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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 June 30, 2003 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 |_|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes |_| No |X|
The number of shares of common stock of the Registrant, par value $.001
per share, outstanding as of August 8, 2003 was 7,658,660.
1
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited)
and December 31, 2002 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 17
Item 4 - Controls and Procedures 18
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 19
Signature 20
Certifications 21
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
June 30, December 31,
2003 2002
-------- -------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,002 $ 1,452
Accounts receivable, net 15,662 14,909
Prepaid expenses and other current assets 2,728 2,119
-------- --------
Total current assets 20,392 18,480
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 975 1,233
GOODWILL, net 11,531 11,531
INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net 549 661
NOTE RECEIVABLE FROM STOCKHOLDER, net - -
OTHER ASSETS 2,137 1,916
-------- --------
Total assets $ 35,584 $ 33,821
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 3,099 $ -
Current maturities of long-term debt 2,780 3,442
Accounts payable, accrued liabilities and bank overdrafts 12,103 12,169
-------- --------
Total current liabilities 17,982 15,611
LONG-TERM DEBT, net of current maturities 12,558 14,041
OTHER LONG-TERM LIABILITIES 316 269
-------- --------
Total liabilities 30,856 29,921
-------- --------
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 June 30, 2003 and
December 31, 2002 8 8
Additional paid-in capital 12,883 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (8,001) (8,829)
-------- --------
Total stockholders' equity 4,728 3,900
-------- --------
Total liabilities and stockholders' equity $ 35,584 $ 33,821
======== ========
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 For the Six Months
Ended Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue $ 40,887 $ 38,885 $ 81,194 $ 77,434
Cost of revenue 33,149 30,653 66,192 61,274
-------- -------- -------- --------
Gross profit 7,738 8,232 15,002 16,160
-------- -------- -------- --------
Costs and Expenses:
Selling, general and
administrative expenses 6,607 6,395 13,135 13,349
Depreciation and amortization 189 305 406 608
Other (income) expense, net (65) 99 (1,166) 49
Interest expense 637 700 1,247 1,411
-------- -------- -------- --------
Total Costs and Expenses 7,368 7,499 13,622 15,417
-------- -------- -------- --------
Income before provision for income taxes 370 733 1,380 743
Provision for income taxes 148 293 552 297
-------- -------- -------- --------
Net income $ 222 $ 440 $ 828 $ 446
======== ======== ======== ========
Net income per share:
Basic $ .03 $ .06 $ .11 $ .06
======== ======== ======== ========
Diluted $ .03 $ .05 $ .10 $ .05
======== ======== ======== ========
Basic weighted average common
shares outstanding 7,659 7,659 7,659 7,659
======== ======== ======== ========
Diluted weighted average common
shares outstanding 8,165 8,169 8,167 8,168
======== ======== ======== ========
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 Six Months Ended
June 30,
----------------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 828 $ 446
Adjustments to reconcile net income to net cash (used in) provided by
operating activities -
Non-cash extinguishment of debt (1,034) -
Gain on disposal of equipment and leasehold improvements (62) (35)
Depreciation, amortization and deferred financing amortization 517 688
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net (753) 743
Prepaid expenses and other current assets (609) (156)
Other assets (221) 66
Increase in -
Accounts payable, accrued liabilities and bank overdrafts (66) 1,296
Other long-term liabilities 47 146
------- -------
Net cash (used in) provided by operating activities (1,353) 3,194
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 68 82
Additions to equipment and leasehold improvements (153) (340)
------- -------
Net cash used in investing activities (85) (258)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 3,099 -
Repayments of long-term debt (1,111) (1,391)
Deferred financing costs - (150)
------- -------
Net cash provided by (used in) financing activities 1,988 (1,541)
------- -------
Net increase in cash and cash equivalents 550 1,395
CASH AND CASH EQUIVALENTS, beginning of period 1,452 1,165
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,002 $ 2,560
======= =======
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 accounting principles generally
accepted in the United States of America ("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, 2002 has been derived from the audited financial
statements at that date. Certain reclassifications have been made to
the June 30, 2002 condensed consolidated statements of operations to
conform to the current period presentation. 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 six months ended June 30,
2003 are not necessarily indicative of the results that may be expected
for any other interim period or for the year ending December 31, 2003.
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, 2002.
