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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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
incorporation or organization) Identification No.)
80 WESLEY STREET
SOUTH HACKENSACK, NEW JERSEY 07606
(Address of principal executive offices) (Zip Code)
(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[X] No[ ]
The number of shares of common stock of the Registrant, par value $.001
per share, outstanding as of November 12, 2004 was 7,658,660.
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004
INDEX
PAGE
----
PART I - Financial Information
ITEM 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of September 30, 2004 (unaudited)
and December 31, 2003 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 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 11
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)
September 30, December 31,
2004 2003
------------- -------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,217 $ 1,697
Accounts receivable, net 20,610 18,786
Prepaid expenses and other current assets 2,873 4,068
------------- -------------
Total current assets 24,700 24,551
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,278 1,446
GOODWILL 11,531 11,531
OTHER INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net 1,810 437
OTHER ASSETS 1,148 2,387
------------- -------------
Total assets $ 40,467 $ 40,352
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 6,863 $ 5,767
Current maturities of long-term debt 479 2,585
Accounts payable and accrued liabilities 12,878 14,392
------------- -------------
Total current liabilities 20,220 22,744
LONG-TERM DEBT, net of current maturities 9,937 11,785
OTHER LONG-TERM LIABILITIES 211 240
------------- -------------
Total liabilities 30,368 34,769
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares authorized;
393,701 shares issued and outstanding at September 30, 2004 4,000 -
Common stock, $.001 par value; 30,000,000 shares authorized;
7,688,027 shares issued 8 8
Additional paid-in capital 12,729 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (6,476) (7,146)
------------- -------------
Total stockholders' equity 10,099 5,583
------------- -------------
Total liabilities and stockholders' equity $ 40,467 $ 40,352
============= =============
See accompanying notes to condensed consolidated financial statements.
3
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue $ 49,705 $ 40,846 $ 145,444 $ 122,040
Cost of revenue 40,338 32,549 118,116 98,741
---------- ---------- ---------- ----------
Gross profit 9,367 8,297 27,328 23,299
---------- ---------- ---------- ----------
Costs and Expenses:
Selling, general and administrative expenses 7,863 7,042 23,397 20,177
Depreciation and amortization 272 171 767 577
Other (income) expense, net (11) (285) 601 (1,451)
Interest expense 423 633 1,447 1,880
---------- ---------- ---------- ----------
Total Costs and Expenses 8,547 7,561 26,212 21,183
---------- ---------- ---------- ----------
Income before provision for income taxes 820 736 1,116 2,116
Provision for income taxes 328 294 446 846
---------- ---------- ---------- ----------
Net income $ 492 $ 442 $ 670 $ 1,270
========== ========== ========== ==========
Net income per share:
Basic $ .06 $ .06 $ .09 $ .17
========== ========== ========== ==========
Diluted $ .03 $ .05 $ .05 $ .16
========== ========== ========== ==========
Basic weighted average common shares outstanding 7,659 7,659 7,659 7,659
========== ========== ========== ==========
Diluted weighted average common shares outstanding 18,336 8,175 13,048 8,169
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
4
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the Nine Months Ended
September 30,
-------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 670 $ 1,270
Adjustments to reconcile net income to net cash used in operating
activities -
Non-cash extinguishment of debt - (1,034)
Gain on disposal of equipment and leasehold improvements (16) (90)
Depreciation, amortization and deferred financing amortization 905 878
Deferred financing charge/OID write-off 628 -
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts receivable, net (1,824) (2,365)
Prepaid expenses and other current assets 1,195 (2,894)
Other assets (389) (300)
(Decrease) increase in -
Accounts payable and accrued liabilities (1,514) 922
Other long-term liabilities (29) 62
----------- -----------
Net cash used in operating activities (374) (3,551)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 21 94
Additions to equipment and leasehold improvements (383) (208)
----------- -----------
Net cash used in investing activities (362) (114)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 1,096 5,026
Repayments of long-term debt (1,330) (1,747)
Proceeds from long-term debt 1,000 -
Deferred financing costs (510) -
----------- -----------
Net cash provided by financing activities 256 3,279
----------- -----------
Net decrease in cash and cash equivalents (480) (386)
CASH AND CASH EQUIVALENTS, beginning of period 1,697 1,452
