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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002 or
[] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from_______________to____________
Commission File Number: 0-26954
CD&L, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3350958
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
80 Wesley Street 07606
South Hackensack, New Jersey (Zip Code)
(Address of principal executive offices)
(201) 487-7740
(Registrant's telephone number, including area code)
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 common stock of the Registrant, par value $.001 per
share, outstanding as of November 8, 2002 was 7,658,660.
1
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
Item 4 - Controls and Procedures 17
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signature 19
Certifications 20
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
September 30, December 31, 2001
2002
------------------ ------------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,749 $1,165
Accounts receivable, net 14,626 15,077
Prepaid expenses and other current assets 1,995 2,183
------------------ ------------------
Total current assets 18,370 18,425
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,462 1,961
GOODWILL, net 11,531 11,531
INTANGIBLE ASSETS, net 718 721
NOTE RECEIVABLE FROM STOCKHOLDER, net 300 300
OTHER ASSETS 2,487 2,543
------------------ ------------------
Total assets $34,868 $35,481
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $589 $-
Current maturities of long-term debt 3,061 2,362
Accounts payable, accrued liabilities and bank overdrafts
11,849 11,140
------------------ ------------------
Total current liabilities 15,499 13,502
LONG-TERM DEBT 14,655 18,233
OTHER LONG-TERM LIABILITIES 272 131
------------------ ------------------
Total liabilities 30,426 31,866
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.001 par value; 30,000,000 shares
authorized; 7,688,027 shares issued at September 30, 2002
and December 31, 2001 8 8
Additional paid-in capital 12,883 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (8,287) (9,114)
------------------ ------------------
Total stockholders' equity 4,442 3,615
------------------ ------------------
Total liabilities and stockholders' equity $34,868 $35,481
================== ==================
See accompanying notes to condensed consolidated financial statements.
3
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Three Months Ended For the Nine Months
September 30, Ended
September 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
--------------- ------------- ------------- ---------------
Revenue $38,921 $40,566 $116,355 $120,400
Cost of revenue 31,240 32,279 92,514 94,968
--------------- ------------- ------------- ---------------
Gross profit 7,681 8,287 23,841 25,432
--------------- ------------- ------------- ---------------
Costs and Expenses:
Selling, general and
administrative expenses 6,136 6,860 19,485 20,834
Depreciation and amortization 348 565 1,036 1,953
Other (income) expense, net (49) (36) - 2,204
Interest expense 610 709 1,941 2,179
--------------- ------------- ------------- ---------------
Total Costs and Expenses 7,045 8,098 22,462 27,170
--------------- ------------- ------------- ---------------
Income (loss) before provision for income
taxes 636 189 1,379 (1,738)
Provision for income taxes 255 75 552 218
--------------- ------------- ------------- ---------------
Net income (loss) $381 $114 $827 $(1,956)
=============== ============= ============= ===============
Net income (loss) per share:
Basic $.05 $.01 $.11 $(.26)
=============== ============= ============= ===============
Diluted $.05 $.01 $.10 $(.26)
=============== ============= ============= ===============
Basic weighted average common
shares outstanding 7,659 7,659 7,659 7,659
=============== ============= ============= ===============
Diluted weighted average common
shares outstanding 8,166 8,164 8,167 7,659
=============== ============= ============= ===============
See accompanying notes to condensed consolidated financial statements.
4
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months
------------------------------------
Ended September 30,
2002 2001
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $827 $(1,956)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities -
Gain on disposal of equipment and leasehold improvements (53) (37)
Loss on sale of subsidiary - 2,283
Depreciation and amortization 1,036 1,953
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts receivable, net 451 (112)
Prepaid expenses and other current assets 188 1,070
Other assets 67 (65)
Increase (decrease) in -
Accounts payable, accrued liabilities and bank overdrafts 709 (932)
Other long-term liabilities 141 (3)
--------------- ---------------
Net cash provided by operating activities 3,366 2,201
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 136 205
Proceeds from sale of businesses, net - 12,306
Additions to equipment and leasehold improvements (470) (185)
--------------- ---------------
Net cash (used in) provided by investing activities (334) 12,326
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net 589 (10,868)
Repayments of long-term debt (2,887) (2,359)
Deferred financing costs (150) -
--------------- ---------------
Net cash used in financing activities (2,448) (13,227)
--------------- ---------------
CASH USED IN DISCONTINUED OPERATIONS - (1,425)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 584 (125)
CASH AND CASH EQUIVALENTS, beginning of period 1,165 319
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $1,749 $194
=============== ===============
See accompanying notes to condensed consolidated financial statements.
