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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2002
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.)
1870 Crown Drive 75234
Dallas, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(214) 561-7500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of December 1, 2002 was 11,206,817 shares.
================================================================================
DYNAMEX INC.
================================================================================
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 2
October 31, 2002 (Unaudited) and July 31, 2002
Condensed Statements of Consolidated Operations (Unaudited) 3
Three months ended October 31, 2002 and 2001 (Restated)
Condensed Statements of Consolidated Cash Flows (Unaudited) 4
Three months ended October 31, 2002 and 2001 (Restated)
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K. 14
Signature 15
Certifications 16-17
Exhibit Index E-1
1
DYNAMEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
- --------------------------------------------------------------------------------
October 31, July 31,
2002 2002
----------- -----------
(Unaudited)
ASSETS
CURRENT
Cash and cash equivalents $ 4,689 $ 4,489
Accounts receivable (net of allowance for doubtful accounts
of $593 and $562, respectively) 25,100 23,165
Prepaid and other current assets 2,017 3,223
Deferred income tax 1,649 1,657
----------- -----------
Total current assets 33,455 32,534
Property and equipment - net 4,327 4,627
Goodwill 43,861 43,739
Intangibles - net 1,215 950
Deferred income taxes 10,948 11,407
Other assets 609 613
----------- -----------
Total assets $ 94,415 $ 93,870
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable trade $ 4,141 $ 3,894
Accrued liabilities 14,509 13,543
Current portion of long-term debt 5,786 5,778
----------- -----------
Total current liabilities 24,436 23,215
LONG-TERM DEBT 22,677 25,531
----------- -----------
Total liabilities 47,113 48,746
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; $0.01 par value, 10,000,000 shares authorized;
none outstanding -- --
Common stock; $0.01 par value, 50,000,000 shares authorized;
11,206,817 and 11,206,817 outstanding, respectively 112 112
Additional paid-in capital 74,062 74,062
Retained earnings (25,860) (27,828)
Unrealized foreign currency translation adjustment (1,012) (1,222)
----------- -----------
Total stockholders' equity 47,302 45,124
----------- -----------
Total liabilities and stockholders' equity $ 94,415 $ 93,870
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2
DYNAMEX INC.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended
October 31,
--------------------------
2002 2001
---------- ----------
(Restated)
Sales $ 61,732 $ 61,736
Cost of sales 43,309 43,456
---------- ----------
Gross profit 18,423 18,280
Selling, general and administrative expenses 14,341 14,809
Depreciation and amortization 580 782
(Gain) loss on disposal of property and equipment 32 (18)
---------- ----------
Operating income 3,470 2,707
Interest expense 613 910
Other income (14) (26)
---------- ----------
Income before taxes 2,871 1,823
Income tax expense 903 916
---------- ----------
Income before cumulative effect of change in
accounting principle 1,968 907
Cumulative effect of change in accounting for goodwill -- (19,261)
---------- ----------
Net income (loss) $ 1,968 $ (18,354)
========== ==========
Basic earnings (loss) per common share:
Before cumulative effect of accounting change $ 0.18 $ 0.09
Accounting change -- (1.89)
---------- ----------
Basic earnings (loss) per common share $ 0.18 $ (1.80)
========== ==========
Diluted earnings (loss) per common share:
Before cumulative effect of accounting change $ 0.17 $ 0.09
Accounting change -- (1.88)
---------- ----------
Diluted earnings (loss) per common share $ 0.17 $ (1.79)
========== ==========
Weighted average shares:
Common shares outstanding 11,207 10,207
Adjusted common shares - assuming
exercise of stock options 11,279 10,245
See accompanying notes to condensed consolidated financial statements.
