ITEM 1. BUSINESS
GENERAL
Dynamex is a leading provider of same-day delivery and logistics services in the United States and Canada. From its base as the largest nationwide same-day transportation company in Canada, over the last four years Dynamex has established a presence in 21 metropolitan markets in the United States and has continued to expand its system in Canada. Through its network of branch offices, the Company provides same-day, door-to-door delivery services utilizing its ground couriers. For many of its inter-city deliveries, the Company uses third party air or motor carriers in conjunction with its ground couriers to provide same-day service. In addition to traditional on-demand delivery services, the Company offers scheduled distribution services, which encompass recurring, often daily, point-to-point deliveries or multiple destination deliveries that often require intermediate handling. The Company also offers fleet and facilities management services. These services include designing and managing systems to maximize efficiencies in transporting, sorting and delivering customers' products on a local and multi-city basis. With its fleet management service, the Company manages and may provide a fleet of dedicated vehicles at single or multiple customer sites. The Company's on-demand delivery capabilities are available to supplement scheduled distribution arrangements or dedicated fleets as needed. Facilities management services include the Company's operation and management of a customer's mailroom.
The Company was organized under the laws of Delaware in 1992 as Parcelway Systems Holding Corp. In May 1995, the Company acquired Dynamex Express and, in July 1995, the Company changed its name to Dynamex Inc. At the time of its acquisition by the Company, Dynamex Express had developed a national network of 20 locations across Canada and offered an array of services on a national, multi-city and local basis. In December 1995, the Company acquired the on-demand ground courier operations of Mayne Nickless, which had operations in eight U.S. cities and two Canadian cities. In August 1996, in conjunction with the Company's initial public offering (the "IPO") the Company acquired five same-day delivery businesses in three U.S. and two Canadian cities (the "IPO Acquisitions"). Subsequent to the IPO and through August 31, 1998 the Company acquired 22 additional same-day delivery businesses in thirteen U.S. and three Canadian cities. See "-- Recent Acquisitions."
INDUSTRY OVERVIEW
The delivery and logistics industry is large, highly fragmented and growing. The industry is composed primarily of same-day, next-day and second-day service providers. The Company primarily services the same-day, intra-city delivery market. The same-day delivery and logistics industry in the U.S. and Canada primarily consists of several thousand small, independent businesses serving local markets and a small number of multi-location regional or national operators. The Company believes that the same-day delivery and logistics industry offers substantial consolidation opportunities as a result of industry fragmentation and that there are significant operating benefits to large-scale service providers. Relative to smaller operators in the industry, the Company believes that national operators such as the Company benefit from several competitive advantages including: national brand identity, professional management, the ability to service national accounts and centralized administrative and management information systems.
Management believes that the same-day delivery segment of the transportation industry is benefiting from several recent trends. For example, the trend toward outsourcing has resulted in numerous shippers turning to third party providers for a range of services including same-day delivery and management of in-house distribution. Many businesses that outsource their distribution requirements prefer to purchase such services from one source that can service multiple cities,
thereby decreasing the number of vendors from which they purchase services. Additionally, the growth of "just-in-time" inventory practices designed to reduce inventory-carrying costs has increased the demand for the same-day delivery of such inventory. Technological developments such as e-mail and facsimile have increased the pace of business and other transactions, thereby increasing demand for the same-day delivery of a wide array of items, ranging from voluminous documents to critical manufacturing parts and medical devices. Consequently, there has been increased demand for the same-day transportation of items that are not suitable for fax or electronic transmission, but for which there is an immediate need.
BUSINESS STRATEGY
The Company intends to expand its operations in the U.S. and Canada to capitalize on the demand of local, regional and national businesses for innovative same-day transportation solutions. The key elements of the Company's business strategy are as follows:
Focus on Primary Services. The Company provides three primary services: (i) same-day on-demand delivery services, (ii) same-day scheduled distribution services and (iii) outsourcing services such as fleet management and facilities management. The Company focuses its same-day on-demand delivery business on transporting non-faxable, time sensitive items throughout metropolitan areas. By delivering items of greater weight over longer distances and providing value added on-demand services such as non-technical swap-out of failed equipment, the Company expects to raise the yield per delivery relative to the yield generated by delivering documents within a central business district. Additionally, the Company intends to capitalize on the market trend towards outsourcing transportation requirements by concentrating its logistics services in same-day scheduled distribution and fleet management. The delivery transactions in a fleet management and scheduled distribution program are recurring in nature, thus creating the potential for long term customer relationships. Additionally, these value added services are generally less vulnerable to price competition than traditional on-demand delivery services.
Target National and Regional Accounts. The Company's sales force focuses on pursuing and maintaining national and regional accounts. The Company anticipates that its (i) existing multi-city network of locations combined with new locations to be acquired, (ii) ability to offer value added services such as fleet management to complement its basic same-day delivery services and (iii) experienced, operations oriented management team and sales force, will create further opportunities with many of its existing customers and attract new national and regional accounts.
Create Strategic Alliances. By forming alliances with strategic partners that offer services that complement those of the Company, the Company and its partner can jointly market their services, thereby accessing one another's customer base and providing such customers with a broader range of value added services. For example, the Company has formed an alliance with Purolator, the largest Canadian overnight courier company, whereby on an exclusive basis the Company and Purolator provide one another with certain delivery services and market one another's delivery services to their respective customers. See "-- Sales and Marketing."
SERVICES
The Company capitalizes on its routing, dispatch and vehicle and personnel management expertise developed in the ground courier business to provide its customers with a broad range of value added, same-day distribution services. By creating innovative applications of its core services, the Company intends to expand the market for its distribution services and increase the yield per service provided.
Same-Day On-Demand Delivery. The Company provides same-day intra-city on-demand delivery services whereby Company messengers or drivers respond to a customer's request for immediate pick-up and delivery. The Company also provides same-day inter-city delivery services by utilizing third party air or motor carriers in conjunction with the Company's ground couriers. The Company focuses on the delivery of non-faxable, time sensitive items throughout major metropolitan areas rather than traditional downtown document delivery. By delivering items of greater weight over longer distances and providing value added on-demand services such as non-technical swap-out of failed equipment, the Company expects to continue to raise the yield per delivery relative to the yield generated from downtown document deliveries. For the fiscal years ended July 31, 2000, 1999 and 1998, approximately 58%, 62% and 62%, respectively, of the Company's revenues were generated from on-demand same-day delivery services.
Same-Day Scheduled Distribution. The Company provides same-day scheduled distribution services for time-sensitive local deliveries. Scheduled distribution services include regularly scheduled deliveries made on a point-to-point basis and deliveries that may require intermediate handling, routing or sorting of items to be delivered to multiple locations. The Company's on-demand delivery capabilities are available to supplement the scheduled drivers as needed. A bulk shipment may be received at the Company's warehouse where it is sub-divided into smaller bundles and sorted for delivery to specified locations. Same-day scheduled distribution services are provided on both a local and multi-city basis. For example, in the suburban Washington, D.C./Baltimore area the Company provides scheduled, as well as on-demand, delivery services for a group of local hospitals and medical laboratories, transferring samples between these facilities. In Ontario, Canada, the Company services the scheduled distribution requirements of a consortium of commercial banks. These banks require regular pick-up of non-negotiable materials that are then delivered by the Company on an intra- and inter-city basis. For the fiscal years ended July 31, 2000, 1999 and 1998, approximately 19%, 12% and 13%, respectively, of the Company's revenues were generated from same-day scheduled distribution services.
Outsourcing Services. The Company's outsourcing services include fleet management and mailroom or other facilities management, such as maintenance of call centers for inventory tracking and delivery. With its outsourcing services, the Company is able to apply its same-day delivery capability and logistics experience to design and manage efficient delivery systems for its customers. The outsourcing service offerings can expand along with the customer's needs. Management believes that the trend toward outsourcing has resulted in many customers reducing their reliance on in-house transportation departments and increasing their use of third-party providers for a variety of delivery services.
The largest component of the Company's outsourcing services is fleet management. With its fleet management service, the Company provides transportation services primarily for customers that previously managed such operations in-house. This service is generally provided with a fleet of dedicated vehicles that can range from passenger cars to tractor-trailers (or any combination) and may display the customer's logo and colors. In addition, the Company's on-demand delivery capability may supplement the dedicated fleet as necessary, thereby allowing a smaller dedicated fleet to be maintained than would otherwise be required. The Company's fleet management services include designing and managing systems created to maximize efficiencies in transporting, sorting and delivering customers' products on a local and multi-city basis. Because the Company generally does not own vehicles but instead hires drivers who do, the Company's fleet management solutions are not limited by the Company's need to utilize its own fleet.
By outsourcing their fleet management, the Company's customers (i) utilize the Company's distribution and route optimization experience to deliver their products more efficiently, (ii) gain the flexibility to expand or contract fleet size as necessary, and (iii) reduce the costs and administrative burden associated with owning or leasing vehicles and hiring and managing transportation employees. For example, the Company has configured and now manages a distribution fleet for one of the largest distributors to drugstores in Canada. For the fiscal years ended July 31, 2000, 1999 and 1998, approximately 23%, 26% and 25%, respectively, of the Company's revenues were generated from fleet management and other outsourcing services.
While the volume and profitability of each service provided varies significantly from branch office to branch office, each of the Company's branch offices generally offers the same core services. Factors, which impact the business mix per branch, include customer base, competition, geographic characteristics, available labor and general economic environment. The Company can bundle its various delivery and logistics services to create customized distribution solutions and, by doing so, seeks to become the single source for its customers' distribution needs.
OPERATIONS
The Company's operations are divided into two U.S. regions and one Canadian region, with each of the Company's approximately 40 branches assigned to the appropriate region. Branch operations are locally managed with regional and national oversight and support provided as necessary. A branch manager is assigned to each branch office and is accountable for all aspects of such branch operations including its profitability. Each branch manager reports to a regional manager with similar responsibilities for all branches within his region. Certain administrative and marketing functions may be centralized for multiple branches in a given city or region. Dynamex believes that the strong operational background of its senior management is important to building brand identity throughout the United States while simultaneously overseeing and encouraging individual managers to be successful in their local markets.
Same-Day On-Demand Delivery. Most branches have operations centers staffed by dispatchers, as well as customer service representatives and operations personnel. Incoming calls are received by trained customer service representatives
who utilize computer systems to provide the customer with a job-specific price quote and to transmit the order to the appropriate dispatch location. Certain of the Company's larger clients can access such software through electronic data interface to enter dispatch requirements, page specific drivers, make inquiries and receive billing information. A dispatcher coordinates shipments for delivery within a specific time frame. Shipments are routed according to the type and weight of the shipment, the geographic distance between the origin and destination and the time allotted for the delivery. Coordination and deployment of delivery personnel for on-demand deliveries is accomplished either through communications systems linked to the Company's computers, through pagers or by radio.
