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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 April 30, 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. X Yes No
--- ---
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of May 31, 2002 was 11,206,817 shares.
DYNAMEX INC.
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INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 2
April 30, 2002 (Unaudited) and July 31, 2001
Condensed Statements of Consolidated Operations (Unaudited) 3
Three and Nine Months ended April 30, 2002 and 2001
Condensed Statements of Consolidated Cash Flows (Unaudited) 4
Nine Months ended April 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 6. Exhibits and Reports on Form 8-K. 16
1
DYNAMEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
--------------------------------------------------------------------------------
April 30, July 31,
2002 2001
--------- ---------
(Unaudited)
ASSETS
CURRENT
Cash and cash equivalents $ 3,198 $ 8,066
Accounts receivable (net of allowance for doubtful accounts
of $724 and $986, respectively) 24,947 24,799
Prepaid and other current assets 2,637 3,328
Deferred income tax 1,697 1,577
--------- ---------
TOTAL CURRENT ASSETS 32,479 37,770
Property and equipment - net 5,251 6,165
Intangibles - net 74,719 74,527
Deferred income taxes 1,108 2,635
Other assets 607 815
--------- ---------
TOTAL ASSETS $ 114,164 $ 121,912
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT
Accounts payable trade $ 3,418 $ 4,265
Accrued liabilities 14,050 13,080
Current portion of long-term debt 5,847 11,066
--------- ---------
TOTAL CURRENT LIABILITIES 23,315 28,411
Long-term debt 27,540 32,198
Provision for lawsuit settlement -- 1,313
--------- ---------
TOTAL LIABILITIES 50,855 61,922
--------- ---------
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;
11,207 and 10,207 outstanding, respectively 112 102
Additional paid-in capital 74,061 72,759
Retained deficit (9,789) (11,576)
Unrealized foreign currency translation adjustment (1,075) (1,295)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 63,309 59,990
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 114,164 $ 121,912
========= =========
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 Nine months ended
April 30, April 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Sales $ 57,030 $ 59,938 $ 175,842 $ 187,293
Cost of sales 39,990 41,555 123,272 129,599
---------- ---------- ---------- ----------
Gross profit 17,040 18,383 52,570 57,694
Selling, general and administrative expenses 13,676 14,704 42,811 45,556
Depreciation and amortization 699 1,797 2,217 5,783
(Gain) loss on disposal of property and equipment (5) (5) (18) (13)
---------- ---------- ---------- ----------
Operating income 2,670 1,887 7,560 6,368
Interest expense 667 1,453 2,343 4,161
Other (income) expense (27) (49) 520 (150)
---------- ---------- ---------- ----------
Income before taxes 2,030 483 4,697 2,357
Income tax expense 700 500 2,910 1,817
---------- ---------- ---------- ----------
Net income (loss) $ 1,330 $ (17) $ 1,787 $ 540
========== ========== ========== ==========
Earnings (loss) per common share - basic: $ 0.12 $ (0.00) $ 0.17 $ 0.05
========== ========== ========== ==========
Earnings (loss) per common share - assuming dilution: $ 0.12 $ (0.00) $ 0.17 $ 0.05
========== ========== ========== ==========
Weighted average shares:
Common shares outstanding 10,680 10,207 10,414 10,207
Adjusted common shares - assuming
exercise of stock options 10,722 10,207 10,450 10,219
See accompanying notes to condensed consolidated financial statements.
