicker, III -- -- 1,400/32,000 --/--
</TABLE>
25
<PAGE> 28
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors and
executive officers, and persons who own more than 10% of the Company's common
stock, are required to report their initial ownership of the Company's common
stock and any subsequent changes in that ownership to the Securities and
Exchange Commission. Specific due dates have been established for these
reports, and the Company is required to disclose in this report any failure to
file by these dates. Based solely upon a review of Forms 3, 4 and 5 furnished
to the Company, the Company believes that all of its directors, officers and
applicable stockholders timely filed these reports.
STOCK PRICE PERFORMANCE
Set forth below is a line graph indicating the stock price performance of
the Company's common stock for the period beginning August 13, 1996 (the date
of the Company's initial public offering) and ending July 31, 1999 as
contrasted with the AMEX Market Index and the Russell 2000 Stock Index**. The
graph assumes that $100 was invested at the beginning of the period and has
been adjusted for any stock dividends distributed after August 13, 1996. No
cash or stock dividends have been paid during this period.
COMPARATIVE CUMULATIVE TOTAL RETURN
AMONG DYNAMEX INC.,
AMEX MARKET INDEX
AND RUSSELL 2000 INDEX
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
8/13/96 7/31/97 7/31/98 7/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dynamex Inc. 100.00 85.29 135.29 38.24
Russell 2000 Index 100.00 133.37 136.45 145.05
AMEX Market Index 100.00 118.84 129.72 133.39
</TABLE>
ASSUMES $100 INVESTED ON AUGUST 13, 1996
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING JULY 31, 1999
----------
** The Russell 2000 Stock Index represents companies with a market
capitalization similar to that of the Company. The Company does not
believe it can reasonably identify a peer group because it believes that
there is only one public company engaged in lines of business directly
comparative to those of the Company.
26
<PAGE> 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of September 16, 1999 for (i) each
person known by the Company to own beneficially more than 5% of the common
stock, (ii) each director, (iii) each Named Executive and (iv) all directors
and executive officers of the Company as a group. Except pursuant to applicable
community property laws and except as otherwise indicated, each stockholder
identified in the table possesses sole voting and investment power with respect
to its or his shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
-------------------
NAME OF BENEFICIAL OWNER NUMBER(1) PERCENT
---------------------------------------- --------- -------
<S> <C> <C>
Richard K. McClelland................... 96,600 *
Kenneth H. Bishop....................... 10,422 *
Brian J. Hughes(2)...................... -- *
Wayne Kern.............................. 13,460 *
Jeffrey N. MacDowell.................... 2,000 *
Ray E. Schmitz.......................... 1,000 *
Stephen P. Smiley....................... 9,160 *
James H. Wicker, III.................... 1,400 *
All directors and executive officers
as a group............................. 134,042 1.31%
Other 5% stockholders:
James M. Hoak, Jr.(3)................... 1,406,765 13.90%
Nathan H. Dardick ...................... 678,100 6.64%
2331 Orrington Avenue
Evanston, IL 60201
Safeco FUNDS(4)......................... 685,000 6.70%
Talon Asset Management, Inc.(5)......... 534,960 5.30%
One North Franklin, Suite 450
Chicago, IL 60606
</TABLE>
----------
* Indicates less than 1%.
(1) Includes shares issuable upon the exercise of stock options outstanding and
fully vested as of September 16, 2000.
(2) Excludes 254,000 shares beneficially owned by Guidant Mutual Insurance
Company, which employs Mr. Hughes as Vice President -- Investments. Mr.
Hughes disclaims beneficial ownership of such shares.
(3) Mr. Hoak resigned as a Director of the Company in June 1999. Mr. Hoak's
address is One Galleria Tower, Suite 1050, 13355 Noel Road, Dallas, Texas
75240. Excludes an aggregate of 38,661 shares owned by Mr. Hoak's wife and
children, to which shares Mr. Hoak disclaims beneficial ownership. 215,334
of the shares beneficially owned by Mr. Hoak are owned directly by CCP
Investment Corporation, a Texas corporation, of which Mr. Hoak is the sole
owner and director.
(4) Based on information as of January 28, 2000, as reported on Schedule 13G
filed jointly by SAFECO Common Stock Trust, SAFECO Asset Management Company
and SAFECO Corporation, of which shares are owned beneficially by
registered investment companies for which each of SAFECO Common Stock Trust
at 10865 Willows Road NE, Redmond, WA 98052, SAFECO Asset Management
Company at 601 Union Street, Suite 2500, Seattle, WA 98101, and SAFECO
Corporation at SAFECO Plaza, Seattle, WA 98185, serve as advisors.