(2) STOCK BASED COMPENSATION:
In December 2002, Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148") was issued and became effective in 2002. This
Statement amends SFAS No. 123 "Accounting for Stock-Based
Compensation," ("SFAS 123") to provide alternative methods of
transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based compensation. The Company has
elected to continue to recognize stock-based compensation using the
intrinsic value method and has incorporated the additional disclosure
requirements of SFAS 148.
The Company has adopted the disclosure provisions of SFAS 148. As a
result, under the provisions of SFAS 123, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in
accounting for its stock option plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Pro
forma information regarding net income and earnings per share is
required, and has been determined as if the Company had accounted for
its stock options under the fair value method. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for the three and
six months ended June 30, 2003 and 2002-
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------- ------------ ------------
Weighted average fair value $0.36 $0.41 $0.35 $0.45
Risk-free interest rate 4.30% 4.30% 4.30% 4.30%
Volatility factor 86% 101% 68% 101%
Expected life 7 years 7 years 7 years 7 years
Dividend yield None None None None
6
The pro forma information regarding net income and earnings per share
is as follows (in thousands, except per share data)-
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------- ------------ ------------
Net income, as reported $222 $440 $828 $446
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (1) (24) 1 (63)
------------ ------------- ------------ ------------
Pro forma net income $221 $416 $829 $383
============ ============= ============ ============
Net income per share:
Basic, as reported $.03 $.06 $.11 $.06
Diluted, as reported $.03 $.05 $.10 $.05
Basic, pro forma $.03 $.05 $.11 $.05
Diluted, pro forma $.03 $.05 $.10 $.05
(3) 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 (4.25% at June 30,
2003) and LIBOR based loans at the bank's LIBOR, as defined, plus 225
basis points (3.37% at June 30, 2003). 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, leasehold improvements and general intangibles of the
Company and its subsidiaries. During the six months ended June 30,
2003, the maximum borrowings outstanding under the Fleet Facility were
approximately $3,099,000 and the outstanding borrowings as of June 30,
2003 were approximately $3,099,000. As of June 30, 2003, the Company
had borrowing availability of $767,000 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. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. At June 30, 2003, the Company did not
comply with the Unsubordinated Liabilities to Tangible Net Worth Ratio
covenant, as defined. On August 8, 2003, the Company obtained a waiver
from its lender for the covenant violation.
(4) 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 12.0% 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 contained
in the Senior Notes agreement. Upon receipt of the waiver in relation
to the Fleet Facility, the Company was in compliance with the Senior
Notes covenants as of June 30, 2003.
7
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. The Company used the proceeds to finance acquisitions and to
reduce outstanding short-term borrowings. As of August 17, 2000,
November 21, 2000, March 30, 2001, May 30, 2001, August 20, 2001,
November 19, 2001, April 12, 2002, June 28, 2002 and April 23, 2003,
the Company 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 the Company 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
through 2005 would be reduced to 10% on a prospective basis if the
Company makes a voluntary principal repayment of $750,000 at any time
prior to maturity.
Seller-Financed Debt -
On March 30, 2001, pursuant to an Asset Purchase Agreement dated as of
March 7, 2001, Sureway Worldwide, LLC ("Sureway Worldwide"), a
wholly-owned subsidiary of Global Delivery Systems, LLC ("Global"),
purchased certain assets from a subsidiary of CD&L. As part of the
payment price for such assets, Sureway Worldwide issued to CD&L a
promissory note in the original principal amount of $2,500,000
guaranteed by Global (the "Note Receivable"). Such note and the
guaranty were subordinated to Sureway Worldwide's and Global's
obligations to its secured lender. No payments had been made to CD&L on
the Note Receivable since issuance. CD&L wrote-off the entire amount of
the Note Receivable on December 31, 2001 based on management's
determination that the note would not be collected.
On February 16, 1999, the Company and its subsidiary, Sureway Air
Traffic Corporation, Inc. ("Sureway"), entered into and consummated an
asset and stock purchase agreement with Victory Messenger Service,
Inc., Richard Gold ("Gold"), Darobin Freight Forwarding Co., Inc.
("Darobin"), and The Trust Created Under Paragraph Third of the Last
Will and Testament of Charles Gold (the "Trust"), (collectively "Gold
Wings"), whereby Sureway purchased all of the outstanding shares of the
capital stock of Darobin and certain of the assets and liabilities of
the other sellers. In conjunction therewith, the Company became
obligated for seller-financed acquisition debt of $1,650,000. As of
February 28, 2003, the note had a remaining principal balance of
$1,034,000 (the "CDL/Gold Note").
