UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
CONSOLIDATED DELIVERY & LOGISTICS, 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)
Registrant's telephone number, including area code (201) 487-7740
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The number of shares of the registrant's Common Stock, $.001 par value
outstanding was 7,353,458 and the aggregate market value of voting stock held by
nonaffiliates of the registrant was $21,741,558 as of March 10, 2000.
Documents Incorporated by Reference: The information required by Part III (other
than the required information regarding executive officers) is incorporated by
reference from the registrant's definitive proxy statement, which will be filed
with the Commission not later than 120 days following December 31, 1999.
PART I
Statements and information presented within this Annual Report on Form
10-K for Consolidated Delivery & Logistics, Inc. (the " Company", "CDL", or
"we") include certain statements that may be deemed to be "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Exchange Act. These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations and intentions and other statements contained in this
report that are not historical facts. When used in this report, the words
"expects," "anticipates," "intends," "plans," "believes," "seeks" and
"estimates" and similar expressions are generally intended to identify
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. Such statements are
subject to a number of assumptions, risks and uncertainties, including the risk
factors (Item 1 - Risk Factors) discussed below, general economic and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in law or regulations and other factors,
many of which are beyond the control of the Company. Readers are cautioned that
any such statements are not guarantees of future performance and that actual
results or developments may differ materially from those projected in the
forward-looking statements. All subsequent written or oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified by these factors.
Item 1 - BUSINESS DESCRIPTION
Overview
We are one of the leading national full-service provider of customized
time-critical ground and air delivery services to a wide range of commercial,
industrial, retail and E-Commerce based customers. Our services are provided
throughout the United States and to major cities around the world.
In conjunction with our initial public offering in November 1995 we
acquired 11 time-critical ground and air delivery businesses that operated in 52
cities across the United States. As of December 31, 1999, we had acquired 13
additional time-critical ground and air delivery businesses.
We offer the following ground delivery services through E-Commerce and
other traditional outlets:
o rush delivery service, typically consisting of delivering
time-sensitive packages, such as critical machine parts or
emergency medical devices, from-point-to-point on an as needed
basis;
o dedicated contract logistics, providing a comprehensive
solution to major corporations that want the control,
flexibility and image of an in-house fleet with all the
economic benefits of outsourcing;
o routed services, providing, on a recurring and often daily
basis, deliveries from pharmaceutical suppliers to pharmacies,
from manufacturers to retailers, and the interbranch
distribution of financial documents in a commingled system;
and
o facilities management, including providing and supervising
mailroom personnel, mail and package sorting, internal
delivery and outside local messenger services.
We offer the following air delivery services through E-Commerce and
other traditional outlets:
o customized heavy freight, typically involving moving
heavyweight and oversize shipments from businesses such as
printers and computer distributors that require extra
handling, late cut-off times or time-definite delivery
windows;
o next-flight-out, providing businesses such as advertising
agencies and entertainment companies with the ability to ship
their products on the next available flight to be delivered
directly to their customers; and
o international shipments, providing companies the ability to
have additional attention, shorter transit time or
time-definite delivery windows anywhere in the world.
Our Industry
The overall U.S. ground and air delivery industry is composed largely
of companies that provide same-day, next-day and two-day delivery services. We
primarily service the same-day, time-critical delivery segment of that overall
market. In contrast, the next-day and two-day delivery market segments are
dominated by large national entities such as United Parcel Service and FedEx
Corp.
We believe that the same-day delivery industry, which is currently
serviced by a fragmented system of approximately 10,000 companies that include
only a small number of large regional or national operators, is undergoing
substantial growth and consolidation. We believe that several factors, including
the following, are driving that growth and consolidation:
o E-Commerce Opportunities. The significant growth in business-to-
business and business-to-consumer customized and time-critical
services through E-Commerce presents substantial expansion
opportunities.
o Outsourcing and Vendor Consolidation. Commercial and industrial
businesses, which are major consumers of same-day delivery services,
have continued to follow the trend of concentrating on their core
business by outsourcing non-core activities. Businesses also are
increasingly seeking single-source solutions for their regional and
national same-day delivery needs rather than utilizing a number of
smaller local delivery companies. At the same time, larger national
and international companies are looking toward decentralized
distribution systems. We believe that significant opportunities exist
for larger regional or national carriers that are able to provide a
full range of services to such businesses.
o Heightened Customer Expectations. Increasing customer demand for
specialized services such as customized billing, enhanced tracking,
storage, inventory management and just-in-time delivery capabilities
favor companies with greater resources to devote to providing those
services. The use of facsimile technology and the Internet have
increased the speed at which the processing of information and
transactions occur such that the requirements for immediate delivery
of a wide range of critical items has become commonplace. This
practice increases demand for same-day, time-critical delivery
services.
We provide our customers with a full range of customized,
time-critical ground and air delivery service options.
Ground Delivery
Rush. In providing rush delivery services, or services on demand, our messengers
and drivers respond to customer requests for the immediate pick up and delivery
of time-sensitive packages. We generally offer one-, two- and four-hour service,
on a 7-days-a-week, 24-hours-a-day basis. Our typical customers for rush service
include commercial and industrial companies, hospitals and service providers
such as accountants, lawyers, advertising and travel agencies and public
relations firms.
Scheduled. Our scheduled delivery services are provided on a recurring and often
daily basis. We typically pick up or receive large shipments of products, which
are then sorted, routed and delivered. These deliveries are made in accordance
with a customer's specific schedule that generally provides for deliveries to be
made at particular times. Typical routes may include deliveries from
pharmaceutical suppliers to pharmacies, from manufacturers to retailers, the
interbranch distribution of financial documents, payroll data and other
time-critical documents for banks, financial institutions and insurance
companies. We also provide these services to large retailers for home delivery,
including large cosmetic companies, door-to-door retailers, catalog marketers,
home health care distributors and other direct sales companies.
Facilities Management. We provide mailroom management services, including the
provision and supervision of mailroom personnel, mail and package sorting,
internal delivery and outside local messenger services. Typical customers for
our facilities management services include commercial enterprises and
professional firms.
Dedicated Contract Logistics. We offer efficient and cost-effective dedicated
delivery solutions, such as fleet replacement solutions, dedicated delivery
systems and transportation systems management services. These services provide
major pharmaceutical wholesalers, office product companies and financial
institutions with the control, flexibility and image of an in-house fleet and
with all of the economic benefits of outsourcing.
Air Services
We provide next-flight-out and scheduled air courier and airfreight
services to our customers, both domestically and internationally. Our air
services include arranging for:
o the transportation of a shipment from the customer's location to the
airport;
o air transportation; and
o the delivery of the shipment to its ultimate destination.
In order to meet the needs of our customers, we have established
relationships with many major airlines and large airfreight companies from which
we purchase cargo space on an as-needed basis.
We report certain information about our operating segments. This
information can be found in Note 12 to the Company's Financial Statements
included in this report.
Our Internal Operations
Our ground and air divisions are currently managed and evaluated
separately. Those divisions have operations centers staffed by dispatchers, as
well as order entry and other operations personnel. Our ground and air divisions
operate from 78 leased facilities in 23 states.
In February 2000 the Company announced a plan to depart from
geographically based operations to three product-driven business groups
operating nationally. These groups will be the Distribution Group, the Courier
Group and the E-Commerce Group. The Distribution Group will focus on industry
specific customer lines including financial institutions, pharmaceuticals,
healthcare, office products, technology and retailing plus home delivery. The
Courier Group will focus on time-sensitive, same-day product movement business
in similar industry focused lines. The E-Commerce Group will focus on time
critical business-to-business and business-to-consumer deliveries.
Ground Delivery Division
We accomplish coordination and deployment of our ground delivery
personnel either through communications systems linked to our computers, through
pagers, or by radio or telephone. A dispatcher coordinates shipments for
delivery within a specific time frame. We route a shipment according to its type
and weight, the geographic distance between its origin and destination and the
time allotted for its delivery. In the case of scheduled deliveries, we design
routes to minimize the unit costs of the deliveries and to enhance route
density. We continue to deploy new hardware and software systems designed to
enhance the capture, routing, tracking and reporting of deliveries throughout
our network. To further improve customer service, we plan to provide customers
the opportunity to access this information via the internet.
Air Delivery Division
Our air courier and airfreight service begins when a customer places
an order, which is then dispatched for pick up. We assign a tracking number to
the shipment and enter it into our computer system. We then route the shipment
based on delivery specifications, destination and timing considerations. We
collect proof of delivery at the shipment's final destination to conclude and
confirm the delivery, at which time we invoice the customer. During 1999 we
introduced a new integrated Business Information System which will be fully
deployed by the summer of 2000. During 2000 we will be launching an Internet
based Shipment Management System which will allow our customers to enter orders,
track shipment progress and monitor on-time performance of our service. This
highly customizable system will allow us to offer this service to companies
requiring a specialized distribution solution wherein we will be able to pick up
a shipment from our customer's supplier or distributor and deliver directly to
the end user.