Same-Day Scheduled Distribution. A dispatcher coordinates and assigns scheduled deliveries to the drivers and manages the delivery flow. In many cases, certain drivers will handle a designated group of scheduled routes on a recurring basis. Any intermediate handling required for a scheduled distribution is conducted at the Company's warehouse or at a third party facility such as the airport.
Outsourcing Services. The largest component of the Company's outsourcing services is its fleet management. Fleet management services are coordinated by the Company's logistics specialists who have experience in designing, implementing and managing integrated networks for transportation services. Based upon the specialist's analysis of a customer's fleet and distribution requirements, the Company develops a plan to optimize fleet configuration and route design. The Company provides the vehicles and drivers necessary to implement the fleet management plan. Such vehicles and drivers are generally dedicated to a particular customer and may display the customer's name and logo on its vehicles. The Company can supplement these dedicated vehicles and drivers with its on-demand capability as necessary.
Prices for the Company's services are determined at the branch level based on the distance, weight and time-sensitivity of a particular delivery. The Company generally enters into customer contracts for scheduled distribution, and fleet and facilities management, which are generally terminable by such customer upon notice generally ranging from 30 to 90 days. The Company does not typically enter into contracts with its customers for on-demand delivery services.
Substantially all of the Dynamex drivers are owner-operators who provide their own vehicles, pay all expenses of operating their vehicles and receive a percentage of the delivery charge as compensation. Management believes that this creates a higher degree of responsiveness on the part of its drivers as well as significantly lowering the capital required to operate the business and reducing the Company's fixed costs.
SALES AND MARKETING
The Company markets its services through a sales force comprised of national and local sales representatives. The Company's national sales force, comprised of approximately 5 persons, includes product specialists dedicated to specific services, such as fleet management. Additionally, some of these specialists have developed expertise in servicing certain industries such as banks and telecommunications companies. As part of its overall marketing plan, the Company intends to increase the number of national product and industry specialists. Approximately 80 local employee sales representatives target business opportunities from the branch offices and approximately 20 specialized sales representatives contact existing customers to assess customer satisfaction and requirements. The Company's sales force will seek to generate additional business from existing local accounts, which often include large companies with multiple locations. The expansion of the Company's national sales program and continuing investment in technology to support its expanding operations have been undertaken at a time when large companies are increasing their demand for delivery providers who offer a range of delivery services at multiple locations.
The Company's local sales representatives make regular calls on existing and potential customers to identify such customers' delivery and logistics needs. The Company's national product and industry specialists augment the local marketing efforts and seek new applications of the Company's primary services in an effort to expand the demand for such services. Customer service representatives on the local and national levels regularly communicate with customers to monitor the quality of services and to quickly respond to customer concerns. The Company maintains a database of its customers' service utilization patterns and satisfaction level. This database is used by the Company's specialized sales force to analyze opportunities and conduct performance audits.
Fostering strategic alliances with customers who offer services that complement those of the Company is an important component of the Company's marketing strategy. For example, under an agreement with Purolator, the Company serves as Purolator's exclusive provider of same-day courier services, which services are then marketed by Purolator to its customers. The Company also provides Purolator with local and inter-city, same-day ground courier service for misdirected Purolator
shipments. Purolator, in turn, serves as the Company's exclusive provider of overnight delivery services which services are marketed by the Company to its customers. Purolator reports that it is the largest overnight courier in Canada with approximately 12,000 employees who process over 2.5 million pieces each week.
CUSTOMERS
The Company's target customer is a business that distributes time-sensitive, non-faxable items that weigh from one to seventy pounds to multiple locations. The primary industries served by the Company include financial services, electronics, pharmaceuticals, medical laboratories and hospitals, auto parts, legal services and Canadian governmental agencies. Management believes that for the fiscal year ended July 31, 2000, no single industry accounted for more than 10% of the Company's annual revenues. A significant number of the Company's customers are located in Canada. For the fiscal years ended July 31, 2000, 1999 and 1998, approximately 33%, 33% and 37% of the Company's revenues, respectively, were generated in Canada. See Note 12 of Notes to Consolidated Financial Statements for additional information concerning the Company's foreign operations.
COMPETITION
The market for the Company's same-day delivery and logistics services has been and is expected to remain highly competitive. The Company believes that the principal competitive factors in the markets in which it competes are reliability, quality, breadth of service and price.
Most of the Company's competitors in the same-day intra-city delivery market are privately held companies that operate in only one location, with no one competitor dominating the market. However, there is a trend toward industry consolidation and companies with greater financial and other resources than the Company that may not currently operate in the delivery and logistics business may enter the industry to capitalize on such trend. Price competition for basic delivery services is particularly intense.
The market for the Company's logistics services is also highly competitive, and can be expected to become more competitive as additional companies seek to capitalize on the growth in the industry. The Company's principal competitors for such services are other delivery companies and in-house transportation departments. The Company generally competes on the basis of its ability to provide customized service regionally and nationally, which it believes is an important advantage in this highly fragmented industry, and on the basis of price.
The Company competes for acquisition candidates with other companies in the industry and companies that may not currently operate in the industry but may acquire and consolidate local courier businesses. Management believes that its operating experience and its strategy to fully integrate each acquired company by adding its core services and introducing national and multi-city marketing will allow it to remain competitive in the acquisition market.
The Company's principal competitors for drivers are other delivery companies within each market area and e-commerce companies. Management believes that its method of driver compensation, which is based on a percentage of the delivery charge, is attractive to drivers and helps the Company to recruit and retain drivers.
RECENT ACQUISITIONS
Commencing with the IPO in August 1996 and continuing through September 1998, the Company acquired the following same-day delivery businesses (collectively the "Acquisitions"):
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(1) Collectively the "IPO Acquisitions."
(2) Collectively the "Fiscal 1997 Acquisitions."
(3) Collectively the "Fiscal 1998 Acquisitions."
(4) Collectively the "Fiscal 1999 Acquisitions."
The aggregate consideration paid by the Company for the Acquisitions included cash paid of approximately $81.3 million and the issuance by the Company of approximately $700,000 in promissory notes and approximately 1,499,000 shares of common stock. In addition, in certain instances, the Company may pay additional cash consideration if such acquired businesses obtain certain performance goals. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consideration paid by the Company for the Acquisitions was determined through arms-length negotiations among the Company and the representatives of the owners of these acquired companies. The factors considered by the parties in determining the purchase price include, among other things, the historical operating results and the future prospects of the acquired companies.
Each of the Acquisitions has been accounted for using the purchase method of accounting. Accordingly, each acquired company is included in the Company's consolidated results of operations from the date of its respective acquisition.
REGULATION
The Company's business and operations are subject to various federal (U.S. and Canadian), state, provincial and local regulations and, in many instances, require permits and licenses from state authorities. The Company holds nationwide general commodities authority from the Federal Highway Administration of the U.S. Department of Transportation to transport certain property as a motor carrier on an inter-state basis within the contiguous 48 states. Where required, the Company holds statewide general commodities authority. The Company holds permanent extra-provincial (and where required, intra-provincial) operating authority in all Canadian provinces where the Company does business.
In connection with the operation of certain motor vehicles, the handling of hazardous materials in its courier operations and other safety matters, including insurance requirements, the Company is subject to regulation by the United States Department of Transportation, the states and by the appropriate Canadian federal and provincial regulations. The Company is also subject to regulation by the Occupational Safety and Health Administration, provincial occupational health and safety legislation and federal and provincial employment laws respecting such matters as hours of work, driver logbooks and workers' compensation. To the extent the Company holds licenses to operate two-way radios to communicate with its fleet, the Federal Communications Commission regulates the Company. The Company believes that it is in substantial compliance with all of these regulations. The failure of the Company to comply with the applicable regulations could result in substantial fines or possible revocations of one or more of the Company's operating permits.
SAFETY
From time to time, the Company's drivers are involved in accidents. The Company carries liability insurance with a per claim and an aggregate limit of $15.0 million. Owner-operators are required to maintain liability insurance of at least the minimum amounts required by applicable state and provincial law (generally such minimum requirements range from $35,000 to $75,000). The Company also has insurance policies covering property and fiduciary trust liability, which coverage includes all drivers. The Company reviews prospective drivers to ensure that they have acceptable driving records. In addition, where required by applicable law, the Company requires prospective drivers to take a physical examination and to pass a drug test. Branch managers are responsible for training drivers on any additional safety requirements as dictated by customer specifications.
INTELLECTUAL PROPERTY
The Company has registered "DYNAMEX" and "DYNAMEX EXPRESS" as federal trademarks in the Canadian Intellectual Office and has filed applications in the U.S. Patents and Trademark's office for federal trademark registration of such names. No assurance can be given that any such registration will be granted in the U.S. or that if granted, such registration will be effective to prevent others from using the trademark concurrently or preventing the Company from using the trademark in certain locations.
EMPLOYEES
At September 1, 2000, the Company had approximately 2,800 employees, of whom approximately 1,800 primarily were employed in various management, supervisory, administrative, and other corporate positions and approximately 1,000 were employed as drivers and messengers. Additionally at September 1, 2000, the Company had contracts with approximately 4,000 independent owner-operator drivers. Management believes that the Company's relationship with such employees and independent owner-operators is good. See "Risk Factors -- Certain Tax Matters Related to Drivers."
Of the approximately 5,000 drivers and messengers used by the Company as of September 1, 2000, approximately 1,800 are located in Canada and approximately 3,200 are located in the U.S. Although the drivers and messengers located in Canada are generally independent contractors, approximately 65% are represented by major international labor unions. Management believes that the Company's relationship with such unions is good. Unions represent none of the Company's U.S. employees, drivers or messengers.
RISK FACTORS
In addition to other information in this report, the following risk factors should be considered carefully in evaluating the Company and its business. This report contains forward-looking statements, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this report.
Acquisition Strategy; Possible Need for Additional Financing
The Company completed its last acquisition in August 1998. Currently, there are no pending nor are there any contemplated acquisitions. Should the Company pursue acquisitions in the future, the Company may be required to incur additional debt, issue additional securities that may potentially result in dilution to current holders and also may result in increased goodwill, intangible assets and amortization expense. Additionally, the Company must obtain the consent of its primary lenders to consummate any acquisition. There can be no assurance that the Company's primary lenders will consent to such acquisitions or that if additional financing is necessary, it can be obtained on terms the Company deems acceptable. As a result, the Company might be unable to successfully implement its acquisition strategy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
Limited Combined Operating History
Recent acquisitions have greatly expanded the size and scope of the operations of the Company. The process of integrating acquired businesses often involves unforeseen difficulties and may require a disproportionate amount of the Company's financial and other resources, including management time. There can be no assurance that the Company will be able to profitably manage recently acquired companies or successfully integrate their operations into the Company.
Highly Competitive Industry
The market for same-day delivery and logistics services has been and is expected to remain highly competitive. Competition is often intense, particularly for basic delivery services. High fragmentation and low barriers to entry characterize the industry and there is a recent trend toward consolidation. Other companies in the industry compete with the Company not only for provision of services but also for acquisition candidates and qualified drivers. Some of these companies have longer operating histories and greater financial and other resources than the Company. Additionally, companies that do not currently operate delivery and logistics businesses may enter the industry in the future to capitalize on the consolidation trend. See "Business -- Competition."
