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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 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 March 8, 2002 was 10,506,817 shares.
DYNAMEX INC.
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INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 2
January 31, 2002 (Unaudited) and July 31, 2001
Condensed Statements of Consolidated Operations (Unaudited) 3
Three and Six Months ended January 31, 2002 and 2001
Condensed Statements of Consolidated Cash Flows (Unaudited) 4
Six Months ended January 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements (Unaudited) 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. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 15
Item 6. Exhibits and Reports on Form 8-K. 15
1
DYNAMEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
--------------------------------------------------------------------------------
January 31, July 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS
CURRENT
Cash and cash equivalents $ 3,724 $ 8,066
Accounts receivable (net of allowance for doubtful accounts
of $788 and $986, respectively) 23,495 24,799
Prepaid and other current assets 1,491 3,328
Deferred income tax 1,373 1,577
----------- -----------
TOTAL CURRENT ASSETS 30,083 37,770
Property and equipment - net 5,819 6,165
Intangibles - net 74,768 74,527
Deferred income taxes 1,709 2,635
Other assets 642 815
----------- -----------
TOTAL ASSETS $ 113,021 $ 121,912
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT
Accounts payable trade $ 4,268 $ 4,265
Accrued liabilities 12,903 13,080
Current portion of long-term debt 5,914 11,066
----------- -----------
TOTAL CURRENT LIABILITIES 23,085 28,411
Long-term debt 28,150 32,198
Provision for lawsuit settlement 919 1,313
----------- -----------
TOTAL LIABILITIES 52,154 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;
10,507 and 10,207 outstanding, respectively 105 102
Additional paid-in capital 73,150 72,759
Retained deficit (11,120) (11,576)
Unrealized foreign currency translation adjustment (1,268) (1,295)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 60,867 59,990
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 113,021 $ 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 Six months ended
January 31, January 31,
-------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ---------
Sales $ 57,077 $ 62,531 $ 118,813 $ 127,355
Cost of sales 39,827 43,224 83,283 88,044
---------- ---------- ---------- ---------
Gross profit 17,250 19,307 35,530 39,311
Selling, general and administrative expenses 14,326 15,263 29,135 30,852
Depreciation and amortization 736 1,957 1,518 3,986
(Gain) loss on disposal of property and equipment 5 (6) (13) (8)
---------- ---------- ---------- ---------
Operating income 2,183 2,093 4,890 4,481
Interest expense 766 1,364 1,676 2,708
Other (income) expense 573 (56) 547 (101)
---------- ---------- ---------- ---------
Income before taxes 844 785 2,667 1,874
Income tax expense 1,294 726 2,210 1,317
---------- ---------- ---------- ---------
Net income (loss) $ (450) $ 59 $ 457 $ 557
========== ========== ========== =========
Earnings (loss) per common share - basic: $ (0.04) $ 0.01 $ 0.04 $ 0.05
========== ========== ========== =========
Earnings (loss) per common share - assuming dilution: $ (0.04) $ 0.01 $ 0.04 $ 0.05
========== ========== ========== =========
Weighted average shares:
Common shares outstanding 10,363 10,207 10,285 10,207
Adjusted common shares - assuming
exercise of stock options 10,363 10,207 10,320 10,207
See accompanying notes to condensed consolidated financial statements.
3
DYNAMEX INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
(Unaudited)
-------------------------------------------------------------------------------
Six months ended
January 31,
--------------------------
2002 2001
---------- ----------
OPERATING ACTIVITIES
Net income $ 457 $ 557
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,461 1,617
Amortization of intangible assets 56 2,369
Provision for losses on accounts receivable 367 534
Deferred income taxes 1,130 607
Gain on disposal of property and equipment (13) (8)
Changes in current operating assets and liabilities:
Accounts receivable 938 (333)
Prepaids and other assets 1,835 906
Accounts payable and accrued liabilities (174) (2,720)
---------- ----------
Net cash provided by operating activities 6,057 3,529
---------- ----------
INVESTING ACTIVITIES
Payments for acquisitions -- (681)
Purchase of property and equipment (1,147) (667)
Net proceeds from disposal of property and equipment 12 12
---------- ----------
Net cash used in investing activities (1,135) (1,336)
---------- ----------
FINANCING ACTIVITIES
Principal payments on long-term debt (8,098) (1,854)
Net borrowings (payments) under line of credit (1,100) 600
Other assets and deferred offering costs (429) 149
---------- ----------
Net cash used in financing activities (9,627) (1,105)
---------- ----------
---------- ----------
EFFECT OF EXCHANGE RATES ON CASH FLOW INFORMATION 363 (49)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,342) 1,039
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,066 5,600
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,724 $ 6,639
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,448 $ 3,710
========== ==========
Cash paid for taxes $ 1,287 $ 692
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of 300 shares in shareholder class action lawsuit settlement $ 394 $ --
Assets acquired, liabilities paid and consideration paid
for acquisitions were as follows:
Accrual of earnouts to former owners $ -- $ 201
Prior year earnouts converted to notes payable -- (1,240)
Change in accrued earnouts -- 1,720
---------- ----------
Cash payments for acquisitions $ -- $ 681
========== ==========
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 January 31, 2002, the
results of its operations for the three and six month periods ended January 31,
2002 and 2001 and its cash flows for the six month periods ended January 31,
2002 and 2001.