3
DYNAMEX INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
(Unaudited)
--------------------------------------------------------------------------------
Nine months ended
April 30,
------------------------
2002 2001
---------- ----------
OPERATING ACTIVITIES
Net income $ 1,787 $ 540
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,146 2,391
Amortization of intangible assets 71 3,392
Provision for losses on accounts receivable 498 740
Deferred income taxes 1,407 602
Gain on disposal of property and equipment (18) (13)
Changes in current operating assets and liabilities:
Accounts receivable (480) 982
Prepaids and other assets 525 535
Accounts payable and accrued liabilities 122 (2,209)
---------- ----------
Net cash provided by operating activities 6,058 6,960
---------- ----------
INVESTING ACTIVITIES
Payments for acquisitions -- (1,011)
Purchase of property and equipment (1,250) (888)
Net proceeds from disposal of property and equipment 12 12
---------- ----------
Net cash used in investing activities (1,238) (1,887)
---------- ----------
FINANCING ACTIVITIES
Principal payments on long-term debt (9,675) (2,807)
Net borrowings (payments) under line of credit (200) (200)
Other assets and deferred offering costs (235) 143
---------- ----------
Net cash used in financing activities (10,110) (2,864)
---------- ----------
---------- ----------
EFFECT OF EXCHANGE RATES ON CASH FLOW INFORMATION 422 (162)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,868) 2,047
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,066 5,600
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,198 $ 7,647
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,918 $ 5,241
========== ==========
Cash paid for taxes $ 481 $ 1,188
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of 1,000 shares in shareholder class action lawsuit settlement $ 1,313 $ --
Issuance of note receivable to finance customer trade receivable 166 --
Assets acquired, liabilities paid and consideration paid
for acquisitions were as follows:
Accrual of earnouts to former owners -- 819
Change in accrued earnouts -- 1,432
Prior year earnouts converted to notes payable -- (1,240)
---------- ----------
Cash payments for acquisitions $ -- $ 1,011
========== ==========
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 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 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, 2001.
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 April 30, 2002, the results
of its operations for the three and nine month periods ended April 30, 2002 and
2001 and its cash flows for the nine month periods ended April 30, 2002 and
2001.
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the three and nine months ended April 30, 2002 was
$1,523 and $2,007, respectively, compared to a loss of $396 and income of $38
for the same periods ended April 30, 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 $193 and $219 in the three
and nine month periods ended April 30, 2002, respectively, compared to a loss of
$379 and a loss of $502 for the same periods in the prior year.
3. GOODWILL AND INTANGIBLE ASSETS
In August 2001, the Company adopted Statement of Financial Accounting Standards
No. 141, "Business Combinations," ("SFAS No. 141") and No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS No. 141 applies to all business combinations initiated after June 30, 2001
and for purchase business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS No. 142, that the Company reclassify, if
necessary, the carrying amounts of intangible assets and goodwill based on the
criteria of SFAS No. 141.
5
DYNAMEX INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
--------------------------------------------------------------------------------
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, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. SFAS No. 142
provides for a six-month transitional period from the effective date of adoption
for the Company to perform an assessment of whether there is an indication that
goodwill is impaired. To the extent that an indication of impairment exists, the
Company must perform a second test to measure the amount of the impairment. The
Company has completed the initial assessment as required by SFAS No. 142 and has
determined that the carrying value of each of its reporting units, identified as
the United States and Canada, exceeded the reporting units fair value. The
Company is currently in the process of completing the second phase of this
evaluation to measure the amount of impairment. Management expects that upon
completion of this evaluation, the Company will record a non-cash, after-tax
charge of between $16 and $20 million as the cumulative effect of a change in
accounting principle in the Statement of Operations. As required by SFAS No.
142, the charge will be recorded in the first quarter of fiscal year 2002 once
the second phase of the impairment test is completed. The impairment test is
required to be completed and the final adjustments made by the end of the
Company's fiscal year end on July 31, 2002.