Sales and Marketing
We believe that a direct sales force most effectively reaches
customers for same-day, time-critical delivery services and, accordingly, we do
not currently engage in mass media advertising. We market directly to individual
customers by designing and offering customized service packages after
determining their specific delivery and distribution requirements. We are
implementing a coordinated major account strategy by building on established
relationships with regional and national customers. We also employ certain
direct response marketing techniques.
Many of the services we provide, such as facilities management,
dedicated contract logistics and routed delivery services, are determined on the
basis of competitive bids. However, we believe that quality and service
capabilities are also important competitive factors. In certain instances, we
have obtained business by offering a superior level of service, even though we
were not the low bidder for a particular contract. We derive a substantial
portion of our revenues from customers with whom we have entered into contracts.
Virtually all of the scheduled dedicated vehicle and facilities management
services that we provide are pursuant to contracts. Most of these contracts may
be terminated by the customer on relatively short notice without penalty.
Competition
The market for our delivery services is highly competitive. We believe
that the principal competitive factors in the markets in which we compete are
reliability, quality, breadth of service offerings and price. We compete on all
of those factors. Most of our competitors in the time-critical ground and air
delivery market are privately held companies that operate in only one location
or within a limited service area.
In addition to our time-critical delivery services, customers also
utilize next-day and second-day services. The market for next-day and second-day
services is dominated by nationwide network providers, which have built large,
capital-intensive distribution channels that allow them to process a high volume
of materials. These companies typically have fixed deadlines for next-day or
second-day delivery services. By contrast, we specialize in on-demand,
next-flight-out deliveries or services which, by their nature, are not governed
by rigid time schedules. If one of our customers is unable to meet a network
provider's established deadline, we can pick up the shipment, put it on the next
available flight and deliver it, in some cases, before the network provider's
scheduled delivery time. Our services are available 24-hours-a-day,
7-days-a-week.
We obtain space on scheduled airline flights to provide our air
services and accordingly we do not have to acquire or maintain an expensive
fleet of airplanes. As a result, we can provide a more flexible, specialized
service to our customers without incurring the high fixed overhead that the
larger network providers must incur.
Acquisitions and Sales of Businesses
We were formed as a Delaware corporation in June 1994. As of December
31, 1999, we had acquired 24 same-day time-critical delivery businesses,
including the 11 companies that we acquired simultaneously with the commencement
of our operations in November 1995. We paid approximately $67.8 million ($29.6
million in cash and 2,935,702 shares of our common stock) to acquire the 11
founding companies. In addition to the acquisition of the those companies, we
acquired certain additional assets from two companies in transactions that we
accounted for as purchases. Those acquired assets were not material.
In 1996, we acquired five additional businesses that had approximately
$15.6 million in aggregate annual revenues. We paid approximately $3.3 million
to acquire those companies using a combination of cash, seller-financed debt and
shares of our common stock. Subsequently, the aggregate purchase price paid for
those companies was reduced by approximately $616,000 because the actual
revenues of some of the acquired companies did not reach the revenues projected
by the sellers. We accounted for each of the 1996 acquisitions as purchases.
In 1997, we did not make any acquisitions and instead focused on
internal growth. Consistent with our change of strategic focus, in January 1997
we sold our contract logistics subsidiary back to its founder in exchange for
137,239 shares of our common stock. In connection with that sale, we recorded a
gain of approximately $816,000 before the effect of Federal and state income
taxes.
During December 1997, we sold our direct mail business for $850,000 in
cash and notes. In connection with that sale, we recorded a gain of
approximately $23,000 net of Federal and state income taxes of approximately
$15,000. Accordingly, the direct mail business, which reflected income of
$171,000 in 1996 and a loss of $1.2 million in 1997, has been reclassified as
discontinued operations in the accompanying consolidated financial statements.
In 1999, the company to which we sold our direct mail business went out of
business and defaulted on their note and the Company wrote off the remaining
balance of the note of $661,868.
In 1998, we acquired four same-day, time-critical delivery businesses
which had aggregate annual revenues of approximately $25.1 million. We paid
approximately $14.5 million for the businesses consisting of a combination of
cash, shares of our common stock, and seller-financed debt. We accounted for
each of the 1998 acquisitions as purchases.
In 1999, we acquired four same-day, time critical delivery businesses
which had aggregate annual revenues of approximately $24.8 million. We paid
approximately $12.7 million for the businesses consisting of a combination of
cash, shares of our common stock and seller-financed debt. The acquisitions were
accounted for as purchase transactions. Under the terms of our purchase
agreement there is the potential for additional payments of up to $1.2 million
to be paid upon the accomplishment of certain financial and operational
objectives.
Regulation
Our delivery operations are subject to various state and local
regulations and, in many instances, we require permits and licenses from state
authorities. To a limited degree, state and local authorities have the power to
regulate the delivery of certain types of shipments and operations within
certain geographic areas. Interstate and intrastate motor carrier operations are
also subject to safety requirements prescribed by the U.S. Department of
Transportation ("DOT") and by state departments of transportation. If we fail to
comply with applicable regulations, we could face substantial fines or possible
revocation of one or more of our operating permits.
Safety
We seek to ensure that all of our employee drivers meet safety
standards established by us and our insurance carriers as well as the US
Department of Transportation. In addition, where required by the DOT or state or
local authorities, we require that our independent owner/operators meet certain
specified safety standards. We review prospective drivers in an effort to ensure
that they meet applicable requirements.
Employees and Independent Contractors
As of December 31, 1999, we employed approximately 3,700 people, 2,600
as drivers or messengers, 700 in operations, 250 in clerical and administrative
positions, 70 in sales and 70 in management. We are not a party to any
collective bargaining agreements, although we are subject to union organizing
activity from time to time. We also had agreements with approximately 1,700
independent contractor drivers as of December 31, 1999. We have not experienced
any work stoppages and believe that our relationship with our employees and
independent contractor drivers is good.
Risk Factors
You should carefully consider the following factors as well as the
other information in this report before deciding to invest in shares of our
common stock.
We may have difficulty integrating the operations of businesses that had
formerly been operated as independent entities.
We conducted no operations and generated no revenue prior to our
initial public offering when we acquired 11 same-day courier companies in
November 1995. Since that time, we have acquired thirteen additional businesses.
All of the business that we have acquired had previously operated as separate
independent entities. We anticipate that we will acquire additional businesses
in the future. The process of integrating acquired businesses with our existing
operations often involves unforeseen difficulties, may require a significant
amount of our financial and other resources and may divert the attention of our
management. We may experience delays, complications and unanticipated expenses
in implementing, integrating and operating acquired businesses, which could have
a material adverse effect on our business, financial condition and results of
operations. We cannot assure you that we will be able to successfully convert
the computer, accounting and other internal systems of these businesses to our
existing systems and integrate those businesses with our existing operations
without substantial costs, delays or other operational or financial problems.
We may not be able to effectively manage growth.
We expect to expend significant time and effort in expanding our
existing businesses and identifying, acquiring and integrating acquisitions.
This growth may place considerable strain on our resources. Our management and
financial reporting systems, procedures and controls may not be adequate to
support our operations as they expand. Any future growth also will impose
significant added responsibilities on our senior management, including the need
to identify, recruit and integrate additional management and employees. We may
not be able to identify and retain additional management and employees to
oversee this growth. If we are unable to manage our growth efficiently and
effectively, or if we are unable to attract and retain additional qualified
personnel, our business, financial condition and results of operations could be
materially adversely effected.
The same-day delivery industry is characterized by growth through acquisition
and we may not be able to compete effectively for acquisition candidates.
One of our strategies is to increase our revenues and profitability,
and expand our markets, by acquiring other same-day air and ground delivery
businesses. We may not be able to identify or acquire additional same-day
delivery companies which may adversely affect our ability to expand our
operations and increase our revenues and earnings to the degree desired. Several
large, national publicly-traded companies compete with us for acquisition
candidates in an effort to consolidate the delivery industry. We may not be able
to compete effectively for acquisition candidates at all, or on terms that we
deem acceptable.
The price of our common stock or our cash reserves may not be sufficient to
finance future acquisitions.
We cannot readily predict the timing, size and success of our
acquisition efforts or the capital we will need to finance acquisitions. We
intend to finance future acquisitions by using a combination of shares of our
common stock, notes and cash. In the event that our common stock does not
maintain a sufficient market value, or potential acquisition candidates are
unwilling to accept our common stock as part of or all of the consideration to
be paid for their businesses, we may be required to use our limited cash
resources to maintain our acquisition program. If we have insufficient cash
resources to pursue acquisitions, the growth of our operations could be limited
unless we are able to obtain additional capital through debt or equity
financing. We may not be able to obtain that financing at all, or on terms that
we deem acceptable. The terms of our agreements with our lenders restrict our
ability to acquire other businesses.
Acquisitions may divert the attention of our management and otherwise affect our
operations.
Identifying acquisition candidates and negotiating acquisition
agreements may divert our management's attention away from the operation of our
existing business. In addition, acquisitions may:
o adversely affect our operating results, or the timing of those
results;
o increase our dependence on retention, hiring and training of key
personnel;
o subject us to unanticipated problems or legal liabilities inherent in
the acquired businesses; and
o fail to achieve the anticipated levels of revenue and earnings
expected at the time of the purchase.