On February 28, 2003, the Company completed a series of related
transactions with GMV Express, Inc. ("GMV"), Gold (a principal of GMV)
and his affiliates, and Global and its subsidiary, Sureway Worldwide.
The net effect of the transactions with Global, Sureway Worldwide, GMV
and Gold is that the Company assigned the Note Receivable to GMV in
exchange for a release on the CDL/Gold Note payable, so that the
Company is now relieved of its $1,034,000 liability for the CDL/Gold
Note and the Company has no further rights to the Note Receivable. In
addition, the Company received payments from Sureway Worldwide and
Global of approximately $117,000 ($72,000 in settlement of disputed
claims and $45,000 for other amounts due) and provided Gold with a
release covering claims of breach of certain non-competition
agreements. As a result of this transaction, the Company recorded a
gain of $1,034,000 which is included within other (income) expense,
net.
8
(5) GOODWILL, INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS:
On June 30, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") was issued. SFAS 142 eliminated goodwill amortization over
its estimated useful life. However, goodwill is subject to at least an
annual assessment for impairment by applying a fair-value based test.
Additionally, acquired intangible assets must 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 are
amortized over their useful lives. 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 SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). During 2002, a
transitional goodwill impairment test was performed and the Company
determined that there was no impairment of goodwill. Further, as
required by SFAS 142, an annual impairment test was completed at the
end of fiscal 2002 and the Company determined that there was no
impairment. 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 the recognition of an
impairment of goodwill. However, changes in business conditions could
result in impairment in the future. 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.
Intangible assets and deferred financing costs consist of the following
(in thousands)-
As of June 30, 2003
---------------------------------
Accumulated
Cost Amortization
-------------- ----------------
Deferred financing costs $1,338 $789
Other 58 58
-------------- ----------------
$1,396 $847
============== ================
Intangible asset amortization expense for the three months ended June
30, 2003 and 2002 was approximately $56,000 and $47,000, respectively
and $112,000 and $96,000 for the six months ended June 30, 2003 and
2002, respectively.
Estimated annual intangible amortization expense for the years ended
December 31 (in thousands)-
2003 $224
2004 224
2005 199
2006 14
9
(6) 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 (the "Brana Note") in such amount as may be due for any
defense costs or award arising out of this suit. Mr. Brana has agreed
to repay the Company on December 1, 2003, together with interest
calculated at a rate per annum equal to the rate charged the Company by
its senior lender. Mr. Brana delivered 357,301 shares of CD&L common
stock to the Company as collateral for the Brana Note. 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 the balance of $325,000 plus
interest at a rate of 12.0% per annum was paid in monthly installments
ending July 1, 2002.
At June 30, 2003 and December 31, 2002, the Company had a receivable
due from Mr. Brana totaling $2,800,000. As of June 30, 2003,
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 Brana Note, the Company maintained a $2,800,000 reserve against
the receivable.
In an effort to resolve all outstanding disputes between Mr. Brana and
the Company, a settlement agreement is currently being negotiated. If
an agreement is reached, the Company would return to Mr. Brana the
357,301 shares of CD&L common stock held by the Company as collateral
for the $2,800,000 note, and provide certain releases for claims that
the Company may have against him. Mr. Brana's employment with the
Company was terminated on September 1, 2002 and he has served as a paid
consultant since that time.
(7) LITIGATION:
The Company is, from time to time, a party to litigation arising in the
normal course of its business, including claims for uninsured personal
injury and property damage incurred in connection with its same-day
delivery operations. In connection therewith, the Company has recorded
reserves of $292,000 and $325,000 as of June 30, 2003 and December 31,
2002, respectively.
Also from time to time, federal and state authorities have sought to
assert that independent contractors in the transportation industry,
including those utilized by CD&L, are employees rather than independent
contractors. The Company believes that the independent contractors that
it utilizes are not employees under existing interpretations of federal
and state laws. However, federal and state authorities have and may
continue to challenge this position. Further, laws and regulations,
including tax laws, and the interpretations of those laws and
regulations, may change.