3
DYNAMEX INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended
October 31,
--------------------------
2002 2001
---------- ----------
OPERATING ACTIVITIES (Restated)
Net income (loss) $ 1,968 $ (18,354)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 571 745
Amortization and write down of goodwill and intangible assets 9 30,062
Provision for losses on accounts receivable 183 219
Deferred income taxes 467 (10,228)
(Gain) loss on disposal of property and equipment 32 (17)
Changes in current operating assets and liabilities:
Accounts receivable (2,118) (1,557)
Prepaids and other assets 1,206 781
Accounts payable and accrued liabilities 1,211 761
---------- ----------
Net cash provided by operating activities 3,529 2,412
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (257) (514)
Net proceeds from disposal of property and equipment 15 17
---------- ----------
Net cash used in investing activities (242) (497)
---------- ----------
FINANCING ACTIVITIES
Principal payments on long-term debt (1,376) (1,550)
Net borrowings under line of credit (1,467) 1,000
Other assets and deferred financing fees (257) (41)
---------- ----------
Net cash used in financing activities (3,100) (591)
---------- ----------
---------- ----------
EFFECT OF EXCHANGE RATES ON CASH 13 (208)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 200 1,116
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,489 8,066
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,689 $ 9,182
========== ==========
SUPPLEMENTAL DISCLOSURE ON NON-CASH INFORMATION
Cash paid for interest $ 487 $ 850
========== ==========
Cash paid for (refunds of) taxes $ (75) $ 1,194
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
DYNAMEX INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Dynamex Inc. (the "Company" and "Dynamex") provides same-day delivery and
logistics services in the United States and Canada. The Company's primary
services are (i) same-day, on-demand delivery, (ii) scheduled distribution and
(iii) fleet management.
The consolidated financial statements include the accounts of Dynamex Inc. and
its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated. All dollar amounts in the financial
statements and notes to the financial statements except per share data are
stated in thousands of dollars unless otherwise indicated. Except as otherwise
indicated, references to years mean our fiscal year ending July 31, 2003 or
ended July 31 of the year referenced, and comparisons are to the corresponding
period of the prior year.
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 Corp. (Canada)
o Alpine Enterprises Ltd. (Canada)
o Roadrunner Transportation, Inc. (U.S.)
o New York Document Exchange Corp. (U.S.)
The accompanying interim financial statements are unaudited. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes the disclosures included herein are adequate to
make the information presented not misleading. The results of the interim
periods presented are not necessarily indicative of results to be expected for
the full fiscal year, and should be read in conjunction with the Company's
audited financial statements for the fiscal year ended July 31, 2002.
The accompanying interim financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position at October 31, 2002 and the
results of its operations and cash flows for the three-month periods ended
October 31, 2002 and 2001. The tax provision for the three-month periods ended
October 31, 2002 and 2001 are based upon management's estimate of the Company's
annualized effective tax rate.
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the three months ended October 31, 2002 was $2,178
compared to a restated comprehensive loss of $18,978 for the period ended
October 31, 2001. The two components of comprehensive income are net income
(loss) and foreign currency translation adjustments. The changes in the exchange
rate between the U.S. dollar and the Canadian dollar resulted in a foreign
currency translation gain of $210 and a foreign currency translation loss of
$625 for the three months ended October 31, 2002 and 2001, respectively.
3. GOODWILL
Effective August 1, 2001, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 142 requires, among other things,
that companies no longer amortize goodwill, but instead test goodwill for
impairment at least annually. In addition, SFAS No. 142 requires that the
Company identify reporting units for the purposes of assessing potential future
impairments of goodwill. The Company completed its goodwill impairment analysis
during the fourth quarter of fiscal 2002 and recognized a transitional goodwill
impairment loss related to its United States operations of $30.0 million and
recorded the charge net of $10.7 million of deferred tax benefits as the
cumulative effect of a change in accounting principle in the Consolidated
Statements of Operations. The valuations performed as part of the analysis
employed a combination of present value techniques to measure fair value
corroborated by comparisons to estimated market multiples. Third party
specialists were engaged to assist in the valuations. As required by SFAS No.
142, the charge was recorded in the first quarter of fiscal year 2002. Since the
financial statements for that period had previously been released, that period
presented herein has been restated to reflect this charge.