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,217 $ 1,066
=========== ===========
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 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 accounting principles generally accepted in
the United States of America 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 and nine months ended
September 30, 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 and requires additional disclosures. 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" 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 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 and
nine months ended September 30, 2004 and 2003:
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
-------------------------- -------------------------
2004 2003 2004 2003
----------- ------------ ----------- -----------
Risk-free interest rate 4.41% 4.00% 4.14% 4.20%
Volatility factor 82% 142% 101% 99%
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 net income per share
is as follows (in thousands, except per share data)-
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income, as reported $ 492 $ 442 $ 670 $ 1,270
Stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (109) (1) (443) (2)
------------ ------------ ------------ ------------
Pro forma net income $ 383 $ 441 $ 227 $ 1,268
============ ============ ============ ============
Net income per share:
Basic, as reported $ .06 $ .06 $ .09 $ .17
Diluted, as reported $ .03 $ .05 $ .05 $ .16
Basic, pro forma $ .05 $ .06 $ .03 $ .17
Diluted, pro forma $ .02 $ .05 $ .02 $ .16
(3) SHORT-TERM BORROWINGS:
As of June 27, 2002, CD&L and Summit Business Capital Corporation, doing
business as Fleet Capital - Business Finance Division ("Summit"),
entered into an agreement establishing a revolving credit facility (the
"Fleet Facility") of $15.0 million. 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
(5.0% at September 30, 2004) and LIBOR based loans at the bank's LIBOR,
as defined, plus 225 basis points (3.94% at September 30, 2004). Credit
availability is based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15.0 million and is collateralized
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 nine months
ended September 30, 2004, the maximum borrowings outstanding under the
Fleet Facility were $7.9 million and the outstanding borrowings as of
September 30, 2004 were $5.8 million. As of September 30, 2004, the
Company had total cash on hand and borrowing availability of $4.2
million under the Fleet Facility, after adjusting for restrictions
related to outstanding standby letters of credit of $6.5 million 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 amended, as of September 30, 2004.
Insurance Financing Agreements -
In connection with the renewal of certain of the Company's insurance
policies, CD&L entered into an agreement to finance annual insurance
premiums. A total of $1.4 million was financed through this arrangement
at an interest rate of 3.223%. The note matures in April 2005. The
related annual insurance premiums were paid to the various insurance
companies at the beginning of each policy year. There was $1.1 million
outstanding debt related to the insurance financing arrangement as of
September 30, 2004.
7
4) LONG-TERM DEBT:
On January 29, 1999, the Company completed a $15.0 million 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 was required to maintain certain
financial ratios and comply with other financial conditions contained in
the Senior Notes agreement.
At March 31, 2004, the Company owed $11.0 million on the Senior Notes.
On April 14, 2004, an agreement was reached among the Company, Paribas
and Exeter (collectively "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:
(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 3,937,008 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 $1.016
per share which was equal to the market price of the Company's
common stock on the date of the transaction. 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 and
will be paid quarterly. 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 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.
(e) The Investors, Paribas and the Company entered into 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").
8
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, the Company has
taken a charge of $0.6 million recorded in other expense in the second
quarter of 2004, representing the unamortized balance of the original
issue discount and deferred financing costs related to the original
private placement.
Costs incurred relative to the aforementioned transactions amounted to
approximately $0.5 million. Of this amount, $0.3 million has been
accounted for as deferred financing costs and is being amortized over
the term of the new financing agreements. The remaining $0.2 million has
been accounted for as a reduction in paid-in capital. These amounts have
been allocated based on the proportion of debt to equity raised in the
aforementioned transactions.