5
CD&L, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited financial statements at that date. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results that
may be expected for any other interim period or for the year ending
December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the CD&L, Inc.
(the "Company" or "CD&L") Form 10-K for the year ended December 31,
2001.
(2) SHORT-TERM BORROWINGS:
As of June 27, 2002 CD&L and Summit Business Capital Corporation, doing
business as Fleet Capital - Business Finance Division, entered into an
agreement establishing a revolving credit facility (the "Fleet
Facility") of $15,000,000. The Fleet Facility replaced a revolving
credit facility with First Union Commercial Corporation established in
July 1997. The Fleet Facility expires on June 27, 2005 and provides
CD&L with standby letters of credit, prime rate based loans at the
bank's prime rate, as defined, plus 25 basis points and LIBOR based
loans at the bank's LIBOR, as defined, plus 225 basis points. Credit
availability is based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15,000,000 and is secured by
substantially all of the assets, including certain cash balances,
accounts receivable, equipment and leasehold improvements and general
intangibles of the Company and its subsidiaries. During the nine months
ended September 30, 2002, the maximum borrowings outstanding under the
Fleet Facility (prior to June 27, 2002, the First Union revolving
credit facility) were approximately $1,826,000 and the outstanding
borrowings as of September 30, 2002 were approximately $589,000. As of
September 30, 2002, the Company had borrowing availability of
$1,970,000 under the Fleet Facility, after adjusting for restrictions
related to outstanding Standby Letters of Credit of $7,000,000 and
minimum availability requirements. Under the terms of the Fleet
Facility, the Company is required to maintain certain financial ratios
and comply with other financial conditions. At September 30, 2002 the
Company was in compliance with all loan covenants of the Fleet
Facility.
(3) LONG-TERM DEBT:
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes and warrants (the "Senior
Notes") with three financial institutions. The Senior Notes originally
bore interest at 12% per annum and are subordinate to all senior debt
including the Company's Fleet Facility. Under the terms of the Senior
Notes, as amended, the Company is required to maintain certain
financial ratios and comply with other financial conditions for which
the Company was in compliance as of September 30, 2002. The Senior
Notes mature on January 29, 2006 and may be prepaid by the Company
under certain circumstances. The warrants expire January 19, 2009 and
are exercisable at any time prior to expiration at a price of $.001 per
equivalent share of common stock for an aggregate of 506,250 shares of
the Company's stock, subject to additional adjustments. The Company has
recorded the fair value of the warrants of $1,265,000 as a credit to
additional paid-in-capital and a debt discount on the Senior Notes.
6
Effective as of June 28, 2002, CD&L and the note holders modified the
Senior Subordinated Loan Agreement (the "Senior Note Agreement")
entered into on January 29, 1999. The Senior Note Agreement, as
amended, provides for scheduled repayments of $250,000 at the end of
each calendar quarter beginning in the first quarter of 2003 and ending
in the fourth quarter of 2005. Such payments increase to $312,500 if
CD&L meets certain availability benchmarks under the Fleet Facility, as
defined. The interest rate on the $3,000,000 of the notes scheduled to
be repaid would be reduced to 10% on a prospective basis if CD&L makes
a voluntary principal repayment of $750,000 at any time prior to
maturity.
A subordinated note with a remaining principal balance of $1,049,000
issued to The Trustee created under Paragraph Third of the Last Will
and Testament of Charles Gold ("Goldwings") in connection with the
Company's purchase of the assets and stock of that business in 1999 had
a payment due on September 15, 2002 that has not yet been made. The
Company is currently in negotiations regarding payments due under this
note, but no agreement has been reached. As a result, the Company has
classified all amounts due under this note as of September 30, 2002 to
current maturities of long-term debt in the accompanying financial
statements.
(4) GOODWILL AND INTANGIBLE ASSETS:
On June 30, 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") was issued. SFAS
142 eliminates goodwill amortization over its estimated useful life.
However, goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value based test. Additionally, acquired
intangible assets should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights,
or if the intangible asset can be sold, transferred, licensed, rented
or exchanged, regardless of the acquirer's intent to do so. Intangible
assets with definitive lives will need to be amortized over their
useful lives. The statement requires that by June 30, 2002, a company
must establish its fair value benchmarks in order to test for
impairment. The Company adopted SFAS 142 effective January 1, 2002. For
purposes of performing the fair-value based test of goodwill, the
Company has determined that it has one reporting unit. This reporting
unit is consistent with its single operating segment, which management
determined is appropriate under the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). The Company
completed the first step of the goodwill impairment test by comparing
the fair value of its single reporting unit to its carrying amount,
including goodwill. Fair value was determined by two methods:
1. Present value of future estimated cash flows, including a
determination of a terminal value.