At April 30, 2002, goodwill and other intangible assets and the related
amortization expense consist of the following:
2002 Amortization Expense
------------------------------------- -------------------------------------------------
Three Months Ended Nine Months Ended
April 30, April 30,
Accumulated ----------------------- -----------------------
Asset Amortization Net 2002 2001 2002 2001
-------- -------------- -------- ---------- ---------- ---------- ----------
Unamortized intangible assets:
Goodwill $ 88,936 $ (15,091) $ 73,845 $ -- $ 894 $ -- 2,689
Amortized intangible assets:
Covenants not-to-compete 9,915 (9,896) 19 9 156 55 790
Trademarks 470 (61) 409 5 8 16 14
Deferred bank financing fees 2,647 (2,201) 446 159 93 453 273
-------- -------------- -------- ---------- ---------- ---------- ----------
Total amortized intangible assets 13,032 (12,158) 874 173 257 524 1,077
Total $101,968 $ (27,249) $ 74,719 $ 173 1,151 $ 524 3,766
-------- -------------- -------- ---------- ---------- ---------- ----------
Amortization of deferred financing fees is classified as interest expense in the
consolidated statement of operations. Amortization of goodwill ceased effective
August 1, 2001.
Aggregate amortization expense incurred during the nine months ended April 30,
2002 and estimated for the succeeding five fiscal years are as follows:
For the nine months ended April 30, 2002 $ 524
For the fiscal year ended July 31, 2003 (estimated) 318
For the fiscal year ended July 31, 2004 (estimated) 21
For the fiscal year ended July 31, 2005 (estimated) 21
For the fiscal year ended July 31, 2006 (estimated) 20
For the fiscal year ended July 31, 2007 (estimated) 18
6
DYNAMEX INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
--------------------------------------------------------------------------------
The effect of the adoption of SFAS No. 142 on the reported net income for the
three and nine months ended April 30, 2001 is as follows:
Three Months Ended Nine months Ended
April 30, 2001 April 30, 2001
-------------------- --------------------
Reported net income (loss) $ (17) $ 540
Add back: Amortization of goodwill (net
of taxes) 572 1,721
-------------------- --------------------
Net income, as adjusted $ 555 $ 2,261
-------------------- --------------------
Basic and diluted earnings per share:
Reported net income $ 0.00 $ 0.05
Amortization of goodwill (net of taxes) $ 0.06 $ 0.17
-------------------- --------------------
Basic and diluted earnings per share, as
adjusted $ 0.06 $ 0.22
-------------------- --------------------
4. CONTINGENCIES
The Company agreed to, among other things, contribute one million shares of
common stock towards the settlement of the shareholder class action lawsuit
pursuant to the Memorandum of Understanding dated September 20, 2000. During the
three months ended April 30, 2002, the Company issued 700,000 shares of common
stock. All settlement shares have now been issued.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
This discussion contains forward-looking statements, which involve
assumptions regarding Company operations and future prospects. Although the
Company believes its expectations are based on reasonable assumptions, such
statements are subject to risk and uncertainty, including, among other things,
statements with respect to the outcome of the Special Committee's review,
acquisition strategy, competition, foreign exchange, and risks associated with
the local delivery industry. These and other risks are mentioned from time to
time in the Company's filings with the Securities and Exchange Commission.
Caution should be taken that these factors could cause the actual results to
differ from those stated or implied in this and other Company communications.
GENERAL
The Company is a leading provider of same-day delivery and logistics services in
the United States and Canada. Through internal growth and acquisitions, the
Company has built a national network of same-day delivery and logistics systems
in Canada and has established operations in 21 U.S. metropolitan areas.
A significant portion of the Company's revenues is generated in Canada. For the
three and nine month periods ended April 30, 2002, Canadian revenues accounted
for approximately 32.7% and 32.8%, respectively, of total consolidated revenue,
compared to 33.2% and 33.6% for the same periods in 2001.