Some or all of these factors could have a material adverse affect on our
business, financial condition and results of operation, especially in the fiscal
quarters immediately following acquisition.
As a same-day delivery company, our ability to service our clients effectively
is often dependent upon factors beyond our control.
Our revenues and earnings are especially sensitive to events that are
beyond our control that affect the same-day delivery services industry,
including:
o extreme weather conditions;
o economic factors affecting our significant customers;
o fluctuations in fuel prices; and
o shortages of or disputes with labor, mainly drivers and messengers.
Our 2000 financial results to date are being adversely affected by
recent general labor shortages and gas price increases. So long as such factors
continue to exist, it will put pressure on our profit margins.
In addition, demand for our same-day delivery services may decrease as
a result of downturns in the level of general economic activity and employment.
The development and increased popularity of facsimile machines and electronic
mail has reduced the demand for certain types of delivery services, including
our services. As a result, same-day delivery companies, including CDL, have
changed focus to those delivery services involving items that are unable to be
delivered via alternative methods. Similar industry-wide developments may have a
material adverse effect on our business, financial condition or results of
operations.
Our reputation will be harmed, and we could lose customers, if the information
and telecommunications technologies on which we rely fail to adequately perform.
Our business depends upon a number of different information and
telecommunication technologies as well as the ability to develop and implement
new technology enabling us to manage and process a high volume of transactions
accurately and timely. Any impairment of our ability to process transactions in
this way could result in the loss of customers and diminish our reputation. In
support of the recently announced business reorganization we will be further
consolidating our information systems. The contemplated consolidation of these
systems may not be successful or completed on a timely or cost effective basis.
Governmental regulation of the transportation industry, particularly with
respect to our independent contractors, may substantially increase our operating
expenses.
From time to time, federal and state authorities have sought to assert
that independent contractors in the transportation industry, including those
utilized by us, are employees rather than independent contractors. We believe
that the independent contractors that we utilize 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. If, as a result of changes in laws, regulations,
interpretations or enforcement by federal or state authorities, we become
required to pay for and administer added benefits to independent contractors,
our operating costs could substantially increase.
The Internal Revenue Service is examining our payment of employee drivers
vehicle costs during 1996 and 1997.
Certain of our employees own and operate their own vehicles in the
course of their employment. In certain cases, we pay for all or a portion of the
costs of operating those vehicles. We believe that these arrangements do not
represent additional compensation to those employees. However, the IRS is
currently examining certain payments made to employee drivers during 1996 and
1997 and may seek to recharacterize some or all of those payments as additional
compensation. If those amounts are recharacterized, we may have to pay
additional employment-related taxes on those amounts, which will increase our
operating costs.
Claims above our insurance limits, or significant increases in our insurance
premiums, may reduce our profitability.
We utilize the services of approximately 3,500 drivers. From time to
time some of those drivers are involved in automobile accidents. We currently
carry liability insurance of $1 million for each driver accident, subject to
applicable deductibles (generally $250,000 per occurrence), carry umbrella
coverage up to $25 million in the aggregate and require that our independent
contractors maintain liability insurance of at least the minimum amounts
required by state and federal law. However, claims against us may exceed the
amounts of our and our independent contractors' insurance coverage. If we were
to experience a material increase in the frequency or severity of accidents,
liability claims or workers' compensation claims, or unfavorable resolutions of
claims, our operating results could be materially affected.
Shareholders will experience dilution when we issue the additional shares of
common stock that we are permitted or required to issue under convertible
debentures, convertible notes, options and warrants.
We are permitted, and in some cases obligated, to issue shares of
common stock in addition to the common stock that is currently outstanding. If
and when we issue these shares, the percentage of the common stock currently
issued and outstanding will be diluted. The following is a summary of additional
shares of common stock that we have currently reserved for issuance as of March
10, 2000:
o 3,145,333 shares are issuable upon the exercise of options or other
benefits under our employee stock option plan, consisting of:
o outstanding options to purchase 1,460,319 shares at a weighted average
exercise price of $6.08 per share, of which options covering 1,099,297
shares were exercisable as of December 31, 1999; and
o 439,681 shares available for future awards after December 31, 1999;
o 506,250 shares are issuable upon the exercise of outstanding warrants
at an exercise price of $.001 per share;
o 145,750 shares are issuable upon the exercise of outstanding
convertible debentures at a conversion price of $5.00 per share; and
o 593,333 shares are issuable upon the exercise of outstanding
convertible notes at a weighted average exercise price of $6.59 per
share.
The Board of Directors has authorized, subject to shareholder
approval, the Year 2000 Stock Incentive Plan (the "Plan") pursuant to which up
to 1,350,000 shares of the Company's common stock may be issued upon the
exercise of incentive and non-qualified options granted thereunder to employees
and others eligible to participate in the Plan.
Our success is dependent on the continued service of our key management
personnel.
Our future success depends, in part, on the continued service of our
key management personnel. A number of management personnel employed by the
Company entered into five year employment contracts at the time of our initial
public offering in November 1995. Those contracts are due to expire in November
2000. If certain of these employees including those individuals identified to
head- up the product-driven groups were unable or unwilling to continue in their
present positions, our business, financial condition, operating results and
future prospects could be materially adversely affected.
If we fail to maintain our governmental permits and licenses, we may be subject
to substantial fines and possible revocation of our authority to operate our
business in certain jurisdictions.
Our delivery operations are subject to various state, local and
federal regulations that in many instances require permits and licenses. If we
fail to maintain required permits or licenses, or to comply with applicable
regulations, we could be subject to substantial fines or our authority to
operate our business in certain jurisdictions could be revoked.
Intense price competition could reduce the demand for our service.
We may not be able to compete successfully in the same-day ground and
air delivery and logistics market. Many of our competitors are larger than us
and have substantially greater financial resources than we do. The market for
our services has been extremely competitive and is expected to be so for the
foreseeable future. Price competition is often intense, particularly in the
market for basic delivery services where entry barriers are low.
We do not anticipate paying dividends on our common stock.
We have never declared or paid any dividends on our common stock. We
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will depend upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant. In addition, our credit agreement
restricts our ability to declare and pay dividends without the consent of our
lenders.
Our certificate of incorporation, by-laws, shareholder rights plan and Delaware
law contain provisions that could discourage a takeover that current
shareholders may consider favorable.
Provisions of our certificate of incorporation, by-laws and our
recently-adopted shareholder rights plan, as well as Delaware law, may
discourage, delay or prevent a merger or acquisition that you may consider
favorable. These provisions of our certificate of incorporation and by-laws:
o establish a classified board of directors in which only a portion of
the total number of directors will be elected at each annual meeting;
o authorize the board to issue preferred stock;
o prohibit cumulative voting in the election of directors;
o limit the persons who may call special meetings of stockholders;
o prohibit stockholder action by written consent; and
o establish advance notice requirements for nominations for the election
of the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
In addition, we have recently adopted a Stockholder Protection Rights
Plan in order to protect against offers to acquire us that our Board of
Directors believe to be inadequate or not otherwise in our best interests. There
are, however, certain possible disadvantages to having the Plan in place which
might adversely impact us. The existence of the Plan may limit our flexibility
in dealing with potential acquirers in certain circumstances and may deter
potential acquirers from approaching us.
Executive Management
Albert W. Van Ness, Jr. has served as the Chairman of the Board, Chief
Executive Officer and Director of CDL since February 1997. He remains a Managing
Partner of Club Quarters, LLC, a hotel development and management company, since
October 1992. From June 1990 until October 1992, Mr. Van Ness served as Director
of Managing People Productivity, a consulting firm. Prior thereto, from 1982
until June 1990, Mr. Van Ness held various executive offices with Cunard Line
Limited, a passenger ship and luxury hotel company, including Executive Vice
President and Chief Operating Officer of the Cunard Leisure Division and
Managing Director and President of the Hotels and Resorts Division. Prior
thereto, Mr. Van Ness served as the President of Seatrain Intermodal Services,
Inc., a cargo shipping company.
William T. Brannan has served as the President and Chief Operating
Officer of CDL since November 1994. From January 1991 until October 1994, Mr.
Brannan served as President, Americas Region - US Operations, for TNT Express
Worldwide, a major European-based overnight express delivery company. Mr.
Brannan has 23 years of experience in the transportation and logistics industry.
Russell J. Reardon was appointed Chief Financial Officer in November
1999. Mr. Reardon has been Vice President - Treasurer of CDL since January 1999.
Prior thereto, from September 1998 until January 1999 Mr. Reardon was Chief
Financial Officer, Secretary and Vice President - Finance of Able Energy, Inc. a
regional home heating oil supplier. From April 1996 until June 1998 Mr. Reardon
was Chief Financial Officer, Secretary and Vice President - Finance of
Logimetrics, Inc. a manufacturer of broad-band wireless communication devices.