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the three and six months ended January 31, 2002 was
$201 and $483, respectively, compared to $352 and $434 for the same periods
ended January 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 $651 and $26 in the three and six month
periods ended January 31, 2002, respectively, compared to a gain of $293 and a
loss of $123 for the same periods in the prior year. The translation gain
realized in the three-month period ended January 31, 2002 offsets the $714
foreign currency translation adjustment realized on the repatriation of excess
Canadian cash that is included in the Condensed Statement of Consolidated
Operations.
3. GOODWILL AND INTANGIBLE ASSETS
In August 2001, the Company adopted SFAS No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." 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.
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
5
DYNAMEX INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
--------------------------------------------------------------------------------
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 January 31, 2002, goodwill and other intangible assets and the related
amortization expense consist of the following:
2002 Amortization Expense
--------------------------------------- -----------------------------------------------
Three Months Ended Six Months Ended
January 31, January 31,
Accumulated --------------------- ---------------------
Asset Amortization Net 2002 2001 2002 2001
-------- ------------ -------- -------- -------- -------- --------
Goodwill $ 88,779 $ (15,054) $ 73,725 $ -- $ 891 $ -- $ 1,795
Covenants not-to-compete 9,909 (9,881) 28 14 282 46 634
Trademarks 470 (55) 415 5 2 10 6
Deferred bank financing fees 808 (208) 600 210 93 294 188
-------- ------------ -------- -------- -------- -------- --------
Total $ 99,966 $ (25,198) $ 74,768 $ 229 $ 1,268 $ 350 2,623
======== ============ ======== ======== ======== ======== ========
Amortization of deferred financing fees is classified as interest expense in the
consolidated statement of operations. Amortization of goodwill ceased effective
August 1, 2001.
The pro forma effect of the adoption of SFAS No. 142 on the reported net income
for the three and six months ended January 31, 2001 is as follows:
Three Months Ended Six Months Ended
January 31,2001 January 31, 2001
------------------ ----------------
Reported net income $ 59 $ 557
Add back: Amortization of goodwill 891 1,795
-------- -------
Net income, as adjusted $ 950 $ 2,352
-------- -------
Basic and diluted earnings per share:
Reported net income $ 0.01 $ 0.05
Amortization of goodwill $ 0.09 $ 0.18
-------- -------
Basic and diluted earnings per share, as
adjusted $ 0.10 $ 0.23
-------- -------
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
period ended January 31, 2002, the Company issued 300,000 shares of common
stock. The remaining 700,000 shares will be issued during the Company's fiscal
third quarter.
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,
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 six month periods ended January 31, 2002, Canadian revenues accounted
for approximately 32.7% and 32.8%, respectively, of total consolidated revenue,
compared to 34.5% and 33.8% for the same periods in 2001.
RESULTS OF OPERATIONS
Results of Operations
Three months ended Six months ended
January 31, January 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.8% 69.1% 70.1% 69.1%
-------- -------- -------- --------
Gross profit 30.2% 30.9% 29.9% 30.9%
Selling, general and administrative expenses 25.1% 24.4% 24.5% 24.2%
Depreciation and amortization 1.3% 3.1% 1.3% 3.1%
(Gain) loss on disposal of property and equipment 0.0% 0.0% 0.0% 0.0%
-------- -------- -------- --------
Operating income 3.8% 3.4% 4.1% 3.6%
Interest expense 1.3% 2.2% 1.4% 2.1%
Other (income) expense 1.0% (0.1)% 0.5% (0.1)%
-------- -------- -------- --------
Income before taxes 1.5% 1.3% 2.2% 1.6%
======== ======== ======== ========
Income tax expense 2.3% 1.2% 1.9% 1.0%
-------- -------- -------- --------
Net income (loss) (0.8)% 0.1% 0.3% 0.6%
======== ======== ======== ========
THREE MONTHS ENDED JANUARY 31, 2002 COMPARED TO THREE MONTHS ENDED JANUARY 31,
2001.