(5) Talon Asset Management, Inc. is an investment adviser as specified on
Schedule 13G filing dated March 10, 1999, and reported shares are owned
beneficially by registered investment companies for which Talon Asset
Management Inc. serves as investment adviser.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended July 31, 1999, 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 1999, the officer repaid $102,000 of the loan principal
plus accrued interest.
27
<PAGE> 30
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 June 17, 1999. (News release dated June
15, 1999 announcing that prior years accounting to be reviewed by Special
Committee of Board of Directors.)
Current Report on Form 8-K dated September 21, 1999. (News release dated
September 17, 1999 announcing the results of the Special Committee, the
restatement of prior periods and a halt in trading in the Company's common
stock by the American Stock Exchange.)
Current Report on Form 8-K dated December 30, 1999. (News release
announcing delay in filing Form 10-K for year ended July 31, 1999 and
preliminary first quarter 2000 results.)
Current Report on Form 8-K dated March 7,2000. (News release announcing the
resignation of Deloitte & Touche LLP as the Company's independent auditors.)
Current Report on Form 8-K dated April 24, 2000. (News release announcing
the appointment of BDO Seidman, LLP as the Company's independent auditors.)
28
<PAGE> 31
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: June 28, 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 June 28, 2000.
NAME TITLE
---- -----
/s/ RICHARD K. McCLELLAND Chairman of the Board, Chief Executive
----------------------------- Officer, President and Director
Richard K. McClelland (Principal Executive Officer)
/s/ RAY E. SCHMITZ Vice President, Controller and Chief
----------------------------- Accounting Officer
Ray E. Schmitz
/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
29
<PAGE> 32
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
DYNAMEX INC.
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets, July 31, 1999 and 1998 (restated) F-3
Consolidated Statements of Operations for the fiscal years ended
July 31, 1999, 1998 (restated) and 1997 (restated) F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended
July 31, 1999, 1998 (restated) and 1997 (restated) F-5
Consolidated Statements of Cash Flows for the fiscal years ended
July 31, 1999, 1998 (restated) and 1997 (restated) F-6
Notes to the Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 33
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, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended July 31, 1999. 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, 1999 and 1998 and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 1999 in conformity with
generally accepted accounting principles.
As more fully described in Note 9 to the consolidated financial statements, the
Company is a defendant in two class action lawsuits. Management is unable to
determine the likely outcome of these lawsuits or to reasonably estimate the
amount of loss, if any. Accordingly, the consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
/s/ BDO Seidman, LLP
-------------------------
BDO SEIDMAN, LLP
Dallas, Texas
June 28, 2000
F-2
<PAGE> 34
DYNAMEX INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 1999 AND 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(restated)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 2,933 $ 1,361
Accounts receivable (net of allowance for doubtful accounts of $1,320
and $967, respectively) 25,945 26,636
Prepaid and other current assets 2,488 4,815
Deferred income taxes 2,148 1,113
--------- ---------
Total current assets 33,514 33,925
PROPERTY AND EQUIPMENT - net 9,308 8,414
INTANGIBLES - net 82,860 77,710
DEFERRED INCOME TAXES 2,899 1,110
OTHER ASSETS 1,841 1,610
--------- ---------
Total assets $ 130,422 $ 122,769
========= =========
LIABILITIES
CURRENT
Accounts payable $ 6,349 $ 3,144
Accrued liabilities 15,292 14,602
Income taxes payable 117 --
Current portion of long-term debt 427 777
--------- ---------
Total current liabilities 22,185 18,523
LONG-TERM DEBT 46,690 36,287
--------- ---------
Total liabilities 68,875 54,810
========= =========
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
10,069 shares outstanding, respectively 102 101
Additional paid-in capital 72,759 72,307
Retained deficit (10,202) (3,526)
Receivable from stockholder (102) (204)
Accumulated other comprehensive loss:
Cumulative translation adjustment (1,010) (719)
--------- ---------
Total stockholders' equity 61,547 67,959
========= =========
Total liabilities and stockholders' equity $ 130,422 $ 122,769
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 35
DYNAMEX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(restated) (restated)
<S> <C> <C> <C>
SALES $ 239,631 $ 208,019 $ 132,587
COST OF SALES 163,156 140,037 88,342
--------- --------- ---------
GROSS PROFIT 76,475 67,982 44,245
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 66,166 55,866 34,197
DEPRECIATION AND AMORTIZATION (INCLUDING 1999 INTANGIBLE IMPAIRMENT OF $3,971) 13,211 8,770 4,991