Management believes that none of these actions, including the actions
described above, will have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
(8) INCOME PER SHARE:
Basic earnings per share represents net income divided by the weighted
average shares outstanding. Diluted earnings per share represents net
income divided by the weighted average shares outstanding adjusted for
the incremental dilution of potentially dilutive common shares.
10
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows
(in thousands)-
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- ------------- ------------- --------------
Basic weighted average
common shares outstanding 7,659 7,659 7,659 7,659
Effect of dilutive securities:
Stock options and warrants 506 510 508 509
-------------- ------------- ------------- --------------
Diluted weighted average
common shares
outstanding 8,165 8,169 8,167 8,168
============== ============= ============= ==============
The following potentially dilutive common shares 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 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
2003 2002 2003 2002
-------------- ------------ ------------ ------------
Stock options and warrants 1,939 1,908 1,907 1,907
Seller financed convertible notes 431 491 431 491
(9) NEW ACCOUNTING PRONOUNCEMENT:
In January 2003, Interpretation No. 46 of the Financial Accounting
Standards Board, "Consolidation of Variable Interest Entities" ("FIN
46") was issued. The Company does not believe that it has any
relationships with variable interest entities that will be subject to
the requirements of FIN 46.
(10) RELATED PARTY TRANSACTIONS:
Effective as of February 1, 2003, the Company has leased its former
vehicle repair facility to a company whose principal is a shareholder
and former executive of the Company. During the three and six months
ended June 30, 2003, the Company paid for vehicle maintenance and
repairs of approximately $73,000 and $134,000, respectively. During the
first six months of 2003, the Company sold 38 vehicles for
approximately $23,400 to this company. Additionally, the Company
received rent from this company of approximately $9,000 and $15,000
during the three and six months ended June 30, 2003, respectively.
Refer to the 2002 Form 10-K for additional discussion of related party
transactions.
11
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 performance, growth and
acquisition strategies, liquidity and capital needs and its future
prospects. Actual results may not necessarily develop as the Company
anticipates due to many factors including, but not limited to the
timing of certain transactions, unexpected expenses encountered, the
effect of economic and market conditions, the impact of competition and
the factors listed in the Company's 2002 Report on Form 10-K and other
SEC filings. Because of these and other reasons, the Company's actual
results may vary materially from management's current expectations.
Overview
The condensed consolidated financial statements of the Company
including all related notes, which appear elsewhere in this report,
should be read in conjunction with this discussion of the Company's
results of operations and its liquidity and capital resources.
Critical Accounting Policies and Estimates
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 of
America. 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 ongoing 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 reflect
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 and debtors to make payments when due or within a reasonable
period of time thereafter. The Company estimates allowances for
doubtful accounts and notes receivable by evaluating past due aging
trends, analyzing customer payment histories and assessing market
conditions relating to its customers' operations and financial
condition. Such allowances are developed principally for specific
customers. If the financial condition of the Company's customers and
debtors 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.
12
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 consolidated 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 retains certain insurance risk through various insurance
policies. The Company's deductible for workers' compensation is
$500,000 per loss ($350,000 prior to May 1, 2003). The deductible for
employee health medical costs is $150,000 per loss ($125,000 prior to
March 1, 2002). Effective July 1, 2003, automobile liability coverage
is maintained for covered vehicles through a fully-insured indemnity
program with no deductible ($350,000 deductible prior to July 1, 2003).
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, which
include fully developed estimates of both reported claims and 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 have 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.
Results of Operations
Income and Expense as a Percentage of Revenue
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2003 2002 2003 2002
---------------- -------------- ------------- --------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross profit 18.9% 21.2% 18.5% 20.9%
Selling, general and
administrative expenses 16.2% 16.4% 16.2% 17.2%
Depreciation and amortization 0.5% 0.8% 0.5% 0.8%
Other (income) expense, net (0.2%) 0.3% (1.4%) 0.1%
Interest expense 1.6% 1.8% 1.5% 1.8%
Income before provision for income
taxes 0.9% 1.9% 1.7% 1.0%
Net income 0.5% 1.1% 1.0% 0.6%
13
Six Months Ended June 30, 2003 Compared to the Six Months Ended June
30, 2002
Revenue for the six months ended June 30, 2003 increased by $3,760,000,
or 4.9%, to $81,194,000 from $77,434,000 for the six months ended June
30, 2002. An increase in volume from new and existing customers
contributed to such revenue increase, partially offset by certain price
reductions granted to extend customer contracts.
