================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 000-21057 DYNAMEX INC. (Exact name of registrant as specified in its charter) Delaware 86-0712225 (State of incorporation) (I.R.S. Employer Identification No.) 1870 Crown Drive 75234 Dallas, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (214) 561-7500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of the registrant's common stock, $.01 par value, outstanding as of December 1, 2002 was 11,206,817 shares. ================================================================================ DYNAMEX INC. ================================================================================ INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets 2 October 31, 2002 (Unaudited) and July 31, 2002 Condensed Statements of Consolidated Operations (Unaudited) 3 Three months ended October 31, 2002 and 2001 (Restated) Condensed Statements of Consolidated Cash Flows (Unaudited) 4 Three months ended October 31, 2002 and 2001 (Restated) Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition 7 and Results of Operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13 Item 4. Controls and Procedures 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K. 14 Signature 15 Certifications 16-17 Exhibit Index E-1 1 DYNAMEX INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) -------------------------------------------------------------------------------- October 31, July 31, 2002 2002 ----------- ----------- (Unaudited) ASSETS CURRENT Cash and cash equivalents $ 4,689 $ 4,489 Accounts receivable (net of allowance for doubtful accounts of $593 and $562, respectively) 25,100 23,165 Prepaid and other current assets 2,017 3,223 Deferred income tax 1,649 1,657 ----------- ----------- Total current assets 33,455 32,534 Property and equipment - net 4,327 4,627 Goodwill 43,861 43,739 Intangibles - net 1,215 950 Deferred income taxes 10,948 11,407 Other assets 609 613 ----------- ----------- Total assets $ 94,415 $ 93,870 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable trade $ 4,141 $ 3,894 Accrued liabilities 14,509 13,543 Current portion of long-term debt 5,786 5,778 ----------- ----------- Total current liabilities 24,436 23,215 LONG-TERM DEBT 22,677 25,531 ----------- ----------- Total liabilities 47,113 48,746 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock; $0.01 par value, 10,000,000 shares authorized; none outstanding -- -- Common stock; $0.01 par value, 50,000,000 shares authorized; 11,206,817 and 11,206,817 outstanding, respectively 112 112 Additional paid-in capital 74,062 74,062 Retained earnings (25,860) (27,828) Unrealized foreign currency translation adjustment (1,012) (1,222) ----------- ----------- Total stockholders' equity 47,302 45,124 ----------- ----------- Total liabilities and stockholders' equity $ 94,415 $ 93,870 =========== =========== See accompanying notes to condensed consolidated financial statements. 2 DYNAMEX INC. CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (in thousands except per share data) (Unaudited) -------------------------------------------------------------------------------- Three months ended October 31, -------------------------- 2002 2001 ---------- ---------- (Restated) Sales $ 61,732 $ 61,736 Cost of sales 43,309 43,456 ---------- ---------- Gross profit 18,423 18,280 Selling, general and administrative expenses 14,341 14,809 Depreciation and amortization 580 782 (Gain) loss on disposal of property and equipment 32 (18) ---------- ---------- Operating income 3,470 2,707 Interest expense 613 910 Other income (14) (26) ---------- ---------- Income before taxes 2,871 1,823 Income tax expense 903 916 ---------- ---------- Income before cumulative effect of change in accounting principle 1,968 907 Cumulative effect of change in accounting for goodwill -- (19,261) ---------- ---------- Net income (loss) $ 1,968 $ (18,354) ========== ========== Basic earnings (loss) per common share: Before cumulative effect of accounting change $ 0.18 $ 0.09 Accounting change -- (1.89) ---------- ---------- Basic earnings (loss) per common share $ 0.18 $ (1.80) ========== ========== Diluted earnings (loss) per common share: Before cumulative effect of accounting change $ 0.17 $ 0.09 Accounting change -- (1.88) ---------- ---------- Diluted earnings (loss) per common share $ 0.17 $ (1.79) ========== ========== Weighted average shares: Common shares outstanding 11,207 10,207 Adjusted common shares - assuming exercise of stock options 11,279 10,245 See accompanying notes to condensed consolidated financial statements. 