(GAIN) LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT 205 (199) (57)
--------- --------- ---------
OPERATING INCOME (LOSS) (3,107) 3,545 5,114
INTEREST EXPENSE 4,572 4,228 1,600
--------- --------- ---------
INCOME (LOSS) BEFORE TAXES (7,679) (683) 3,514
INCOME TAXES (1,003) 935 1,825
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (6,676) (1,618) 1,689
EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT (net of
income tax benefit of $222) -- -- (335)
--------- --------- ---------
NET INCOME (LOSS) $ (6,676) $ (1,618) $ 1,354
--------- --------- ---------
Earnings (loss) per common share - basic:
Income (loss) before extraordinary item $ (0.66) $ (0.20) $ 0.25
Extraordinary loss -- -- (0.05)
--------- --------- ---------
Net income (loss) $ (0.66) $ (0.20) $ 0.20
--------- --------- ---------
Earnings (loss) per common share - diluted
Income (loss) before extraordinary item $ (0.66) $ (0.20) $ 0.25
Extraordinary loss -- -- (0.05)
--------- --------- ---------
Net income (loss) $ (0.66) $ (0.20) $ 0.20
--------- --------- ---------
Weighted average shares:
Common shares outstanding 10,099 7,937 6,670
Adjusted common shares - assuming exercise of stock warrants
and options 10,099 7,937 6,839
--------- --------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<PAGE> 36
DYNAMEX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1999, 1998 AND 1997
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
RECEIVABLE ADDITIONAL OTHER
FROM PAID-IN RETAINED COMPREHENSIVE
COMMON STOCK STOCKHOLDER WARRANTS CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
------------------ ----------- -------- -------- -------- ------------ --------
SHARES AMOUNT
-------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996 2,543 $ 25 $ -- $ 624 $ 8,756 $ (3,262) $ 15 $ 6,158
Sale of common stock in connection with IPO 2,990 30 -- -- 20,946 -- -- 20,976
Issuance of common stock in connection
with IPO acquisitions 174 2 -- -- 1,386 -- -- 1,388
Issuance of common stock on exercise of stock
warrants 540 5 -- (624) 633 -- -- 14
Issuance of common stock in connection with
acquisitions 1,091 11 -- -- 9,246 -- -- 9,257
Unrealized foreign currency translation
adjustment -- -- -- -- -- -- (199) (199)
Net income -- -- -- -- -- 1,354 -- 1,354
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE AT JULY 31, 1997 (restated) 7,338 73 -- -- 40,967 (1,908) (184) 38,948
Sale of common stock in connection with
follow-on offering 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 (restated) 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
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE> 37
DYNAMEX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1999, 1998 AND 1997
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(restated) (restated)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (6,676) $ (1,618) $ 1,354
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,067 3,133 1,730
Amortization and write-down of goodwill and other intangibles 10,144 5,637 3,261
Provision for losses on accounts receivable 2,109 632 559
Extraordinary loss on early retirement of debt -- -- 557
Deferred income taxes (2,824) (1,416) (807)
(Gain) loss on disposal of property and equipment 205 (199) (57)
Changes in assets and liabilities:
Accounts receivable (1,330) (613) (5,133)
Prepaids and other current assets 2,329 (1,655) (1,387)
Accounts payable and accrued liabilities 1,993 1,460 2,450
-------- -------- --------
Net cash provided by operating activities 9,017 5,361 2,527
-------- -------- --------
INVESTING ACTIVITIES
Payments for acquisitions (14,055) (35,925) (31,321)
Purchase of property and equipment (3,432) (3,820) (2,228)
Net proceeds from disposal of property and equipment 283 745 97
-------- -------- --------
Net cash used in investing activities (17,204) (39,000) (33,452)
-------- -------- --------
FINANCING ACTIVITIES
Principal payments on long-term debt (627) (740) (8,039)
Net borrowings under line of credit 10,680 4,163 --
Proceeds from issuance of long-term debt -- 55 18,160
Proceeds from shareholder receivable 102 -- --
Net proceeds from sale of common stock 58 30,030 20,990
Other assets and deferred financing fees (234) 702 (540)
-------- -------- --------
Net cash provided by financing activities 9,979 34,210 30,571
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (220) (536) 786
-------- -------- --------
NET INCREASE IN CASH 1,572 35 432
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,361 1,326 894
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,933 $ 1,361 $ 1,326
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Cash paid for interest $ 3,952 $ 3,557 $ 1,261
Cash paid for taxes 2,436 5,773 500
-------- -------- --------
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 $ 14,450 $ 37,059 $ 42,666
Issuance of notes payable -- -- (700)
Issuance of common stock (395) (1,134) (10,645)
-------- -------- --------
$ 14,055 $ 35,925 $ 31,321
-------- -------- --------
</TABLE>
See accompanying notes to the consolidated financial statements
F-6
<PAGE> 38
DYNAMEX INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
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.