Cost of revenue increased by $4,918,000, or 8.0%, to $66,192,000 for
the six months ended June 30, 2003 from $61,274,000 for the six months
ended June 30, 2002. Cost of revenue for the six months ended June 30,
2003 represents 81.5% of revenues as compared to 79.1% for the same
period in 2002. The increase in cost of revenue is due primarily to the
increase in revenue; however the increase in cost of revenue as a
percentage of revenue is due primarily to certain price reductions
referred to above and an increase in direct labor costs as compared to
the same period in 2002.
Selling, general and administrative expenses ("SG&A") decreased by
$214,000, or 1.6%, to $13,135,000 for the six months ended June 30,
2003 from $13,349,000 for the same period in 2002. Stated as a
percentage of revenue, SG&A decreased to 16.2% for the six months ended
June 30, 2003 as compared to 17.2% for the same period in 2002. The
decrease in SG&A is due primarily to a reduction in compensation
expense of $1,209,000 which includes reduced staffing, lower incentive
compensation and the reversal of previously recorded severance
benefits. This reduction in SG&A is partially offset by a $257,000
increase in facility rent costs and an increase of $552,000 due to
additional expenditures in the following areas: systems/data
processing, medical benefits, general insurance, office maintenance,
utilities, professional fees and meals and entertainment.
Depreciation and amortization decreased by $202,000, or 33.2%, to
$406,000 for the six months ended June 30, 2003 from $608,000 for the
same period in 2002. Such reduction was primarily caused by the full
depreciation of certain vehicles held under a capital lease that ended
during 2002 and reduced capital expenditures in 2000, 2001 and 2002.
Other (income) expense, net increased to $1,166,000 of income for the
six months ended June 30, 2003 from $49,000 of expense for the same
period in 2002 for the reasons discussed below.
On March 30, 2001, pursuant to an Asset Purchase Agreement dated as of
March 7, 2001, Sureway Worldwide, LLC ("Sureway Worldwide"), a
wholly-owned subsidiary of Global Delivery Systems, LLC ("Global"),
purchased certain assets from a subsidiary of CD&L. As part of the
payment price for such assets, Sureway Worldwide issued to CD&L a
promissory note in the original principal amount of $2,500,000
guaranteed by Global (the "Note Receivable"). Such note and the
guaranty were subordinated to Sureway Worldwide's and Global's
obligations to its secured lender. No payments had been made to CD&L on
the Note Receivable since issuance. CD&L wrote-off the entire amount of
the Note Receivable on December 31, 2001 based on management's
determination that the note would not be collected.
On February 16, 1999, the Company and its subsidiary, Sureway Air
Traffic Corporation, Inc. ("Sureway"), entered into and consummated an
asset and stock purchase agreement with Victory Messenger Service,
Inc., Richard Gold ("Gold"), Darobin Freight Forwarding Co., Inc.
("Darobin"), and The Trust Created Under Paragraph Third of the Last
Will and Testament of Charles Gold (the "Trust"), (collectively "Gold
Wings"), whereby Sureway purchased all of the outstanding shares of the
capital stock of Darobin and certain of the assets and liabilities of
the other sellers. In conjunction therewith, the Company became
obligated for seller-financed acquisition debt of $1,650,000. As of
February 28, 2003, the note had a remaining principal balance of
$1,034,000 (the "CDL/Gold Note").
14
On February 28, 2003, the Company completed a series of related
transactions with GMV Express, Inc. ("GMV"), Gold (a principal of GMV)
and his affiliates, and Global and its subsidiary, Sureway Worldwide.
The net effect of the transactions with Global, Sureway Worldwide, GMV
and Gold is that the Company assigned the Note Receivable to GMV in
exchange for a release on the CDL/Gold Note payable, so that the
Company is now relieved of its $1,034,000 liability for the CDL/Gold
Note and the Company has no further rights to the Note Receivable. In
addition, the Company received payments from Sureway Worldwide and
Global of approximately $117,000 ($72,000 in settlement of disputed
claims and $45,000 for other amounts due) and provided Gold with a
release covering claims of breach of certain non-competition
agreements. As a result of this transaction, the Company recorded a
gain of $1,034,000 during the six month period ended June 30, 2003,
included within other (income) expense, net.
As a result of the factors discussed above, income before provision for
income taxes increased by $637,000 for the six months ended June 30,
2003 as compared to the same period in 2002.