The Company incurred a net loss for the three months ended January 31, 2002 of
$450,000 ($0.04 per share) compared to net income of $59,000 ($0.01 per share)
in the same period last year. Results for the current quarter 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 second quarter was $690,000 or $0.07 per share. Comparatively, the pro forma
effect of the adoption of SFAS No. 142 on the reported net income for the
three-month period ended January 31, 2001 would have been to increase net income
by $891,000 to $950,000, or $0.10 per share.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
Sales for the three months ended January 31, 2002 decreased $5.4 million, or
8.7%, to $57.1 million from $62.5 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 January 31, 2002 versus 2001 that had the
effect of decreasing sales for the three months ended January 31, 2002 by more
than $1.0 million had the conversion rate been the same as the period ended in
2001. The three months ended January 31, 2002 had 61.2 revenue days compared to
61.9 revenue days in the same period last year. On a revenue per day basis,
sales decreased 7.8% in 2002 compared to 2001 with Canadian sales decreasing
13.3% and U.S. sales decreasing 4.8%. In Canadian dollars, Canadian sales
decreased 9.4% 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 $6.6 million (18.9%) to $28.3 million, and from 55.9% to 49.6% as
a percentage of total sales in the three months ended January 31, 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 $1.2 million (4.2%) in the three months ended January
31, 2002 compared to the same period last year.
Cost of sales for the three months ended January 31, 2002 decreased $3.4
million, or 7.9%, to $39.8 million from $43.2 million for the same period in
2001. Cost of sales, as a percentage of sales, increased to 69.8% for the three
months ended January 31, 2002 from 69.1% 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 January 31, 2002 decreased $937,000, or 6.1%, to $14.3 million from $15.3
million for the same period in 2001. This decrease is attributable to several
factors. Salaries and benefits declined almost $600,000 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 $400,000 of non-essential employee related costs
including travel and entertainment. Through on-going cost reduction initiatives,
the Company has reduced communication and office cost by approximately $140,000
in the three-month period ended January 31, 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. As a percentage of
sales, SG & A expenses were 25.1% for the three months ended January 31, 2002,
compared to 24.4% in the same period last year due to lower sales in 2002.
For the three months ended January 31, 2002, depreciation and amortization was
$0.7 million compared to $2.0 million for the same period ended in 2001. This
decrease is primarily attributable to the adoption of Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142") ($0.9 million) and the reduction
in amortization of covenants not-to-compete that are fully amortized after three
years ($0.3 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 January 31, 2002 was $766,000, down
16% from the first quarter of fiscal year 2002 and 44% from the prior year
period. This decrease is attributable to lower outstanding debt and to a lower
prime rate during the current quarter. The prime rate charged by the Company's
banks was lowered 0.75% to 4.75% during the quarter ended January 2002. The
effect of lower interest rates is slightly offset by the Company's interest rate
swap, required by its credit agreement, that effectively fixed the rate at 6.14%
on $13 million of debt. As a result of the reduction in the prime rate this
quarter, the Company recorded approximately $20,000 to mark-to-market the
interest rate swap.
SIX MONTHS ENDED JANUARY 31, 2002 COMPARED TO SIX MONTHS ENDED JANUARY 31, 2001.
Net income for the six months ended January 31, 2002 was $457,000 compared to
$557,000 for the same period in 2001. A reduction in sales accompanied by a
slightly lower gross margin in the six months ended January 31, 2002 were
partially offset by reductions in depreciation and amortization and in interest
expense. Results for the current period include one-time
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
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 six months ended January 31, 2002 was $1,597,000 or $0.15 per share.
Comparatively, the pro forma effect of the adoption of SFAS No. 142 on the
reported net income for the six-month period ended January 31, 2001 would have
been to increase net income by $1,795,000 to $2,352,000, or $0.23 per share.
Sales for the six months ended January 31, 2002 decreased $8.5 million, or 6.7%,
to $119 million from $127 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 six months ended January 31, 2002 by some
$1.7 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 5.3%. On a revenue per day basis, sales decreased 6.3%
in 2002 compared to 2001 with Canadian sales decreasing 9.4% and U.S. sales
decreasing 4.7%. In Canadian dollars, Canadian sales decreased 5.5% on a revenue
per day basis in 2002 versus 2001.