During its review of the fiscal third quarter financial statements ending
April 30, 1999, the Company discovered unsupportable accounting entries.
The unsupportable accounting entries related to the timing of the sale of
an asset and the reduction in accruals for workers' compensation and bad
debts. On June 14, 1999, the Audit Committee of the Company's Board of
Directors formed a Special Committee of outside directors to review the
matter further. The Special Committee engaged the law firm of Weil, Gotshal
& Manges LLP ("Weil, Gotshal") to assist in connection with the review.
Weil, Gotshal engaged Deloitte & Touche LLP to assist in connection with
the review.
On September 17, 1999, the Special Committee of the Board of Directors
announced the results of its review. The Special Committee recommended to
the Board of Directors, among other things, and the Board of Directors
concurred, that the reported financial results for fiscal years 1997 and
1998 and the first three quarters of fiscal year 1999 be adjusted and
restated. The adjustments resulted from the improper application of
generally accepted accounting principles to purchase accounting, the
improper deferral of expenses, the unsupported accounting entries and the
recognition of revenues prior to services being rendered or before all
contingencies were resolved. (See Note 3 of the Notes to the Consolidated
Financial Statements)
As a result of additional analysis and review during the re-audit, certain
additional adjustments were identified that impacted the financial
statements for the years ended July 31, 1999, 1998 and 1997. These
adjustments related primarily to the reduction in the carrying value of
intangibles, an additional bad debt accrual, a valuation reserve related to
federal net operating losses in the U.S., a reduction in the value of fixed
assets and an additional accounts payable accrual.
The results for the year ended July 31, 1999 include non-recurring and
unusual charges and adjustments. Selling, general and administrative
expenses 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. 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 some $4 million. The Company also provided
a 100% valuation allowance of approximately $930,000 for federal net
operating losses incurred in 1999 compared to $1,146,000 for federal net
operating losses incurred in 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.)
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
F-7
<PAGE> 39
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 - 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 7-12 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.
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 $10,144, $5,637 and
$3,261 for the years ended July 31, 1999, 1998 and 1997, 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, 1999 and 1998, the
Company incurred $325 and $919, respectively of costs incurred in
connection with debt financings (See Note 8). 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 $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
F-8
<PAGE> 40
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 13 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.
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. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133".
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
yearend 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, 1999,
1998 and 1997, the company recorded comprehensive income (loss) from
foreign currency translation as follows:
<TABLE>
<CAPTION>
JULY 31,
-------------------------------------------
1999 1998 1997
--------- --------- -------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Net income (loss) $ (6,676) $ (1,618) $ 1,354
Change in comprehensive income (loss) (291) (535) $ (199)
-------- --------- ---------
Comprehensive income (loss) $ (6,967) $ (2,153) $ 1,155
-------- --------- ---------
</TABLE>
3. RESTATEMENT
During its review of the fiscal third quarter financial statements ending
April 30, 1999, the Company discovered unsupportable accounting entries
made in the prior year period. The unsupportable accounting entries related
to the timing of the sale of an asset and the reduction in accruals for
workers' compensation and bad debts. On June 14, 1999, the Audit Committee
of the Company's Board of Directors formed a Special Committee of outside
directors to review the matter further.
On September 17, 1999, the Special Committee of the Board of Directors
announced the results of its review. The Special Committee recommended to
the Board of Directors, among other things, that the reported financial
results for fiscal years 1998 and 1997 and the first three quarters of
fiscal year 1999 be adjusted and restated. The adjustments resulted from
the improper application of generally accepted accounting principles to
purchase accounting, the improper deferral of expenses, the unsupported
accounting entries and the recognition of revenues prior to services being
rendered or before all contingencies were resolved.