Provision for income taxes increased by $255,000 for the six months
ended June 30, 2003 as compared to the same period in 2002. This was
due to the increase in income before provision for income taxes
discussed above. The effective tax rate for both periods was 40%.
Net income improved by $382,000 to net income of $828,000 for the six
months ended June 30, 2003 as compared to net income of $446,000 for
the same period in 2002. This was due to the factors discussed above.
Three Months Ended June 30, 2003 Compared to the Three Months Ended
June 30, 2002
Revenue for the three months ended June 30, 2003 increased by
$2,002,000, or 5.1%, to $40,887,000 from $38,885,000 for the three
months ended June 30, 2002. An increase in volume from new and existing
customers contributed to such revenue increase, partially offset by
certain price reductions granted to extend customer contracts.
Cost of revenue increased by $2,496,000, or 8.1%, to $33,149,000 for
the three months ended June 30, 2003 from $30,653,000 for the three
months ended June 30, 2002. Cost of revenue for the three months ended
June 30, 2003 represents 81.1% of revenues as compared to 78.8% for the
same period in 2002. The increase in cost of revenue is due primarily
to the increase in revenue; however the increase in cost of revenue as
a percentage of revenue is due primarily to certain price reductions
referred to above and an increase in direct labor costs as compared to
the same period in 2002.
Selling, general and administrative expenses ("SG&A") increased by
$212,000, or 3.3%, to $6,607,000 for the three months ended June 30,
2003 from $6,395,000 for the same period in 2002. Stated as a
percentage of revenue, SG&A decreased to 16.2% for the three months
ended June 30, 2003 as compared to 16.4% for the same period in 2002.
The increase in SG&A is due to a variety of factors including a
$260,000 increase in provision for doubtful accounts and an increase of
$301,000 due to additional expenditures in the following areas:
premises rent, computer costs/data processing and other indirect
expenses. This increase in SG&A is partially offset by a reduction in
compensation expense of $566,000.
Depreciation and amortization decreased by $116,000, or 38.0%, to
$189,000 for the three months ended June 30, 2003 from $305,000 for the
same period in 2002. Such reduction was primarily caused by the full
depreciation of certain vehicles held under a capital lease that ended
during 2002 and reduced capital expenditures in 2000, 2001 and 2002.
Other (income) expense, net shows a favorable increase to $65,000 of
income for the three months ended June 30, 2003 from $99,000 of expense
for the same period in 2002. This fluctuation is primarily due to the
Company recording costs associated with early extinguishment of its
borrowing facility with First Union Commercial Corporation in 2002 of
$142,000.
15
As a result of the factors discussed above, income before provision for
income taxes decreased by $363,000 for the three months ended June 30,
2003 as compared to the same period in 2002.
Provision for income taxes decreased by $145,000 for the three months
ended June 30, 2003 as compared to the same period in 2002. This was
due to the decrease in income before provision for income taxes
discussed above. The effective tax rate for both periods was 40%.
Net income decreased by $218,000 to net income of $222,000 for the
three months ended June 30, 2003 as compared to net income of $440,000
for the same period in 2002. This was due to the factors discussed
above.
Liquidity and Capital Resources
The Company's working capital decreased by $459,000 from $2,869,000 as
of December 31, 2002 to $2,410,000 as of June 30, 2003. The decrease is
primarily a result of cash used in operating activities. Cash and cash
equivalents increased by $550,000 to $2,002,000 as of June 30, 2003.
Cash of $1,353,000 was used in operations, while $85,000 was used in
net investing activities and $1,988,000 was provided by net financing
activities. Capital expenditures amounted to $153,000 and $340,000 for
the six months ended June 30, 2003 and 2002, 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 (4.25% at June 30,
2003) and LIBOR based loans at the bank's LIBOR, as defined, plus 225
basis points (3.37% at June 30, 2003). 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, leasehold improvements and general intangibles of the
Company and its subsidiaries. During the six months ended June 30,
2003, the maximum borrowings outstanding under the Fleet Facility were
approximately $3,099,000 and the outstanding borrowings as of June 30,
2003 were approximately $3,099,000. As of June 30, 2003, the Company
had borrowing availability of $767,000 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. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. At June 30, 2003, the Company did not
comply with the Unsubordinated Liabilities to Tangible Net Worth Ratio
covenant, as defined. On August 8, 2003, the Company obtained a waiver
from its lender for the covenant violation.