John Ovens was appointed Vice President in September 1999 after
serving in a consulting capacity to the Company since June 1999. Prior to
joining the Company Mr. Ovens served as President, CEO and Director for Express
Messenger Systems, Inc., a time-critical delivery company located in the Western
United States from July 1994 until relocating to the East Coast and joining the
Company.
Joseph J. Leonhard was appointed Vice President, Finance - Treasurer
in November 1999. Mr. Leonhard has been the Controller of CDL since June 1995
and was appointed to the position of Vice-President in May 1996. Prior thereto,
from June 1987 until June 1995, Mr. Leonhard was the Controller and Chief
Financial Officer of Scientific Devices East, Inc.
Mark Carlesimo has been General Counsel of CDL since September 1997.
From July 1983 until September 1997, Mr. Carlesimo served as Vice President of
Legal Affairs of Cunard Line Limited.
Jeremy Weinstein was appointed Controller in November, 1999. Prior to
his appointment, Mr. Weinstein served as the Company's Northeast Region
Controller since March 1997 and before that was controller of the Company's
Manhattan operation.
Robin Dennis was appointed Vice President - Information Technology of
CDL in January 1999 Immediately prior to his appointment, Mr. Dennis was an
independent consultant providing information technology advice to a wide range
of companies. Prior thereto Mr. Dennis served as Vice President - Information
Technology for Cunard Line Limited from October 1988 until February 1997.
Michael Brooks has served as Director of the Company since December
1995, as Southeast Region Manager since August 1996 and as President of Silver
Star Express, Inc., a subsidiary of the Company, since November 1995. Prior to
the merger of Silver Star Express, Inc. into the Company, Mr. Brooks was
President of Silver Star Express, Inc. since 1988. Mr. Brooks has 24 years of
experience in the same-day ground and distribution industries. In addition, Mr.
Brooks is currently a Director of the Express Carriers Association, an associate
member of the National Small Shipment Traffic Conference and an affiliate of the
American Transportation Association.
Randy Catlin has served as Air Division Manager of the Company and as
Chief Executive Officer of SureWay Worldwide, a subsidiary of the Company, since
March 1997. From 1984 until 1997, Mr. Catlin was Vice-Chairman of SureWay
Worldwide, formerly known as Sureway Air Traffic Corporation. Mr. Catlin has 31
years of experience in the air courier industry. In addition, Mr. Catlin is
currently Chairman of the annual conference of the Air Courier Conference of
America, and has served previously as President and Director of the
organization.
Item 2. Properties -
As of December 31, 1999, the Company operated from 78 leased
facilities (not including 6 authorized sales agent locations). These facilities
are principally used for operations, general and administrative functions and
training. In addition, several facilities also contain storage and warehouse
space. The table below summarizes the location of the Company's current
facilities.
State Number of Facilities
- ----- --------------------
New York.......................................... 19
Florida........................................... 9
California........................................ 9
New Jersey........................................ 6
North Carolina.................................... 6
Massachusetts..................................... 3
Georgia........................................... 3
Louisiana......................................... 2
Ohio.............................................. 2
Indiana........................................... 2
Maine............................................. 2
Missouri.......................................... 2
South Carolina.................................... 2
Tennessee......................................... 2
Illinois.......................................... 1
Alabama........................................... 1
Arizona........................................... 1
Connecticut....................................... 1
Maryland.......................................... 1
New Hampshire..................................... 1
Virginia.......................................... 1
Delaware.......................................... 1
Washington........................................ 1
The Company's corporate headquarters is located at 80 Wesley Street,
Hackensack, New Jersey. The Company believes that its properties are generally
well maintained, in good condition and adequate for its present needs.
Furthermore, the Company believes that suitable additional or replacement space
will be available when required.
As of December 31, 1999, the Company owned or leased approximately
1,100 trucks of various types, which are primarily operated by drivers employed
by the Company. In addition, certain of the Company's employee drivers own or
lease their own vehicles. The Company also hires independent contractors who
typically provide their own vehicles and are required to carry at least the
minimum amount of insurance required by state law.
The Company's aggregate rental expense for the year ended December 31,
1999 was approximately $13.8 million. See Note 13 to the Company's Consolidated
Financial Statements.
Item 3. Legal Proceedings
In February 1996, Liberty Mutual Insurance Company ("Liberty Mutual")
filed an action against Securities Courier Corporation ("Securities"), a
subsidiary of the Company, Mr. Vincent Brana and certain other parties in the
United States District Court for the Southern District of New York alleging,
among other things, that Securities Courier had fraudulently obtained automobile
liability insurance from Liberty Mutual in the late 1980s and early 1990s at
below market rates. This suit, which claims common law fraud, fraudulent
inducement, unjust enrichment and violations of the civil provisions of the
Federal RICO statute, among other things, seeks an unspecified amount of
compensatory and punitive damages from the defendants, as well as attorneys'
fees and other expenses. Three additional defendants were added by way of a
second amended complaint on April 9, 1998. Securities and Mr. Brana have filed
cross claims against each of these additional defendants and certain original
defendants who had acted as insurance brokers for certain of the policies at
issue. Under the terms of its acquisition of Securities, the Company has certain
rights to indemnification from Mr. Brana. In connection with the
indemnification, Mr. Brana has entered into a Settlement Agreement and executed
a Promissory Note in the amount of up to $500,000 or such greater amount as may
be due for any defense costs or award arising out of this suit. Mr. Brana
originally delivered 100,000 shares of CDL common stock to the Company as
collateral for the note which was due on December 1, 2000. Because of the
increased costs in defending the suit Mr. Brana delivered an additional 50,000
shares of CDL common stock to the Company and the Company agreed to extend the
due date until December 1, 2002. In April 1999 a motion for summary judgement
was filed and denied by the Court in December 1999. The plaintiff subsequently
filed a Third Amended Complaint for breach of contract and additional claims for
quantum meruit. The parties are presently participating in court-ordered
non-binding mediation in an attempt to resolve this litigation which extends the
time to respond to the Third Amended Complaint until thirty days after
completion of the final mediation session, subject to the Court's approval.
Mediation sessions are scheduled through March 2000. Due to the continuing legal
costs in defending this suit, Mr. Brana has agreed to deliver 200,000 additional
shares of CDL common stock to the Company on or before May 31, 2000. The Company
does not believe that an adverse determination in this matter would result in a
material adverse effect on the on the consolidated financial position or results
of operations of the Company.
The Company is, from time to time, a party to litigation arising in
the normal course of its business, most of which involves claims for personal
injury and property damage incurred in connection with its same-day ground and
air delivery operations. Management believes that none of these actions will
have a material adverse effect on the consolidated financial position or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -
The Company's Common Stock has been trading on the American Stock
Exchange under the symbol "CDV" since February 23, 1999. Prior to that date, the
Company's Common Stock was included for quotation on the Nasdaq National Market
under the symbol "CDLI." The following table sets forth the high and low sales
prices for the Common Stock for 1998 and 1999.
1998 Low High
First Quarter $2.63 $5.00
Second Quarter $4.25 $5.50
Third Quarter $3.00 $5.50
Fourth Quarter $2.75 $3.75
1999 Low High
First Quarter $3.06 $4.44
Second Quarter $2.88 $4.81
Third Quarter $2.94 $4.25
Fourth Quarter $2.75 $4.13
On March 10, 2000, the last reported sale price of the Common Stock
was $3.375 per share. As of March 10, 2000, there were approximately 264
shareholders of record of Common Stock and, based on security position listings,
the Company believes there were approximately 1,355 beneficial holders of the
Common Stock.
Recent Sales of Unregistered Securities
The following shares of the Company's Common Stock have been sold or
issued without being registered under the Securities Act of 1933: o On January
31, 1999 the Company issued 506,250 common stock purchase warrants in connection
with the private placement of 12% Senior Subordinated Notes in the principal
amount of $15,000,000.
No underwriter or placement agent was used in connection with the
above referenced securities transactions, and no underwriting commissions were
paid. No means of general solicitation was used in offering the securities. The
securities in each transaction were sold to a limited group of accredited
investors in private placement transactions, exempt from registration under
Section 4(2) of the Securities Act or Regulation D thereunder. All purchasers of
the Company's securities were sophisticated investors who qualified as
accredited investors within the meaning of Rule 501(a) of Regulation D under the
Securities Act.
Dividends
The Company has not declared or paid any dividends on its Common
Stock. The Company currently intends to retain earnings to support its growth
strategy and does not anticipate paying dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, results of operations, current and anticipated
cash needs and plans for expansion. The Company's ability to pay cash dividends
on the Common Stock is also limited by the terms of its Revolving Credit
Facility. See Item 1. Business - Risk Factors - No Future Dividends and Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Consolidated Delivery & Logistics, Inc. ("CDL") was founded in June
1994. In November 1995, simultaneously with the closing of the CDL initial
public offering (the "Offering") separate wholly owned subsidiaries of CDL
merged (the "Merger") with each of 11 acquired businesses (the "Founding
Companies"). Consideration for the acquisition of these businesses consisted of
a combination of cash and common stock of CDL. The assets and liabilities of the
acquired businesses at September 30, 1995 were recorded by CDL at their
historical amounts.