Long-term debt consists of the following (in thousands) -
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
Senior Subordinated Notes, net of unamortized discount of
$0 and $377, respectively. $ 0 $ 10,623
Series A Convertible Subordinated Notes 4,000 -
Series B Convertible Subordinated Notes 4,000 -
Capital lease obligations due through October 2007 with
interest at rates ranging from 8.0% to 11.5% and
collateralized by the related property. 5 76
Seller-financed debt on acquisitions, payable in monthly
installments through May 2009. Interest is payable at
rates ranging between 7.0% and 9.0%. 2,411 3,671
------------- -------------
10,416 14,370
Less - Current maturities (479) (2,585)
------------- -------------
$ 9,937 $ 11,785
============= =============
(5) RIGHTS OFFERING:
In September 2004, the Company commenced a rights offering to its common
stockholders, whereby the common stockholders of the Company had the
right to acquire up to $2.8 million of additional shares of common stock
of the Company in the aggregate at a price equal to $1.016 per share,
the conversion price of the Series A Convertible Notes. The rights
offering expired on October 15, 2004 and resulted in the issuance of
1,697,651 shares of common stock, with gross proceeds to the Company of
approximately $1.7 million, excluding fees and costs incurred by the
Company in the rights offering.
(6) GOODWILL, OTHER INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS:
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). This Statement requires 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.
9
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.
The majority of the purchase price of the Indiana acquisition on March
1, 2004 is related to the value of the customer list and is included as
an intangible asset in the September 30, 2004 consolidated balance
sheet. This asset is being amortized over 5 years. (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 $0.4 million as of September 30, 2004
(net of accumulated amortization of $0.1 million). Amortization of
deferred financing costs was $0.2 million for the nine months ended
September 30, 2004 and $0.3 million for the same period in 2003.
Amortization of deferred financing costs is recorded as interest
expense.
(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 $0.9 million as of September 30, 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.
(8) 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.
10
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows (in
thousands)-
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2004 2003 2004 2003
------- ------- ------- -------
Basic weighted average
common shares outstanding 7,659 7,659 7,659 7,659
Effect of dilutive securities:
Stock options and warrants 835 516 796 510
Convertible preferred stock 3,937 - 2,625 -
Subordinated convertible debentures 5,905 - 1,968 -
------- ------- ------- -------
Diluted weighted average common shares
outstanding 18,336 8,175 13,048 8,169
======= ======= ======= =======
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Stock options and warrants 1,790 1,877 1,771 1,899
Seller financed convertible notes 205 431 215 431
Subordinated convertible debentures - - 1,968 -
(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 included the release of
certain non-compete agreements. Consideration for the repurchase
included 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 related to the value of the customer list. $1.4 million (net of
$0.2 accumulated amortization) is included as an intangible asset in the
September 30, 2004 consolidated balance sheet. This asset is being
amortized over 5 years.
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.
11
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. For a discussion of our critical accounting
policies, see the Company's Annual Report on Form 10-K for 2003.
RESULTS OF OPERATIONS
INCOME AND EXPENSE AS A PERCENTAGE OF REVENUE
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross profit 18.8% 20.3% 18.8% 19.1%
Selling, general and
administrative expenses 15.8% 17.2% 16.1% 16.5%
Depreciation and amortization 0.5% 0.4% 0.5% 0.5%
Other (income) expense, net (0.0)% (0.7)% 0.4% (1.2)%
Interest expense 0.9% 1.6% 1.0% 1.6%
Income before provision for
income taxes 1.6% 1.8% 0.8% 1.7%
Net income 1.0% 1.1% 0.5% 1.0%
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Revenue for the three months ended September 30, 2004 increased by $8.9
million, or 21.7%, to $49.7 million from $40.8 million for the three
months ended September 30, 2003. The increase was due to new customers
and a higher volume of business from existing customers. The revenue
growth reflected the launch of the Company's nationwide business
development program and its ability to expand into new markets with its
existing customer base. The increase was partially offset by business
interruptions in the current quarter related to hurricanes in the
southeast and the presidential conventions in New York City and Boston.