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 12.0% 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 contained
in the Senior Notes agreement. Upon receipt of the waiver in relation
to the Fleet Facility, the Company was in compliance with the Senior
Notes covenants as of June 30, 2003.
16
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. The Company used the proceeds to finance acquisitions and to
reduce outstanding short-term borrowings. As of August 17, 2000,
November 21, 2000, March 30, 2001, May 30, 2001, August 20, 2001,
November 19, 2001, April 12, 2002, June 28, 2002 and April 23, 2003,
the Company 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 the Company 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
through 2005 would be reduced to 10% on a prospective basis if the
Company makes a voluntary principal repayment of $750,000 at any time
prior to maturity.
Self-Insurance -
The Company's risk of incurring uninsured losses has increased in 2003
as a result of increased deductibles retained by the Company in order
to reduce premiums in conjunction with the renewal of certain insurance
policies in 2003. There can be no assurances that the Company's risk
management policies and procedures will minimize future uninsured
losses or that a material increase in frequency or severity of
uninsured losses will not occur and adversely impact the Company's
future consolidated financial results.
The Company has an accumulated deficit of ($8,001,000) as of June 30,
2003. There can be no assurances that the Company's lenders will agree
to waive any future covenant violations, if any, continue to
renegotiate and modify the terms of their loans, or further extend the
maturity date, should it become necessary to do so. Further, there can
be no assurances that the Company will be able to meet its revenue,
cost or income projections, upon which the debt covenants are based.
Management believes that cash flows from operations and its borrowing
capacity, after the debt modifications referred to above, are
sufficient to support the Company's operations and general business and
capital requirements for at least the next twelve months. Such
conclusions are predicated upon sufficient cash flow from operations
and the continued availability of a revolving credit facility. The
risks associated with cash flow from operations are mitigated by the
Company's low gross profit margin. Unless extraordinary, decreases in
revenue should be accompanied by corresponding decreases in costs,
resulting in minimal impact to liquidity. The risks associated with the
revolving credit facility are as discussed above.
Inflation
While inflation has not had a material impact on the Company's results
of operations for the periods presented herein, recent fluctuations in
fuel prices can and do affect the Company's operating costs.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the effect of changing interest rates. At
June 30, 2003, the Company's debt consisted of approximately
$12,602,000 (excluding unamortized discount of $467,000) of fixed rate
debt with a weighted average interest rate of 13.3% and $6,302,000 of
variable rate debt with a weighted average interest rate of 5.7%. The
variable rate debt consists of six seller-financed notes with an
interest rate of prime plus 200 basis points with a minimum rate of
7.0% and maximum rate of 9.0% and $3,099,000 of borrowings of revolving
line of credit debt. If interest rates on variable rate debt were to
increase by 57 basis points (one-tenth of the rate at June 30, 2003),
the net impact to the Company's results of operations and cash flows
for the six month period ended June 30, 2003 would be a decrease of
approximately $18,000. Maximum borrowings of revolving line of credit
debt during the six months ended June 30, 2003 were $3,099,000.
17
Item 4 - Controls and Procedures
As of the end of the Company's most recently completed fiscal quarter
covered by this Quarterly Report, the Company carried out an
evaluation, with the participation of the Company's management,
including the Company's Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the Company's
disclosure controls and procedures pursuant to Securities Exchange Act
Rule 13a-15. Based upon that evaluation, the Company's CEO and CFO
concluded that the Company's disclosure controls and procedures are
effective in ensuring that information required to be disclosed by the
Company in the reports that it files or submits under the Securities
Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms. There have
been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter to
which this Quarterly Report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal
control over financial reporting.
18
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Albert W. Van Ness, Jr. Pursuant to Exchange
Act Rules 13a-15e and 15d-15e, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Russell J. Reardon Pursuant to Exchange Act
Rules 13a-15e and 15d-15e, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
99.3 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.
99.4 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 second
quarter of 2003.
o Report on Form 8-K filed on May 2, 2003 concerning the May 1,
2003 press release announcing fiscal year 2002 earnings.
o Report on Form 8-K filed on May 22, 2003 concerning the May
22, 2003 press release announcing first quarter earnings for
the 2003 fiscal year.
19
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: August 13, 2003 CD&L, INC.
By: \s\ Russell J. Reardon
------------------------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
20