The statement of operations data shown below for the nine month period
ended September 30, 1995 is that of the Combined Founding Companies prior to the
Merger (the "Combined Founding Companies") on a historical basis. During the
periods presented, the Combined Founding Companies were not under common control
or management and some were not taxable entities. Therefore the data presented
may not be comparable to or indicative of post-Merger results.
The selected financial data with respect to Consolidated Delivery &
Logistics, Inc.'s consolidated statement of operations for the years ended
December 31, 1997, 1998 and 1999 and with respect to Consolidated Delivery &
Logistics, Inc.'s consolidated balance sheet as of December 31, 1998 and 1999
have been derived from Consolidated Delivery & Logistics, Inc.'s consolidated
financial statements that appear elsewhere herein. The financial data provided
below should be read in conjunction with these accompanying consolidated
financial statements and notes thereto as well as "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SELECTED FINANCIAL DATA (Continued)
(In thousands, except per share amounts)
Statement of Operations Data:
Combined
Founding Consolidated Delivery & Logistics, Inc. and Subsidiaries
Companies
(4)
------------- ---------------------------------------------------------------------
For The
Nine Months For the Pro
Ended For The Year Forma Period
September Ended Ended For The Years Ended
30, December 31, December 31, December 31,
1995 1995 (3) 1995 (1)(2) 1996 1997 1998 1999
------------ ---------- ------------- ----------- --------- -------- ------------
Revenue $109,168 $37,322 $146,490 $163,090 $171,502 $185,739 $224,564
Gross profit 33,162 11,337 44,499 41,010 41,654 43,677 53,387
Operating income (loss) 3,971 578 4,549 (1,468) 2,702 4,847 7,668
Income (loss) from
continuing 2,112 (26) 2,086 (854) 1,657 2,311 2,911
operations (5)
Net income (loss) $2,182 ($195) $1,987 ($683) $459 $2,311 $2,911
Basic income (loss) per
share:
Continuing operations ($.02) $.32 ($.13) $.25 $.35 $.40
-Net income (loss) ($.10) $.30 ($.10) $.07 $.35 $.40
========== ============ ======== ========= ========= =========
Diluted income (loss)
per
-Share
-Continuing operations ($.02) $.31 ($.13) $.25 $.34 $.37
-Net income (loss) ($.10) $.29 ($.10) $.07 $.34 $.37
========= ============ ========= ========== ========== =========
Balance Sheet Data:
Consolidated Delivery & Logistics, Inc. and Subsidiaries
---------------------------------------------------------------------------------
December 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- --------- ---------- -------- ----------
Working capital (deficit) $7,948 $5,472 $2,519 ($4,196) $5,989
Equipment and leasehold
Improvements, net 3,582 3,857 5,667 6,630 6,624
Total assets 31,856 35,001 36,159 52,088 68,786
Long-term debt, net of
current maturities 3,027 3,415 2,240 6,383 22,885
Stockholders' equity 8,311 8,730 8,614 11,407 17,369
(1) Reflects the results of operations of the Combined Founding Companies for
the period from January 1 to September 30, 1995 and the results of
operations of Consolidated Delivery & Logistics, Inc. and Subsidiaries for
the year ended December 31, 1995.
(2) The computation of pro forma basic earnings per share for the year ended
December 31, 1995 is based upon (i) 493,869 shares of Common Stock issued
prior to the Mergers, (ii) 2,935,700 shares issued to the stockholders of
the Founding Companies in connection with the Mergers and (iii) 3,200,000
shares sold in the Offering. The computation of pro forma diluted earnings
per share for the year ended December 31, 1995 is based upon the preceding
shares and the dilution attributable to the debentures which were
convertible into 180,995 shares of Common Stock. The conversion of the
stock options outstanding at December 31, 1995 is not included in the
computation as the effect would be antidilutive.
(3) The Company selected October 1, 1995 as the effective date of the Merger.
The assets and liabilities of the Founding Companies at September 30, 1995
were recorded by CD&L at their historical amounts. The statement of
operations includes the results of operations of the Founding Companies
from October 1, 1995 through December 31, 1995. The results of operations
for Consolidated Delivery & Logistics, Inc. prior to the Mergers are not
significant.
(4) Pro Forma income tax provisions have been provided for certain Founding
Companies.
(5) During 1997, the Company disposed of its fulfillment and direct mail
operation. Accordingly, the operating results and gain on disposition of
the fulfillment and direct mail business have been reclassified as
discontinued operations for the periods presented.
Item 7. 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, inability to conclude acquisitions on satisfactory terms, the
effect of economic and market conditions, the impact of competition and the
factors listed in Item 1 - Risk Factors. Because of these and other reasons the
Company's actual results may vary materially from management's current
expectations.
Overview
The 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. During 1998 the Company refocused its
acquisition efforts and acquired four same-day ground delivery businesses. In
1999, the Company acquired four additional companies. See "Business-Recent
Acquisitions." Each of these acquisitions has been accounted for using the
purchase method of accounting.
Results of Operations 1999 Compared with 1998
Revenue for the year ended December 31,1999 increased $38.9 million,
or 20.9%, to $224.6 million from $185.7 million for the year ended December 31,
1998. The increase included $19.0 million contributed by the businesses acquired
in 1999 as well as increased sales from the Company's existing operations.
Ground delivery revenue increased $28.3 million, or 21.7%, including
$5.8 million from companies acquired in 1999. Air delivery revenue increased by
$10.6 million, or 19.1%. Revenue from two 1999 air delivery acquisitions of
$13.2 million was partially offset by a $2.6 million decline in existing
revenues.
Cost of revenue consists primarily of payments to employee drivers and
independent contractors, agents, airlines, other direct pick-up and delivery
costs and the costs of dispatching drivers and messengers. These costs increased
$29.1 million, or 20.5% from $142.1 million for 1998 to $171.2 million in 1999.
Stated as a percentage of revenue, these costs decreased to 76.2% for 1999 from
76.5% for 1998. This decrease reflects the companies success in controlling
costs and the impact of the synergies from companies acquired in 1999. As a
result of the revenue increase discussed above, gross profit increased by $9.7
million or 22.2%, from $43.7 million in 1998 to $53.4 million in 1999.
Selling general and administration expense ("SG&A") includes costs
incurred at the terminal level related to taking orders and administrative costs
related to such functions. Also included are costs to support the Company's
marketing and sales effort and the expense of maintaining information systems,
human resources, financial, legal and other administrative functions. SG&A
increased by $5.6 million, or 15.7%, from $35.7 million in 1998 to $41.3 million
in 1999. As a percentage of revenue SG&A decreased to 18.4% in 1999 compared to
19.2% of revenue in 1998. The improvement primarily reflects the synergies
realized with the 1999 acquisitions. Depreciation and amortization increased by
$1.3 million, or 41.9%, from $3.1 million for 1998 to $4.4 million for 1999.
As a result of the above, operating income increased $2.9 million, or
60.4%, from $4.8 million for the year ended December 31, 1998 to $7.7 million
for the year ended December 31, 1999. Stated as a percentage of revenue,
operating income increased from 2.6% for 1998 to 3.4% for 1999.
Interest expense increased by $2.0 million from $1.2 million in 1998
to $3.2 million in 1999. The net increase is primarily attributable to the debt
incurred in connection with the 1999 acquisitions.
Certain trends that began in late 1999 are expected to continue into
2000 and will have an adverse effect on the Company's operating results in the
short term. The Company recently lost certain pharmaceutical distribution
customers and has not yet replaced that revenue with new customers. There has
been upward pressure on certain of our direct operating costs, primarily fuel
and related labor. We have instituted certain cost containment measures and have
put an increased emphasis on the previously announced product-based
restructuring. While we can't predict the long-term fluctuation of either fuel
or labor costs, we expect continued pressure on our direct operating costs in
the near term.
Results of Operations 1998 Compared with 1997
Revenue for the year ended December 31,1998 increased $14.2 million,
or 8.3%, to $185.7 million from $171.5 million for the year ended December 31,
1997 including $7.3 million contributed by the businesses acquired in 1998 as
well as increased sales from the Company's existing operations.
Ground delivery revenue increased $15.2 million, or 13.2%, consisting
of the $7.3 million from acquired businesses previously mentioned with the
balance of the increase resulting from the addition of new contract distribution
routes as well as the expansion of existing routes. Air delivery revenue
decreased by $1.0 million, or 1.8%, due to the elimination during 1998 of
certain unprofitable business.
Cost of revenue consists of, among other things, payments to employee
drivers and independent contractors, agents, airlines, other direct pick-up and
delivery costs and the costs of dispatching drivers and messengers. These costs
increased $12.3 million, or 9.5% from $129.8 million for 1997 to $142.1 million
in 1998. Stated as a percentage of revenue, these costs increased to 76.5% for
1998 from 75.7% for 1997, or 0.8% year over year. This increase reflects the
generally lower gross profit associated with contract distribution services. As
a result of the revenue increase discussed above, gross profit increased by $2.0
million or 4.8%, from $41.7 million in 1997 to $43.7 million in 1998.