2. Market capitalization utilizing quoted market prices of the
Company's common stock.
The adoption of SFAS 142 did not result in an impairment of goodwill.
However, changes in business conditions could result in an impairment
in the future. Examples of such changes include, but are not limited
to, bankruptcy or loss of a significant customer, a significant adverse
change in regulatory factors, a loss of key personnel, increased levels
of competition from companies with greater financial resources than the
Company and margin erosion caused by our inability to increase prices
to our customers at the same rate that our costs increase.
7
Intangible assets consist of the following:
As of September 30, 2002
---------------------------------------------
Accumulated
(000s) Cost Amortization
-------------------- -------------------
Non-compete agreements $250 $250
Deferred financing costs 1,338 621
Other 58 57
-------------------- -------------------
$1,646 $928
==================== ===================
Amortization expense for the three and nine months ended September 30,
2002 was approximately $57,000 and $153,000, respectively.
Estimated amortization expense for the years ended December 31,
(000s)
2003 $224
2004 224
2005 199
2006 14
As a result of adopting SFAS 142 on January 1, 2002, the Company
discontinued the amortization of goodwill. A reconciliation of
previously reported net income and earnings per share to the amounts
adjusted for the exclusion of goodwill amortization, net of the related
income tax effect is as follows:
Three Months Ended September 30,
---------------------------------------------
(000s, except per share amounts) 2002 2001
-------------------- -------------------
Reported net income $381 $114
Goodwill amortization, net of tax - 116
-------------------- -------------------
Adjusted net income $381 $230
==================== ===================
Adjusted net income per share - basic $.05 $.03
==================== ===================
Adjusted net income per share - diluted $.05 $.03
==================== ===================
Nine Months Ended September 30,
---------------------------------------------
(000s, except per share amounts) 2002 2001
-------------------- -------------------
Reported net income $827 $(1,956)
Goodwill amortization, net of tax - 357
-------------------- -------------------
Adjusted net income $827 $(1,599)
==================== ===================
Adjusted net income per share - basic $.11 $(.21)
==================== ===================
Adjusted net income per share - diluted $.10 $(.21)
==================== ===================
(5) NOTE RECEIVABLE FROM STOCKHOLDER:
In February 1996, Liberty Mutual Insurance Company ("Liberty Mutual")
filed an action against Securities Courier Corporation ("Securities"),
a subsidiary of the Company, Mr. Vincent Brana, an employee of the
Company, and certain other parties in the United States District Court
for the Southern District of New York. Under the terms of its
acquisition of Securities, the Company had certain rights to
indemnification from Mr. Brana. In connection with the indemnification,
Mr. Brana has entered into a Settlement Agreement and executed a
Promissory Note in such amount as may be due for any defense costs or
award arising out of this suit. Mr. Brana delivered 357,301 shares of
CD&L common stock to the Company, which is being held as partial
collateral. On September 8, 2000 the parties entered into a settlement
agreement in which Securities and Mr. Brana agreed to pay Liberty
Mutual $1,300,000. An initial payment of $650,000 was made by
Securities on October 16, 2000, $325,000 plus interest at a rate of
10.5% per annum was paid in monthly installments ending July 1, 2001
and $325,000 plus interest at a rate of 12.0% per annum was paid in
monthly installments ending July 1, 2002. All such amounts were paid
when due.
8
As a result of the foregoing settlement, at September 30, 2002 and
December 31, 2001 the Company had a receivable due from Mr. Brana
totaling $2,800,000. As of December 31, 2000, considering the market
value of the collateral and Mr. Brana's failure to update and provide
satisfactory evidence to support his ability to pay the promissory
note, the Company recorded a $2,500,000 reserve against the receivable.
Mr. Brana has disputed his obligation to satisfy the amounts when they
are due.
(6) LITIGATION:
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for
personal injury and property damage incurred in connection with its
same-day delivery operations. In connection therewith, the Company has
recorded reserves of $325,000 and $575,000 as of September 30, 2002 and
December 31, 2001, respectively. Management believes that none of these
actions will have a material adverse effect on the consolidated
financial position or results of operations of the Company.
(7) INCOME (LOSS) PER SHARE:
Basic income (loss) per share includes no dilution and is computed by
dividing income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
income (loss) per share reflects the potential dilution if certain
securities are converted and also includes certain shares that are
contingently issuable. Because of the Company's net loss for the nine
months ended September 30, 2001, equivalent shares represented by 3,942
Stock Options and 505,449 Warrants would be anti-dilutive and therefore
are not included in the loss per share calculations for the nine months
ended September 30, 2001.
