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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 March 31, 2004 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 May 7, 2004 was 7,658,660.
1
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004
INDEX
Page
Part I - Financial Information
Item 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2004 and 2003 (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 17
Part II - Other Information
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)
March 31, December 31,
2004 2003
-------- --------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 697 $ 1,697
Accounts receivable, net 18,738 18,786
Prepaid expenses and other current assets 2,940 4,068
-------- --------
Total current assets 22,375 24,551
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,279 1,446
GOODWILL, net 11,531 11,531
INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net
1,956 437
OTHER ASSETS 1,062 2,387
-------- --------
Total assets $ 38,203 $ 40,352
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 3,799 $ 5,767
Current maturities of long-term debt 2,043 2,585
Accounts payable, accrued liabilities and bank overdrafts
14,981 14,392
-------- --------
Total current liabilities 20,823 22,744
LONG-TERM DEBT, net of current maturities 11,395 11,785
OTHER LONG-TERM LIABILITIES 233 240
-------- --------
Total liabilities 32,451 34,769
-------- --------
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 March 31, 2004 and
December 31, 2003 8 8
Additional paid-in capital 12,883 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (6,977) (7,146)
-------- --------
Total stockholders' equity 5,752 5,583
-------- --------
Total liabilities and stockholders' equity $ 38,203 $ 40,352
======== ========
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 March 31,
-----------------------
2004 2003
-------- --------
Revenue $ 46,482 $ 40,307
Cost of revenue 37,884 33,043
-------- --------
Gross profit 8,598 7,264
-------- --------
Costs and Expenses:
Selling, general, and administrative expenses 7,535 6,528
Depreciation and amortization 221 217
Other (income), net (11) (1,101)
Interest expense 571 610
-------- --------
Total Costs and Expenses 8,316 6,254
-------- --------
Income before provision for income taxes 282 1,010
Provision for income taxes 113 404
-------- --------
Net income $ 169 $ 606
======== ========
Net income per share:
Basic $ .02 $ .08
======== ========
Diluted $ .02 $ .07
======== ========
Basic weighted average common shares outstanding 7,659 7,659
======== ========
Diluted weighted average common shares outstanding 8,238 8,170
======== ========
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 Three Months
Ended March 31,
----------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 169 $ 606
Adjustments to reconcile net income to net cash provided by (used in)
operating activities -
Non-cash extinguishment of debt -- (1,034)
Gain on disposal of equipment and leasehold improvements (2) (34)
Depreciation, amortization and deferred financing amortization 274 272
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net 48 (1,092)
Prepaid expenses and other current assets 1,128 (143)
Other assets (277) (122)
Increase (decrease) in -
Accounts payable, accrued liabilities and bank overdrafts 589 829
Other long-term liabilities (7) (8)
------- -------
Net cash provided by (used in) operating activities 1,922 (726)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 3 36
Additions to equipment and leasehold improvements (25) (54)
------- -------
Net cash used in investing activities (22) (18)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (1,968) 1,575
Repayments of long-term debt (932) (542)
------- -------
Net cash (used in) provided by financing activities (2,900) 1,033
------- -------
Net (decrease) increase in cash and cash equivalents (1,000) 289
CASH AND CASH EQUIVALENTS, beginning of period 1,697 1,452
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 697 $ 1,741
======= =======
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, 2003 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 months ended March 31, 2004
are not necessarily indicative of the results that may be expected for
any other interim period or for the year ending December 31, 2004. 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, 2003.
(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 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. The Company's
stock options have all been issued with their exercise price at market
value at the date of grant. Accordingly, no compensation expense has
been recognized for its stock-based compensation plans. Pro forma
information regarding net income and net income per share is required
under the provisions of SFAS No. 123, 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 months ended March 31, 2004 and 2003.
For the Three Months Ended
March 31,
-----------------------------
2004 2003
------------ -------------
Weighted average fair value $0.62 $0.52
Risk-free interest rate 4.00% 4.30%
Volatility factor 82% 101%
Expected life 7 years 7 years
Dividend yield None None
6
The pro forma information regarding net income and net income per share
is as follows (in thousands, except per share data)-
For the Three Months
Ended March 31,
-------------------------
2004 2003
---------- -----------
Net income, as reported $169 $606
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (4) (2)
---------- -----------
Pro forma net income $165 $604
========== ===========
Net income per share:
Basic, as reported $.02 $.08
Diluted, as reported $.02 $.07
Basic, pro forma $.02 $.08
Diluted, pro forma $.02 $.07
(3) SHORT-TERM BORROWINGS:
At March 31, 2004, short-term borrowings totaled $3,799,000 consisting
of a line of credit balance of $3,543,000 and $256,000 of outstanding
borrowings related to the insurance financing arrangements discussed
below.