Selling general and administration expenses ("SG&A") includes costs
incurred at the terminal level related to taking orders and administrative costs
related to such functions. Also included are costs to support the Company's
marketing and sales effort and the expense of maintaining information systems,
human resources, financial, legal and other administrative functions. SG&A
decreased by $1.0 million, or 2.7%, from $36.7 million in 1997 to $35.7 million
in 1998. Primarily due to the Company's investment in computer systems and
support, depreciation and amortization increased by $800,000, or 34.8%, from
$2.3 million for 1997 to $3.1 million for 1998.
As a result of the above, operating income increased $2.1 million, or
77.8%, from $2.7 million for the year ended December 31, 1997 to $4.8 million
for the year ended December 31, 1998. Stated as a percentage of revenue,
operating income increased from 1.6% for 1997 to 2.6% for 1998.
Income from continuing operations included a gain of $816,000
resulting from the sale of the Company's contract logistics subsidiary in
January, 1997 with no similar gain for 1998. Interest expense increased by
$100,000, or 9.1%, from $1.1 million in 1997 to $1.2 million in 1998. The net
increase results from a reduction in the Company's line of credit because of
positive cash flow offset by borrowings necessary to acquire four businesses in
1998.
Net income increased by $1.8 million from $459,000 in 1997 to $2.3
million in 1998. A loss from discontinued operations of $1.2 million was
included in net income in 1997. If the effects of the discontinued operations
were not considered, income from continuing operations would have increased
$600,000 or 35.3%, from $1.7 million in 1997 to $2.3 million for the year ended
December 31, 1998.
Liquidity and Capital Resources
The Company's working capital increased by $10.2 million from a
deficit of $4.2 million as of December 31, 1998 to working capital of $6.0
million as of December 31, 1999. The increase is a result of the repayment of
the Company's short term borrowings using the proceeds of the 12% senior
subordinated notes.
Cash and cash equivalents increased slightly during 1999. Cash of $3.2
million was provided from operations and $4.6 million from net financing
activities while $7.8 million was used to acquire property and equipment and to
acquire four businesses during 1999.
Capital expenditures amounted to $2.4 million, $2.2 million and $1.2
million for the years ended December 31, 1999, 1998 and 1997 respectively. These
expenditures primarily upgraded and expanded computer system capability,
expanded and maintained Company facilities in the ordinary course of business
and upgraded the Company fleet. The Company incurred capital lease obligations
of $549,000 in an agreement to lease 40 vehicles in 1999 and $2.5 million during
1997 in an agreement to lease 175 vehicles.
Outstanding borrowings under our credit facility were $7.2 million and
we had $3.3 million outstanding in Standby Letters of Credit as of December 31,
1999. We also had $15.0 million in principal outstanding under our 12% Senior
Subordinated Notes, $13.9 million net of unamortized discount. We also had
$729,000 of outstanding debentures, $1.5 million of capital lease obligations
and various equipment notes and $9.2 million of seller financed debt. We had
$8.2 million available under our credit facility and $2.5 million available
under our equipment acquisition term loan facility.
Management believes that cash flows from operations, together with its
borrowing capacity (see Note 9 of the accompanying notes to the consolidated
financial statements) are sufficient to support the Company's operations and
general business and capital liquidity requirements for the foreseeable future.
Our 2000 financial results to date have been impacted adversely by
recent general labor shortages and gas price increases. So long as such factors
continue, the Company expects to experience a negative impact on its profit
margins.
Year 2000 Compliance
The Company initiated a program in 1997 to assess the risks of Year
2000 noncompliance, remediate all non-compliant systems, assess the readiness of
key third parties and develop contingency plans. The critical aspects of the
Year 2000 readiness program were completed in the third quarter of 1999. The
Company has not experienced any significant business disruptions related to the
transition to the Year 2000; however, we continue to actively monitor our
systems and third party suppliers throughout most of the first quarter.
Contingency plans are in place to prevent the failure of critical systems from
having a material effect on the Company and address the risk of third party
noncompliance. Total costs to address the Year 2000 issue were not material to
the Company's financial position, results of operations or cash flows.
Inflation
While inflation has not had a material impact on the Company's results
of operations for the last three years, fluctuations in fuel prices can and do
affect the Company's operating costs.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
CDL's major "market risk" exposure is the effect of changing interest
rates. CDL manages its interest expense by using a combination of fixed and
variable rate debt. At December 31, 1999, the Company's debt consisted of
approximately $25.4 million of fixed rate debt with a weighted average interest
rate of 10.3% and $7.2 million of variable rate debt with a weighted average
interest rate of 9.8%. The amount of variable rate debt fluctuates during the
year based on CD&L's cash requirements. Maximum borrowings of variable rate debt
at any quarter end were $7.2 million. If interest rates on such variable rate
debt were to increase by 85 basis points (approximately one-tenth of the rate at
December 31, 1999), the net impact to the Company's results of operations and
cash flows would be a decrease of approximately $65,000.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants ............................... 20
Consolidated Balance Sheets as of December 31, 1999 and 1998............ 21
Consolidated Statements of Operations For The Years Ended
December 31, 1999, 1998, and 1997................................... 22
Consolidated Statements of Changes in Stockholders' Equity
For The Years Ended December 31, 1999, 1998 and 1997................ 23
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1999, 1998 and 1997.................................... 24
Notes to Consolidated Financial Statements.............................. 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Consolidated Delivery & Logistics, Inc.:
We have audited the accompanying consolidated balance sheets of Consolidated
Delivery & Logistics, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Consolidated
Delivery & Logistics, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statement schedules is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 25, 2000
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
ASSETS
December 31,
-------------------------------------
1999 1998
------------------ ----------------
CURRENT ASSETS:
Cash and cash equivalents, including $34 and $73 of restricted cash
in 1999 and 1998, respectively (Note 2) $339 $295
Accounts receivable, less allowance for doubtful accounts of $1,939
and $1,865 in 1999 and 1998, respectively (Note 9) 27,560 24,491
Deferred income taxes (Notes 2 and 11) 876 1,456
Prepaid expenses and other current assets (Note 5) 3,445 1,104
------------------ ------------------
Total current assets 32,220 27,346
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net (Notes 2 and 6)
6,624 6,630
INTANGIBLE ASSETS, net (Notes 2, 3 and 7) 27,932 16,491
SECURITY DEPOSITS AND OTHER ASSETS (Note 17) 2,010 1,621
------------------ ------------------
Total assets $68,786 $52,088
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 9) $7,188 $13,577
Current maturities of long-term debt (Note 9) 2,513 3,181
Accounts payable 8,394 6,281
Accrued expenses and other current liabilities (Note 8) 8,136 7,271
Income taxes payable (Notes 2 and 11) - 1,232
------------------ -------------------
Total current liabilities 26,231 31,542
------------------ -------------------
LONG-TERM DEBT, net of current maturities (Note 9) 22,885 6,383
------------------ -------------------
DEFERRED INCOME TAXES PAYABLE (Notes 2 and 11) 1,625 1,717
------------------ -------------------
OTHER LONG-TERM LIABILITIES 676 1,039
------------------ -------------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 14)
STOCKHOLDERS' EQUITY (Notes 13, 14, 15 and 16):
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,
7,353,458 and 6,843,702 shares issued and outstanding in
1999 and 1998, respectively 7 7
Additional paid-in capital 12,721 9,670
Treasury stock, 29,367 shares at cost (162) (162)
Retained earnings 4,803 1,892
------------------ -------------------
Total stockholders' equity 17,369 11,407
------------------ -------------------
Total liabilities and stockholders' equity $68,786 $52,088
================== ===================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
For the Years Ended December 31,
-------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- -------------------
Revenue (Note 2) $224,564 $185,739 $171,502
Cost of revenue 171,177 142,062 129,848
--------------------- ---------------------- ------------------
Gross profit 53,387 43,677 41,654
Selling, general and administrative expenses 41,290 35,709 36,681
Depreciation and amortization 4,429 3,121 2,271
--------------------- ---------------------- ---------------------
Operating income 7,668 4,847 2,702
Other (income) expense
Gain on sale of subsidiary, net (Note 18) - - (816)
Interest expense 3,216 1,246 1,144
Other income, net (354) (126) (171)
--------------------- ---------------------- ---------------------
--------------------- ---------------------- ---------------------
2,862 1,120 157
--------------------- ---------------------- ---------------------
Income from continuing operations before provision
for income taxes 4,806 3,727 2,545
Provision for income taxes
(Notes 2 and 11) 1,895 1,416 888
--------------------- ---------------------- ---------------------
Income from continuing operations 2,911 2,311 1,657
--------------------- ---------------------- ---------------------
Discontinued operations (Note 4) -
Income (loss) from discontinued operations, net of
income taxes - - (1,221)
Gain on disposal of assets, net of provision for -
income taxes - 23
--------------------- ---------------------- ---------------------
Income (loss) from discontinued operations - (1,198)
--------------------- ---------------------- ---------------------
Net income $2,911 $2,311 $ 459
===================== ====================== =====================
Basic income (loss) per share:
Continuing operations $.40 $.35 $ .25