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
(000s) 2002 2001 2002 2001
--------------- ------------- ------------- --------------
Basic weighted average
common shares outstanding 7,659 7,659 7,659 7,659
Effect of dilutive securities:
Stock options 2 - 3 -
Warrants 505 505 505 -
--------------- ------------- ------------- --------------
Diluted weighted average
common shares
outstanding 8,166 8,164 8,167 7,659
=============== ============= ============= ==============
9
The following common stock equivalents were excluded from the
computation of diluted earnings per share because the exercise or
conversion price was greater than the average market price of common
shares:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -------------------------------
(000s) 2002 2001 2002 2001
--------------- -------------- ------------- --------------
Stock options 1,931 1,877 1,913 1,822
Subordinated
convertible debentures - 7 - 12
Seller financed
convertible notes 475 553 475 553
(8) NEW ACCOUNTING PRONOUNCEMENTS:
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 replaces
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("SFAS 121") and establishes accounting and reporting
standards for long-lived assets to be disposed of by sale. SFAS 144
requires that those assets be measured at the lower of carrying amount
or fair value less cost to sell. SFAS 144 also broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity that
will be eliminated from the ongoing operations of the entity in a
disposal transaction. The adoption of this new principle did not have a
material impact on the Company's financial condition or results of
operations.
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145") was issued.
SFAS 145 eliminates extraordinary accounting treatment for reporting
gain or loss on debt extinguishments, and amends other existing
authoritative pronouncements to make various technical corrections,
clarifies meanings, or describes their applicability under changed
conditions. The Company has adopted the provisions of SFAS 145
beginning with the quarter ended June 30, 2002.
In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146") was issued. SFAS 146 requires recording costs associated
with exit or disposal activities at their fair values when a liability
has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan. Adoption of SFAS
146 is required with the beginning of fiscal year 2003. The Company has
not yet completed the evaluation of the impact of adopting SFAS 146.
10
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following discussion of the Company's results of operations and of
its liquidity and capital resources should be read in conjunction with
the condensed consolidated financial statements of the Company and the
related notes thereto which appear elsewhere in this report.
Percentages and dollar amounts have been rounded to aid presentation.
Disclosure Regarding Forward-Looking Statements
The Company is provided a "safe harbor" for forward-looking statements
contained in this report by the Private Securities Litigation Reform
Act of 1995. The Company may discuss forward-looking information in
this report such as its expectations for future business development,
cost reduction programs, revenue growth and fuel, insurance and labor
cost controls, as well as its liquidity and capital needs and its
future prospects. These forward-looking statements involve certain
risks and uncertainties that may cause the actual events or results to
differ materially from those indicated by such forward-looking
statements. Potential risks and uncertainties include, without
limitation, the risk that the Company will be unable to price its
services so as to increase its profit margins, or that the Company's
cost reduction programs will fail to prevent further erosion of its
profit margins, or that the Company will be unable to continue growing
revenue internally, or that the Company will be unable to reduce its
fuel, insurance and labor costs, or that the Company will be unable to
achieve the other cost savings or additional profits for forward
quarters contemplated by the Company's business management strategy, or
that the Company will be unable to continue to meet its financial
covenants under existing credit lines or otherwise have adequate cash
flow from operations or credit facilities to support its operations and
revenue growth, or that the slowing economy will reduce demand for the
Company's services or other risks specified in the Company's 2001
Report on Form 10-K and other SEC filings.
11
Critical Accounting Policies
The Company's discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to accounts and notes
receivable, intangible assets, income taxes and contingencies. The
Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts and
notes receivable for estimated losses resulting from the inability of
its customers to make payments when due or within a reasonable period
of time thereafter. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make required payments, additional allowances may be
required.
Goodwill
The value of the Company's goodwill is significant relative to
total assets and stockholders' equity. The Company reviews goodwill for
impairment on at least an annual basis using several fair-value based
tests, which include, among others, a discounted cash flow and terminal
value computation. The discounted cash flow and terminal value
computation is based on management's estimates of future operations.
Changes in business conditions could materially impact management's
estimates of future operations and this could result in an impairment
of goodwill. Such impairment, if any, could have a significant impact
on the Company's operations and financial condition. Examples of
changes in business conditions include, but are not limited to,
bankruptcy or loss of a significant customer, a significant adverse
change in regulatory factors, a loss of key personnel, increased levels
of competition from companies with greater financial resources than the
Company and margin erosion caused by our inability to increase prices
to our customers at the same rate that our costs increase.