3 DYNAMEX INC. CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (in thousands) (Unaudited) -------------------------------------------------------------------------------- Three months ended October 31, -------------------------- 2002 2001 ---------- ---------- OPERATING ACTIVITIES (Restated) Net income (loss) $ 1,968 $ (18,354) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 571 745 Amortization and write down of goodwill and intangible assets 9 30,062 Provision for losses on accounts receivable 183 219 Deferred income taxes 467 (10,228) (Gain) loss on disposal of property and equipment 32 (17) Changes in current operating assets and liabilities: Accounts receivable (2,118) (1,557) Prepaids and other assets 1,206 781 Accounts payable and accrued liabilities 1,211 761 ---------- ---------- Net cash provided by operating activities 3,529 2,412 ---------- ---------- INVESTING ACTIVITIES Purchase of property and equipment (257) (514) Net proceeds from disposal of property and equipment 15 17 ---------- ---------- Net cash used in investing activities (242) (497) ---------- ---------- FINANCING ACTIVITIES Principal payments on long-term debt (1,376) (1,550) Net borrowings under line of credit (1,467) 1,000 Other assets and deferred financing fees (257) (41) ---------- ---------- Net cash used in financing activities (3,100) (591) ---------- ---------- ---------- ---------- EFFECT OF EXCHANGE RATES ON CASH 13 (208) ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 200 1,116 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,489 8,066 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,689 $ 9,182 ========== ========== SUPPLEMENTAL DISCLOSURE ON NON-CASH INFORMATION Cash paid for interest $ 487 $ 850 ========== ========== Cash paid for (refunds of) taxes $ (75) $ 1,194 ========== ========== See accompanying notes to condensed consolidated financial statements. 4 DYNAMEX INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION Dynamex Inc. (the "Company" and "Dynamex") provides same-day delivery and logistics services in the United States and Canada. The Company's primary services are (i) same-day, on-demand delivery, (ii) scheduled distribution and (iii) fleet management. The consolidated financial statements include the accounts of Dynamex Inc. and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. All dollar amounts in the financial statements and notes to the financial statements except per share data are stated in thousands of dollars unless otherwise indicated. Except as otherwise indicated, references to years mean our fiscal year ending July 31, 2003 or ended July 31 of the year referenced, and comparisons are to the corresponding period of the prior year. The operating subsidiaries of the Company, with country of incorporation, are as follows: o Dynamex Operations East, Inc. (U.S.) o Dynamex Operations West, Inc. (U.S.) o Dynamex Dedicated Fleet Services, Inc. (U.S.) o Dynamex Canada Corp. (Canada) o Alpine Enterprises Ltd. (Canada) o Roadrunner Transportation, Inc. (U.S.) o New York Document Exchange Corp. (U.S.) The accompanying interim financial statements are unaudited. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. The results of the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year, and should be read in conjunction with the Company's audited financial statements for the fiscal year ended July 31, 2002. The accompanying interim financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position at October 31, 2002 and the results of its operations and cash flows for the three-month periods ended October 31, 2002 and 2001. The tax provision for the three-month periods ended October 31, 2002 and 2001 are based upon management's estimate of the Company's annualized effective tax rate. 2. COMPREHENSIVE INCOME (LOSS) Comprehensive income for the three months ended October 31, 2002 was $2,178 compared to a restated comprehensive loss of $18,978 for the period ended October 31, 2001. The two components of comprehensive income are net income (loss) and foreign currency translation adjustments. The changes in the exchange rate between the U.S. dollar and the Canadian dollar resulted in a foreign currency translation gain of $210 and a foreign currency translation loss of $625 for the three months ended October 31, 2002 and 2001, respectively. 3. GOODWILL Effective August 1, 2001, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill. The Company completed its goodwill impairment analysis during the fourth quarter of fiscal 2002 and recognized a transitional goodwill impairment loss related to its United States operations of $30.0 million and recorded the charge net of $10.7 million of deferred tax benefits as the cumulative effect of a change in accounting principle in the Consolidated Statements of Operations. The valuations performed as part of the analysis employed a combination of present value techniques to measure fair value corroborated by comparisons to estimated market multiples. Third party specialists were engaged to assist in the valuations. As required by SFAS No. 142, the charge was recorded in the first quarter of fiscal year 2002. Since the financial statements for that period had previously been released, that period presented herein has been restated to reflect this charge. 