5
DYNAMEX INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
4. INTANGIBLES
At October 31, 2002, intangibles and related amortization expense for the three
months ended October 31, 2002 and 2001 consist of the following:
Amortization Expense
Accumulated Three Months Ended October 31,
Asset Amortization Net 2002 2001
------- ------------ ------- ---------- ----------
Covenants not-to-compete $ 9,917 $ 9,910 $ 7 $ 4 $ 32
Trademarks 470 72 398 5 5
Deferred bank financing fees 1,333 523 810 151 85
------- ------------ ------- ---------- ----------
Total $11,719 $ 10,504 $ 1,215 $ 160 $ 121
------- ------------ ------- ---------- ----------
During the quarter ended October 31, 2002, the Company capitalized $649 related
to the amendment of its Credit Agreement. These fees will amortized over the
life of the Credit Agreement, which matures November 2003. Amortization of
deferred financing fees is classified as interest expense in the consolidated
statement of operations. Estimated amortization expense for the succeeding five
fiscal years, including deferred bank financing fees, is $647 for 2003, $270 for
2004 and approximately $20 per year thereafter.
5. COMPUTATION OF EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share computation as required by Statement
of Financial Accounting Standards No. 128, Earnings Per Share. Common stock
equivalents related to stock options are excluded from diluted earnings (loss)
per share calculation if their effect would be anti-dilutive to earnings (loss)
per share before effect of change in accounting principle.
Three Months Ended October 31,
------------------------------
2002 2001
---------- ----------
Net income before cumulative effect of
change in accounting principle $ 1,968 $ 907
Cumulative effect of change in accounting
principle -- (19,261)
---------- ----------
Net income (loss) $ 1,968 $ (18,354)
========== ==========
Weighted average common
shares outstanding 11,207 10,207
Common share equivalents related to options 72 38
---------- ----------
Common shares and common share
equivalents 11,279 10,245
========== ==========
Basic earnings (loss) per common share:
Before cumulative effect of accounting change $ 0.18 $ 0.09
Accounting change -- (1.89)
---------- ----------
Basic earnings (loss) per common share $ 0.18 $ (1.80)
========== ==========
Diluted earnings (loss) per common share:
Before cumulative effect of accounting change $ 0.17 $ 0.09
Accounting change -- (1.88)
---------- ----------
Diluted earnings (loss) per common share $ 0.17 $ (1.79)
========== ==========
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================
This discussion contains forward-looking statements, which involve
assumptions regarding Company operations and future prospects. Although the
Company believes its expectations are based on reasonable assumptions, such
statements are subject to risk and uncertainty, including, among other things,
competition, foreign exchange, and risks associated with the local delivery
industry. These and other risks are mentioned from time to time in the Company's
filings with the Securities and Exchange Commission. Caution should be taken
that these factors could cause the actual results to differ from those stated or
implied in this and other Company communications.
GENERAL
The Company is a leading provider of same-day delivery and logistics services in
the United States and Canada. Through internal growth and acquisitions, the
Company has built a national network of same-day delivery and logistics systems
in Canada and has established operations in 22 U.S. metropolitan areas.
Effective August 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). As a result of the adoption of this new
accounting pronouncement, a goodwill impairment charge of $19.3 million was
recognized during fiscal 2002. In accordance with SFAS No. 142 and other
accounting pronouncements, the Company measured the impairment during fiscal
2002, and once the impairment was finalized, recorded the charge with an
effective date of August 1, 2001. Since the financial statements for that period
had previously been released, that period presented herein has been restated to
reflect this charge. The following discussion of the Company's results of
operations is based on income before the accounting change.
A significant portion of the Company's revenues is generated in Canada. For the
three month period ended October 31, 2002, Canadian revenues accounted for
approximately 33.5% of total consolidated revenue, compared to 32.8% for the
same period in 2001.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's condensed statements of consolidated operations, expressed as a
percentage of sales.
Three months ended
October 31,
------------------
2002 2001
------ ------
Sales 100.0% 100.0%
Cost of sales 70.2% 70.4%
------ ------
Gross profit 29.8% 29.6%
Selling, general and
administrative expenses 23.2% 24.0%
Depreciation and amortization 0.9% 1.2%
Loss on disposal of assets 0.1% 0.0%
------ ------
Operating income 5.6% 4.4%
Interest expense and other 1.0% 1.4%
------ ------
Income before income taxes and accounting
change 4.6% 3.0%
====== ======
THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
2001.