12
Cost of revenue increased by $7.8 million, or 23.9%, to $40.3 million
for the three months ended September 30, 2004 from $32.5 million for the
three months ended September 30, 2003. Cost of revenue for the three
months ended September 30, 2004 represented 81.2% of revenue as compared
to 79.7% for the same period in 2003. The increase in cost of revenue as
a percent of revenue was due primarily to an increase in driver labor
costs. The increase was also impacted by operating inefficiencies and
business interruptions related to the hurricanes in the southeast and
the presidential conventions.
Selling, general and administrative expenses ("SG&A") increased by $0.9
million, or 11.7%, to $7.9 million for the three months ended September
30, 2004 from $7.0 million for the same period in 2003, primarily due to
a higher compensation expense as a result of new hires and higher
incentive compensation. Stated as a percentage of revenue, SG&A declined
to 15.8% for the three months ended September 30, 2004 from 17.2% for
the same period in 2003, as revenue growth exceeded the growth in SG&A
expenses.
Depreciation and amortization increased by $0.1 million, or 59.1%, to
$0.3 million for the three months ended September 30, 2004 from $0.2
million for the same period last year. This increase was due to the
amortization of the First Choice customer list (see Note 9).
Other income, net, decreased by $0.3 million to $0.0 million for the
three months ended September 30, 2004 from $0.3 million for the same
period in 2003. The other income in 2003 related to a World Trade Center
Recovery Grant received by one of the Company's New York City
facilities.
Interest expense decreased by $0.2 million to $0.4 million for the three
months ended September 30, 2004 as compared to $0.6 million for the same
period last year. The reduction in interest was due to the debt
restructuring. (See Note 4 and "Liquidity and Capital Resources - 2004
Restructuring of Senior Notes Debt" below)
As a result of the factors discussed above, income before provision for
income taxes increased by $0.1 million to $0.8 million for the three
months ended September 30, 2004, as compared to $0.7 for the same period
in 2003.
Provision for income taxes was flat at $0.3 million for the three months
ended September 30, 2004 and 2003. The effective rate for both periods
was 40.0%.
Net income increased by $0.1 million to net income of $0.5 million for
the three months ended September 30, 2004 as compared to net income of
$0.4 million for the same period in 2003. This was due to the factors
discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Revenue for the nine months ended September 30, 2004 increased by $23.4
million, or 19.2%, to $145.4 million from $122.0 million for the nine
months ended September 30, 2003. The increase was due to new customers
as well as a higher volume of business from existing customers. The
revenue growth reflected the launch of the Company's nationwide business
development program and its ability to expand into new markets with its
existing customer base, partially offset by the business interruptions
in the current quarter.
Cost of revenue increased by $19.4 million, or 19.6%, to $118.1 million
for the nine months ended September 30, 2004 from $98.7 million for the
nine months ended September 30, 2003. Cost of revenue for the nine
months ended September 30, 2004 represented 81.2% of revenues as
compared to 80.9% for the same period in 2003. The increase in cost of
revenue as a percent of revenue was due primarily to an increase in
driver labor costs.
SG&A increased by $3.2 million, or 16.0%, to $23.4 million for the nine
months ended September 30, 2004 from $20.2 million for the same period
in 2003. The increase in SG&A was primarily due to a $1.8 million
increase in compensation expense as a result of new hires and higher
incentive
13
compensation. All other increases including rent, travel and
entertainment, general insurance and computer related costs totaled $1.4
million, partially offset by a $0.4 million reduction in medical claims.
As a percentage of revenue, SG&A decreased by 0.4% to 16.1% for the nine
months ended September 30, 2004 as compared to 16.5% for the same period
in 2003.