Insurance Reserves
The Company maintains certain insurance risk through insurance
policies with a $350,000 deductible for workmens' compensation and
automobile liability ($250,000 prior to July 1, 2002) and a $150,000
deductible for employee health medical costs ($125,000 prior to March
1, 2002). The Company reserves the estimated amounts of uninsured
claims and deductibles related to such insurance retentions for claims
that have occurred in the normal course of business. These reserves are
established by management based upon the recommendations of third-party
administrators who perform a specific review of open claims, with
consideration of incurred but not reported claims, as of the balance
sheet date. Actual claim settlements may differ materially from these
estimated reserve amounts.
Income Taxes
The Company files income tax returns in every jurisdiction in
which it has reason to believe it is subject to tax. Historically, the
Company has been subject to examination by various taxing
jurisdictions. To date, none of these examinations has resulted in any
material additional tax. Nonetheless, any tax jurisdiction may contend
that a filing position claimed by the Company regarding one or more of
its transactions is contrary to that jurisdiction's laws or
regulations.
12
Results of Operations
Income and Expense as a Percentage of Revenue
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
-------------------------------- -----------------------------
2002 2001 2002 2001
--------------- ------------- ------------ -------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross profit 19.7% 20.4% 20.5% 21.1%
Selling, general and
administrative expenses 15.7% 16.9% 16.7% 17.3%
Depreciation and amortization 0.9% 1.4% 0.9% 1.6%
Other (income) expense, net (0.1)% (0.1)% 0.0% 1.8%
Interest expense 1.6% 1.7% 1.7% 1.8%
Income (loss) before provision for
income taxes 1.6% 0.5% 1.2% (1.4)%
Net income (loss) 1.0% 0.3% 0.7% (1.6)%
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended
September 30, 2001
Revenue for the nine months ended September 30, 2002 decreased by $4.0
million, or 3.4%, to $116.4 million from $120.4 million for the nine
months ended September 30, 2001. The decrease included approximately
$4.6 million in revenue lost due to the sale of the Company's Mid-West
Region operations on June 14, 2001. After adjusting for the sale,
revenue increased by approximately $0.6 million due to the start-up of
several new distribution contracts.
Cost of revenue decreased by $2.5 million, or 2.6%, to $92.5 million
for the nine months ended September 30, 2002 from $95.0 million for the
nine months ended September 30, 2001. Cost of revenue for the nine
months ended September 30, 2002 represents 79.5% of revenues as
compared to 78.9% for the same period in 2001. The decrease in cost of
revenue included approximately $3.6 million in cost of revenue
eliminated due to the sale of the Company's Mid-West Region operations
on June 14, 2001. After adjusting for the sale, cost of revenue
increased by approximately $1.1 million due primarily to an increase in
labor costs as compared to the same period in 2001. The increased labor
costs, as a percentage of revenue, were partially attributable to the
economic decline that occurred in the northeastern United States as a
result of the September 11, 2001 events.
Selling, general and administrative expenses ("SG&A") decreased by $1.3
million, or 6.5%, to $19.5 million for the nine months ended September
30, 2002 from $20.8 million for the same period in 2001. Stated as a
percentage of revenue, SG&A decreased to 16.7% for the nine months
ended September 30, 2002 as compared to 17.3% for the same period in
2001. SG&A in 2001 included approximately $0.6 million in SG&A
eliminated due to the sale of the Company's Mid-West Region operations
on June 14, 2001. After adjusting for the sale, SG&A decreased by
approximately $0.7 million due primarily to decreased provisions for
doubtful accounts and reductions in professional and consulting fees,
partially offset by increased insurance costs.
13
Depreciation and amortization decreased by $1.0 million, or 47.0%, to
$1.0 million for the nine months ended September 30, 2002 from $2.0
million for the same period in 2001. On June 30, 2001, Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") was issued. SFAS 142 eliminates goodwill
amortization over its estimated useful life. However, goodwill will be
subject to at least an annual assessment for impairment by applying a
fair-value based test. Additionally, acquired intangible assets should
be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented or
exchanged, regardless of the acquirer's intent to do so. Intangible
assets with definitive lives will need to be amortized over their
useful lives. The statement requires that by June 30, 2002, a company
must establish its fair value benchmarks in order to test for
impairment. The Company adopted SFAS 142 effective January 1, 2002. For
purposes of performing the fair-value based test of goodwill, the
Company has determined that it has one reporting unit. This reporting
unit is consistent with its single operating segment, which management
determined is appropriate under the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). The Company
completed the first step of the goodwill impairment test by comparing
the fair value of its single reporting unit to its carrying amount,
including goodwill. Fair value was determined by two methods:
1. Present value of future estimated cash flows, including a
determination of a terminal value.