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 March 31,
2004) and LIBOR based loans at the bank's LIBOR, as defined, plus 225
basis points (3.34% at March 31, 2004). 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 three months ended March 31,
2004, the maximum borrowings outstanding under the Fleet Facility were
$6,008,000 and the outstanding borrowings as of March 31, 2004 were
$3,543,000. As of March 31, 2004, the Company had total cash on hand
and borrowing availability of $3,246,000 under the Fleet Facility,
after adjusting for restrictions related to outstanding standby letters
of credit of $6,515,000 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. The Company was in compliance with its
debt covenants as of March 31, 2004.
Insurance Financing Agreements -
In connection with the renewal of certain of the Company's insurance
policies, CD&L entered into four agreements to arrange for the
financing of annual insurance premiums. A total of $3,236,000 was
financed through these arrangements. The interest rates range from
3.50% to 4.75% and the notes matured in March and April 2004. The
related annual insurance premiums were paid to the various insurance
companies at the beginning of each policy year. The outstanding debt of
$256,000 at March 31, 2004 is included in short-term borrowings. The
corresponding prepaid insurance has been recorded in prepaid expenses
and other current assets.
7
(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. Although we were in compliance with our
Senior Notes debt covenants at December 31, 2003, we were anticipating
non-compliance with certain covenants in 2004 and beyond. Additionally,
based on our cash flow projections, we would likely have been unable to
pay the $9,000,000 balloon payment on the Senior Notes due to be paid
in January 2006. Subsequently, on April 14, 2004, we restructured our
senior debt and related covenants. The restructuring includes an
agreement among us, our lenders and certain members of CD&L management
and others which improves the Company's short-term liquidity and
reduces interest expense. See Note 10 - Subsequent Events.
Long-term debt consists of the following (in thousands) -
March 31, December 31,
2004 2003
------------------- ------------------
Senior Subordinated Notes, net of unamortized discount of $331 and $377,
respectively. $10,669 $10,623
Capital lease obligations due through October 2007 with interest at rates
ranging from 6.5% to 11.5% and secured by the related property. 75 76
Seller-financed debt on acquisitions, payable in monthly installments through
June 2007. Interest is payable at rates ranging between 7.0% and 11.0%.(a) 2,694 3,671
------------------- ------------------
13,438 14,370
Less - Current maturities (2,043) (2,585)
------------------- ------------------
$11,395 $11,785
=================== ==================
(a) In April 2002, the Company renegotiated the repayment terms of certain
seller-financed debt. Effective with the July 2002 payments, the
individual notes convert into five-year term loans with principal and
interest payments due monthly. The interest rate on seller-financed
debt, as amended in 2002, is generally a floating interest rate with a
floor of 7% and a ceiling of 9%. The one note not renegotiated in 2002
matured in March 2004 and was paid.
(5) GOODWILL, OTHER INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS:
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). This Statement required that goodwill no longer
be amortized over its estimated useful life but tested for impairment
on an annual basis. As required by SFAS 142, annual impairment tests
were completed at the end of fiscal 2003 and 2002 and the Company
determined that there was no impairment.
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 as well as comparing the Company's market
capitalization to the book value of the Company. The discounted cash
flow and terminal value computation is based on management's estimates
of future operations. Changes in business conditions or interest rates
could materially impact management's estimates of future operations and
consequently the Company's evaluation of fair value, and this could
result in an impairment of goodwill. Such impairment, if any, could
have a significant impact on the Company's reported results from future
operations and financial condition.
8
The majority of the purchase price of the Indiana acquisition on March
1, 2004, is included as an intangible asset in the March 31,2004
consolidated balance sheet. The purchase price allocation is
preliminary, and will be finalized in the second quarter of 2004. (See
Note 9).
The costs incurred to obtain financing, including all related fees, are
included in intangible assets and deferred financing costs in the
accompanying consolidated balance sheets and are amortized as interest
expense over the life of the related financing, from 3 - 7 years. Such
costs are amortized over the term of the related debt agreements using
the straight line method, which approximates that of the effective
interest method.