5 DYNAMEX INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- 4. INTANGIBLES At October 31, 2002, intangibles and related amortization expense for the three months ended October 31, 2002 and 2001 consist of the following: Amortization Expense Accumulated Three Months Ended October 31, Asset Amortization Net 2002 2001 ------- ------------ ------- ---------- ---------- Covenants not-to-compete $ 9,917 $ 9,910 $ 7 $ 4 $ 32 Trademarks 470 72 398 5 5 Deferred bank financing fees 1,333 523 810 151 85 ------- ------------ ------- ---------- ---------- Total $11,719 $ 10,504 $ 1,215 $ 160 $ 121 ------- ------------ ------- ---------- ---------- During the quarter ended October 31, 2002, the Company capitalized $649 related to the amendment of its Credit Agreement. These fees will amortized over the life of the Credit Agreement, which matures November 2003. Amortization of deferred financing fees is classified as interest expense in the consolidated statement of operations. Estimated amortization expense for the succeeding five fiscal years, including deferred bank financing fees, is $647 for 2003, $270 for 2004 and approximately $20 per year thereafter. 5. COMPUTATION OF EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computation as required by Statement of Financial Accounting Standards No. 128, Earnings Per Share. Common stock equivalents related to stock options are excluded from diluted earnings (loss) per share calculation if their effect would be anti-dilutive to earnings (loss) per share before effect of change in accounting principle. Three Months Ended October 31, ------------------------------ 2002 2001 ---------- ---------- Net income before cumulative effect of change in accounting principle $ 1,968 $ 907 Cumulative effect of change in accounting principle -- (19,261) ---------- ---------- Net income (loss) $ 1,968 $ (18,354) ========== ========== Weighted average common shares outstanding 11,207 10,207 Common share equivalents related to options 72 38 ---------- ---------- Common shares and common share equivalents 11,279 10,245 ========== ========== Basic earnings (loss) per common share: Before cumulative effect of accounting change $ 0.18 $ 0.09 Accounting change -- (1.89) ---------- ---------- Basic earnings (loss) per common share $ 0.18 $ (1.80) ========== ========== Diluted earnings (loss) per common share: Before cumulative effect of accounting change $ 0.17 $ 0.09 Accounting change -- (1.88) ---------- ---------- Diluted earnings (loss) per common share $ 0.17 $ (1.79) ========== ========== 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ This discussion contains forward-looking statements, which involve assumptions regarding Company operations and future prospects. Although the Company believes its expectations are based on reasonable assumptions, such statements are subject to risk and uncertainty, including, among other things, competition, foreign exchange, and risks associated with the local delivery industry. These and other risks are mentioned from time to time in the Company's filings with the Securities and Exchange Commission. Caution should be taken that these factors could cause the actual results to differ from those stated or implied in this and other Company communications. GENERAL The Company is a leading provider of same-day delivery and logistics services in the United States and Canada. Through internal growth and acquisitions, the Company has built a national network of same-day delivery and logistics systems in Canada and has established operations in 22 U.S. metropolitan areas. Effective August 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). As a result of the adoption of this new accounting pronouncement, a goodwill impairment charge of $19.3 million was recognized during fiscal 2002. In accordance with SFAS No. 142 and other accounting pronouncements, the Company measured the impairment during fiscal 2002, and once the impairment was finalized, recorded the charge with an effective date of August 1, 2001. Since the financial statements for that period had previously been released, that period presented herein has been restated to reflect this charge. The following discussion of the Company's results of operations is based on income before the accounting change. A significant portion of the Company's revenues is generated in Canada. For the three month period ended October 31, 2002, Canadian revenues accounted for approximately 33.5% of total consolidated revenue, compared to 32.8% for the same period in 2001. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's condensed statements of consolidated operations, expressed as a percentage of sales. Three months ended October 31, ------------------ 2002 2001 ------ ------ Sales 100.0% 100.0% Cost of sales 70.2% 70.4% ------ ------ Gross profit 29.8% 29.6% Selling, general and administrative expenses 23.2% 24.0% Depreciation and amortization 0.9% 1.2% Loss on disposal of assets 0.1% 0.0% ------ ------ Operating income 5.6% 4.4% Interest expense and other 1.0% 1.4% ------ ------ Income before income taxes and accounting change 4.6% 3.0% ====== ====== THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2001. Net income for the three months ended October 31, 2002 was $1,968,000, an increase of 117% compared to income of $907,000 (before the accounting change) for the three months ended October 31, 2001. Lower selling, general and administrative and interest expense, along with lower depreciation expense and a slightly improved gross margin, all contributed to the improved results for the current year quarter. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ Sales for the three months ended October 31, 2002 were $61.7 million, the same as the prior year quarter. On a revenue per day basis, Canadian sales increased 2.2% while U.S. sales were 1.1% below the prior year. The exchange rate between the U.S. dollar and the Canadian dollar declined in the current year quarter compared to the same quarter last year. Had the exchange rate been the same in both periods, sales per day would have been approximately 1% higher in the current year quarter compared to the prior year. On-demand sales represented 50.1% of total sales in the current year quarter compared to 50.4% in the prior year. Cost of sales for the three months ended October 31, 2002 declined $0.2 million, or 0.3%, to $43.3 million from $43.5 million for the same period in 2001. Cost of sales, as a percentage of sales, decreased to 70.2% from 70.4% for the same period ended in 2001. The improvement in gross margin was due to improved operating efficiencies realized in the current period, including the elimination of inefficient routing. Selling, general and administrative ("SG & A") expenses for the three months ended October 31, 2002 decreased $0.5 million, or 3.2%, to $14.3 million from $14.8 million for the same period in 2001. This decrease in SG & A expenses in the three months ended October 31, 2002 is attributable to several factors. Compensation costs decreased $0.2 million primarily in the administrative, dispatch and customer service areas in the U.S. The Company also incurred less professional fees ($0.2 million) in the three month period ended October 31, 2002, primarily from lower legal and IT consulting fees. SG & A expenses, as a percentage of sales, were 23.2% for the three months ended October 31, 2002, down from 24.0% for the same period last year. For the three months ended October 31, 2002, depreciation and amortization was $0.6 million compared to $0.8 million for the same period ended in 2001. This decrease is primarily attributable to the lower capital expenditures in 2002 and 2001 compared to prior years and, to a lesser extent, the reduction in amortization of covenants not-to-compete that are fully amortized after three years. Interest expense for the three months ended October 31, 2002 declined $0.3 million, or 33%, to $0.6 million from $0.9 million for the same period ended in 2001, and as a percentage of sales, to 1.0% from 1.4%. This decline results from both a lower interest rate and lower levels of debt. The weighted average interest rate for all borrowings at October 31, 2002 was 5.74%, compared to 6.25% at October 31, 2001. The Company has also reduced its debt since October 31, 2001 by over $14 million. The effective income tax rate declined from 50% in the three-month period ended October 31, 2001 to 31% in the current period. The primary reason for this decline is the increase in U.S. taxable income that is substantially offset by the utilization of the net operating loss carryforwards generated in prior years, and further by a marginally lower tax rate in Canada in the current year period. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $3.5 million for the three months ended October 31, 2002 compared to $2.4 million for the same period in 2001. Net cash provided by operations, prior to changes in current operating assets and liabilities and deferred income taxes, was $2.8 million for the three months ended October 31, 2002 compared to $1.9 million for the three months ended October 31, 2001 (before the effects of the write-off of goodwill), due to the higher income before accounting change. Capital expenditures for the three months ended October 31, 2002 were approximately $257,000. Management expects annual capital expenditures to be in the $1.5 to $2.0 million range for the full fiscal year. The Company does not have significant capital expenditure requirements to replace or expand the number of vehicles used in its operations because substantially all of its drivers are owner-operators who provide their own vehicles. As of October 31, 2002, the Company's bank credit agreement (Credit Agreement) consisted of an amortizing term loan of $16.9 million and a revolving credit facility of $19.5 million due November 30, 2003. Amounts outstanding under the revolving credit facility included borrowings of $11.1 million and outstanding letters of credit totaling $4.2 million. Interest on outstanding borrowings is payable monthly at prime plus 0.50% or LIBOR plus 3.50%. The Company has entered into 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ interest rate protection arrangements on a portion of the borrowings under the Credit Agreement. The interest rate on $13 million of outstanding debt has been fixed at 6.14%. This hedging arrangement is effective October 31, 2001 and matures on February 28, 2003. At the expiration of the current agreement, the Company intends to enter into a new interest rate protection agreement on a minimum of 30% of the then outstanding Loans as required by the Credit Agreement. Amounts outstanding under the Credit Agreement are secured by all of the Company's U.S. assets and 100% of the stock of its principal Canadian subsidiaries. The Credit Agreement also contains restrictions on the payment of dividends, incurring additional debt, capital expenditures