F-9
<PAGE> 41
As a result of additional analysis and review during the re-audit process,
certain additional adjustments were identified that impacted the financial
statements for the years ended July 31, 1999, 1998 and 1997. These
adjustments related primarily to the reduction in the carrying value of
intangibles, an additional bad debt accrual, a valuation reserve related to
federal net operating losses in the U.S., a reduction in the value of fixed
assets and an additional accounts payable accrual.
A summary of the effect of the restatement on the consolidated balance
sheets at July 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- --------------------------
As Previously As As Previously As
Reported Restated Reported Restated
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Accounts receivable - net $ 27,171 $ 26,636 $ 20,867 $ 20,750
Prepaid and other current assets 5,932 4,815 3,301 2,724
Property and equipment 9,890 8,414 5,787 6,419
Intangibles 81,955 77,710 54,036 51,204
Deferred income taxes 670 2,223 405 807
Other assets 687 1,610 1,832 2,267
Accounts payable 2,813 3,144 1,759 1,759
Accrued liabilities 13,735 14,602 9,196 8,694
Retained earnings (deficit) 3,628 (3,526) 250 (1,908)
Unrealized foreign currency translation adjustment $ (890) (719) (190) (184)
</TABLE>
A summary of the effect of the restatement on the consolidated statement of
operations for the years ended July 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- ---------------------------
As Previously As As Previously As
Reported Restated Reported Restated
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Sales $ 207,746 $ 208,019 $ 131,867 $ 132,587
Cost of Sales 139,317 140,037 87,193 88,342
Selling, general and administrative expenses 51,997 55,866 33,318 34,196
(Gain) loss on disposal of property and equipment -- (199) -- (57)
Depreciation and amortization 6,679 8,770 3,424 4,991
Operating income 9,753 3,545 7,932 5,114
Interest expense 4,223 4,228 1,600 1,600
Net income (loss) before taxes 5,530 (683) 6,332 3,514
Income tax expense 2,152 935 2,485 1,825
Net income (loss) 3,378 (1,618) 3,847 1,354
</TABLE>
4. 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.
During the fiscal year ended July 31, 1997, the Company acquired 16 same
day delivery businesses in eight U.S. cities and four Canadian cities for
approximately $31 million in cash, the issuance by the Company of
approximately $700 in promissory notes and the issuance of approximately
1.3 million shares of common stock valued at $11 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,
F-10
<PAGE> 42
1999, if all performance goals are met, is approximately $6 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, 1998 and 1997, are presented
as if the acquisitions had occurred as of August 1, 1996.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
PRO FORMA PRO FORMA PRO FORMA
--------- --------- ---------
(UNAUDITED)
(restated) (restated)
<S> <C> <C> <C>
Sales $ 239,835 $ 233,312 $ 195,964
--------- --------- ---------
Income (loss) before extraordinary item $ (6,669) $ (294) $ 2,429
--------- --------- ---------
Net income (loss) $ (6,669) $ (294) $ 2,094
--------- --------- ---------
Per share -- assuming dilution:
Income (loss) before extraordinary item $ (0.66) $ (0.04) $ 0.36
Net income (loss) $ (0.66) $ (0.04) $ 0.31
</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 1997
-------- -------- --------
(restated) (restated)
<S> <C> <C> <C>
Accounts receivable $ 88 $ 5,905 $ 5,035
Property and equipment 23 1,708 4,037
Other assets 2 481 900
Intangibles 14,427 32,288 37,831
Liabilities assumed (90) (3,323) (5,137)
-------- -------- --------
Net assets acquired $ 14,450 $ 37,059 $ 42,666
======== ======== ========
</TABLE>
Consideration for these transactions consisted of the following:
<TABLE>
<CAPTION>
JULY 31,
-------------------------------
1999 1998 1997
------- ------- -------
(restated) (restated)
<S> <C> <C> <C>
Cash paid, net of cash acquired $14,055 $35,925 $31,321
Issuance of notes payable -- -- 700
Issuance of common stock 395 1,134 10,645
------- ------- -------
Total consideration $14,450 $37,059 $42,666
======= ======= =======
</TABLE>
5. 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
F-11
<PAGE> 43
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.