Net income for the three months ended October 31, 2002 was $1,968,000, an
increase of 117% compared to income of $907,000 (before the accounting change)
for the three months ended October 31, 2001. Lower selling, general and
administrative and interest expense, along with lower depreciation expense and a
slightly improved gross margin, all contributed to the improved results for the
current year quarter.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================
Sales for the three months ended October 31, 2002 were $61.7 million, the same
as the prior year quarter. On a revenue per day basis, Canadian sales increased
2.2% while U.S. sales were 1.1% below the prior year. The exchange rate between
the U.S. dollar and the Canadian dollar declined in the current year quarter
compared to the same quarter last year. Had the exchange rate been the same in
both periods, sales per day would have been approximately 1% higher in the
current year quarter compared to the prior year. On-demand sales represented
50.1% of total sales in the current year quarter compared to 50.4% in the prior
year.
Cost of sales for the three months ended October 31, 2002 declined $0.2 million,
or 0.3%, to $43.3 million from $43.5 million for the same period in 2001. Cost
of sales, as a percentage of sales, decreased to 70.2% from 70.4% for the same
period ended in 2001. The improvement in gross margin was due to improved
operating efficiencies realized in the current period, including the elimination
of inefficient routing.
Selling, general and administrative ("SG & A") expenses for the three months
ended October 31, 2002 decreased $0.5 million, or 3.2%, to $14.3 million from
$14.8 million for the same period in 2001. This decrease in SG & A expenses in
the three months ended October 31, 2002 is attributable to several factors.
Compensation costs decreased $0.2 million primarily in the administrative,
dispatch and customer service areas in the U.S. The Company also incurred less
professional fees ($0.2 million) in the three month period ended October 31,
2002, primarily from lower legal and IT consulting fees. SG & A expenses, as a
percentage of sales, were 23.2% for the three months ended October 31, 2002,
down from 24.0% for the same period last year.
For the three months ended October 31, 2002, depreciation and amortization was
$0.6 million compared to $0.8 million for the same period ended in 2001. This
decrease is primarily attributable to the lower capital expenditures in 2002 and
2001 compared to prior years and, to a lesser extent, the reduction in
amortization of covenants not-to-compete that are fully amortized after three
years.
Interest expense for the three months ended October 31, 2002 declined $0.3
million, or 33%, to $0.6 million from $0.9 million for the same period ended in
2001, and as a percentage of sales, to 1.0% from 1.4%. This decline results from
both a lower interest rate and lower levels of debt. The weighted average
interest rate for all borrowings at October 31, 2002 was 5.74%, compared to
6.25% at October 31, 2001. The Company has also reduced its debt since October
31, 2001 by over $14 million.
The effective income tax rate declined from 50% in the three-month period ended
October 31, 2001 to 31% in the current period. The primary reason for this
decline is the increase in U.S. taxable income that is substantially offset by
the utilization of the net operating loss carryforwards generated in prior
years, and further by a marginally lower tax rate in Canada in the current year
period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3.5 million for the three months
ended October 31, 2002 compared to $2.4 million for the same period in 2001. Net
cash provided by operations, prior to changes in current operating assets and
liabilities and deferred income taxes, was $2.8 million for the three months
ended October 31, 2002 compared to $1.9 million for the three months ended
October 31, 2001 (before the effects of the write-off of goodwill), due to the
higher income before accounting change.
Capital expenditures for the three months ended October 31, 2002 were
approximately $257,000. Management expects annual capital expenditures to be in
the $1.5 to $2.0 million range for the full fiscal year. 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.