2. Market capitalization utilizing quoted market prices of the
Company's common stock.
The adoption of SFAS 142 did not result in an impairment of goodwill.
However, changes in business conditions could result in an impairment
in the future. Examples of such changes include, but are not limited
to, bankruptcy or loss of a significant customer, a significant adverse
change in regulatory factors, a loss of key personnel, increased levels
of competition from companies with greater financial resources than the
Company and margin erosion caused by our inability to increase prices
to our customers at the same rate that our costs increase. Adoption of
SFAS 142 increased pretax earnings by approximately $523,000 for the
nine months ended September 30, 2002 due to the cessation of goodwill
amortization.
Other expense, net decreased by $2.2 million, primarily as a result of
the loss recorded on the sale of the Company's Mid-West Region business
in 2001. On June 14, 2001, the Company consummated a transaction
providing for the sale of all the outstanding stock in National
Express, Inc. As a result of the transaction, the Company recorded a
$2.3 million loss on the sale. During the same period in 2002, the
Company recorded approximately $0.1 million of costs associated with
early extinguishment of its borrowing facility with First Union
Commercial Corporation. This was offset by gains recorded on the
disposition of certain equipment.
As a result of the factors discussed above, income (loss) before
provision for income taxes increased by $3.1 million for the nine
months ended September 30, 2002 as compared to the same period in 2001.
Net income (loss) improved by $2.8 million to net income of $0.8
million for the nine months ended September 30, 2002 as compared to a
loss of ($2.0) million for the same period in 2001. This was primarily
due to the factors discussed above.
Three Months Ended September 30, 2002 Compared to the Three Months
Ended September 30, 2001
Revenue for the three months ended September 30, 2002 decreased by $1.7
million, or 4.1%, to $38.9 million from $40.6 million for the three
months ended September 30, 2001. The decrease is due primarily to the
rate reductions provided to customers to extend existing contracts.
14
Cost of revenue decreased by $1.1 million, or 3.2%, to $31.2 million
for the three months ended September 30, 2002 from $32.3 million for
the three months ended September 30, 2001. Cost of revenue for the
three months ended September 30, 2002 represents 80.3% of revenues as
compared to 79.6% for the same period in 2001. The decrease in cost of
revenue is due primarily to the decrease in revenue, however the
increase in cost of revenue as a percentage of revenue is due primarily
to an increase in labor costs as compared to the same period in 2001.
The increased labor costs, as a percentage of revenue, were partially
attributable to the continuing economic pressures in the northeastern
United States as a result of the September 11, 2001 events.
SG&A decreased by $0.8 million, or 10.6%, to $6.1 million for the three
months ended September 30, 2002 from $6.9 million for the same period
in 2001. Stated as a percentage of revenue, SG&A decreased to 15.7% for
the three months ended September 30, 2002 as compared to 16.9% for the
same period in 2001. The decrease in SG&A is due primarily to decreased
bonuses earned and decreased provisions for doubtful accounts,
partially offset by increased insurance costs.
Depreciation and amortization decreased by $0.3 million, or 38.4%, to
$0.3 million for the three months ended September 30, 2002 from $0.6
million for the same period in 2001. On June 30, 2001, Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") was issued. SFAS 142 eliminates goodwill
amortization over its estimated useful life. However, goodwill will be
subject to at least an annual assessment for impairment by applying a
fair-value based test. Additionally, acquired intangible assets should
be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented or
exchanged, regardless of the acquirer's intent to do so. Intangible
assets with definitive lives will need to be amortized over their
useful lives. The statement requires that by June 30, 2002, a company
must establish its fair value benchmarks in order to test for
impairment. The Company adopted SFAS 142 effective January 1, 2002. For
purposes of performing the fair-value based test of goodwill, the
Company has determined that it has one reporting unit. This reporting
unit is consistent with its single operating segment, which management
determined is appropriate under the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). The Company
completed the first step of the goodwill impairment test by comparing
the fair value of its single reporting unit to its carrying amount,
including goodwill. Fair value was determined by two methods:
1. Present value of future estimated cash flows, including a
determination of a terminal value.
2. Market capitalization utilizing quoted market prices of the
Company's common stock.
The adoption of SFAS 142 did not result in an impairment of goodwill.