RESULTS OF OPERATIONS
Three months ended Nine months ended
April 30, April 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 70.1% 69.3% 70.1% 69.2%
--------- --------- --------- ---------
Gross profit 29.9% 30.7% 29.9% 30.8%
Selling, general and administrative expenses 24.0% 24.5% 24.4% 24.3%
Depreciation and amortization 1.2% 3.1% 1.3% 3.1%
(Gain) loss on disposal of property and equipment 0.0% 0.0% 0.0% 0.0%
--------- --------- --------- ---------
Operating income 4.7% 3.1% 4.2% 3.4%
Interest expense 1.2% 2.4% 1.3% 2.2%
Other (income) expense 0.0% (0.1)% 0.3% (0.1)%
--------- --------- --------- ---------
Income before taxes 3.5% 0.8% 2.6% 1.3%
Income tax expense 1.2% 0.8% 1.7% 1.0%
--------- --------- --------- ---------
Net income (loss) 2.3% 0.0% 0.9% 0.3%
========= ========= ========= =========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
THREE MONTHS ENDED APRIL 30, 2002 COMPARED TO THREE MONTHS ENDED APRIL 30, 2001.
The Company reported net income for the three months ended April 30, 2002 of
$1,330,000 ($0.12 per share) compared to a net loss of $17,000 ($0.00 per share)
in the same period last year. The effect of the adoption of SFAS No. 142 on the
reported net loss for the three-month period ended April 30, 2001 would have
been to increase net income by $572,000 to $555,000, or $0.06 per share.
Sales for the three months ended April 30, 2002 decreased $2.9 million, or 4.9%,
to $57.0 million from $59.9 million for the same period in 2001. There was a
decrease in the conversion rate between the U.S. dollar and the Canadian dollar
for the three months ended April 30, 2002 versus 2001 that had the effect of
decreasing sales for the three months ended April 30, 2002 by more than $0.5
million had the conversion rate been the same as the period ended in 2001. The
three months ended April 30, 2002 had 61.8 revenue days compared to 62.0 revenue
days in the same period last year. On a revenue per day basis, sales decreased
4.6% in 2002 compared to 2001 with Canadian sales decreasing 4.2% and U.S. sales
decreasing 4.8%. In Canadian dollars, Canadian sales decreased 1.7% on a revenue
per day basis in 2002 versus 2001.
The decline in sales is directly attributable to the economic slowdown in both
the U.S. and Canada and has primarily impacted on-demand services. On-demand
sales declined $4.7 million (14.4%) to $27.8 million, and from 54.2% to 48.7% as
a percentage of total sales in the three months ended April 30, 2002 compared to
the same period last year. The decline in on-demand sales was partially offset
by the growth in scheduled and distribution, and outsourcing services. These
services increased $1.8 million (6.4%) in the three months ended April 30, 2002
compared to the same period last year.
Cost of sales for the three months ended April 30, 2002 decreased $1.6 million,
or 3.8%, to $40.0 million from $41.6 million for the same period in 2001. Cost
of sales, as a percentage of sales, increased to 70.1% for the three months
ended April 30, 2002 from 69.3% for the same period ended in 2001. This increase
primarily results from the change in the overall business mix of the Company.
Scheduled and distribution and other specialized services sales are increasing
as a percentage of total sales while on demand sales have declined both as a
percentage of sales and in absolute dollars. Scheduled and distribution and
other specialized services generally have a higher cost of sales and lower
selling, general and administrative costs than on demand sales.
Selling, general and administrative ("SG & A") expenses for the three months
ended April 30, 2002 decreased $1.0 million, or 7.0%, to $13.7 million from
$14.7 million for the same period in 2001. This decrease is attributable to
several factors. Salaries and benefits declined over $300,000 as a result of the
change in the business mix that requires fewer personnel in the dispatch and
customer service areas, as well as lower administrative salaries. The Company
has eliminated approximately $200,000 of non-essential employee related costs
including travel and entertainment. Through on-going cost reduction initiatives,
the Company has reduced communication, occupancy and office cost by
approximately $240,000 in the three-month period ended April 30, 2002. As a
percentage of sales, SG & A expenses were 24.0% for the three months ended April
30, 2002, compared to 24.5% in the same period last year.
For the three months ended April 30, 2002, depreciation and amortization was
$0.7 million compared to $1.8 million for the same period ended in 2001. This
decrease is primarily attributable to the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangibles" ("SFAS No. 142")
($0.9 million) and the reduction in amortization of covenants not-to-compete
that are fully amortized after three years ($0.2 million). SFAS No. 142 requires
management to perform a two-phase assessment of the carrying amount of goodwill.