Claims Exposure
As of September 1, 2000, the Company utilized the services of approximately 5,000 drivers and messengers. From time to time such persons are involved in accidents or other activities that may give rise to liability claims. The Company currently carries liability insurance with a per claim and an aggregate limit of $15.0 million. Owner-operators are required to maintain liability insurance of at least the minimum amounts required by applicable state or provincial law (generally such minimum requirements range from $35,000 to $75,000). The Company also has insurance policies covering property and fiduciary trust liability, which coverage includes all drivers and messengers. There can be no assurance that claims against the Company, whether under the liability insurance or the surety bonds, will not exceed the applicable amount of coverage, that the Company's insurer will be solvent at the time of settlement of an insured claim, or that the Company will be able to obtain insurance at acceptable levels and costs in the future. If the Company were to experience a material increase in the frequency or severity of accidents, liability claims, workers' compensation claims or unfavorable resolutions of claims, the Company's business, financial condition and results of operations could be materially adversely affected. In addition, significant increases in insurance costs could reduce the Company's profitability.
Certain Tax Matters Related to Drivers
Substantially all of the Company's drivers own their own vehicles and as of September 1, 2000, approximately 80% of these owner-operators were independent contractors as opposed to employees of the Company. The Company does not pay or withhold any federal, state or provincial employment tax with respect to or on behalf of independent contractors. From time to time, taxing authorities in the U.S. and Canada have sought to assert that independent owner-operators in the transportation industry, including those utilized by the Company, are employees, rather than independent contractors. The Company believes that the independent owner-operators utilized by the Company are not employees under existing interpretations of federal (U.S. and Canadian), state and provincial laws. However, there can be no assurance that federal (U.S. and Canadian), state or provincial authorities will not challenge this position, or that other laws or regulations, including tax laws, or interpretations thereof, will not change. If, as a result of any of the foregoing, the Company is required to pay withholding taxes and pay for and administer added employee benefits to these drivers, the Company's operating costs would increase. Additionally, if the Company is required to pay back-up withholding with respect to amounts previously paid to such drivers, it may also be required to pay penalties or be subject to other liabilities as a result of incorrect classification of such drivers. If the drivers are deemed to be employees rather than independent contractors, then the Company may be required to increase their compensation since they will no longer be receiving commission-based compensation. Any of the foregoing circumstances could have a material adverse impact on the Company's financial condition and results of operations, and/or to restate financial information from prior periods. See "Business -- Services" and "-- Employees."
In addition to the drivers that are independent contractors, certain of the Company's drivers are employed by the Company and own and operate their own vehicles during the course of their employment. The Company reimburses these employees for all or a portion of the operating costs of those vehicles. The Company believes that these reimbursement arrangements do not represent additional compensation to those employees. However, there can be no assurance that federal (U.S. and Canadian), state or provincial taxing authorities will not seek to recharacterize some or all of such payments as additional compensation. If such amounts were so recharacterized, the Company would have to pay additional employment related taxes on such amounts, and may also be required to pay penalties, which could have an adverse impact on the Company's financial condition and results of operations, and/or to restate financial information from prior periods. See "Business -- Services" and "-- Employees."
Foreign Exchange
Significant portions of the Company's operations are conducted in Canada. Exchange rate fluctuations between the U.S. and Canadian dollar result in fluctuations in the amounts relating to the Canadian operations reported in the Company's consolidated financial statements. The Canadian dollar is the functional currency for the Company's Canadian operations; therefore, any change in the exchange rate will effect the Company's reported revenues for such period. The Company historically has not entered into hedging transactions with respect to its foreign currency exposure, but may do so in the future. There can be no assurance that fluctuations in foreign currency exchange rates will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 12 of Notes to Consolidated Financial Statements.
Permits and Licensing
Although recent legislation has significantly deregulated certain aspects of the transportation industry, the Company's delivery operations are still subject to various federal (U.S. and Canadian), state, provincial and local laws, ordinances and regulations that in many instances require certificates, permits and licenses. Failure by the Company to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or regulations could result in substantial fines or possible revocation of the Company's authority to conduct certain of its operations. Furthermore, delays in obtaining approvals for the transfer or grant of certificates, permits or licenses, or failure to obtain such approvals, could impede the implementation of the Company's acquisition program. See "Business -- Regulation."
Dependence on Key Personnel
The Company's success is largely dependent on the skills, experience and performance of certain key members of its management. The loss of the services of any of these key employees could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success and plans for growth also depend on its ability to attract, train and retain skilled personnel in all areas of its business. There is strong competition for skilled personnel in the same-day delivery and logistics businesses.
Risks Associated with the Local Delivery Industry; General Economic Conditions
The Company's revenues and earnings are especially sensitive to events that affect the delivery services industry including extreme weather conditions, economic factors affecting the Company's significant customers and shortages of or disputes with labor, any of which could result in the Company's inability to service its clients effectively or the inability of the Company to profitably manage its operations. In addition, downturns in the level of general economic activity and employment in the U.S. or Canada may negatively impact demand for the Company's services.
Technological advances in the nature of facsimile and electronic mail have affected the market for on-demand document delivery services. Although the Company has shifted its focus to the distribution of non-faxable items and logistics services, there can be no assurance that these or other technologies will not have a material adverse effect on the Company's business, financial condition and results of operations in the future.
Dependence on Availability of Qualified Courier Personnel
The Company is dependent upon its ability to attract, train and retain, as employees or through independent contractor or other arrangements, qualified courier personnel who possess the skills and experience necessary to meet the needs of its operations. The Company competes in markets in which unemployment is relatively low and the competition for couriers and other employees is intense. The Company must continually evaluate, train and upgrade its pool of available couriers to keep pace with demands for delivery services. There can be no assurance that qualified courier personnel will continue to be available in sufficient numbers and on terms acceptable to the Company. The inability to attract and retain qualified courier personnel would have a material adverse impact on the Company's business, financial condition and results of operations.
Volatility of Stock Price
Prices for the Company's common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the common stock, investor perception of the Company and general economic and market conditions. Variations in the Company's operating results, general trends in the industry and other factors could cause the market price of the common stock to fluctuate significantly. In addition, general trends and developments in the industry, government regulation and other factors could have a significant impact on the price of the common stock. The stock market has, on occasion, experienced extreme price and volume fluctuations that have often particularly affected market prices for smaller companies and that often have been unrelated or disproportionate to the operating performance of the affected companies, and the price of the common stock could be affected by such fluctuations.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases facilities in 59 locations. These facilities are principally used for operations and general and administrative functions. The chart below summarizes the locations of facilities that the Company leases:
The Company believes that its properties are well maintained, in good condition and adequate for its present needs. The Company anticipates that suitable additional or replacement space will be available when required. The Company's facilities rental expense for the fiscal years ended July 31, 2000, 1999 and 1998 were approximately $4.5, $4.3 and $3.5 million, respectively. The Company's principal executive offices are located in Irving, Texas. See Note 7 of Notes to the Consolidated Financial Statements for additional information.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In November and December 1998, two class action lawsuits were filed in the United States District Court for the Northern District of Texas, naming the Company, Richard K. McClelland, the Company's Chief Executive Officer, and Robert P. Capps, the Company's former Chief Financial Officer, as defendants. The lawsuits arise from the Company's November 2, 1998 announcement that the Company was (i) revising its results of operations for the year ended July 31, 1998 from that which had been previously announced on September 16, 1998 and (ii) restating its results of operations for the third quarter of fiscal 1998 from that which had been previously reported. On February 5, 1999, the Court entered an Order consolidating the actions and approved the selection of three law firms as co-lead counsel. A consolidated and amended complaint was filed on March 22, 1999. In addition to the defendants named in the original complaints, the amended complaint also named as defendants the underwriters of the Company's May 1998 secondary offering of common stock, Schroder & Co., Inc., William Blair & Company, and Hoak Breedlove Wesneski & Co. (the "Underwriter Defendants"). On May 6, 1999, defendants filed a motion to dismiss the consolidated and amended complaint in its entirety.
On June 14, 1999, the Company issued a press release announcing that the Audit Committee of the Board of Directors had formed a Special Committee of outside directors to review potentially unsupportable accounting entries for the third and fourth quarters of fiscal 1998. On September 17, 1999, the Company issued a press release announcing that the Special Committee had completed its review of the Company's financial reporting and that the Company would restate its previously reported financial results for the fiscal years 1997 and 1998 and the first three quarters of the fiscal year 1999.
On October 14, 1999, pursuant to a stipulation of the parties, plaintiffs filed a second amended class action complaint that added allegations relating to the information disclosed in the Company's June 14 and September 17, 1999 press releases. In addition to the defendants named in the amended complaint, the Second Amended Class Action Complaint named Deloitte & Touche and Deloitte & Touche LLP (the Court subsequently dismissed Deloitte & Touche LLP without prejudice pursuant to the stipulation of the parties). The Second Amended Class Action Complaint alleges that the defendants issued a series of materially false and misleading statements and omitted material facts concerning the Company's financial condition and business operations. The lawsuit alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek unspecified damages on behalf of all other purchasers of the Company's common stock during the period of September 18, 1997 through and including September 17, 1999.
On September 20, 2000, the Company, Richard McClelland, Robert Capps and the Underwriter Defendants signed a memorandum of understanding setting forth the terms of a proposed settlement of this action. Deloitte & Touche is not a party to the memorandum of understanding. The proposed settlement provides that the Company's primary directors and officers liability insurer, American Home Insurance Company, will pay $2 million towards the settlement. In addition, the Company will pay $1 million and contribute one million shares of common stock towards the proposed settlement. The Company has also agreed to pay to the class 75% of any recoveries, after legal expenses and costs, from the Company's excess insurer, Reliance Insurance Company, and former auditors, Deloitte & Touche LLP and Deloitte & Touche. The settlement is conditioned upon, among other things, execution of a definitive settlement agreement and related documents, the provision of notice of the settlement of the Company's shareholders, and approval of the settlement by the United States District Court for the Northern District of Texas.
In accordance with applicable accounting standards, the company records a charge reflecting contingent liabilities when management determines that a material loss is "probable" and either "quantifiable" or "reasonably estimable." As a result of the signing of the memorandum of understanding on September 20, 2000, the Company recorded a fourth quarter charge of $2.3 million in the fiscal year ended July 31, 2000. The charge includes the value of one million shares of the Company's common stock based on the closing price of the stock on September 20, 2000 ($1.3 million), plus $1 million cash. The cash is payable in two installments, the first installment of $350,000 was paid on September 23, 2000 with the remaining $650,000 plus interest payable at least 10 business days before the date scheduled by the court for the settlement fairness hearing. The Company will deliver the one million shares of the Company's stock after the effective date of the Settlement.