As of October 31, 2002, the Company's bank credit agreement (Credit Agreement)
consisted of an amortizing term loan of $16.9 million and a revolving credit
facility of $19.5 million due November 30, 2003. Amounts outstanding under the
revolving credit facility included borrowings of $11.1 million and outstanding
letters of credit totaling $4.2 million. Interest on outstanding borrowings is
payable monthly at prime plus 0.50% or LIBOR plus 3.50%. The Company has entered
into
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================
interest rate protection arrangements on a portion of the borrowings under
the Credit Agreement. The interest rate on $13 million of outstanding debt has
been fixed at 6.14%. This hedging arrangement is effective October 31, 2001 and
matures on February 28, 2003. At the expiration of the current agreement, the
Company intends to enter into a new interest rate protection agreement on a
minimum of 30% of the then outstanding Loans as required by the Credit
Agreement. Amounts outstanding under the Credit Agreement are secured by all of
the Company's U.S. assets and 100% of the stock of its principal Canadian
subsidiaries. The Credit Agreement also contains restrictions on the payment of
dividends, incurring additional debt, capital expenditures and investments by
the Company as well as requiring the Company to maintain certain financial
ratios. Generally, the Company must obtain the lenders' consent to consummate
any acquisition.
The Company's EBITDA (Earnings before interest, taxes, depreciation and
amortization) was approximately $4.1 million for the three months ended October
31, 2002, compared to $3.5 million in the same period last year. This increase
is attributable to lower selling, general and administrative costs and a
slightly higher gross margin. Management has included EBITDA in its discussion
herein as a measure of liquidity because it believes that it is a widely
accepted financial indicator of a company's ability to service and/or incur
indebtedness, maintain current operating levels of fixed assets and acquire
additional operations and businesses. EBITDA should not be considered as a
substitute for statement of operations or cash flow data from the Company's
financial statements, which have been prepared in accordance with generally
accepted accounting principles. In addition, the Company's definition of EBITDA
may not be identical to similarly entitled measures used by other companies.
The Company's cash flows from operations for the three months ended October 31,
2002 were approximately $3.5 million. Consequently, purchases of property and
equipment and payments of long-term debt were financed entirely by internally
generated cash flow.
Management expects that its future capital requirements will generally be met
from internally generated cash flow. The Company's access to other sources of
capital, such as additional bank borrowings and the issuance of debt securities,
is affected by, among other things, general market conditions affecting the
availability of such capital. The Company completed its last acquisition in
August 1998. 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.
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's contractual commitments as of
October 31, 2002 for the periods indicated:
Less than 1
Total year 1-3 years 3-5 years Thereafter
-------- ----------- --------- --------- ----------
Long-term Debt $ 28,446 $ 5,769 $ 22,677 $ -- $ --
Capital Lease Obligations 17 17 -- -- --
Operating Leases 11,565 4,605 5,115 1,404 441
-------- ----------- --------- --------- ----------
Total $ 40,028 $ 10,391 $ 27,792 $ 1,404 $ 441
======== =========== ========= ========= ==========
The Company has entered into an employment agreement with its CEO which provides
for the payment of a base salary in the annual amount of $275, participation in
an executive bonus plan, an auto allowance, and participation in other employee
benefit plans. In addition, the Company has entered into retention agreements
with certain key executive officers and other employees that provide certain
benefits in the event their employment is terminated subsequent to a change in
control of the Company, as defined in the retention agreements. The Company
believes that it is unlikely that these circumstances will transpire, but if
they did the potential exposure could range between $3,000 and $4,000.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================
DEFERRED TAXES
During the three months ended October 31, 2002, U.S. tax deductions exceeded
financial statement deductions by approximately $1.6 million. As a result, net
deferred tax assets were reduced by approximately $0.5 million during this
quarter, with an offsetting charge to tax expense in the Statement of
Consolidated Operations. The Company has U.S. net operating losses totaling
approximately $13.3 million at October 31, 2002 and has established an 100%
valuation allowance in accordance with the provisions of SFAS No. 109 for U.S.
operating losses 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.
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 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.
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. 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.
CLAIMS EXPOSURE
As of December 1, 2002, the Company utilized the services of approximately 4,600
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 limit of $20 million.
Drivers are required to maintain vehicle 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================
CERTAIN TAX MATTERS RELATED TO DRIVERS
Substantially all of the Company's drivers supply their own vehicles and as of
December 1, 2002, over 90% 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 were 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 require the Company to
restate financial information from prior periods.
In addition to the drivers that are independent contractors, certain of the
Company's drivers are employed by the Company and supply 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.
FOREIGN EXCHANGE
Significant portions of the Company's operations are conducted in Canada.