Discontinued operations - - (.18)
===================== ====================== =====================
Net income per share $.40 $.35 $.07
===================== ====================== =====================
Diluted income (loss) per share:
Continuing operations $.37 $.34 $.25
Discontinued operations - - (.18)
--------------------- ---------------------- ---------------------
Net income per share $.37 $.34 $.07
===================== ====================== =====================
Basic weighted average common
shares outstanding 7,214 6,662 6,672
===================== ====================== =====================
Diluted weighted average common
shares outstanding 7,868 6,839 6,675
===================== ====================== =====================
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands except share data)
Retained
Additional Earnings Total
Common Stock Paid-in Treasury (Accumulated Stockholders'
---------------------------
Shares Amount Capital Stock Deficit) Equity
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 6,795,790 $7 $9,601 $ - ($878) $8,730
Retirement of common stock
pursuant to saleof (137,239) - (600) - - (600)
subsidiary
Shares issued in connection with
acquisition of a business 8,333 - 25 - - 25
Net income - - - - 459 459
----------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31,1997 6,666,884 7 9,026 - (419) 8,614
Treasury shares acquired in
connection with adjustment
of purchase price of a
business acquired (29,367) - - (162) - (162)
Shares issued in connection with
acquisitions of businesses 206,185 - 644 - - 644
Net income - - - - 2,311 2,311
----------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1998 6,843,702 7 9,670 (162) 1,892 11,407
Discount for Warrants issued in
connection with private
placement - - 1,265 - - 1,265
Shares issued in connection with
Employee Stock Purchase
Plans 73,172 - 251 - - 251
Shares issued in connection with
executive compensation 47,051 - 150 - - 150
Shares issued in connection with
acquisitions of businesses 389,533 - 1,385 - - 1,385
Net income - - - - 2,911 2,911
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 7,353,458 $7 $12,721 $(162) $4,803 $17,369
========================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The Years Ended December 31,
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998 1997
----------------- --------------- ---------------
Net income $2,911 $2,311 $459
Adjustments to reconcile net income to net cash provided by
Operating activities -
Gain on disposal of equipment and leasehold improvements (135) (21) (22)
Gain on sale of subsidiary - - (816)
Loss from discontinued operations - - 1,221
Gain on disposal of assets of discontinued operations - - (23)
Depreciation and amortization 4,429 3,121 2,271
Provision for doubtful accounts 973 1,151 1,117
Deferred income tax provision (benefit) 488 300 (35)
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable (2,699) (2,100) (2,005)
Prepaid expenses and other current assets (2,230) 630 (415)
Other assets (415) (298) (303)
Increase (decrease) in -
Accounts payable, accrued liabilities and income taxes payable 688 227 1,359
Other long-term liabilities (790) (343) (236)
----------------- --------------- ---------------
Net cash provided by operating activities of continuing
Operations 3,220 4,978 2,572
----------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and leasehold improvements (2,423) (2,245) (1,191)
Proceeds from sales of equipment and leasehold improvements 397 144 112
Proceeds from sale of assets of discontinued operations - - 125
Purchases of businesses, net of cash acquired (5,778) (7,233) -
----------------- --------------- ---------------
Net cash used in investing activities (7,804) (9,334) (954)
----------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net (6,389) 6,217 160
Proceeds from long-term debt 15,000 150 -
Repayments of long-term debt (4,478) (3,450) (1,393)
Issuance of warrants in connection with long-term financing 1,265 - -
Issuance of stock 401 - -
Deferred financing costs (1,171) (36) (125)
----------------- --------------- ---------------
Net cash provided by (used in) financing activities 4,628 2,881 (1,358)
----------------- --------------- ---------------
CASH USED BY DISCONTINUED OPERATIONS - (42) (205)
================= =============== ================
Net increase (decrease) in cash and cash equivalents 44 (1,517) 55
CASH AND CASH EQUIVALENTS, beginning of year 295 1,812 1,757
================= =============== ===============
CASH AND CASH EQUIVALENTS, end of year $339 $295 $1,812
================= =============== ===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS:
Consolidated Delivery & Logistics, Inc. ("the Company") was founded in June
1994. In November 1995, simultaneously with the closing of the Company's initial
public offering (the "Offering") separate wholly owned subsidiaries of the
Company merged (the "Merger") with each of eleven acquired businesses.
Consideration for the acquisition of these businesses consisted of a combination
of cash and common stock of the Company, par value $0.001 per share. The assets
and liabilities of the acquired businesses at September 30, 1995 were recorded
by the Company at their historical amounts.
Consolidated Delivery & Logistics, Inc. and Subsidiaries ("CDL") provides an
extensive network of same-day ground and air delivery services to a wide range
of commercial, industrial and retail customers. CDL ground delivery operations
currently are concentrated on the East Coast, with a strategic presence both in
the Midwest and on the West Coast. CDL air delivery services are provided
throughout the United States and to major cities around the world.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Use of Estimates in Preparation of the Financial Statements -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -
CDL considers all highly liquid investments with original maturities of three
months or less to be cash equivalents. Cash equivalents are carried at cost,
which approximates market value. Included in cash and cash equivalents is cash
restricted for a national marketing and advertising program for CDL's sales
agency agreements (see Note 13).
Equipment and Leasehold Improvements -
Equipment and leasehold improvements are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements and assets subject to capital leases are
amortized over the shorter of the terms of the leases or lives of the assets.
Deferred Financing Costs -
The costs incurred for obtaining financing, including all related legal and
accounting fees are included in other assets in the accompanying consolidated
balance sheets and are amortized over the life of the related financing from 2 -
7 years.
Intangible Assets -
Intangible assets consist of goodwill, customer lists, and non-compete
agreements. Goodwill represents the excess of the purchase price over the fair
value of assets of businesses acquired and is amortized on a straight-line basis
over 25 years to 40 years. Customer lists and non-compete agreements are
amortized over the estimated period to be benefited, generally from 3 to 5
years.
Revenue Recognition -
Revenue is recognized when the shipment is completed, or when services are
rendered to customers, and expenses are recognized as incurred. Certain
customers pay in advance, giving rise to deferred revenue.
Income Taxes -
CDL accounts for income taxes utilizing the liability approach. Deferred income
taxes are provided for differences in the recognition of assets and liabilities
for tax and financial reporting purposes. Temporary differences result primarily
from accelerated depreciation and amortization for tax purposes and various
accruals and reserves being deductible for tax purposes in future periods.
Long-Lived Assets -
CDL reviews its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. The measurement of impairment losses to be
recognized is based on the difference between the fair values and the carrying
amounts of the assets. Impairment would be recognized in operating results if a
diminution in value occurred. The Company does not believe that any such changes
have occurred.
Fair Value of Financial Instruments -
Due to the short maturities of CDL's cash, receivables and payables, the
carrying value of these financial instruments approximates their fair values.
The fair value of CDL's debt is estimated based on the current rates offered to
CDL for debt with similar remaining maturities. CDL believes that the carrying
value of its debt estimates the fair value of such debt instruments.
Stock Based Compensation -
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") requires that an entity account for employee stock
compensation under a fair value based method. However, SFAS 123 also allows an
entity to continue to measure compensation cost for employee stock-based
compensation plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
("Opinion 25"). CDL has elected to continue to account for employee stock-based
compensation under Opinion 25 and provide the required pro forma disclosures as
if the fair value based method of accounting under SFAS 123 had been applied
(see Note 14). Income (Loss) Per Share -
Basic earnings per share represents net income (loss) divided by the weighted
average shares outstanding. Diluted earnings per share represents net income
(loss) divided by weighted average shares outstanding adjusted for the
incremental dilution of common stock equivalents
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows:
1999 1998 1997
-------------- ------------- -------------
-------------- ------------- -------------
Basic weighted average common
Shares outstanding 7,214,426 6,662,258 6,672,284
Effect of dilutive securities:
Stock options and warrants 648,952 175,249 2,656
Employee stock purchase plan 4,450 1,496 -
-------------- ------------- -------------
Diluted weighted average common
shares outstanding 7,867,829 6,839,003 6,674,940
============== ============= =============
The following common stock equivalents were excluded from the computation of
diluted Earnings Per Share because the exercise or conversion price was greater
than the average market price of common shares -
1999 1998 1997
Stock options 522,546 573,684 685,038
Subordinated convertible debentures 145,750 161,818 180,995
Seller financed convertible notes 593,333 685,470 -
============== ============= =============
Reclassifications -
Certain reclassifications have been made to the prior years' consolidated
financial statements in order to conform to the 1999 presentation.
(3) BUSINESS COMBINATIONS:
On February 16, 1999, CDL entered into and consummated an asset and stock
purchase agreement with its subsidiary, Sureway Air Traffic Corporation
("Sureway") and Victory Messenger Service, Inc., Richard 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.