and investments by the Company as well as requiring the Company to maintain certain financial ratios. Generally, the Company must obtain the lenders' consent to consummate any acquisition. The Company's EBITDA (Earnings before interest, taxes, depreciation and amortization) was approximately $4.1 million for the three months ended October 31, 2002, compared to $3.5 million in the same period last year. This increase is attributable to lower selling, general and administrative costs and a slightly higher gross margin. Management has included EBITDA in its discussion herein as a measure of liquidity because it believes that it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness, maintain current operating levels of fixed assets and acquire additional operations and businesses. EBITDA should not be considered as a substitute for statement of operations or cash flow data from the Company's financial statements, which have been prepared in accordance with generally accepted accounting principles. In addition, the Company's definition of EBITDA may not be identical to similarly entitled measures used by other companies. The Company's cash flows from operations for the three months ended October 31, 2002 were approximately $3.5 million. Consequently, purchases of property and equipment and payments of long-term debt were financed entirely by internally generated cash flow. Management expects that its future capital requirements will generally be met from internally generated cash flow. The Company's access to other sources of capital, such as additional bank borrowings and the issuance of debt securities, is affected by, among other things, general market conditions affecting the availability of such capital. The Company completed its last acquisition in August 1998. Should the Company pursue acquisitions in the future, the Company may be required to incur additional debt. There can be no assurance that the Company's primary lenders will consent to such acquisitions or that if additional financing is necessary, it can be obtained on terms the Company deems acceptable. CONTRACTUAL OBLIGATIONS The following table sets forth the Company's contractual commitments as of October 31, 2002 for the periods indicated: Less than 1 Total year 1-3 years 3-5 years Thereafter -------- ----------- --------- --------- ---------- Long-term Debt $ 28,446 $ 5,769 $ 22,677 $ -- $ -- Capital Lease Obligations 17 17 -- -- -- Operating Leases 11,565 4,605 5,115 1,404 441 -------- ----------- --------- --------- ---------- Total $ 40,028 $ 10,391 $ 27,792 $ 1,404 $ 441 ======== =========== ========= ========= ========== The Company has entered into an employment agreement with its CEO which provides for the payment of a base salary in the annual amount of $275, participation in an executive bonus plan, an auto allowance, and participation in other employee benefit plans. In addition, the Company has entered into retention agreements with certain key executive officers and other employees that provide certain benefits in the event their employment is terminated subsequent to a change in control of the Company, as defined in the retention agreements. The Company believes that it is unlikely that these circumstances will transpire, but if they did the potential exposure could range between $3,000 and $4,000. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ DEFERRED TAXES During the three months ended October 31, 2002, U.S. tax deductions exceeded financial statement deductions by approximately $1.6 million. As a result, net deferred tax assets were reduced by approximately $0.5 million during this quarter, with an offsetting charge to tax expense in the Statement of Consolidated Operations. The Company has U.S. net operating losses totaling approximately $13.3 million at October 31, 2002 and has established an 100% valuation allowance in accordance with the provisions of SFAS No. 109 for U.S. operating losses not currently deductible. The Company continually reviews the adequacy of the valuation allowance and releases the allowance, when it is determined that it is more likely than not that the benefits will be realized. The remaining deferred tax assets represent deductions for financial statement purposes that will reduce future taxable income. INFLATION The Company does not believe that inflation has had a material effect on the Company's results of operations nor does it believe it will do so in the foreseeable future. However, there can be no assurance the Company's business will not be affected by inflation in the future. RISK FACTORS In addition to other information in this report, the following risk factors should be considered carefully in evaluating the Company and its business. This report contains forward-looking statements, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this report. ACQUISITION STRATEGY; POSSIBLE NEED FOR ADDITIONAL FINANCING The Company completed its last acquisition in August 1998. Currently, there are no pending acquisitions. Should the Company pursue acquisitions in the future, the Company may be required to incur additional debt, issue additional securities that may potentially result in dilution to current holders and