Depreciation and amortization increased by $0.2 million to $0.8 million
or 0.5% of revenue for the nine months ended September 30, 2004 from
$0.6 million for the same period in 2003. This increase was due to the
amortization of the First Choice customer list (see Note 9).
Other expense, net, increased by $2.1 million to $0.6 million for the
nine months ended September 30, 2004 from other income, net, of $1.5
million for the same period in 2003. The 2004 year to date expense of
$0.6 million was due to the write-off of deferred financing costs and
original issue discount related to the original Senior Debt which was
restructured on April 14, 2004. The Company recorded a gain included in
other income, net, of $1.3 million during the first quarter of 2003 as a
result of the exchange of the Sureway note receivable. Refer to the 2003
Form 10-K for further discussion. Additional other income in 2003
related to a World Trade Center Recovery Grant received by one of the
Company's New York City facilities.
Interest expense decreased by $0.5 million to $1.4 million for the nine
months ended September 30, 2004 from $1.9 million for the same period in
2003. This was due to the Paribas Senior Debt restructuring. (See Note 4
and "Liquidity and Capital Resources - 2004 Restructuring of Senior
Notes Debt" below)
As a result of the factors discussed above, income before provision for
income taxes decreased by $1.0 million to $1.1 million for the nine
months ended September 30, 2004 from $2.1 million for the same period
last year.
Provision for income taxes decreased by $0.4 million to $0.4 million for
the nine months ended September 30, 2004 as compared to $0.8 million for
the same period in 2003. This was due to the drop in income before
provision for income taxes discussed above. The effective tax rate for
both periods was 40%.
Net income declined by $0.6 million to $0.7 million for the nine months
ended September 30, 2004 as compared to $1.3 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 in the sum of
$11.0 million 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 between Paribas and the 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.
14
The following table summarizes the Company's long-term obligations as of
September 30, 2004:
LONG-TERM OBLIGATIONS DUE BY PERIOD (IN THOUSANDS)
-----------------------------------------------------------------
2008-
2004 2005 2006 2007 THEREAFTER TOTAL
-------- -------- -------- -------- ---------- --------
Long-term debt $ 115 $ 486 $ 521 $ 528 $ 8,761 $ 10,411
Capital leases $ 2 $ 2 $ 1 $ - $ - $ 5
Operating leases -
(Primarily for facilities) $ 3,615 $ 3,031 $ 2,280 $ 1,228 $ 660 $ 10,814
The Company's working capital increased by $2.7 million from $1.8
million as of December 31, 2003 to $4.5 million as of September 30,
2004. Cash and cash equivalents decreased by $0.5 million to $1.2
million as of September 30, 2004. Cash of $0.4 million was used in
operations, while $0.4 million was used in net investing activities and
$0.3 million was provided by net financing activities. Capital
expenditures amounted to $0.4 million and $0.2 million for the nine
months ended September 30, 2004 and 2003, respectively.
As of June 27, 2002, CD&L and Summit entered into an agreement
establishing the Fleet Facility. 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 (5.0%
at September 30, 2004) and LIBOR based loans at the bank's LIBOR, as
defined, plus 225 basis points (3.94% at September 30, 2004). Credit
availability is based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15.0 million and is collateralized
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 nine months
ended September 30, 2004, the maximum borrowings outstanding under the
Fleet Facility were approximately $7.9 million and the outstanding
borrowings as of September 30, 2004 were approximately $5.8 million. As
of September 30, 2004, the Company had total cash on hand and borrowing
availability of $4.2 million under the Fleet Facility, after adjusting
for restrictions related to outstanding standby letters of credit of
$6.5 million 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 September 30, 2004.
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 ($6.5) million as of September
30, 2004. 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
15
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 through at least September 30, 2005. 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.