The first phase has been completed and management has determined that impairment
exists. The Company is currently completing the second phase of this evaluation
to measure the amount of impairment. Management expects that upon completion of
this evaluation, the Company will record a non-cash, after-tax charge of between
$16 and $20 million as the cumulative effect of a change in accounting principle
in the Statement of Operations. As required by SFAS No. 142, the charge will be
recorded in the first quarter of fiscal year 2002 once the second phase of the
impairment test is completed. The impairment test is required to be completed
and the final adjustments made by the end of the Company's fiscal year end on
July 31, 2002.
Interest expense for the three months ended April 30, 2002 was $667,000, down
13% from the second quarter of fiscal year 2002 and 54% from the prior year
period. This decrease is attributable to lower outstanding debt during the
current quarter. The prime rate charged by the Company's banks remained at 4.75%
throughout the quarter ended April 2002.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
NINE MONTHS ENDED APRIL 30, 2002 COMPARED TO NINE MONTHS ENDED APRIL 30, 2001.
Net income for the nine months ended April 30, 2002 was $1,787,000 ($0.17 per
share) compared to $540,000 ($0.05 per share) for the same period in 2001. A
reduction in sales accompanied by a slightly lower gross margin in the nine
months ended April 30, 2002 were partially offset by reductions in depreciation
and amortization and in interest expense. Results for the current period include
one-time charges totaling $1.1 million associated with restructuring Canadian
operations that allowed the Company to repatriate excess Canadian cash and pay
down long-term debt by $5 million. These charges include a non-cash foreign
currency translation adjustment of $714,000, Canadian taxes of $226,000 and
professional fees of approximately $200,000. Excluding those one-time charges,
net income for the nine month period was $2,927,000 or $0.28 per share.
Comparatively, the effect of the adoption of SFAS No. 142 on the reported net
income for the nine month period ended April 30, 2001 would have been to
increase net income by $1,721,000 to $2,261,000, or $0.22 per share.
Sales for the nine months ended April 30, 2002 decreased $11.5 million, or 6.1%,
to $176 million from $187 million for the same period in 2001. The decrease in
the conversion rate between the U.S. dollar and the Canadian dollar had the
effect of decreasing sales for the nine months ended April 30, 2002 by some $2.2
million had the conversion rate been the same as in 2001. Excluding the impact
of the change in the exchange rate between the U.S. and Canadian dollar, the
decrease in sales was 5.0%. On a revenue per day basis, sales decreased 5.8% in
2002 compared to 2001 with Canadian sales decreasing 7.8% and U.S. sales
decreasing 4.7%. In Canadian dollars, Canadian sales decreased 4.2% on a revenue
per day basis in 2002 versus 2001.
Cost of sales for the nine months ended April 30, 2002 decreased $6.3 million,
or 4.9%, to $123 million from $129 million for the same period in 2001. Cost of
sales, as a percentage of sales for the nine months ended January 31,2002
increased to 70.1% from 69.2% for the same period ended in 2001. This increase
in cost of sales primarily results from the change in the overall business mix
of the Company. Scheduled and distribution and other specialized services sales
are increasing as a percentage of total sales while on demand sales have
declined both as a percentage of sales and in absolute dollars. Scheduled and
distribution and other specialized services generally have a higher cost of
sales and lower selling, general and administrative costs than on demand sales.
SG & A expenses for the nine months ended April 30, 2002 decreased $2.8 million,
or 6.0%, to $42.8 million from $45.6 million for the same period in 2001. As a
percentage of sales, SG & A expenses increased slightly to 24.4% for the nine
months ended April 30, 2002 compared to 24.3% in 2000 due to lower sales in the
current year. Salaries and benefits declined almost $1.5 million as a result of
the change in the business mix that requires fewer personnel in the dispatch and
customer service areas, as well as lower administrative salaries. The Company
has eliminated approximately $870,000 of non-essential employee related costs
including travel and entertainment. Through on-going cost reduction initiatives,
the Company has reduced communication, occupancy and office cost by almost
$600,000 in the nine month period ended April 30, 2002. These cost savings were
partially offset by an increase in professional fees of approximately $200,000
related to the restructuring of our Canadian operations.