Deferred financing costs totaled $381,000 as of March 31, 2004 (net of
accumulated amortization of $957,000). Amortization of deferred
financing costs for the three months ended March 31, 2004 was $56,000
compared to the same amount for the same period last year. Amortization
of deferred financing costs has been recorded as interest expense.
(6) 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 $885,000 as of March 31, 2004 and December 31, 2003.
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.
(7) NET INCOME PER SHARE:
Basic net income per share represents net income divided by the
weighted average shares outstanding. Diluted net income per share
represents net income divided by the weighted average shares
outstanding adjusted for the incremental dilution of potentially
dilutive common shares.
9
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows
(in thousands)-
Three Months Ended
March 31,
-----------------
2004 2003
----- -----
Basic weighted average common
shares outstanding 7,659 7,659
Effect of dilutive securities:
Stock options and warrants 579 511
----- -----
Diluted weighted average common
Shares outstanding 8,238 8,170
===== =====
The following potentially dilutive common shares were excluded from the
computation of diluted net income per share because the exercise or
conversion price was greater than the average market price of common
shares (in thousands):
Three Months Ended
March 31,
----------------
2004 2003
----- -----
Stock options and warrants 1,763 1,884
Seller-financed convertible notes 227 431
(8) 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 first three months
ended March 31, 2004 and 2003, the Company has made payments for
vehicle maintenance and repairs of $39,000 and $61,000, respectively.
Additionally, the Company has recorded rental income from this company
of $9,000 during the three months ended March 31, 2004 and $6,000 for
the same period last year. Refer to the 2003 Form 10-K for additional
discussion of related party transactions.
(9) 2004 ACQUISITION:
On March 1, 2004, the Company consummated a transaction providing for
the repurchase of certain Indiana-based assets and liabilities sold to
First Choice in June 2001. The acquisition includes the release of
certain non-compete agreements. Consideration for the repurchase
includes cancellation of a certain note receivable owed by First Choice
of approximately $1.6 million plus a three-year contingent earn-out
based on future net revenue generated by the accounts repurchased. The
majority of the purchase price of the Indiana acquisition on March 1,
2004, is included as an intangible asset in the March 31,2004
consolidated balance sheet. The purchase price allocation is
preliminary, and will be finalized in the second quarter of 2004.
(10) SUBSEQUENT EVENTS:
At March 31, 2004, the Company was indebted to Paribas and Exeter
(collectively "Paribas") in the sum of $11,000,000 pursuant to a
subordinated note bearing interest at 12% per annum (see Senior Notes
in Note 4). On April 14, 2004, an agreement was reached among the
Company, Paribas and certain members of CD&L management and others
("Investors") as to the financial restructuring of the Senior Notes.
Paribas agreed to convert a portion of its existing debt due from CD&L
into equity and to modify the terms of its subordinated note if the
Investors purchased a portion of the note and accepted similar
modifications. The nature of the restructuring is as follows:
10
(a) Paribas exchanged notes in the aggregate principal amount of
$4.0 million for shares of the Series A Convertible Redeemable
Preferred Stock of the Company, par value $.001 per share
("Preferred Stock") with a liquidation preference of $4.0
million. The Preferred Stock is convertible into an aggregate
of approximately 4,000,000 shares of Common Stock, does not
pay dividends (unless dividends are declared and paid on the
Common Stock), and is redeemable by the Company for the
liquidation value. The conversion price is equal to the market
price of the Company's common stock on the date of the
transaction (computed as the average closing price of the
Company's shares for the five days prior to the closing).
Holders of the Preferred Stock have the right to elect two
directors.
(b) Paribas and the Company amended the terms of the $7.0 million
balance of the Notes, and then exchanged the original notes
for the amended and restated notes, which consist of two
series of convertible notes, the Series A Convertible
Subordinated Notes (the "Series A Convertible Notes") in the
principal amount of $3.0 million and the Series B Convertible
Subordinated Notes ("Series B Convertible Notes") in the
principal amount of $4.0 million (collectively, the
"Convertible Notes"). The Loan Agreement was amended and
restated to reflect the terms of the substituted Series A
Convertible Notes and the Series B Convertible Notes,
including the elimination of most financial covenants.
Principal is due in a balloon payment at the maturity date of
April 14, 2011. The Convertible Notes bear interest at a rate
of 9% for the first two years of the term, 10.5% for the next
two years, and 12% for the final three years of the term. The
terms of the two series of Convertible Notes are identical
except for the conversion price ($1.016 for the Series A
Convertible Notes, the average closing price for the Company's
shares for the 5 days prior to the closing, and $2.032 for the
Series B Convertible Notes).