The Company's liquidity also improved in the fourth quarter as a
result of a rights offering. One of the terms of the restructuring
agreement with respect to the Paribas Senior Notes was that the Company
would commence a rights offering to its common stockholders to acquire
additional shares of common stock at a price equal to the conversion
price of the Series A Convertible Notes. In September 2004, the Company
commenced such a rights offering, offering to sell to its common
stockholders up to 2,784,578 common shares at $1.016 per share. The
rights offering expired in October 2004 and resulted in the issuance of
1,697,651 shares of common stock with gross proceeds to the Company of
approximately $1.7 million.
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
September 30, 2004, the Company's debt consisted of approximately $9.1
million of fixed rate debt with a weighted average interest rate of
8.32% and $8.2 million of variable rate debt with a weighted average
interest rate of 5.16%. 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 of revolving line of credit debt at the bank's prime rate
plus 25 basis points (5.0% at September 30, 2004). If interest rates on
variable rate debt were to increase by 52 basis points (one-tenth of the
rate at September 30, 2004), the net impact to the Company's results of
operations and cash flows for the nine month period ended September 30,
2004 would be a decrease of income before provision for income taxes and
cash flows from operating activities of approximately $32,000. Maximum
borrowings of revolving line of credit debt during the nine months ended
September 30, 2004 were $7.9 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 since the
filing of the Company's Form 10-Q for the quarterly period
ending June 30, 2004.
. Report on Form 8-K filed on August 19, 2004 concerning
the August 17, 2004 press release announcing second
quarter earnings for the 2004 fiscal year.
. Report on Form 8-K filed on September 21, 2004
concerning the September 15, 2004 press release
announcing the extension of the terms of the Rights
Offering
. Report on Form 8-K filed on November 5, 2004 concerning
the Company's change in their public accounting firm
from Deloitte & Touche LLP to JH Cohn LLP which took
effect November 5, 2004.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 15, 2004 CD&L, INC.
By: \s\ Russell J. Reardon
---------------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
19
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Albert W. Van Ness, Jr., certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of CD&L, Inc. (the
"Company");
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
Quarterly Report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this Quarterly
Report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this Quarterly Report based on such
evaluation; and
(c) Disclosed in this Quarterly Report any change in the
registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: November 15, 2004
\s\ Albert W. Van Ness, Jr.
---------------------------
Albert W. Van Ness, Jr.
Chief Executive Officer
A signed original of this written statement required by Section 302 has
been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Russell J. Reardon, certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of CD&L, Inc. (the
"Company");
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
Quarterly Report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this Quarterly
Report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this Quarterly Report based on such
evaluation; and
(c) Disclosed in this Quarterly Report any change in the
registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: November 15, 2004
\s\ Russell J. Reardon
-----------------------
Russell J. Reardon
Chief Financial Officer
A signed original of this written statement required by Section 302 has
been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CD&L, Inc. (the "Company")
on Form 10-Q for the quarter ended September 30, 2004 filed with the Securities
and Exchange Commission (the "Report"), I, Albert W. Van Ness, Jr., Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the consolidated financial condition of the Company
as of the dates presented and the consolidated results of operations
of the Company for the periods presented.
Dated: November 15, 2004
\s\ Albert W. Van Ness, Jr.
---------------------------
Albert W. Van Ness, Jr.
Chief Executive Officer
The foregoing certification is being furnished solely pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section
1350, Chapter 63 of Title 18, United States Code) and is not being filed as
part of Form 10-Q or as a separate disclosure statement.
A signed original of this written statement required by Section 302 has
been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CD&L, Inc. (the "Company")
on Form 10-Q for the quarter ended September 30, 2004 filed with the Securities
and Exchange Commission (the "Report"), I, Russell J. Reardon, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the consolidated financial condition of the Company
as of the dates presented and the consolidated results of operations
of the Company for the periods presented.
Dated: November 15, 2004
\s\ Russell J. Reardon
-----------------------
Russell J. Reardon
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section
1350, Chapter 63 of Title 18, united States Code) and is not being filed as
part of Form 10-Q or as a separate disclosure statement.
A signed original of this written statement required by Section 302 has
been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon
request.