6. INTANGIBLES
Intangibles from the Company's various acquisitions consist of the
following:
<TABLE>
<CAPTION>
JULY 31,
----------------------
1999 1998
-------- --------
(restated)
<S> <C> <C>
Goodwill $ 88,105 $ 77,997
Trademarks and covenants not-to-compete 10,074 9,668
-------- --------
98,179 87,665
Less accumulated amortization (15,319) (9,955)
-------- --------
Intangibles -- net $ 82,860 $ 77,710
======== ========
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------
1999 1998
-------- --------
(restated)
<S> <C> <C>
Equipment $ 15,304 $ 14,073
Furniture 1,575 1,386
Vehicles 1,599 1,742
Leasehold improvements 2,205 1,891
Other 980 702
-------- --------
21,663 19,794
Less accumulated deprecation (12,355) (11,380)
-------- --------
Property and equipment-- net $ 9,308 $ 8,414
======== ========
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------
1999 1998
-------- --------
(restated)
<S> <C> <C>
Bank credit agreement (a) $ 46,200 $ 35,520
Seller financing notes and other (b) 271 455
Capital lease obligations (Note 9) 646 1,089
-------- --------
47,117 37,064
Less current portion (427) (777)
-------- --------
Long-term debt $ 46,690 $ 36,287
======== ========
</TABLE>
a) Bank Credit Agreement
As a result of the restatement, the Company was denied access to the
line-of-credit starting on September 16, 1999, the banks notified the
Company on November 9, 1999 that it was in default under the terms of the
bank credit agreement and the banks began charging the Company the default
rate of interest of prime plus 2.50% on March 20, 2000. On June 28, 2000,
the Company amended its bank credit agreement. Under the terms of the
amended agreement, all prior covenant violations were waived and the
Company may borrow up to $51.7 million, the amount currently outstanding
(formerly $65 million) on a revolving basis through July 31, 2001, at which
time any amounts outstanding under the facility are due. Interest on
outstanding borrowings is payable monthly at the bank's prime rate plus
2.00%. In addition, the Company is required to pay a commitment fee of
0.375% for any unused amounts of the total commitment
Effective as of January 31, 1999, the Company completed the second
amendment to the Second Amended and Restated Credit Agreement. Under the
terms of the second amendment, the Company could borrow up to $65 million
on a revolving basis through May 1, 2001, at which time any amounts
outstanding under the facility are due. Interest on outstanding
F-12
<PAGE> 44
borrowings was payable quarterly at prime plus .50% or various other
interest rate elections based on LIBOR plus an applicable margin. The
applicable margins ranged from 1.50% to 3.25% and were based on the ratio
of the Company's funded debt to cash flow, both as defined in the
agreement. In addition, the Company was required to pay a commitment fee of
0.25% of any unused amounts of the total commitment. At July 31, 1999 the
weighted average interest rate for the then outstanding borrowings under
the credit agreement was 8.38%.
Borrowings under the agreement are secured by all of the Company's assets
in the United States and by 65% of the stock of the Company's Canadian
subsidiary. The agreement contains restrictions on the payment of
dividends, incurring additional debt, capital expenditures and investments
by the Company. In addition, the Company is required to maintain certain
financial ratios related to minimum amounts of stockholders' equity, fixed
charges to cash flow and funded debt to cash flow, all as defined in the
agreement. The agreement also requires the Company to obtain the consent of
the lender for additional acquisitions in certain instances.
The Company has entered into interest rate protection agreements on a
portion of the borrowings under the revolving credit facility. Through an
interest rate swap, the interest rate on $15 million of outstanding debt
has been fixed at 6.26%, plus the applicable margin, and a collar of
between 5.50% and 6.50%, plus the applicable margin, has been placed on $9
million of outstanding debt. Both of these hedging agreements have
three-year terms and expire on August 31, 2000. The total cost of these
agreements was approximately $65 and is being amortized to interest expense
over the term of the agreements. The counter party to these agreements is a
major financial institution with which the Company also has other financial
relationships. The Company believes that the risk of loss due to
nonperformance by the counter party to these agreements is remote and, in
any event, the amount of such loss would be immaterial to the Company's
results of operations.
At July 31, 1999, the Company had unpaid settlements of approximately $29
related to the interest rate swap. The fair value of this agreement at July
31, 1999 and 1998 was a liability of approximately $64 and $170,
respectively.
b) Seller Financing Notes and Other
In connection with various acquisitions (see Note 4) 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>
2000 $ 427
2001 46,521
2002 153
2003 16
2004 -
Thereafter -
--------
$ 47,117
========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain equipment under properties and non-cancelable
lease agreements, which expire at various dates.