(c) The Investors purchased the Series A Convertible Notes from
Paribas for a purchase price of $3.0 million.
(d) The Company issued an additional $1.0 million of Series A
Convertible Notes to the Investors for an additional payment
of $1.0 million, the proceeds of which were used to reduce
short-term debt, so that there is now $8.0 million of
convertible notes outstanding.
(e) The Investors, Paribas and the Company entered into a
Stockholders Agreement and a Registration Rights Agreement
pursuant to which the shares of the Company's common stock
issuable upon conversion of the Preferred Stock and the
Convertible Notes will be registered for resale with the
Securities and Exchange Commission ("SEC").
In addition, the Company has agreed to commence a rights offering to
its common stockholders as soon as practical, and in any event prior to
January 14, 2005, whereby the common shareholders of the Company shall
have the right to acquire at least $2 million of additional shares of
common stock of the Company in the aggregate at a price equal to the
conversion price of the Series A Convertible Notes.
The Company cannot be compelled to redeem the Preferred Stock for cash
at any time. As the interest on the Investor Notes and the new Paribas
note increase over the term of the notes, the Company will record the
associated interest expense on a straight-line basis, which will give
rise to accrued interest over the early term of the notes.
As a result of the debt restructuring described above, in the second
quarter, the Company may take a charge for all, or a portion, of the
$0.6 million balance of its original issue discount and deferred
financing costs related to the original 1999 financing.
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 2003 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.
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.
12
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 are contrary to that jurisdiction's laws or regulations.
Results of Operations
Income and Expense as a Percentage of Revenue
For the Three Months
Ended March 31,
-------------------
2004 2003
------ ------
Revenue 100.0% 100.0%
Gross profit 18.5% 18.0%
Selling, general and
administrative expenses 16.2% 16.2%
Depreciation and amortization 0.5% 0.5%
Other (income), net -- (2.7%)
Interest expense 1.2% 1.5%
Income before provision for income taxes 0.6% 2.5%
Net income 0.4% 1.5%
13
Three Months Ended March 31, 2004 Compared to the Three Months Ended
March 31, 2003
Revenue for the three months ended March 31, 2004 increased by $6.2
million, or 15.3%, to $46.5 million from $40.3 million for the three
months ended March 31, 2003. The increase is due to an increase in
volume from new and existing customers. The revenue growth reflects the
launch of our nationwide business development program and our ability
to expand into new markets with our existing customer base.
Cost of revenue increased by $4.9 million, or 14.7%, to $37.9 million
for the three months ended March 31, 2004 from $33.0 million for the
three months ended March 31, 2003. Cost of revenue for the three months
ended March 31, 2004 represents 81.5% of revenues as compared to 82.0%
for the same period in 2003. The decrease in cost of revenue as a
percent of revenue is due primarily to insurance and all other net
costs which improved by 170 basis points, partially offset by a 120
basis point increase in direct delivery costs.
Selling, general and administrative expenses ("SG&A") increased by $1.0
million, or 15.0%, to $7.5 million for the three months ended March 31,
2004 from $6.5 million for the same period in 2003. The increase in
SG&A is due primarily to a $0.5 million increase in wages, $0.3 million
increase in facility costs, and all other net increases of $0.2
million. Stated as a percentage of revenue, SG&A was 16.2% as of March
31, 2004 and 2003.
Depreciation and amortization of $0.2 million, or 0.5% of revenue, was
the same as the same period in 2003.
Other income, net, decreased by $1.1 million to $0.0 million for the
three months ended March 31, 2004 from $1.1 million for the same period
in 2003 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").
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 three month period ended March 31, 2003,
included within other income, net.
14
As a result of the factors discussed above, income before provision for
income taxes decreased by $0.7 million to $0.3 million, for the three
months ended March 31, 2004, as compared to the same period in 2003.
Interest expense of $0.6 million was approximately the same as the
expense for the same period last year.
Provision for income taxes decreased by $0.3 million to $0.1 million
for the three months ended March 31, 2004, as compared to $0.4 million
for the same period in 2003. This was due to the decrease in income
before provision for income taxes discussed above. The effective rate
for both periods was 40.0%.
Net income decreased by $0.4 million to net income of $0.2 million for
the three months ended March 31, 2004 as compared to net income of $0.6
million for the same period in 2003. This was due to the factors
discussed above.