However, changes in business conditions could result in an impairment
in the future. Examples of such changes include, but are not limited
to, bankruptcy or loss of a significant customer, a significant adverse
change in regulatory factors, a loss of key personnel, increased levels
of competition from companies with greater financial resources than the
Company and margin erosion caused by our inability to increase prices
to our customers at the same rate that our costs increase. Adoption of
SFAS 142 increased pretax earnings by approximately $170,000 for the
three months ended September 30, 2002 due to the cessation of goodwill
amortization.
As a result of the factors discussed above, income (loss) before
provision for income taxes increased by $0.4 million for the three
months ended September 30, 2002 as compared to the same period in 2001.
15
Net income (loss) improved by $0.3 million to net income of $0.4
million for the three months ended September 30, 2002 as compared to
net income of $0.1 million for the same period in 2001. This was
primarily due to the factors discussed above.
Liquidity and Capital Resources
The Company's working capital decreased by $2,052,000 from $4,923,000
as of December 31, 2001 to $2,871,000 as of September 30, 2002. The
decrease is a result of increased current maturities of long-term debt
due to the classification in current maturities of long-term debt of a
subordinated note of approximately $1,049,000. Cash and cash
equivalents increased by $584,000 to $1,749,000 as of September 30,
2002. Cash of $3,366,000 was provided from operations, while $334,000
was used by net investing activities and $2,448,000 was used by net
financing activities to pay down debt. Capital expenditures amounted to
$470,000 and $185,000 for the nine months ended September 30, 2002 and
2001, respectively.
As of June 27, 2002 CD&L and Summit Business Capital Corporation, doing
business as Fleet Capital - Business Finance Division, entered into an
agreement establishing a revolving credit facility (the "Fleet
Facility") of $15,000,000. The Fleet Facility replaced a revolving
credit facility with First Union Commercial Corporation established in
July 1997. The Fleet Facility expires on June 27, 2005 and provides
CD&L with standby letters of credit, prime rate based loans at the
bank's prime rate, as defined, plus 25 basis points and LIBOR based
loans at the bank's LIBOR, as defined, plus 225 basis points. Credit
availability is based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15,000,000 and is secured by
substantially all of the assets, including certain cash balances,
accounts receivable, equipment and leasehold improvements and general
intangibles of the Company and its subsidiaries. During the nine months
ended September 30, 2002, the maximum borrowings outstanding under the
Fleet Facility (prior to June 27, 2002, the First Union revolving
credit facility) were approximately $1,826,000 and the outstanding
borrowings as of September 30, 2002 were approximately $589,000. As of
September 30, 2002, the Company had borrowing availability of
$1,970,000 under the Fleet Facility, after adjusting for restrictions
related to outstanding Standby Letters of Credit of $7,000,000 and
minimum availability requirements. Under the terms of the Fleet
Facility, the Company is required to maintain certain financial ratios
and comply with other financial conditions. At September 30, 2002 the
Company was in compliance with all loan covenants of the Fleet
Facility.
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes and warrants (the "Senior
Notes") with three financial institutions. The Senior Notes originally
bore interest at 12% per annum and are subordinate to all senior debt
including the Company's Fleet Facility. Under the terms of the Senior
Notes, as amended, the Company is required to maintain certain
financial ratios and comply with other financial conditions for which
the Company was in compliance as of September 30, 2002. The Senior
Notes mature on January 29, 2006 and may be prepaid by the Company
under certain circumstances. The warrants expire January 19, 2009 and
are exercisable at any time prior to expiration at a price of $.001 per
equivalent share of common stock for an aggregate of 506,250 shares of
the Company's stock, subject to additional adjustments. The Company has
recorded the fair value of the warrants of $1,265,000 as a credit to
additional paid-in-capital and a debt discount on the Senior Notes.
Effective as of June 28, 2002, CD&L and the note holders modified the
Senior Subordinated Loan Agreement (the "Senior Note Agreement")
entered into on January 29, 1999. The Senior Note Agreement, as
amended, provides for scheduled repayments of $250,000 at the end of
each calendar quarter beginning in the first quarter of 2003 and ending
in the fourth quarter of 2005. Such payments increase to $312,500 if
CD&L meets certain availability benchmarks under the Fleet Facility, as
defined. The interest rate on the $3,000,000 of the notes scheduled to
be repaid would be reduced to 10% on a prospective basis if CD&L makes
a voluntary principal repayment of $750,000 at any time prior to
maturity.
16
A subordinated note with a remaining principal balance of $1,049,000
issued to The Trustee created under Paragraph Third of the Last Will
and Testament of Charles Gold ("Goldwings") in connection with the
Company's purchase of the assets and stock of that business in 1999 had
a payment due on September 15, 2002 that has not yet been made. The
Company is currently in negotiations regarding payments due under this
note, but no agreement has been reached. As a result, the Company has
classified all amounts due under this note as of September 30, 2002 to
current maturities of long-term debt in the accompanying financial
statements.