Cost of sales for the six months ended January 31, 2002 decreased $4.8 million,
or 5.4%, to $83 million from $88 million for the same period in 2001. Cost of
sales, as a percentage of sales for the six months ended January 31,2002
increased to 70.1% from 69.1% 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 six months ended January 31, 2002 decreased $1.7
million, or 5.6%, to $29.1 million from $30.8 million for the same period in
2001. As a percentage of sales, SG & A expenses increased slightly to 24.5% for
the six months ended January 31, 2002 compared to 24.2% in 2000 due to lower
sales in the current year. Salaries and benefits declined almost $1.1 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 $670,000 of non-essential employee
related costs including travel and entertainment. Through on-going cost
reduction initiatives, the Company has reduced communication and office cost by
approximately $345,000 in the six-month period ended January 31, 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 six months ended January 31, 2002 was $1.5
million compared to $4.0 million for the same period in 2001. This decrease is
primarily attributable to the adoption of SFAS No. 142 ($1.8 million) and the
reduction in amortization of covenants not-to-compete that are fully amortized
after three years ($0.6 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 $1.0 million or 38.1% for the six months ended
January 31, 2002 compared to same period in 2001 and as a percentage of sales,
to 1.4% 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 six months
ended January 31, 2002 compared to $3.5 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 $2.3 million for the six months ended
January 31, 2002 compared to $5.1 million for the same period in the prior year.
The changes in current operating assets and liabilities increased cash flow from
operations by $2.6 million in the current year and decreased cash flow from
operations by $2.1 million in the prior year. Cash interest paid in the six
months ended January 31, 2002 was $1.4 million compared to $3.7 million for the
six months ended January 31, 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
Capital expenditures for the six months ended January 31, 2002 were
approximately $1.1 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 between $0.1 and $0.4 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 $6.4 million for the six months ended January
31, 2002 compared to $8.5 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 six months ended January 31, 2002, U.S. tax deductions exceeded
financial statement deductions by approximately $3.3 million. As a result, net
deferred tax assets were reduced by approximately $1.1 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 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
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 February 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 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
March 1, 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 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
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
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 still subject to various federal (U.S. and
Canadian), state, provincial and local laws, ordinances and regulations that in
many instances require certificates, permits and licenses. Failure by the
Company to maintain required certificates, permits or licenses, or to comply
with applicable laws, ordinances or regulations could result in substantial
fines or possible revocation of the Company's authority to conduct certain of
its operations. Furthermore, delays in obtaining approvals for the transfer or
grant of certificates, permits or licenses, or failure to obtain such approvals,
could impede the implementation of the Company's acquisition program.
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the skills, experience and
performance of certain key members of its management. The loss of the services
of any of these key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success and plans for growth also depend on its ability to attract, train
and retain skilled personnel in all areas of its business. There is strong
competition for skilled personnel in the same-day delivery and logistics
businesses.
RISKS ASSOCIATED WITH THE LOCAL DELIVERY INDUSTRY; GENERAL ECONOMIC CONDITIONS
The Company's revenues and earnings are especially sensitive to events that
affect the delivery services industry including extreme weather conditions,
economic factors affecting the Company's significant customers and shortages of
or disputes with labor, any of which could result in the Company's inability to
service its clients effectively or the inability of the Company to profitably
manage its operations. In addition, downturns in the level of general economic
activity and employment in the U.S. or Canada may negatively impact demand for
the Company's services.
Technological advances in the nature of facsimile and electronic mail have
affected the market for on-demand document delivery services. Although the
Company has shifted its focus to the distribution of non-faxable items and
logistics services, there can be no assurance that these or other technologies
will not have a material adverse effect on the Company's business, financial
condition and results of operations in the future.
DEPENDENCE ON AVAILABILITY OF QUALIFIED COURIER PERSONNEL
The Company is dependent upon its ability to attract, train and retain, as
employees or through independent contractor or other arrangements, qualified
courier personnel who possess the skills and experience necessary to meet the
needs of its operations. The Company competes in markets in which unemployment
is relatively low and the competition for couriers and other employees is
intense. The Company must continually evaluate, train and upgrade its pool of
available couriers to keep pace with demands for delivery services. There can be
no assurance that qualified courier personnel will continue to be available in
sufficient numbers and on terms acceptable to the Company. The inability to
attract and retain qualified courier personnel would have a material adverse
impact on the Company's business, financial condition and results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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.
13
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 $8.0 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
14
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
15
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: March 18, 2002 by /s/ Richard K. McClelland
------------------------------------------
Richard K. McClelland
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Dated: March 18, 2002 by /s/ Ray E. Schmitz
------------------------------------------
Ray E. Schmitz
Vice President - Chief Financial Officer
(Principal Accounting Officer)
16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11.1 Calculation of Net Income (Loss) Per Common Share
E-1