On April 10, 2000, Reliance Insurance Company filed a notice of action in the Superior Court of Justice in Ontario, Canada, seeking a declaratory judgment that defendants in the shareholder class action are not entitled to reimbursement under the Reliance insurance policy for losses incurred in connection with that action. The Reliance policy provides $3
million in excess coverage to supplement the $2 million in coverage provided to the Company pursuant to the underlying policy issued by American Home Assurance Company.
The Special Committee of the Board of Directors has kept the Securities and Exchange Commission apprised of its inquiry and the restatement process. The Company has received informal requests for information from the Staff of the Commission for documents concerning the circumstances of the restatement of the Company's prior period financial statements. The Company has cooperated with the Commission and produced documents responsive to its requests.
The Company is also a party to various legal proceedings arising in the ordinary course of its business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse effect on the financial condition, results of operations, or liquidity of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information -- The Company's common stock began trading on the AMEX under the symbol "DDN" on May 17, 1999. Previously the Company's common stock was traded over-the-counter on the NASDAQ National Market under the symbol "DYMX" beginning on August 13, 1996. As a result of the Company's announcement that financial statements for the years ended July 31, 1998 and 1997 would be restated and should not be relied upon, the AMEX suspended trading in the Company's common stock on September 16, 1999. The AMEX allowed trading in the Company's common stock to resume on July 7, 2000. The following table summarizes the high and low sale prices per share of common stock for the periods indicated, as reported on the AMEX or NASDAQ National Market:
Holders -- As of October 10, 2000, the approximate number of holders of record of common stock was 90.
Dividends -- The Company has not declared or paid any cash dividends on its common stock since its inception. The Company intends to retain future earnings for the operation and expansion of its business and does not anticipate paying any cash dividend in the foreseeable future. In addition, the Company's Credit Agreement restricts the payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources".
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the three years ended July 31, 2000 have been derived from the audited consolidated financial statements of the Company appearing elsewhere herein. The following selected historical financial data for the years ended July 31, 1997 and 1996 has been derived from the consolidated financial statements of the Company not appearing elsewhere herein. The selected financial data are qualified in the entirety, and should be read in conjunction with the Company's consolidated financial statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. Selling, general and administrative expenses for the year ended July 31, 1999 include $2.5 million of costs related to the Special Committee process and non-recurring audit fees, $1.4 million for the write-off of expenses associated with the failed Q International and other acquisitions and $0.7 million for severance and other restructuring costs.
1) EBITDA is defined as income excluding interest, taxes, depreciation and amortization of goodwill and other assets (as presented on the face of the income statement). EBITDA is supplementally presented because management believes that it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness, maintain current operating levels of fixed assets and acquire additional operations and businesses. EBITDA should not be considered as a substitute for statement of income or cash flow data from the Company's financial statements, which have been prepared in accordance with generally accepted accounting principles. Cash flows provided by operating activities for the three years ended July 31, 2000 were $8,162, $9,017, and $5,361 respectively. Cash flows used in investing activities for the three years ended July 31, 2000 were $3,185, $17,204, and $39,000 respectively. Cash flows (used) provided by financing activities for the three years ended July 31, 2000 were ($2,280), $9,979, $34,210 respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information contained in the Company's consolidated financial statements, including the notes thereto, and the other financial information appearing elsewhere in this report. Statements regarding future economic performance, management's plans and objectives, and any statements concerning its assumptions related to the foregoing contained in Management's Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements. Certain factors, which may cause actual results to vary materially from these forward-looking statements, accompany such statements or appear elsewhere in this report, including without limitation, the factors disclosed under "Risk Factors."
GENERAL
In May 1995, the Company acquired Dynamex Express, the ground courier operations of Air Canada ("Dynamex Express"), which was led by Richard K. McClelland, the Company's Chief Executive Officer, and which had a national network of 20 locations across Canada. In December 1995, the Company acquired the on-demand ground courier operations of Mayne Nickless Incorporated and Mayne Nickless Canada Inc. (together, "Mayne Nickless") which had operations in eight U.S. cities and two Canadian cities. In August 1996, the Company completed the IPO Acquisitions and thereby acquired five same-day delivery businesses in three U.S. and two Canadian cities. Subsequent to the IPO and through July 31, 1997, the Company completed the Fiscal 1997 Acquisitions and thereby acquired an additional 11 same-day delivery businesses in six U.S. and two Canadian cities. Between August 1, 1997 and July 31, 1998, the Company completed the Fiscal 1998 Acquisitions, and thereby acquired nine same-day delivery businesses in eight U.S. cities and one Canadian city. In August 1998, the Company acquired two same-day delivery businesses in two U.S. cities. See "Business -- Recent Acquisitions." Each of these acquisitions has been accounted for using the purchase method of accounting. Accordingly, the Company's historical results of operations reflect the results of acquired operations from the date of acquisition. As a result of these various acquisitions, the historical operating results of the Company for the periods presented are not necessarily comparable.
Sales consist primarily of charges to customers for individual delivery services and weekly or monthly charges for recurring services, such as fleet management. Sales are recognized when the service is performed. The yield (revenue per transaction) for a particular service is dependent upon a number of factors including size and weight of articles transported, distance transported, special handling requirements, requested delivery time and local market conditions. Generally, articles of greater weight transported over longer distances and those that require special handling produce higher yields.
Cost of sales consists of costs relating directly to performance of services, including driver and messenger costs and third party delivery charges, if any. Substantially all of the drivers used by the Company own their own vehicles, and approximately 80% of these owner-operators are independent contractors as opposed to employees of the Company. Drivers and messengers are generally compensated based on a percentage of the delivery charge. Consequently, the Company's driver and messenger costs are variable in nature. To the extent that the drivers and messengers are employees of the Company, employee benefit costs related to them, such as payroll taxes and insurance, are also included in cost of sales.
Selling, general and administrative expenses include costs incurred at the branch level related to taking orders and dispatching drivers and messengers, as well as administrative costs related to such functions. Also included in selling, general and administrative expenses are regional and corporate level marketing and administrative costs and occupancy costs related to branch and corporate locations.
Generally, the Company's on-demand services provide higher gross profit margins than do scheduled distribution or fleet management services because driver compensation for on-demand services is generally lower as a percentage of sales from such services. However, scheduled distribution and fleet management services generally have fewer administrative requirements related to order taking, dispatching drivers and billing. As a result of these variances, the Company's margins are dependent in part on the mix of business for a particular period.
As the Company has no significant investment in transportation equipment, depreciation and amortization expense primarily relates to depreciation of office, communication and computer equipment and the amortization of intangible assets acquired in the Company's various acquisitions, each of which has been accounted for using the purchase method of accounting.
A significant portion of the Company's revenues is generated in Canada. For the fiscal years ended July 31, 2000, 1999 and 1998, approximately 33%, 33%, and 37%, respectively, of the Company's revenues were generated in Canada. The decrease in the proportion of revenues generated in Canada is attributable to the high proportion of U.S. businesses acquired in the Acquisitions. Before deduction of corporate costs, the majority of which are incurred in the U.S., the cost structure of the Company's operations in the U.S. and in Canada is very similar. Consequently, when expressed as a percentage of U.S. or Canadian sales, as appropriate, the operating profit generated in each such country (before deduction of corporate costs) is not materially different.
In July 1998 the Company sold its Canadian Strategic Stocking business for cash of approximately $670,000 and a note in the amount of $234,000. The note is payable in installments of $134,000 on January 31, 1999; $100,000 on July 31, 1999. An additional $436,000 is contingently payable from 10% of the annual revenues in excess of a specified base level over a five year period, from the business sold. In connection with the sale, the Company entered into a services agreement with the purchaser whereby the Company will provide transportation, warehouse and inventory management and related services over a five-year period. In addition the Company has agreed to reimburse the purchaser, during the term of the services agreement, for certain promotional and employee-related compensation related to the business and the services provided by the Company. These costs are estimated to be approximately $150,000 to $130,000 annually. The cash and non-contingent portion of the note in excess of the basis of the net assets of the Canadian Strategic Stocking business, received upon closing the transaction which amounts to approximately $900,000, was deferred at July 31, 1998. This deferred revenue will be recognized over future periods as services are provided under the services agreement. In the fiscal years ended July 31, 2000 and 1999, the Company recognized $415,000 and $485,000 of the deferred gain, respectively and earned $264,000 and $172,000 of contingent payments, respectively.
The conversion rate between the U.S. dollar and Canadian dollar increased during the fiscal year ending July 31, 2000 as compared to July 31, 1999. The conversion rate had declined in the fiscal year ending July 31, 1999 compared to the fiscal year ended July 31, 1998. As the Canadian dollar is the functional currency for the Company's Canadian operations, these changes in the exchange rate have effected the Company's reported revenues. The effect of these changes on the Company's net loss for the fiscal years ended July 31, 2000, 1999 and 1998 has not been significant, although there can be no assurance that fluctuations in such currency exchange rate will not, in the future, have a material adverse effect on the Company's business, financial condition or results of operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from the Company's consolidated statement of operations, expressed as a percentage of sales. The following table excludes $2.3 million related to the settlement of the shareholder class-action lawsuit for the period ended July 31, 2000 and $4.6 million of unusual and non-recurring selling, general and administrative expenses for the year ended July 31, 1999 ($2.5 million for the Special Committee process and non-recurring audit fees, $1.4 million for the write-off of expenses associated with the failed Q International and other acquisitions and $0.7 million for severance and other restructuring costs). The table also excludes an impairment of intangibles of $4.0 million from depreciation and amortization for the year ended July 31, 1999.
(a) Excludes the litigation settlement and non-recurring and unusual charges and adjustments described in the paragraph above.
YEAR ENDED JULY 31, 2000 COMPARED TO YEAR ENDED JULY 31, 1999
The net loss for the year ended July 31, 2000 was $3.4 million compared to a net loss of $6.7 million for the year ended July 31, 1999. The results for 2000 include a provision for the tentative settlement of the shareholder class-action lawsuit of $2.3 million. The results for 1999 were also negatively impacted by non-recurring and unusual charges and adjustments. Selling, general and administrative costs include non-recurring audit fees of approximately $2.1 million related to the 1999 audit and the re-audit and restatement of the results for the years ended July 31, 1998 and 1997, professional fees in support of the Special Committee review of $0.4 million, $1.4 million for the write-off of costs associated with the failed Q International and other acquisitions, and $0.7 million for severance and other restructuring costs. In addition, the Company reduced the carrying value of goodwill and covenants not-to-compete for its Dallas, Texas and Hartford, Connecticut operations in the fourth quarter of 1999 by $4 million. The Company also provided a 100% valuation allowance of approximately $2.4 million and $0.9 million for federal net operating losses and the shareholder class action lawsuit settlement incurred in the fiscal years ended July 31, 2000 and 1999, respectively. The following discussion and analysis excludes the aforementioned non-recurring and unusual charges and adjustments in this paragraph.