Exchange rate fluctuations between the U.S. and Canadian dollars result in
fluctuations in the amounts relating to the Canadian operations reported in the
Company's consolidated financial statements. The Canadian dollar is the
functional currency for the Company's Canadian operations; therefore, any change
in the exchange rate will affect the Company's reported revenues for such
period. The Company historically has not entered into hedging transactions with
respect to its foreign currency exposure, but may do so in the future. There can
be no assurance that fluctuations in foreign currency exchange rates will not
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
PERMITS AND LICENSING
The Company's delivery operations are 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.
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 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================
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 and retain 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 and upgrade its pool of available
couriers and support personnel 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.
"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.
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 retain independent contractor drivers may be
impacted by our ability to pass on fuel cost increases to customers to
maintain profit margins and the quality of driver pay.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE EXPOSURE
Significant portions of the Company's operations are conducted in Canada.
Exchange rate fluctuations between the U.S. and Canadian dollar result in
fluctuations in the amounts relating to the Canadian operations reported in the
Company's consolidated financial statements. The Company historically has not
entered into hedging transactions with respect to its foreign currency exposure,
but may do so in the future.
The sensitivity analysis model used by the Company for foreign exchange exposure
compares the revenue and net income figures from Canadian operations, at the
actual exchange rate, to a 10% decrease in the exchange rate. Based on this
model, a 10% decrease would result in a decrease in quarterly revenue of
approximately $2.1 million and a decrease in quarterly net income of
approximately $0.1 million. 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 an interest rate protection agreement on a portion
of the borrowings under its bank credit facility. Through an interest rate swap,
the interest rate on $13 million of outstanding debt has been fixed at 6.14%.
This hedging agreement expires on February 28, 2003 and will be renewed in
accordance with the terms of the bank credit agreement in an amount of 30% of
the then outstanding facility. 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 approximately $0.1 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 4. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934 (Exchange Act). These rules
refer to the controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within required time periods. The Company's Chief Executive and Chief
Financial Officer have evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days before the filing of this
quarterly report (the Evaluation Date), and have concluded that, as of the
Evaluation Date, such controls and procedures were effective at ensuring that
required information will be disclosed on a timely basis in reports filed under
the Exchange Act.
The Company maintains a system of internal accounting controls that is designed
to provide reasonable assurance that the Company's books and records accurately
reflect its transactions and that the established policies and procedures are
followed. Subsequent to the date of our most recent evaluation, there were no
significant changes to internal controls or in other factors that could
significantly affect the Company's internal controls.
13
PART II. OTHER INFORMATION
================================================================================
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse effect on
the financial condition, results of operations, or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11.1 Calculation of Net Income Per Common Share
99.1 Certification of CEO and CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNAMEX INC.
Dated: December 16, 2002 by /s/ Richard K. McClelland
-----------------------------------------
Richard K. McClelland
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Dated: December 16, 2002 by /s/ Ray E. Schmitz
-----------------------------------------
Ray E. Schmitz
Vice President - Chief Financial Officer
(Principal Financial Officer)
Dated: December 16, 2002 by /s/ George S. Stephens
-----------------------------------------
George S. Stephens
Corporate Controller
(Principal Accounting Officer)
15
CERTIFICATION
I, Richard K. McClelland, President and Chief Executive Officer of Dynamex Inc.
and Subsidiaries ("registrant") certify that:
1. I have reviewed this quarter report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such controls and procedures to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls, and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: December 16, 2002 by /s/ Richard K. McClelland
-----------------------------------------
Richard K. McClelland
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
16
CERTIFICATION
I, Ray E. Schmitz, Vice President and Chief Financial Officer of Dynamex Inc.
and Subsidiaries ("registrant") certify that:
1. I have reviewed this quarter report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such controls and procedures to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls, and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: December 16, 2002 by /s/ Ray E. Schmitz
----------------------------------------
Ray E. Schmitz
Vice President - Chief Financial Officer
(Principal Financial Officer)
17
EXHIBIT INDEX
Exhibits
11.1 Calculation of Net Income Per Common Share
99.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
E-1