also may result in increased goodwill, intangible assets and amortization expense. Additionally, the Company must obtain the consent of its primary lenders to consummate any acquisition. There can be no assurance that the Company's primary lenders will consent to such acquisitions or that if additional financing is necessary, it can be obtained on terms the Company deems acceptable. HIGHLY COMPETITIVE INDUSTRy The market for same-day delivery and logistics services has been and is expected to remain highly competitive. Competition is often intense, particularly for basic delivery services. High fragmentation and low barriers to entry characterize the industry. Other companies in the industry compete with the Company not only for provision of services but also for acquisition candidates and qualified drivers. Some of these companies have longer operating histories and greater financial and other resources than the Company. Additionally, companies that do not currently operate delivery and logistics businesses may enter the industry in the future. CLAIMS EXPOSURE As of December 1, 2002, the Company utilized the services of approximately 4,600 drivers and messengers. From time to time such persons are involved in accidents or other activities that may give rise to liability claims. The Company currently carries liability insurance with a per claim limit of $20 million. Drivers are required to maintain vehicle liability insurance of at least the minimum amounts required by applicable state or provincial law (generally such minimum requirements range from $35,000 to $75,000). The Company also has insurance policies covering property and fiduciary trust liability, which coverage includes all drivers and messengers. There can be no assurance that claims against the Company, whether under the liability insurance or the surety bonds, will not exceed the applicable amount of coverage, that the Company's insurer will be solvent at the time of settlement of an insured claim, or that the Company will be able to obtain insurance at acceptable levels and costs in the future. If the Company were to experience a material increase in the frequency or severity of accidents, liability claims, workers' compensation claims or unfavorable resolutions of claims, the Company's business, financial condition and results of operations could be materially adversely affected. In addition, significant increases in insurance costs could reduce the Company's profitability. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ CERTAIN TAX MATTERS RELATED TO DRIVERS Substantially all of the Company's drivers supply their own vehicles and as of December 1, 2002, over 90% of these owner-operators were independent contractors as opposed to employees of the Company. The Company does not pay or withhold any federal, state or provincial employment tax with respect to or on behalf of independent contractors. From time to time, taxing authorities in the U.S. and Canada have sought to assert that independent owner-operators in the transportation industry, including those utilized by the Company, are employees, rather than independent contractors. The Company believes that the independent owner-operators utilized by the Company are not employees under existing interpretations of federal (U.S. and Canadian), state and provincial laws. However, there can be no assurance that federal (U.S. and Canadian), state or provincial authorities will not challenge this position, or that other laws or regulations, including tax laws, or interpretations thereof, will not change. If, as a result of any of the foregoing, the Company were required to pay withholding taxes and pay for and administer added employee benefits to these drivers, the Company's operating costs would increase. Additionally, if the Company is required to pay back-up withholding with respect to amounts previously paid to such drivers, it may also be required to pay penalties or be subject to other liabilities as a result of incorrect classification of such drivers. If the drivers are deemed to be employees rather than independent contractors, then the Company may be required to increase their compensation since they will no longer be receiving commission-based compensation. Any of the foregoing circumstances could have a material adverse impact on the Company's financial condition and results of operations, and/or require the Company to restate financial information from prior periods. In addition to the drivers that are independent contractors, certain of the Company's drivers are employed by the Company and supply and operate their own vehicles during the course of their employment. The Company reimburses these employees for all or a portion of the operating costs of those vehicles. The Company believes that these reimbursement arrangements do not represent additional compensation to those employees. However, there can be no assurance that federal (U.S. and Canadian), state or provincial taxing authorities will not seek to recharacterize some or all of such payments as additional compensation. If such amounts were so recharacterized, the Company would have to pay additional employment related taxes on such amounts, and may