Sales for the year ended July 31, 2000 increased 4.9% to $251 million from $240 million from the prior year. Sales for 2000 were negatively impacted in three locations. In Hartford, Connecticut the Company exited an unprofitable line-of-business in fiscal year 1999. At the Dallas, Texas branch location, the combination of additional competition and the problems encountered in the conversion of the two existing legacy customer order processing systems to the standard COPS system and combining two business units resulted in a significant sales decline for this branch. In the Prairie region of Canada (Alberta and Saskatchewan provinces), the Company lost a major contract when the customer decided to do the work in-house. Excluding these operations, revenue growth would have been 7.1%. Management believes sales growth for the fiscal year 2001 will be negatively impacted because the Company has elected to exit approximately $4.0 million annually of marginally profitable business in several locations in Canada.
Cost of sales increased approximately $8.5 million or 5.2% to $172 million in 2000 from $163 million in 1999. Cost of sales, as a percentage of sales, increased from 68.1% in the 1999 fiscal year to 68.3% in fiscal year 2000. The increase in this percentage primarily results from the change in business mix from 1999 to 2000. Historically, cost of sales for on-demand revenues are lower than the costs associated with other types of business. On-demand sales were approximately 62% of total sales in fiscal year 1999 compared to 58% in fiscal year 2000. This decline can be attributed somewhat to the impact of e-mail on same-day deliveries and to the Company's sales effort to increase other types of business. Management believes that cost of sales, as a percentage of sales, will remain or be slightly above its current level in fiscal year 2001.
Selling, general and administrative (SG&A) costs were $64 million for the fiscal year ended July 31, 2000 compared to $62 million (excluding $4.6 million in unusual charges and adjustments described above) for the year ended July 31, 1999. As a percentage of sales, SG&A costs were 25.6% in 2000 compared to 25.7% in 1999. Included in the year 2000, are non-recurring costs of $0.6 million for temporary accounting assistance required to complete the 1999 fiscal year audit and the
re-audit of the 1998 and 1997 fiscal years. In addition, the fiscal year ended July 31, 2000 includes $0.4 million in legal costs associated with the shareholder lawsuit. The Company recently announced a tentative settlement of the lawsuit. Management expects legal costs associated with the shareholder lawsuit in fiscal year 2001 to be substantially less than the amounts incurred in fiscal year 2000. The Company has recently initiated a new sales program aimed specifically at national accounts. In this regard, the Company will increase the number of sales personnel to implement this program. In addition, a number of initiatives are currently in process to streamline administrative processes and to reduce general and administrative costs. Management expects SG&A costs to remain at or be slightly below their current level as a percentage of sales in the 2001 fiscal year.
Depreciation and amortization was $8.9 million in the fiscal year ended July 31, 2000 compared to $9.2 million in the fiscal year ended July 31, 1999, after adjustment for the $4.0 million reduction in the carrying value of goodwill and intangibles described above. As a percentage of sales, depreciation and amortization was 3.6% in 2000 versus 3.9% in 1999. Management expects depreciation and amortization to continue to decline in fiscal year 2001 both as a percentage of sales and dollar amount due primarily to the reduction in amortization of covenants-not-to compete. The covenants are amortized over a three-year period and substantially all covenants will be fully amortized by the end of the second quarter of fiscal year 2001.
Interest expense increased $1.3 million or 27% in the fiscal year ended July 31, 2000 compared to the same period in 1999. The higher interest expense in 2000 resulted from higher interest rates in reaction to the increases imposed by the Federal Reserve Board during the year, the additional financing costs associated with amending and extending the bank credit agreement terms and the imposition by the banks of the default rate of interest in the fourth quarter of 2000.
YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998
The net loss for the year ended July 31, 1999 was $6.7 million versus a net loss of $1.6 million for the year ended July 31, 1998. The results for 1999 include non-recurring and unusual charges and adjustments. Selling, general and administrative costs include non-recurring audit fees of approximately $2.1 million related to the 1999 audit and the re-audit and restatement of the results for the years ended July 31, 1998 and 1997, professional fees in support of the Special Committee review of $0.4 million, $1.4 million for the write-off of costs associated with the failed Q International and other acquisitions, and $0.7 million for severance and other restructuring costs. In addition, the Company reduced the carrying value of goodwill and covenants not-to-compete for its Dallas, Texas and Hartford, Connecticut operations in the fourth quarter of 1999 by $4 million. The Company also provided a 100% valuation allowance of approximately $0.9 million for federal net operating losses incurred in 1999 compared to $1.1 million for federal net operating losses incurred in 1998. The following discussion and analysis excludes the aforementioned non-recurring and unusual charges and adjustments in this paragraph.
Sales for the year ended July 31,1999 increased approximately $32 million or 15.2%, to $240 million from $208 million for the year ended July 31, 1998. Approximately $30 million of the increase was from the 1998 and 1999 Acquisitions with the remainder from increased sales from the Company's existing operations. The decline in the conversion rate between the U.S. dollar and the Canadian dollar had the effect of decreasing 1999 sales by some $4.5 million had the conversion rate been the same as in 1998. Sales from branches operating throughout both periods increased 1.7% in 1999 compared to 1998. Excluding the impact of the change in the exchange rate between the U.S. and Canadian dollar, the increase in sales from branches operating throughout both periods was 3.5%.
Cost of sales increased approximately $23 million or 16.5% to $163 million in 1999 from $140 million in 1998. The increase primarily relates to the 1998 and 1999 Acquisitions, an increase in the provision for bad debts from 0.3% of sales in 1998 to 0.8% in 1999 and an increase in the percentage of scheduled and distribution and outsourcing revenues that have a higher cost of sales than on-demand. The increase in bad debts in 1999 primarily relates to the Dallas, Texas and Hartford, Connecticut operations. Management believes that future bad debts will be in the 0.3% to 0.5% of total sales range. As the Company pursues new opportunities with national accounts, management anticipates that on-demand revenues will decrease as a percentage of total sales, and therefore that cost of sales will increase as a percentage of total sales.
Selling, general and administrative costs increased $8.3 million to $64 million in the year ended July 31,1999 from $56 million for the same period in 1998. The increase results from the 1998 and 1999 Acquisitions and the additional costs associated with building and installing a wide-area network, the conversion of the customer order processing and dispatching system to a common platform and the audit, professional and legal fees described above. The Company will
continue to incur additional costs to complete the conversion to a common platform and to convert the Company's payroll, human resources and financial and accounting systems to Oracle at an estimated cost of approximately $0.5 million that will be financed from internally generated cash flows. In addition, the Company will incur legal costs related to the class action lawsuit.
Depreciation and amortization increased $470,000 or 5.4% primarily due to the amortization of the value of goodwill and covenants not-to-compete associated with the 1998 and 1999 Acquisitions. Excluding future acquisitions, if any, management anticipates that depreciation and amortization will decrease in fiscal year 2000 and future years due primarily to a reduction in the amortization of covenants not-to-compete that are fully amortized over three years.
Interest expense for the year ended July 31, 1999 increased $379,000, or 8.9%, to $4.6 million from $4.2 million for the year ended July 31, 1998 primarily the result of additional borrowings required to finance the Fiscal 1999 Acquisitions and the Fiscal 1998 Acquisitions and the 1999 earn-out payments.
LIQUIDITY AND CAPITAL RESOURCES.
In fiscal year ended July 31, 2000, the Company's capital needs arose primarily from its capital expenditures and working capital needs. There were no acquisitions made in fiscal year 2000. In the fiscal years ended July 31, 1999 and 1998, the Company's capital needs arose primarily from its acquisition program.
During the fiscal year ended July 31, 1999, the Company completed two acquisitions for aggregate consideration of approximately $1.8 million. In addition, in connection with certain acquisitions, the Company agreed to pay the sellers additional consideration if the acquired operations meet certain performance goals related to their earnings before interest, taxes, depreciation and amortization, as adjusted for certain factors. In conjunction with the acquisitions, the Company issued 119,850 shares of common stock and paid approximately $12 million in cash during the fiscal year ended July 31, 1999 as additional consideration.
During the year ended July 31, 1998, the Company completed nine acquisitions for aggregate consideration of approximately $34 million, consisting of $33 million in cash and the issuance of approximately 114,000 shares of common stock. The cash portion of the consideration for the acquisitions consummated after July 31, 1997 was provided by borrowings under the Credit Facility. In conjunction with the acquisitions, the Company paid approximately $3 million in cash during the fiscal year ended July 31, 1998 as additional consideration.
In addition, in connection with certain acquisitions, the Company agreed to pay the sellers additional consideration if the acquired operations meet certain performance goals related to their earnings before interest, taxes, depreciation and amortization, as adjusted for certain factors. The estimated maximum amount of additional consideration payable, if all performance goals are met, is approximately $5 million payable in cash at July 31, 2000. At July 31, 2000, the amount of earned but unpaid additional consideration was $1.2 million. The Company is in the process of negotiating payment schedules with the former owners. The unpaid balances accrue interest at a rate of 10% per annum. The Company expects to pay the remaining liability in the next two fiscal years.
In May 1998, the Company completed a follow-on offering of 2.5 million shares of common stock. Net proceeds to the Company, after deducting underwriters discount and offering costs, amounted to approximately $30 million, all of which was used to reduce amounts outstanding under the Credit Facility. In conjunction with the follow-on offering, the Company amended the Credit Facility to provide for total borrowings of up to $115 million, of which $36 million was outstanding as of July 31, 1998.
Effective July 31, 2000, the Company amended its bank credit agreement. Under the terms of the amended agreement, the facility was extended through November 30, 2001 and split into an amortizing term loan of $32.2 million and a revolving credit facility of $19.5 million. The revolving credit facility will be governed by an eligible accounts receivable borrowing base agreement, defined as 80% of accounts receivable less than 60 days past due. Required principal payments on the amortizing term loan consist of $794 on November 15, 2000 and quarterly payments of $875 commencing January 31, 2001 until July 31, 2001 and then $1.375 million quarterly until maturity, at which time any amounts outstanding under the facility are due. Interest on outstanding borrowings is payable monthly at prime or LIBOR, plus an applicable margin. The applicable margins for prime range from 0.0% to 1.0%, and for LIBOR from 3.0% to 4.0%, and are based on the ratio of the Company's funded debt to cash flow, both as defined in the agreement. In addition, the company is required to pay a commitment fee of 0.375% for any unused amounts of the revolving credit facility. At July 31, 2000, the weighted-average
interest rate for all outstanding borrowings was approximately 11.50%.See Note 6 of Notes to Consolidated Financial Statements.
On June 28, 2000, the Company amended its bank credit agreement. Under the terms of the amended agreement, all prior covenant violations were waived and the Company may borrow up to $51.7 million on a revolving basis through July 31, 2001, at which time any amounts outstanding under the facility are due. Interest on outstanding borrowings is payable monthly at the bank's prime rate plus 2.00%.