During the nine months ended September 30, 2002, the maximum borrowings
outstanding under the Fleet Facility (prior to June 27, 2002, the First
Union revolving credit facility) were approximately $1,826,000 and the
outstanding borrowings as of September 30, 2002 were approximately
$589,000. The Company also had $12,000,000 in principal outstanding
under its Senior Notes ($11,398,000 net of unamortized discount). The
Company also had $382,000 of capital lease obligations and various
equipment notes and $5,936,000 of seller financed debt. As of September
30, 2002, the Company had borrowing ability of $1,970,000 under the
revolving credit facility, after adjusting for restrictions related to
outstanding Standby Letters of Credit of $7,000,000 and minimum
availability requirements.
Management believes that cash flows from operations and its borrowing
capacity (see Notes 2 and 3 of the accompanying financial statements)
are sufficient to support the Company's operations and general business
and capital liquidity requirements for the foreseeable future.
Inflation
While inflation has not had a material impact on the Company's results
of operations for the periods presented herein, fluctuations in fuel
prices and labor costs can and do affect the Company's operating costs.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
CD&L is exposed to the effect of changing interest rates. At September
30, 2002, the Company's debt consisted of approximately $17,716,000 of
fixed rate debt with a weighted average interest rate of 11.5% and
$589,000 of variable rate debt with a weighted average interest rate of
5.0%. The amount of variable rate debt fluctuates during the year based
upon CD&L's cash requirements. If interest rates on variable rate debt
were to increase by 50 basis points (one-tenth of the rate at September
30, 2002), the Company's results of operations and cash flows for the
nine month period ended September 30, 2002 would not be significantly
impacted as there were minimal amounts of variable rate debt
outstanding during the period.
Item 4 - Controls and Procedures
During the quarter ended September 30, 2002, an evaluation was
performed under the supervision and with the participation of the
Company's management, including the Chairman and Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures. Based on that evaluation, the Company's management,
including the Chairman and Chief Executive Officer and the Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures (as defined in Rule 13a-14 promulgated under the Securities
Exchanges Act of 1934) are effective. There have been no significant
changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
completion of their evaluation.
17
Part II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.
On October 30, 2002, the Company held its annual meeting of
stockholders. The following sets forth a brief description of each matter which
was acted upon, as well as the votes cast for, against or withheld for each such
matter, and, where applicable, the number of abstentions and broker non-votes
for each matter:
1. Election of Directors.
Name of Director Votes For Withheld
---------------- --------- --------
Class I
Albert W. Van Ness, Jr. 5,682,958 795,197
Thomas E. Durkin III 5,903,468 574,687
John A. Simourian 5,903,468 574,687
2. Approval of the Amendment to the Year 2000 Stock Incentive Plan.
Votes For: 2,097,651
Votes Against: 1,538,014
Abstentions: 60,900
Broker Non-Votes: 2,781,590
3. Approval of the CD&L, Inc. 2002 Stock Option Plan For
Independent Directors.
Votes For: 2,102,801
Votes Against: 1,539,364
Abstentions: 54,400
Broker Non-Votes: 2,781,590
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Albert W. Van Ness, Jr. Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Russell J. Reardon 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
The following current reports on Form 8-K were filed during the third
quarter of 2002.
(i) Report on Form 8-K filed on August 9, 2002 concerning the Company's
dismissal of Arthur Andersen LLP and engagement of Deloitte & Touche
LLP as the Company's independent public accountants.
18
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.
Dated: November 19, 2002 CD&L, INC.
By: \s\ Russell J. Reardon
------------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
19
CERTIFICATION
I, Albert W. Van Ness, Jr., certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of CD&L, Inc.;
(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 Quarterly 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 officers 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
have:
(a) designed such disclosure 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 date 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 officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(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 weaknesses in the 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 officers and I have indicated in this
Quarterly Report whether 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 corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: November 19, 2002
\s\ Albert W. Van Ness, Jr.
---------------------------
Albert W. Van Ness, Jr.
Chief Executive Officer
20
CERTIFICATION
I, Russell J. Reardon, certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of CD&L, Inc.;
(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 Quarterly 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 officers 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
have:
(a) designed such disclosure 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 date 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 officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(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 weaknesses in the 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 officers and I have indicated in this
Quarterly Report whether 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 corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: November 19, 2002
\s\ Russell J. Reardon
----------------------
Russell J. Reardon
Chief Financial Officer
21