also be required to pay penalties, which could have an adverse impact on the Company's financial condition and results of operations, and/or to restate financial information from prior periods. FOREIGN EXCHANGE Significant portions of the Company's operations are conducted in Canada. Exchange rate fluctuations between the U.S. and Canadian dollars result in fluctuations in the amounts relating to the Canadian operations reported in the Company's consolidated financial statements. The Canadian dollar is the functional currency for the Company's Canadian operations; therefore, any change in the exchange rate will affect the Company's reported revenues for such period. The Company historically has not entered into hedging transactions with respect to its foreign currency exposure, but may do so in the future. There can be no assurance that fluctuations in foreign currency exchange rates will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". PERMITS AND LICENSING The Company's delivery operations are subject to various federal (U.S. and Canadian), state, provincial and local laws, ordinances and regulations that in many instances require certificates, permits and licenses. Failure by the Company to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or regulations could result in substantial fines or possible revocation of the Company's authority to conduct certain of its operations. DEPENDENCE ON KEY PERSONNEL The Company's success is largely dependent on the skills, experience and performance of certain key members of its management. The loss of the services of any of these key employees could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success and plans for growth also depend on its ability to attract and retain skilled personnel in all areas of its business. There is strong competition for skilled personnel in the same-day delivery and logistics businesses. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ RISKS ASSOCIATED WITH THE LOCAL DELIVERY INDUSTRY; GENERAL ECONOMIC CONDITIONS The Company's revenues and earnings are especially sensitive to events that affect the delivery services industry including extreme weather conditions, economic factors affecting the Company's significant customers and shortages of or disputes with labor, any of which could result in the Company's inability to service its clients effectively or the inability of the Company to profitably manage its operations. In addition, downturns in the level of general economic activity and employment in the U.S. or Canada may negatively impact demand for the Company's services. Technological advances in the nature of facsimile and electronic mail have affected the market for on-demand document delivery services. Although the Company has shifted its focus to the distribution of non-faxable items and logistics services, there can be no assurance that these or other technologies will not have a material adverse effect on the Company's business, financial condition and results of operations in the future. DEPENDENCE ON AVAILABILITY OF QUALIFIED COURIER PERSONNEL The Company is dependent upon its ability to attract and retain qualified courier personnel who possess the skills and experience necessary to meet the needs of its operations. The Company competes in markets in which unemployment is relatively low and the competition for couriers and other employees is intense. The Company must continually evaluate and upgrade its pool of available couriers and support personnel to keep pace with demands for delivery services. There can be no assurance that qualified courier personnel will continue to be available in sufficient numbers and on terms acceptable to the Company. The inability to attract and retain qualified courier personnel would have a material adverse impact on the Company's business, financial condition and results of operations. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT: With the exception of historical information, the matters discussed in this report are "forward looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934. Several important factors have been identified, which could cause actual results to differ materially from those predicted. By way of example: o The competitive nature of the same-day delivery business. o The ability of the Company to attract and retain qualified courier personnel as well as retain key management personnel. o A change in the current tax status of courier drivers from independent contractor drivers to employees or a change in the treatment of the reimbursement of vehicle operating costs to employee drivers. o A significant reduction in the exchange rate between the Canadian dollar and the U.S. dollar. o Failure of the Company to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or regulations could result in substantial fines or possible revocation of the Company's authority to conduct certain of its operations. o The ability of the Company to obtain adequate financing. o The ability of the Company to retain independent contractor drivers may be impacted by our ability to pass on fuel cost increases to customers to maintain profit margins and the quality of driver pay. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN EXCHANGE EXPOSURE Significant portions of the Company's operations are conducted in Canada. Exchange rate fluctuations between the U.S. and Canadian dollar result in fluctuations in the amounts relating to the Canadian operations reported in the Company's consolidated financial statements. The Company historically has not entered into hedging transactions with respect to its foreign currency exposure, but may do so in the future. The sensitivity analysis model used by the Company for foreign exchange exposure compares the revenue and net income figures from Canadian operations, at the actual exchange rate, to a 10% decrease in the exchange rate. Based on this model, a 10% decrease would result in a decrease in quarterly revenue of approximately $2.1 million and a decrease in quarterly net income of approximately $0.1 million. There can be no assurances that the above projected exchange rate decrease will materialize. Fluctuations of exchange rates are beyond the control of the Company's management. INTEREST RATE EXPOSURE The Company has entered into an interest rate protection agreement on a portion of the borrowings under its bank credit facility. Through an interest rate swap, the interest rate on $13 million of outstanding debt has been fixed at 6.14%. This hedging agreement expires on February 28, 2003 and will be renewed in accordance with the terms of the bank credit agreement in an amount of 30% of the then outstanding facility. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. The sensitivity analysis model used by the Company for interest rate exposure compares interest expense fluctuations over a one-year period based on current debt levels and current interest rates versus current debt levels at current interest rates with a 10% increase. Based on this model, a 10% increase would result in an increase in interest expense of approximately $0.1 million. There can be no assurances that the above projected interest rate increase will materialize. Fluctuations of interest rates are beyond the control of the Company's management ITEM 4. CONTROLS AND PROCEDURES The term "disclosure controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (Exchange Act). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. The Company's Chief Executive and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days before the filing of this quarterly report (the Evaluation Date), and have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in reports filed under the Exchange Act. The Company maintains a system of internal accounting controls that is designed to provide reasonable assurance that the Company's books and records accurately reflect its transactions and that the established policies and procedures are followed. Subsequent to the date of our most recent evaluation, there were no significant changes to internal controls or in other factors that could significantly affect the Company's internal controls. 13 PART II. OTHER INFORMATION ================================================================================ PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is a party to various legal proceedings arising in the ordinary course of its business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse effect on the financial condition, results of operations, or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 11.1 Calculation of Net Income Per Common Share 99.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: None 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DYNAMEX INC. Dated: December 16, 2002 by /s/ Richard K. McClelland ----------------------------------------- Richard K. McClelland President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Dated: December 16, 2002 by /s/ Ray E. Schmitz ----------------------------------------- Ray E. Schmitz Vice President - Chief Financial Officer (Principal Financial Officer) Dated: December 16, 2002 by /s/ George S. Stephens ----------------------------------------- George S. Stephens Corporate Controller (Principal Accounting Officer) 15 CERTIFICATION I, Richard K. McClelland, President and Chief Executive Officer of Dynamex Inc. and Subsidiaries ("registrant") certify that: 1. I have reviewed this quarter report on Form 10-Q of the registrant; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls, and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: December 16, 2002 by /s/ Richard K. McClelland ----------------------------------------- Richard K. McClelland President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) 16 CERTIFICATION I, Ray E. Schmitz, Vice President and Chief Financial Officer of Dynamex Inc. and Subsidiaries ("registrant") certify that: 1. I have reviewed this quarter report on Form 10-Q of the registrant; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls, and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: December 16, 2002 by /s/ Ray E. Schmitz ---------------------------------------- Ray E. Schmitz Vice President - Chief Financial Officer (Principal Financial Officer) 17 EXHIBIT INDEX Exhibits 11.1 Calculation of Net Income Per Common Share 99.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 E-1