The Company has entered into interest rate protection arrangements on a portion of the borrowings under the Credit Facility. The interest rate on $15 million of outstanding debt has been fixed at 6.26%, plus the applicable margin, and a collar of between 5.50% and 6.50%, plus the applicable margin, has been placed on $9 million of outstanding debt. These hedging arrangements mature on August 31, 2000. Effective September 7, 2000 the Company entered into a new interest rate protection arrangement on $24 million of the borrowings under the Credit Agreement. The interest rate on $24 million has been fixed at 9.79%, plus the applicable margin. This hedging arrangement matures on July 31, 2001. Amounts outstanding under the Credit Facility are secured by all of the Company's U.S. assets and 65% of the stock of its Canadian subsidiary. The Credit Facility also contains restrictions on the payment of dividends, incurring additional debt, capital expenditures and investments by the Company as well as requiring the Company to maintain certain financial ratios. Generally, the Company must obtain the lenders' consent to consummate any acquisition. See Note 6 of Notes to Consolidated Financial Statements and "Risk Factors -- Acquisition Strategy; Possible Need for Additional Financing."
During the fiscal years ended July 31, 2000, 1999 and 1998, the Company spent approximately $2.7 million, $3.4 million and $3.8 million, respectively, on capital expenditures, which expenditures primarily related to improvements in infrastructure and technology to support the Company's expanding operations. Management expects the amount of capital expenditures for these purposes in future years to be comparable to the expenditures made in the year ended July 31, 2000. The Company does not have significant capital expenditure requirements to replace or expand the number of vehicles used in its operations because substantially all of its drivers are owner-operators who provide their own vehicles. The Company's expansion of its national marketing program consists primarily of increased hiring and salary expenditures related to additional product specialists. These marketing expenditures have not, nor does management expect that in the future they will have, a significant impact on the Company's liquidity. See "Business -- Sales and Marketing."
The Company's cash flow provided by operations for the fiscal years ended July 31, 2000, 1999 and 1998 were approximately $8.2 million, $9.0 and $5.4 million, respectively. Consequently, increases in working capital and purchases of property and equipment during such periods were financed entirely by internally generated cash flow.
Management expects that its future capital requirements will generally be met from internally generated cash flow. The Company's access to other sources of capital, such as additional bank borrowings and the issuance of debt securities, is affected by, among other things, general market conditions affecting the availability of such capital. The Company completed its last acquisition in August 1998. Currently there are no pending nor are there any contemplated acquisitions. Should the Company pursue acquisitions in the future, the Company may be required to incur additional debt. There can be no assurance that the Company's primary lenders will consent to such acquisitions or that if additional financing is necessary, it can be obtained on terms the Company deems acceptable. As a result, the Company may be unable to implement successfully its acquisition strategy.
The Company is a defendant in a class action lawsuit. On September 20, 2000, the Company announced that it has reached an agreement in principle setting forth the essential terms of a settlement of the pending litigation (See Note 7 of Notes to Consolidated Financial Statements). Among other things, the Company agreed to pay $1 million in cash, $350,000 to be paid within three days and $650,000 ten days prior to the date scheduled for the settlement hearing. The Company intends to fund its portion of the cash settlement from internally generated funds and to the extent necessary, borrowings under the bank credit agreement.
YEAR 2000 COMPLIANCE
The Company did not experience any significant malfunctions or errors in its operating or business systems as a result of the Year 2000. Based upon operations since January 1, 2000, the Company does not expect any significant impact to its ongoing business as a result of the Year 2000. It is possible the full impact of the date change has not been fully recognized. However, the Company believes any such problems are likely to be minor and correctable. In addition, the Company could still be negatively affected if its customers or suppliers are adversely affected by the Year 2000 or similar
issues. The Company is not aware of any significant Year 2000 or similar problems that have arisen for its customers and suppliers.
The Company has not, nor does it expect to, incur any material costs associated with the Year 2000.
DEFERRED TAXES
The Company has incurred taxable net operating losses in the United States of $4,410,000, $2,622,000 and $3,197,000 for the years ended July 31, 2000, 1999 and 1998, respectively. In addition, the Company has generated unused foreign tax credits related to its Canadian operations of $520,000. The Company has established 100% valuation allowances in accordance with the provisions of SFAS No. 109 for U.S. operating losses and foreign tax credits not currently deductible. The Company has also established an 100% valuation allowance of $829,000 for the tax benefits of the class action lawsuit settlement that the Company believes, is more likely than not, not to be realized. The Company continually reviews the adequacy of the valuation allowance and releases the allowance, when it is determined that it is more likely than not that the benefits will be realized. The remaining deferred tax assets represent deductions for financial statement purposes that will reduce future taxable income.
INFLATION
The Company does not believe that inflation has had a material effect on the Company's results of operations nor does it believe it will do so in the foreseeable future. However, there can be no assurance the Company's business will not be affected by inflation in the future.
FINANCIAL CONDITION
The Company believes its financial condition remains strong and that it has the financial resources necessary to meet its needs. Cash provided by operating activities and the Company's credit facility should be sufficient to meet the Company's operational needs, however, the Company may require additional financing to pay future earn-out payments to the owners of acquired businesses.
ACCOUNTING PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Management does not believe this will have a material effect on operations. Implementation of this standard has recently been delayed by the FASB for a 12-month period through the issuance of SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 137 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT:
With the exception of historical information, the matters discussed in this report are "forward looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934.
While the Company believes its strategic plan is on target and the business outlook remains strong, several important factors have been identified, which could cause actual results to differ materially from those predicted. By way of example:
o The competitive nature of the same-day delivery business
o The ability of the Company to attract and retain qualified courier personnel as well as retain key management personnel.
o A change in the current tax status of courier drivers from independent contractor drivers to employees or a change in the treatment of the reimbursement of vehicle operating costs to employee drivers.
o A significant reduction in the exchange rate between the Canadian dollar and the U.S. dollar.
o Failure of the Company to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or regulations could result in substantial fines or possible revocation of the Company's authority to conduct certain of its operations.
o The ability of the Company to obtain adequate financing.
o The ability of the Company to pass on fuel cost increases to customers to maintain profit margins and the quality of driver pay.
o The loss of quality drivers to e-commerce companies.
o The final outcome of the Shareholder class action lawsuit.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN EXCHANGE EXPOSURE
Significant portions of the Company's operations are conducted in Canada. Exchange rate fluctuations between the U.S. and Canadian dollar result in fluctuations in the amounts relating to the Canadian operations reported in the Company's consolidated financial statements. The Company historically has not entered into hedging transactions with respect to its foreign currency exposure, but may do so in the future.
The sensitivity analysis model used by the Company for foreign exchange exposure compares the revenue and net income figures from Canadian operations over the previous four quarters at the actual exchange rate versus a 10% decrease in the exchange rate. Based on this model, a 10% decrease would result in a decrease in revenue of $8.3 million and a decrease in net income of $.2 million over this period. There can be no assurances that the above projected exchange rate decrease will materialize. Fluctuations of exchange rates are beyond the control of the Company's management.
INTEREST RATE EXPOSURE
The Company has entered into interest rate protection arrangements on a portion of the borrowings under the Credit Facility. The interest rate on $15 million of outstanding debt has been fixed at 6.26%, plus the applicable margin, and a collar of between 5.50% and 6.50%, plus the applicable margin, has been placed on $9 million of outstanding debt. These hedging arrangements mature on August 31, 2000. Effective September 7, 2000 the Company entered into a new interest rate protection arrangement on $24 million of the borrowings under the Credit Agreement. The interest rate on $24 million has been fixed at 9.79%, plus the applicable margin. The Company does not hold or issue derivative financial instruments for speculative or trading purposes.
The sensitivity analysis model used by the Company for interest rate exposure compares interest expense fluctuations over a one-year period based on current debt levels and current interest rates versus current debt levels at current interest rates with a 10% increase. Based on this model, a 10% increase would result in an increase in interest expense of $.2 million. There can be no assurances that the above projected interest rate increase will materialize. Fluctuations of interest rates are beyond the control of the Company's management.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Directors and Executive Officers" in the company's definitive proxy statement to be filed in connection with the 2000 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Directors and Executive Officers" in the company's definitive proxy statement to be filed in connection with the 2000 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Beneficial Ownership of Common Stock" in the company's definitive proxy statement to be filed in connection with the 2000 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended July 31, 2000, the Company paid $120,000 to a company affiliated with Kenneth Bishop, a director of the Company, for rent on certain properties owned by such company. Rent payments for these properties are $10,000 per month.
The Company has loaned one of its officers $204,000 in connection with the exercise of certain stock options at the time of the follow-on public offering. The principal amount of this loan is due in eight quarterly installments beginning August 31, 1998, of $25,500 plus accrued interest which accrues on the aggregate unpaid amount at the prime rate published by the Company's primary lenders. During 2000, the officer repaid the remaining $102,000 of the loan principal plus accrued interest.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Consolidated Financial Statements on page.
(a) (2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(a) (3) Exhibits
Reference is made to the Exhibit Index on page E-1 for a list of all exhibits filed as a part of this report.
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 21, 1999. (News release dated September 17, 1999 announcing the results of the Special Committee, the restatement of prior periods and a halt in trading in the Company's common stock by the American Stock Exchange.)
Current Report on Form 8-K dated December 30, 1999. (News release announcing delay in filing Form 10-K for year ended July 31, 1999 and preliminary first quarter 2000 results.)
Current Report on Form 8-K dated March 7, 2000. (News release announcing the resignation of Deloitte & Touche LLP as the Company's independent auditors.)
Current Report on Form 8-K dated April 24, 2000. (News release announcing the appointment of BDO Seidman, LLP as the Company's independent auditors.)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dynamex Inc., A Delaware corporation
By: /s/ Ray E. Schmitz ----------------------------------------- Ray E. Schmitz Vice-President, Controller and Chief Accounting Officer
Dated: October 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below be the following persons of the registrant and in the capacities indicated on October 27, 2000.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Dynamex Inc.
We have audited the accompanying consolidated balance sheets of Dynamex Inc. as of July 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dynamex Inc. as of July 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2000 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP - ---------------------------- BDO SEIDMAN, LLP
Dallas, Texas October 18, 2000
DYNAMEX INC. CONSOLIDATED BALANCE SHEETS JULY 31, 2000 AND 1999 (IN THOUSANDS EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
DYNAMEX INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JULY 31, 2000, 1999 AND 1998
(IN THOUSANDS EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
DYNAMEX INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JULY 31, 2000, 1999 AND 1998 (IN THOUSANDS) - --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
DYNAMEX INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JULY 31, 2000, 1999 AND 1998 (IN THOUSANDS) - --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
DYNAMEX INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Dynamex Inc. (the "Company" or "Dynamex") provides same-day delivery and logistics services in the United States and Canada. The Company's primary services are (i) same-day, on-demand delivery, (ii) scheduled and distribution and (iii) fleet management.
The operating subsidiaries of the Company, with country of incorporation, are as follows:
o Dynamex Operations East Inc. (U.S.)
o Dynamex Operations West Inc. (U.S.)
o Dynamex Dedicated Fleet Services, Inc. (U.S.)
o Dynamex Canada Inc (Canada)
o Alpine Enterprises Ltd. (Canada)
o Roadrunner Transportation, Inc. (U.S.)
o New York Document Exchange Corp. (U.S.)
o Cannonball, Inc. (U.S.)
o USC Management Systems, Inc. (U.S.)