Depreciation and amortization for the nine months ended April 30, 2002 was $2.2
million compared to $5.8 million for the same period in 2001. This decrease is
primarily attributable to the adoption of SFAS No. 142 ($2.7 million) and the
reduction in amortization of covenants not-to-compete that are fully amortized
after three years ($0.7 million). As a result of the implementation of SFAS No.
142, management expects to record a non-cash, after-tax charge of between $16
and $20 million as the cumulative effect of a change in accounting principle in
the Statement of Operations. As required by SFAS No. 142, the charge will be
recorded in the first quarter of fiscal year 2002 once the second phase of the
impairment test is completed.
Interest expense decreased $1.8 million or 43.7% for the nine months ended April
30, 2002 compared to same period in 2001 and as a percentage of sales, to 1.3%
from 2.2%. This decrease primarily results from the decrease in the prime rate
during the last year and to lower debt levels.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6.1 million for the nine months
ended April 30, 2002 compared to $7.0 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 $4.5 million for the nine months
ended April 30, 2002 compared to $7.1 million for the same period in the prior
year. The changes in current operating assets and liabilities increased cash
flow from operations
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
by $167,000 in the current year compared to decreased cash flow from operations
by $692,000 in the prior year. Cash interest paid in the nine months ended April
30, 2002 was $1.9 million compared to $5.2 million for the nine months ended
April 30, 2001.
Capital expenditures for the nine months ended April 30, 2002 were approximately
$1.2 million, primarily related to software implementation costs of the
Company's Oracle Human Resource and Payroll modules in the U.S. Management
expects that capital expenditures for the remainder of the fiscal year will be
less than $0.3 million. The Company does not have significant capital
expenditure requirements to replace or expand the number of vehicles used in its
operations because substantially all of its drivers are owner-operators who
provide their own vehicles.
The Company has entered into interest rate protection arrangements on a portion
of the borrowings under the Credit Facility. The interest rate on $13 million of
outstanding debt has been fixed at 6.14%, plus the applicable margin. This
hedging arrangement matures on February 28, 2003. Amounts outstanding under the
Credit Facility are secured by all of the Company's U.S. assets and 100% of the
stock of its principal Canadian subsidiaries. The Credit Facility also contains
restrictions on the payment of dividends, incurring additional debt, capital
expenditures and investments by the Company as well as requiring the Company to
maintain certain financial ratios. Generally, the Company must obtain the
lenders' consent to consummate any acquisition.
The Company's EBITDA (earnings before interest, taxes, depreciation and
amortization) was approximately $9.8 million for the nine months ended April 30,
2002 compared to $12.1 million in the same period in the prior year. This is the
result of the decline in sales for the period and the resulting decline in gross
margin, which was partially offset by lower SG & A expenses. 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.
Management expects that its future capital requirements will generally be met
from internally generated cash flow. The Company's access to other sources of
capital, such as additional bank borrowings and the issuance of debt securities,
is affected by, among other things, general market conditions affecting the
availability of such capital. The Company completed its last acquisition in
August 1998. Currently there are no pending nor are there any contemplated
acquisitions. Should the Company pursue acquisitions in the future, the Company
may be required to incur additional debt. There can be no assurance that the
Company's primary lenders will consent to such acquisitions or that if
additional financing is necessary, it can be obtained on terms the Company deems
acceptable. As a result, the Company may be unable to implement successfully its
acquisition strategy.