At July 31, 1999, minimum annual lease payments for such leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- --------
<S> <C> <C>
2000 $ 309 $ 4,431
2001 232 4,171
2002 193 3,386
2003 17 2,563
2004 -- 1,683
Thereafter -- 1,506
------- --------
751 $ 17,740
Less amount representing interest (105) --
------- ---------
Net present value of future minimum lease payments $ 646 $ 17,740
======= =========
</TABLE>
F-13
<PAGE> 45
Rent expense related to operating leases amounted to approximately $5,756,
$5,058, and $2,987 for the years ended July 31, 1999, 1998 and 1997,
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 it was (i) revising its results of operations for the
year ended July 31, 1998 from that which had been previously announced on
September 16, 1998 and (ii) restating its results of operations for the
third quarter of fiscal 1998 from that which had been previously reported.
On February 5, 1999, the Court entered an Order consolidating the actions
and approved the selection of three law firms as co-lead counsel. A
consolidated and amended complaint was filed on March 22, 1999. On May 6,
1999, defendants filed a motion to dismiss the consolidated and amended
complaint in its entirety.
On June 14, 1999, the Company issued a press release announcing that the
Audit Committee of the Board of Directors had formed a Special Committee of
outside directors to review potentially unsupportable accounting entries
for the third and fourth quarters of fiscal 1998. On September 17, 1999 the
Company issued a press release announcing that the Special Committee had
completed its review of the Company's financial reporting and that the
Company would restate its previously reported financial results for the
fiscal years 1997 and 1998 and the first three quarters of the fiscal year
1999.
On October 14, 1999, pursuant to a stipulation of the parties, plaintiffs
filed a second amended class action complaint that added allegations
relating to the information disclosed in the Company's June 14 and
September 17, 1999 press releases. In addition to the defendants named in
the original complaint, the Second Amended Class Action Complaint named
Deloitte & Touche and Deloitte & Touche LLP (the Court subsequently
dismissed Deloitte & Touche LLP without prejudice pursuant to the
stipulation of the parties). The Second Amended Class Action Complaint
alleges that the defendants issued a series of materially false and
misleading statements and omitted material facts concerning the Company's
financial condition and business operations. The lawsuit alleges violations
of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections
10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek
unspecified damages on behalf of all other purchasers of the Company's
common stock during the period of September 18, 1997 through and including
September 17, 1999.
On December 8, 1999, Dynamex moved to dismiss the complaint in its entirety
on the grounds that plaintiffs' complaint fails to meet the required
pleading standards and that the claims are deficient as a matter of law.
Briefing of the motion was completed on June 1, 2000, and the motion is now
awaiting disposition. At this date, no class has been certified nor has any
discovery commenced.
On April 10, 2000, Reliance Insurance Company filed a notice of action in
the Superior Court of Justice in Ontario, Canada, seeking a declaratory
judgment that defendants in the shareholder class action are not entitled
to reimbursement under the Reliance insurance policy for losses incurred in
connection with that action. The Reliance policy provides $3 million in
excess coverage to supplement the $2 million in coverage provided to the
Company pursuant to the underlying policy issued by American Home Assurance
Company.
At this time management is unable to determine the likely outcome of this
matter or to reasonably estimate the amount of loss with respect to this
matter.
The Special Committee of the Board of Directors has kept the Securities and
Exchange Commission apprised of its inquiry and the restatement process.
The Company has received an informal request for information from the Staff
of the Commission for documents concerning the circumstances of the
proposed restatement of the Company's prior period financial statements.
The Company has cooperated with the Commission and produced documents
responsive to its request.
F-14
<PAGE> 46
10. 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,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
(restated) (restated)
<S> <C> <C> <C>
Canada $ 3,149 $ 3,826 $ 3,031
United States (10,828) (4,509) 484
---------- ---------- ----------
$ (7,679) $ (683) $ 3,515
The provision for income tax consisted of the following:
Current tax expense:
Canada $ 1,489 $ 1,600 $ 1,347
U.S -- -- --
---------- ---------- ----------
Total current tax expense $ 1,489 $ 1,600 $ 1,347
========== ========== ==========
Deferred tax expense (benefit):
Canada $ 107 $ 389 $ 230
U.S (2,599) (1,054) 248
---------- ---------- ----------
Total deferred tax expense (benefit) $ (2,492) $ (665) $ 478
========== ========== ==========
Total income tax provision (benefit) $ (1,003) $ 935 $ 1,825
========== ========== ==========
</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):
<TABLE>
<CAPTION>
JULY 31,
--------------------------
1999 1998
---------- ----------
(restated)
<S> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts $ 512 $ 373
Fixed assets 29 41
Amortization of intangibles 1,363 1,074
Accrued vacation 252 167
Accrued Liabilities & other 1,374 573
Write-down of intangible assets 1,424 --
Charitable contribution carryover 10 --
Foreign tax credit carryforward 442 442
State net operating loss carryforwards 768 605
Federal net operating loss carryforwards 2,261 1,331
---------- ----------
Total deferred tax benefits 8,435 4,606
Less valuation allowance (2,703) (1,773)
---------- ----------
Net deferred tax asset 5,732 2,833
Deferred tax liabilities:
Fixed assets 685 610
---------- ----------
Total deferred tax liabilities 685 610
---------- ----------
Net deferred tax asset $ 5,047 $ 2,223
Financial Statements:
Current deferred tax assets $ 2,148 $ 1,113
---------- ----------
Non-current deferred tax assets $ 2,899 $ 1,110
---------- ----------
</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 $6,152 $3,530
and $333 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 and $2,622 in the year 2019.