Principles of consolidation - The consolidated financial statements include the accounts of Dynamex Inc. and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. All dollar amounts in the financial statements and notes to the financial statements are stated in thousands of dollars unless otherwise indicated.
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses. Actual results may differ from such estimates. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance.
Property and equipment - Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and principally on accelerated methods for tax purposes. Leasehold improvements are depreciated using the straight-line method over their estimated useful lives or the lease term, whichever is shorter. Ordinary maintenance and repairs are charged to operations. Expenditures that extend the physical or economic life of property and equipment are capitalized. The estimated useful lives of property and equipment are as follows:
Business and credit concentrations - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high-credit, quality financial institutions. The Company's customers are not concentrated in any specific geographic region or industry. No single customer accounted for a significant amount of the Company's sales and there were no significant accounts receivable from a single customer. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Intangibles - Intangibles arise from acquisitions accounted for as purchased business combinations and include goodwill, covenants not-to-compete and other identifiable intangibles. Goodwill represents the excess purchase price over all tangible and identifiable intangible net assets acquired. Intangible assets are being amortized over periods ranging from 3 to 25 years. On a periodic basis or as business conditions change, the Company compares the carrying value of intangible assets to estimated future undiscounted net cash flows from the acquired businesses. Should the net book value of the intangible asset exceed future net cash flows, the carrying value of the intangible asset is adjusted to equal the value of discounted future net revenues. In the fourth quarter 1999, the Company adjusted the carrying value of intangible assets associated with its Dallas and Hartford operations by $3,971 with a corresponding charge to amortization expense. Total amortization expense was $5,331, $10,144 and $5,637 for the years ended July 31, 2000, 1999 and 1998, respectively.
Revenue recognition - Revenue and direct expenses are recognized when services are rendered to customers.
Cash and cash equivalents - The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Financial instruments - Carrying values of cash and cash equivalents, accounts receivable, accounts payable and current portion of long-term debt approximate fair value due to the short-term maturities of these assets and liabilities. Long-term debt consists primarily of variable rate borrowings under the bank credit agreement. The carrying value of these borrowings approximates fair value.
The Company utilizes derivative financial instruments, including interest rate swaps and caps, to reduce interest rate fluctuation risk. Amounts paid or received by the Company under these agreements are recorded as an adjustment to interest expense, as realized, or over the term of the related instrument, as appropriate. Fair value of these instruments is determined based on estimated settlement costs using current interest rates. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. In the event that a derivative financial instrument were terminated prior to its contractual maturity, it is the Company's policy to recognize the resulting gain or loss over the shorter of the remaining original contract life of the derivative financial instrument or the remaining term of the underlying hedged debt agreement.
Financing Costs - During the fiscal years ended July 31, 2000, 1999 and 1998, the Company incurred $445, $325 and $919, respectively of costs incurred in connection with debt financings and amendments (See Note 6). These costs are being amortized over the terms of the respective financings and are included in interest expense. The amounts of amortization and the write-off of previous deferred financing costs were $650 in 2000, $730 in 1999 and $675 in 1998.
Income taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The net deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Stock-based compensation - Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," (SFAS 123) encourages but does not require companies to record compensation cost for stock based employee compensation plans at fair value. In accordance with SFAS 123, the Company has elected to continue to account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. (See Note 11 of Notes to the Consolidated Financial Statements)
Earnings (loss) per share - Basic net income (loss) per common share is based on the weighted average number of common shares outstanding during the period. Diluted net income is based on the weighted average common shares outstanding and all dilutive potential common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options and warrants were exercised, that would then share in the earnings of the Company. Outstanding stock options and warrants issued by the Company represent the only dilutive effect reflected in diluted weighted average shares.
Foreign currency translation -Assets and liabilities in foreign currencies are translated into U.S. dollars at the rates in effect at the balance sheet date. Revenues and expenses are translated at average rates for the year. The net exchange differences resulting from these translations are recorded in stockholders' equity. Where amounts denominated in a foreign currency are converted into dollars by remittance or repayment, the realized exchange differences are included in operations.
New accounting pronouncements - In July 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Management does not believe this will have a material effect on operations. Implementation of this standard has recently been delayed by the FASB for a 12-month period through the issuance of SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 138 is effective for all fiscal years beginning after June 15, 2000.
Comprehensive Income (Loss) - Comprehensive income (loss) consists of net income and unrealized gains and losses on foreign currency translation. Balance sheet accounts of foreign operations are translated using the year-end exchange rate, and income statement accounts are translated on a monthly basis using the average exchange rate for the period. Unrealized gains and losses on foreign currency translation adjustments are recorded in shareholders' equity as other comprehensive income. At July 31, 2000, 1999 and 1998, the company recorded comprehensive income (loss) from foreign currency translation as follows:
Reclassification - Certain reclassifications have been made to conform prior year data with the current presentation.
2. ACQUISITIONS
During the fiscal year ended July 31, 1999, the Company acquired two same-day delivery businesses in two U.S. cities for approximately $1.8 million in cash.
During the fiscal year ended July 31, 1998, the Company acquired nine same-day delivery businesses in eight U.S. cities and one Canadian city for approximately $36 million in cash and the issuance of approximately 114,000 shares of common stock valued at $1.1 million at the date of issuance.
In connection with certain acquisitions, the Company agreed to pay the sellers additional consideration if the acquired operations meet certain performance goals. The estimated maximum amount of additional consideration payable at July 31, 2000, if all performance goals are met, is approximately $5 million, all of which is payable in cash. These payments of additional consideration, if required, are to be made on specified dates through October 2000, and generally commence at the end of the twelve-month period following the completion of the relevant acquisition.
Each of these acquisitions has been accounted for using the purchase method of accounting and the results of operations of these companies have been included in these financial statements from the date of acquisition. The aggregate acquisition cost was allocated to the net assets of the companies acquired based upon their respective fair market values, with the excess recorded as goodwill. The following unaudited pro forma combined results of operations for the years ended July 31, 1999 and 1998, are presented as if the acquisitions had occurred as of August 1, 1996.
The unaudited pro forma results of operations are not necessarily indicative of what the actual results of operations of the Company would have been had the acquisition occurred at the beginning of the periods presented, nor do they purport to be indicative of the future results of operations of the Company.
The Company has recorded the fair value of net assets acquired as shown below:
Consideration for these transactions consisted of the following:
3. SALE OF ASSETS
In July 1998 the Company sold its Canadian Strategic Stocking business for cash of approximately $670 and a note in the amount of $234. The note was payable in installments of $134 on January 31, 1999 and $100 on July 31, 1999. An additional amount of $436 is contingently payable from 10% of the annual revenues in excess of a specified base level over a five-year period from the date the business sold. The Company earned and was paid approximately $172 of the contingent payable in the year ended July 31, 1999. In connection with the sale, the Company entered into a services agreement with the purchaser whereby the Company will provide transportation, warehouse and inventory management and related services over a five year period. In addition the Company has agreed to reimburse the purchaser, during the term of the services agreement, for certain promotional and employee-related compensation related to the business and the services provided by the Company. These costs are estimated to amount to approximately $130 annually. The cash and non-contingent portion of the note in excess of the basis of the net assets of the Canadian Strategic Stocking business, received upon closing the transaction which amounts to approximately $900, has been deferred and is included in accrued liabilities at July 31, 1998. This deferred revenue will be recognized over future periods as services are provided under the services agreement. During the fiscal year ended July 31, 1999, the Company recognized $485 of the deferred gain.
4. INTANGIBLES
Intangibles from the Company's various acquisitions consist of the following:
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
6. LONG-TERM DEBT
Long-term debt consists of the following:
a) Bank Credit Agreement
Effective July 31, 2000, the Company amended its bank credit agreement. Under the terms of the amended agreement, the facility was extended through November 30, 2001 and split into an amortizing term loan of $32.2 million and a revolving credit facility of $19.5 million. The revolving credit facility will be governed by an eligible accounts receivable borrowing base agreement, defined as 80% of accounts receivable less than 60 days past due. Required principal payments on the amortizing term loan consist of $794 on November 15, 2000 and quarterly payments of $875 commencing January 31, 2001 until July 31, 2001 and then $1.375 million quarterly until maturity, at which time any amounts outstanding under the facility are due. Interest on outstanding borrowings is payable monthly at prime or LIBOR, plus an applicable margin. The applicable margins for prime range from 0.0% to 1.0%, and for LIBOR from 3.0% to 4.0%, and are based on the ratio of the Company's funded debt to cash flow, both as defined in the agreement. In addition, the company is required to pay a commitment fee of 0.375% for any unused amounts of the revolving credit facility. At July 31, 2000, the weighted-average interest rate for all outstanding borrowings was approximately 11.50%.
On June 28, 2000, the Company amended its bank credit agreement. Under the terms of the amended agreement, all prior covenant violations were waived and the Company may borrow up to $51.7 million on a revolving basis through July 31, 2001, at which time any amounts outstanding under the facility are due. Interest on outstanding borrowings is payable monthly at the bank's prime rate plus 2.00%. In addition, the Company is required to pay a commitment fee of 0.375% for any unused amounts of the total commitment.
Borrowings under the agreement are secured by all of the Company's assets in the United States and by 65% of the stock of the Company's Canadian subsidiary. The agreement contains restrictions on the payment of dividends, incurring additional debt, capital expenditures and investments by the Company. In addition, the Company is required to maintain certain financial ratios related to minimum amounts of stockholders' equity, fixed charges to cash flow and funded debt to cash flow, and to reduce the amortizing term loan principal at the end of each quarter beginning July 31, 2001, by the amount of excess cash flow, all as defined in the agreement. The agreement also requires the Company to obtain the consent of the lender for additional acquisitions in certain instances.
The Company has entered into interest rate protection agreements on a portion of the borrowings under the revolving credit facility. Through an interest rate swap, the interest rate on $15 million of outstanding debt has been fixed at 6.26%, plus the applicable margin, and a collar of between 5.50% and 6.50%, plus the applicable margin, has been placed on $9 million of outstanding debt. Both of these hedging agreements have three-year terms and expire on August 31, 2000. The total cost of these agreements was approximately $65 and is being amortized to interest expense over the term of the agreements. The counter party to these agreements is a major financial institution with which the Company also has other financial relationships. The Company believes that the risk of loss due to nonperformance by the counter party to these agreements is remote and, in any event, the amount of such loss would be immaterial to the Company's results of operations.
At July 31, 2000, the Company had unpaid settlements of approximately $26 related to the interest rate swap. The fair value of this agreement at July 31, 2000 and 1999 was a receivable of $32 and a liability of approximately $64.
b) Seller Financing Notes and Other
In connection with various acquisitions (see Note 2) the Company issued various notes to the sellers of those businesses. These notes bear interest at varying rates based primarily on the prime interest rate.