Liquidity and Capital Resources
2004 Restructuring of Senior Notes Debt
At March 31, 2004, the Company was indebted to Paribas and Exeter
(collectively "Paribas") in the sum of $11,000,000 pursuant to a
subordinated note bearing interest at 12% per annum (see Senior Notes
in Note 4). On April 14, 2004, an agreement was reached among the
Company, Paribas and certain members of CD&L management and others
("Investors") as to the financial restructuring of the Senior Notes. We
believe the restructuring materially improves the Company's liquidity
position. Paribas agreed to convert a portion of its existing debt due
from CD&L into equity and to modify the terms of its subordinated note
if the Investors purchased a portion of the note and accepted similar
modifications. See Notes to Consolidated Financial Statements Note 10 -
Subsequent Events for further discussion of the restructuring
arrangement.
The following table summarizes our proforma contractual and commercial
obligations as of December 31, 2003, after adjusting for the April 14,
2004 restructuring:
Contractual Obligations Payments Due By Period
(in thousands) ---------------------------------------------------------------------------------
2004 2005 2006 2007 2008-Thereafter Total
---- ---- ---- ---- --------------- -----
Long-term debt $ 1,514 $ 760 $ 813 $ 580 $ 8,000 $11,667
Capital leases $ 72 $ 2 $ 2 $ 1 $ -- $ 77
Operating leases (Primarily for $ 3,615 $ 3,031 $ 2,280 $ 1,228 $ 660 $10,814
facilities)
The Company's working capital decreased by $255,000 from $1,807,000 as
of December 31, 2003 to $1,552,000 as of March 31, 2004. The decrease
is primarily a result of cash used in operating activities. Cash and
cash equivalents decreased by $1,000,000 to $697,000 as of March 31,
2004. Cash of $1,922,000 was provided by operations, while $22,000 was
used in net investing activities and $2,900,000 was used in net
financing activities.
15
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 March 31,
2004) and LIBOR based loans at the bank's LIBOR, as defined, plus 225
basis points (3.34% at March 31, 2004). 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 three months ended March 31,
2004, the maximum borrowings outstanding under the Fleet Facility were
approximately $6,008,000 and the outstanding borrowings as of March 31,
2004 were approximately $3,543,000. As of March 31, 2004, the Company
had total cash on hand and borrowing availability of $3,246,000 under
the Fleet Facility, after adjusting for restrictions related to
outstanding standby letters of credit of $6,515,000 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. The Company was in compliance with its
debt covenants as of March 31, 2004.
Self-Insurance -
The Company's risk of incurring uninsured losses has increased in 2004
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 2004. 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 ($6,977,000) as of March 31,
2004. There can be no assurances that the Company's lenders will agree
to waive 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.
16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the effect of changing interest rates. At
March 31, 2004, the Company's debt consisted of approximately $11.3
million (excluding unamortized discount of $.3 million) of fixed rate
debt with a weighted average interest rate of 11.7 % and $6.2 million
variable rate debt with a weighted average interest rate of 5.4%. The
variable rate debt consists of 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 borrowings from the revolving line of credit
debt. If interest rates on variable rate debt were to increase by 54
basis points (one-tenth of the rate at March 31, 2004), the net impact
to the Company's results of operations and cash flows for the three
month period ended March 31, 2004 would be a decrease of income before
provision for income taxes and cash flows from operating activities of
approximately $8,000. Maximum borrowings of revolving line of credit
debt during the three months ended March 31, 2004 were $6.0 million.
Item 4 - Controls and Procedures
(a) Disclosure controls and procedures. As of the end of the
Company's most recently completed fiscal quarter (the
Company's fourth fiscal quarter in the case of an annual
report) covered by this report, the Company carried out an
evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer
and Chief Financial Officer, 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 Chief Executive Officer and Chief
Financial Officer 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.
(b) Changes in internal controls over financial reporting. 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 report relates that have
materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial
reporting.
17
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Section 302 Certification of Albert W. Van Ness, Jr.
31.2 Section 302 Certification of Russell J. Reardon
32.1 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.
32.2 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 first
quarter of 2004.
o Report on Form 8-K filed on April 19, 2004 concerning the
press release announcing 2003 fiscal year earnings.
o Report on Form 8-K filed on April 19, 2004 announcing the debt
restructuring.
o Report on Form 8-K filed on March 16, 2004 concerning the
Acquisition of the Indianapolis business.
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: May 19, 2004 CD&L, INC.
By: \s\ Russell J. Reardon
----------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
19