DEFERRED TAXES
During the nine months ended April 30, 2002, U.S. tax deductions exceeded
financial statement deductions by approximately $3.8 million. As a result, net
deferred tax assets were reduced by approximately $1.4 million during the
period, with an offsetting charge to tax expense in the Statement of
Consolidated Operations. The Company has U.S. net operating losses totaling
approximately $15 million and has established a 100% valuation allowance in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
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.
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.
CLAIMS EXPOSURE
As of May 15, 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 and an aggregate limit of
$20 million. Owner-operators are required to maintain liability insurance of at
least the minimum amounts required by applicable state or provincial law
(generally such minimum requirements range from $35,000 to $75,000). The Company
also has insurance policies covering property and fiduciary trust liability,
which coverage includes all drivers and messengers. There can be no assurance
that claims against the Company, whether under the liability insurance or the
surety bonds, will not exceed the applicable amount of coverage, that the
Company's insurer will be solvent at the time of settlement of an insured claim,
or that the Company will be able to obtain insurance at acceptable levels and
costs in the future. If the Company were to experience a material increase in
the frequency or severity of accidents, liability claims, workers' compensation
claims or unfavorable resolutions of claims, the Company's business, financial
condition and results of operations could be materially adversely affected. In
addition, significant increases in insurance costs could reduce the Company's
profitability.
CERTAIN TAX MATTERS RELATED TO DRIVERS
Substantially all of the Company's drivers own their own vehicles and as of May
15, 2002, 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 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
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
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.
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.
FOREIGN EXCHANGE
Significant portions of the Company's operations are conducted in Canada.
Exchange rate fluctuations between the U.S. and Canadian dollar result in
fluctuations in the amounts relating to the Canadian operations reported in the
Company's consolidated financial statements. The Canadian dollar is the
functional currency for the Company's Canadian operations; therefore, any change
in the exchange rate will affect the Company's reported revenues for such
period. The Company historically has not entered into hedging transactions with
respect to its foreign currency exposure, but may do so in the future. There can
be no assurance that fluctuations in foreign currency exchange rates will not
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
PERMITS AND LICENSING
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. 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.
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the skills, experience and
performance of certain key members of its management. The loss of the services
of any of these key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success and plans for growth also depend on its ability to attract, train
and retain skilled personnel in all areas of its business. There is strong
competition for skilled personnel in the same-day delivery and logistics
businesses.
RISKS ASSOCIATED WITH THE LOCAL DELIVERY INDUSTRY; GENERAL ECONOMIC CONDITIONS
The Company's revenues and earnings are especially sensitive to events that
affect the delivery services industry including extreme weather conditions,
economic factors affecting the Company's significant customers and shortages of
or disputes with labor, any of which could result in the Company's inability to
service its clients effectively or the inability of the Company to profitably
manage its operations. In addition, downturns in the level of general economic
activity and employment in the U.S. or Canada may negatively impact demand for
the Company's services.
Technological advances in the nature of facsimile and electronic mail have
affected the market for on-demand document delivery services. Although the
Company has shifted its focus to the distribution of non-faxable items and
logistics services, there can be no assurance that these or other technologies
will not have a material adverse effect on the Company's business, financial
condition and results of operations in the future.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
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.
"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 pass on fuel cost increases to customers to
maintain profit margins and the quality of driver pay.
14
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, over the
previous four quarters at the actual exchange rate, to a 10% decrease in the
exchange rate. Based on this model, a 10% decrease would result in a decrease in
revenue of approximately $7.9 million and a decrease in net income of
approximately $0.1 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 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. 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
15
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11.1 Calculation of Net Income Per Common Share
(b) Reports on Form 8-K:
None
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNAMEX INC.
Dated: June 13, 2002 by /s/ Richard K. McClelland
-----------------------------------
Richard K. McClelland
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Dated: June 13, 2002 by /s/ Ray E. Schmitz
-----------------------------------
Ray E. Schmitz
Vice President - Chief Financial
Officer
(Principal Accounting Officer)
17
EXHIBIT INDEX
Exhibits
11.1 Calculation of Net Income (Loss) Per Common Share
E-1