F-15
<PAGE> 47
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,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
(restated) (restated)
<S> <C> <C> <C>
Income taxes at statutory rate $ (2,611) $ (232) $ 1,195
Effect on taxes resulting from:
State taxes (541) (225) 24
Foreign 315 383 333
Increase in valuation allowance 930 1,139 133
Other (including permanent differences) 904 (130) 140
---------- ---------- ----------
$ (1,003) $ 935 $ 1,825
---------- ---------- ----------
</TABLE>
11. 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, 1999, 1998 and
1997 amounted to none, $458 and $367, respectively. The Company leases
facilities from an officer and from a member of the Company's board of
directors. During the years ended July 31, 1999, 1998 and 1997, the Company
paid approximately $120, $256 and $178, 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.
12. 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.
13. 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
F-16
<PAGE> 48
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:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(restated) (restated)
<S> <C> <C> <C>
Net income (in thousands): $ (6,676) $ (1,618) $ 1,354
As reported $ (6,868) $ (2,219) $ 973
Pro forma
Earnings per share -- assuming dilution:
As reported $ (0.66) $ (0.20) $ 0.20
Pro forma $ (0.68) $ (0.28) $ 0.14
</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 1999, 1998 and 1997 respectively: dividend
yield of 0% for all years; expected volatility of 72%, 66% and 64%;
risk-free interest rate of 5.53%, 5.92%, and 8.35%; and expected lives of
an average of 10 years for all years. The weighted average fair value of
options granted during 1999, 1998 and 1997 was $3.91, $8.27 and $8.07,
respectively.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
(restated) (restated)
<S> <C> <C> <C>
Number of shares under option:
Outstanding at beginning of year 501,477 471,384 214,384
Granted 374,000 148,000 257,000
Exercised (17,477) (117,907) --
Canceled (123,780) -- --
---------- ---------- ----------
Outstanding at end of year 734,220 501,477 471,384
---------- ---------- ----------
Exercisable at end of year 177,044 116,800 142,030
---------- ---------- ----------
Weighted average exercise price:
Granted $ 4.828 $ 10.164 $ 8.000
Exercised 3.235 3.650 --
Canceled 9.706 -- --
Outstanding at end of year 6.129 7.886 6.263
Exercisable at end of year 7.124 6.414 4.141
---------- ---------- ----------
</TABLE>
The following table summarizes information about stock options outstanding
at July 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF REMAINING LIFE WEIGHTED AVERAGE
SHARES (IN YEARS) EXERCISE PRICE
--------------- ----------------- ----------------
<S> <C> <C>
268,500 9.8 $ 2.250
79,000 5.9 $ 4.250
8,000 8.1 $ 7.250
209,000 7.1 $ 8.000
15,000 9.1 $ 10.000
104,720 8.4 $ 10.375
50,000 8.9 $ 11.875
------- --- --------
734,220 8.3 $ 6.129
------- --- --------
</TABLE>
F-17
<PAGE> 49
14. 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,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
United
States Canada Total
------ ------ -----
<S> <C> <C> <C>
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
(restated) (restated) (restated)
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
(restated) (restated) (restated)
1997
Sales 63,896 68,691 132,587
Operating income 1,455 3,660 5,115
Identifiable assets 62,797 22,700 85,497
Capital expenditures 1,307 921 2,228
Depreciation and amortization 1,102 628 1,730
Amortization of intangibles 2,769 492 3,261
</TABLE>
F-18
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <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(1) -- 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(1) -- 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.
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.
27.2(1) -- Restated 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.