Scheduled principal payments in each of the next five years and thereafter on long-term debt and capital lease obligations are as follows:
7. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain equipment under properties and non-cancelable lease agreements, which expire at various dates.
At July 31, 2000, minimum annual lease payments for such leases are as follows:
Rent expense related to operating leases amounted to approximately $6,131, $5,756, and $5,058 for the years ended July 31, 2000, 1999 and 1998, respectively.
CONTINGENCIES
In November and December 1998, two class action lawsuits were filed in the United States District Court for the Northern District of Texas, naming the Company, Richard K. McClelland, the Company's Chief Executive Officer, and Robert P. Capps, the Company's former Chief Financial Officer, as defendants. The lawsuits arise from the Company's November 2, 1998 announcement that the Company was (i) revising its results of operations for the year ended July 31, 1998 from that which had been previously announced on September 16, 1998 and (ii) restating its results of operations for the third quarter of fiscal 1998 from that which had been previously reported. On February 5, 1999, the Court entered an Order consolidating the actions and approved the selection of three law firms as co-lead counsel. A consolidated and amended complaint was filed on March 22, 1999. In addition to the defendants named in the original complaints, the amended complaint also named as defendants the underwriters of the Company's May 1998 secondary offering of common stock, Schroder & Co., Inc., William Blair & Company, and Hoak Breedlove Wesneski & Co. (the "Underwriter Defendants"). On May 6, 1999, defendants filed a motion to dismiss the consolidated and amended complaint in its entirety.
On June 14, 1999, the Company issued a press release announcing that the Audit Committee of the Board of Directors had formed a Special Committee of outside directors to review potentially unsupportable accounting entries for the third and fourth quarters of fiscal 1998. On September 17, 1999, the Company issued a press release announcing that the Special Committee had completed its review of the Company's financial reporting and that the Company would restate its previously reported financial results for the fiscal years 1997 and 1998 and the first three quarters of the fiscal year 1999.
On October 14, 1999, pursuant to a stipulation of the parties, plaintiffs filed a second amended class action complaint that added allegations relating to the information disclosed in the Company's June 14 and September 17, 1999 press releases. In addition to the defendants named in the amended complaint, the Second Amended Class Action Complaint named Deloitte & Touche and Deloitte & Touche LLP (the Court subsequently dismissed Deloitte & Touche LLP without prejudice pursuant to the stipulation of the parties). The Second Amended Class Action Complaint alleges that the defendants issued a series of materially false and misleading statements and omitted material facts concerning the Company's financial condition and business operations. The lawsuit alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek unspecified damages on behalf of all other purchasers of the Company's common stock during the period of September 18, 1997 through and including September 17, 1999.
On September 20, 2000, the Company, Richard McClelland, Robert Capps and the Underwriter Defendants signed a memorandum of understanding setting forth the terms of a proposed settlement of this action. Deloitte & Touche is not a party to the memorandum of understanding. The proposed settlement provides that the Company's primary directors and officers liability insurer, American Home Insurance Company, will pay $2 million towards the settlement. In addition, the Company will pay $1 million and contribute one million shares of common stock towards the proposed settlement. The Company has also agreed to pay to the class 75% of any recoveries, after legal expenses and costs, from the Company's excess insurer, Reliance Insurance Company, and former auditors, Deloitte & Touche LLP and Deloitte & Touche. The settlement is conditioned upon, among other things, execution of a definitive settlement agreement and related documents, the provision of notice of the settlement of the Company's shareholders, and approval of the settlement by the United States District Court for the Northern District of Texas.
In accordance with applicable accounting standards, the company records a charge reflecting contingent liabilities when management determines that a material loss is "probable" and either "quantifiable" or "reasonably estimable." As a result of the signing of the memorandum of understanding on September 20, 2000, the Company recorded a fourth quarter charge of $2.3 million in the fiscal year ended July 31, 2000. The charge includes the value of one million shares of the Company's common stock based on the closing price of the stock on September 20, 2000 ($1.3 million recorded as Other Liabilities), plus $1 million cash which is recorded in Accrued Liabilities. The cash is payable in two installments, the first installment of $350,000 was paid on September 23, 2000 with the remaining $650,000 plus interest payable at least 10 business days before the date scheduled by the court for the settlement fairness hearing. The Company will deliver the one million shares of the Company's stock after the effective date of the Settlement.
On April 10, 2000, Reliance Insurance Company filed a notice of action in the Superior Court of Justice in Ontario, Canada, seeking a declaratory judgment that defendants in the shareholder class action are not entitled to reimbursement under the Reliance insurance policy for losses incurred in connection with that action. The Reliance policy provides $3 million in excess coverage to supplement the $2 million in coverage provided to the Company pursuant to the underlying policy issued by American Home Assurance Company.
The Special Committee of the Board of Directors has kept the Securities and Exchange Commission apprised of its inquiry and the restatement process. The Company has received informal requests for information from the Staff of the Commission for documents concerning the circumstances of the restatement of the Company's prior period financial statements. The Company has cooperated with the Commission and produced documents responsive to its requests.
The Company is also a party to various legal proceedings arising in the ordinary course of its business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse effect on the financial condition, results of operations, or liquidity of the Company.
8. INCOME TAXES
The United States and Canadian components of income (loss) before income taxes from continuing operations are as follows:
The provision for income tax consisted of the following:
Differences between financial accounting principles and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities under SFAS 109 and consisted of the following components (in thousands):
The Company has established valuation allowances in accordance with the provisions of SFAS No. 109. The valuation allowances primarily relate to U.S. operating losses not currently deductible and foreign tax credits. The Company continually reviews the adequacy of the valuation allowances and releases the allowances when it is determined that it is more likely than not that the benefits will be realized.
The Company has a federal net operating loss carryforward of $10,499, $6,152 and $3,530 for the three years ended July 31, 1999, 1998, and 1997, respectively. This carryforward is available to offset future United States federal taxable income. The net operating losses expire as follows: $333 in the year 2009, $3,197 in the year 2013, $2,622 in the year 2019 and $4,347 in the year 2020.
The Company has not provided for U.S. Federal and foreign withholding taxes on the foreign subsidiaries' undistributed earnings as of July 31, 2000. Such earnings are intended to be reinvested indefinitely.
The differences in income tax provided and the amounts determined by applying the statutory rate to income before income taxes result from the following:
9. RELATED PARTY TRANSACTIONS
A firm related to a former member of the Company's board of directors has provided investment-banking services to the Company. Amounts paid by the Company for such services during the years ended July 31, 2000, 1999 and 1998 amounted to none, none, and $458, respectively. The Company leases facilities from an officer
and from a member of the Company's board of directors. During the years ended July 31, 2000, 1999 and 1998, the Company paid approximately $120, $120 and $256, respectively, in rent to these parties in aggregate.
The Company has loaned to one of its officers $204 in connection with the exercise of certain stock options at the time of the follow-on public offering. The principal amount of this loan is due in eight quarterly installments beginning August 31, 1998, of $26 plus accrued interest which accrues on the aggregate unpaid amount at the prime rate published by the Company's primary lenders. During the fiscal year ended July 31, 2000, the officer repaid the remaining $102 of the loan principal plus accrued interest.
10. STOCKHOLDERS' EQUITY
In May 1998, the Company completed a follow-on offering of 2,500,000 shares of common stock. Net proceeds to the Company, after deducting underwriters discount and offering costs, amounted to approximately $30 million, all of which was used to reduce amounts outstanding under the Credit Facility.
On August 16, 1996, the Company completed an initial public offering of 2,600,000 shares of common stock. On September 10, 1996, the underwriters exercised their over-allotment option to purchase an additional 390,000 shares of common stock. Net proceeds to the Company, after deducting underwriters discount and offering costs, amounted to approximately $21 million, all of which was used to reduce outstanding debt and fund certain acquisitions.
On June 3, 1996, the Company restated its certificate of incorporation to increase the authorized capital stock to 50,000,000 shares of $0.01 par value common stock and to 10,000,000 shares of $0.01 par value preferred stock. The Company then effected a common stock split in the form of a dividend where it distributed three shares of common stock for every common share outstanding. The effect of the dividend was to increase the number of common shares outstanding from 635,865 to 2,543,460.
Rights Agreement
The Board of Directors of the Company approved a Rights Agreement, which is designed to protect stockholders should the Company become the target of coercive and unfair takeover tactics. Pursuant to the Rights Agreement, the Board of Directors declared a dividend of one preferred stock purchase right (a "Right") for each outstanding share of common stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of the Series A Preferred Stock, at a price of $45.00 per one one-hundredth of a share of Series A Preferred Stock, subject to possible adjustment.
11. STOCK OPTION PLAN
Effective June 5, 1996, the Company's stockholders approved the Amended and Restated 1996 Stock Option Plan (the "Option Plan"). The Option Plan has been subsequently amended to increase the maximum aggregate amount of common stock with respect to which options may be granted to 1,000,000 shares. The Option Plan provides for the granting of both incentive stock options and non-qualified stock options. In addition, the Option Plan provides for the granting of restricted stock, which may include, without limitation, restrictions on the right to vote such shares and restrictions on the right to receive dividends on such shares. The exercise price of all options granted under the Option Plan may not be less than the fair market value of the underlying common stock on the date of grant option. Generally, the options vest and become exercisable ratably over a five-year period, commencing one year after the grant date.
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options and, accordingly, no compensation cost has been recognized for stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options consistent with the method set forth under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below:
The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998 respectively: dividend yield of 0% for all years; expected volatility of 73%, 72% and 66%; risk-free interest rate of 4.31%, 5.53%, and 5.92%; and expected lives of an average of 10 years for all years. The weighted average fair value of options granted during 2000, 1999 and 1998 was $1.32, $3.91 and $8.27, respectively.
Stock option activity during the periods indicated is as follows:
The following table summarizes information about stock options outstanding at July 31, 2000:
12. SEGMENT INFORMATION
Dynamex Inc. operates in one reportable business segment, same-day delivery services. The Company evaluates the performance of its geographic regions, United States and Canada, based upon operating income (loss) before unusual and non-recurring items. The following table summarizes selected financial information for the United States and Canada for the years ended July 31, 2000, 1999 and 1998:
INDEX TO EXHIBITS
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(1) Filed herewith.
(2) Filed as an exhibit to the registrant's Registration Statement on Form S-1 (File No. 333-05293), and incorporated herein by reference.
(3) Filed as an exhibit to the registrant's annual report on Form 10-K for the fiscal year ended July 31, 1997, and incorporated herein by reference.
(4) Filed as an exhibit to Registration Statement on Form S-1 (File No. 333-49603), and incorporated herein by reference.
(5) Filed as an exhibit to the registrant's annual report on Form 10-K for the fiscal year ended July 31, 1998, and incorporated herein by reference.
(6) Filed as an exhibit to the registrant's annual report on Form 10-K for the fiscal year ended July 31, 1999, and incorporated herein by reference.
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