The purchase price was comprised of approximately $3.0 million in cash including
estimated direct acquisition costs, $1,650,000 in a 7% subordinated note (the
"Note") and 200,000 shares of CDL common stock at $3.875 per share. The Note is
due April 16, 2001 with interest payable quarterly commencing April 1, 1999. The
Note is subordinate to all existing or future senior debt of CDL. In addition, a
contingent earn out in the aggregate amount of up to $520,000 is payable based
on the achievement of certain financial goals during the two year period
following the closing. The earn out is payable 55% in cash and 45% in CDL common
stock.
On April 30, 1999, CDL entered into and consummated an asset purchase agreement
with its subsidiary, Silver Star Express, Inc. ("Silver Star") and Metro Parcel
Service, Inc., Nathan Spaulding and Kelly M. Spaulding, (collectively, "Metro
Parcel"), whereby Silver Star purchased certain of the assets and liabilities of
Metro Parcel. The purchase price was comprised of approximately $710,000 in
cash, $202,734 in a 7% subordinated note (the "Metro Parcel Note") and 40,000
shares of CDL's common stock at $3.25 per share. The Metro Parcel Note is due
April 30, 2001 with interest payable quarterly commencing August 1, 1999. The
Metro Parcel Note is subordinate to all existing or future senior debt of CDL.
On April 30, 1999, CDL entered into and consummated an asset purchase agreement
with its subsidiary, Clayton/National Courier Systems, Inc. ("Clayton/National")
and Westwind Express, Inc., Logistics Delivery Systems, Inc., Fastrak Delivery
Systems, Inc., Sierra Delivery Services, Inc., and Steven S. Keihner
(collectively, "Westwind"), whereby Clayton/National purchased certain of the
assets and liabilities of Westwind. The purchase price was comprised of
approximately $2,650,000 in cash, $1,680,000 in various 7% subordinated notes
(the "Westwind Notes") and 149,533 shares of CDL's common stock at $3.21 per
share. The Westwind Notes are comprised of two-year notes due April 30, 2001
with a total principal amount of $1,200,000 and three-year notes due April 30,
2002 with a total principal amount of $480,000. Interest on the Westwind Notes
is payable quarterly commencing July 31, 1999. The Westwind Notes are
subordinate to all existing or future senior debt of CDL. In addition, a
contingent earn out in the aggregate amount of up to $700,000 is payable based
on the achievement of certain financial goals during the two year period
following the closing. The earn out is payable 60% in cash and 40% in one year
promissory notes bearing interest at a rate of 7% per annum having similar terms
as the Westwind Notes referred to above.
On May 10, 1999, CDL entered into and consummated an asset purchase agreement
(the "Skycab Purchase Agreement") with its subsidiary, Sureway and Skycab, Inc.
and Martin Shulman (collectively, "Skycab"), whereby Sureway purchased certain
assets of Skycab. The purchase price was comprised of approximately $78,100 in
cash. In addition, a contingent earn out is payable for
sixteen quarters following the closing date. The amount of the earn-out per
quarter is the greater of either $6,250 or 15% of collected revenues for the
three-month period then ended, as defined in the Skycab Purchase Agreement.
Any payments of the earnouts discussed above will increase the goodwill recorded
for the acquisition of the applicable company. The amortization of any
additional goodwill and the conversion of any of the convertible notes payable
into common stock will negatively affect the Company's future earnings per
share.
CDL financed each of the above acquisitions using proceeds from its revolving
credit facility with First Union Commercial Corporation. All of the above
transactions have been accounted for under the purchase method of accounting.
Accordingly, the allocation of the cost of the acquired assets and liabilities
have been made on the basis of the estimated fair value. The aggregate amount of
goodwill recorded for the Gold Wings, Metro Parcel and Skycab acquisitions is
$6.4 million to be amortized over 25 years. The goodwill for the Westwind
acquisition is $5.1 million to be amortized over 40 years. The consolidated
financial statements include the operating results of Gold Wings, Metro Parcel,
Westwind, and Skycab from their respective acquisition dates.
The following summarized unaudited pro forma financial information was prepared
assuming that the Gold Wings, Metro Parcel, Westwind and Skycab acquisitions
occurred on the first day of such periods and include certain pro forma
adjustments. This information is not necessarily indicative of the results the
Company would have obtained had these events actually occurred on such dates or
of the Company's actual or future results (in thousands, except per share
amounts).
For the Year For the Year
Ended Ended
December 31, 1999 December 31, 1998
(Unaudited) (Unaudited)
Revenue $229,598 $203,979
Income from operations 7,889 5,589
Net income $2,945 $2,359
Basic net income per share $.41 $.35
Diluted net income per share $.37 $.34
During 1998, the Company acquired four businesses in transactions accounted for
as purchases. The total consideration paid in these transactions is contingent
upon future activity and is estimated to aggregate $14.5 million, which consists
of $8.0 million paid in cash and 206,185 shares of Common Stock at $3.44 per
share. Of this amount $13.9 million has been assigned to the excess of purchase
price over net assets of businesses acquired (goodwill) and other intangible
assets. The purchase price was subsequently reduced by approximately $754,000
during 1999 due to actual revenue not reaching projected revenue as stipulated
in the purchase agreements. Accordingly, goodwill and seller financed debt were
reduced by this amount to reflect the reduction in the purchase price. Final
determinations of the individual acquisition costs will be made by May 2003. The
results of the acquired businesses have been reflected in the accompanying
consolidated statements of operations since their respective acquisition dates.
(4) DISCONTINUED OPERATIONS:
On December 31, 1997, the Company entered into an agreement providing for the
sale of certain assets of its fulfillment and direct mail business. The selling
price for the assets was $850,000 and is comprised of $125,000 in cash with the
remainder in the form of a promissory note (the "Note Receivable"). The Note
Receivable bore interest at the rate of 6% per annum, with interest only in
monthly installments during 1998. Commencing February 1, 1999 the Note
Receivable was to be paid in equal monthly installments of $14,016 including
principal and interest through January 1, 2004. The Note Receivable was included
in prepaid expenses in the amount of $117,000 and in security deposits in the
amount of $608,000 at December 31, 1998 in the accompanying consolidated balance
sheets. The purchaser has defaulted on the balance of the note and made or will
make no payments since it ceased business in July 1999. The Company wrote off
the remaining balance of approximately $662,000 during 1999.
Accordingly, the financial position, operating results and the gain on the
disposition of the Company's fulfillment and direct mail business have been
segregated from continuing operations and reclassified as a discontinued
operation in the accompanying consolidated financial statements.
Results from the discontinued fulfillment and direct mail business for the year
ended December 31, 1997 included $5,937 of Revenue, a loss from discontinued
operations of $1,221 (net of an income tax benefit of $811) and a gain on the
disposal of assets of $23 (net of an income tax provision of $15).
(5) PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following
(in thousands) -
December 31,
---------------------------------------------
1999 1998
-------------------- -------------------
Other receivables $976 $478
Prepaid supplies and equipment deposits 538 146
Prepaid insurance 1,220 151
Prepaid rent 66 119
Prepaid income taxes 470 -
Other 176 210
-------------------- -------------------
$3,445 $1,104
==================== ===================
(6) EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following (in thousands) -
December 31,
--------------------------------
Useful Lives 1999 1998
------------ --------------- --------------
Transportation and warehouse equipment 3-7 years $8,314 $7,814
Office equipment 3-7 years 6,826 6,203
Other equipment 5-7 years 860 1,018
Leasehold improvements Lease period 1,498 1,516
--------------- --------------
17,498 16,551
Less - accumulated depreciation and amortization (10,874) (9,921)
--------------- --------------
$6,624 $6,630
=============== ==============
Leased equipment under capitalized leases (included above) consists of the following (in thousands) -
December 31,
--------------------------------
1999 1998
---------------- --------------
Equipment $3,839 $3,635
Less - accumulated amortization (2,506) (1,835)
---------------- --------------
$1,333 $1,800
================ ==============
The Company incurred capital lease obligations of $564,000 in 1999 for vehicles and warehouse equipment and
$114,000 during 1998 for office equipment.
(7) INTANGIBLE ASSETS:
Intangible assets (see Note 3) consist of the following (in thousands) -
December 31,
-------------------------------
1999 1998
Useful Lives --------------- --------------
Goodwill 25 - 40 years $27,911 $16,276
Noncompete agreements 3 - 5 years 416 536
Customer lists 3 - 5 years 532 550
Deferred financing costs and other 3 - 7 years 1,332 161
--------------- --------------
30,191 17,523
Less - accumulated amortization (2,259) (1,032)
--------------- --------------
$27,932 $16,491
=============== ==============
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following (in thousands) -
December 31,
-------------------------------
1999 1998
--------------- --------------
Payroll and related expenses $4,113 $3,822
Third party delivery costs 2,817 1,605
Insurance 73 561
Professional fees 332 393
Interest 240 175
Marketing 31 101
Rent 75 50
Other 455 564
--------------- --------------
$8,136 $7,271
=============== ==============
(9) SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
Short-term borrowings -
At December 31, 1999 and 1998, the Company had a line of credit agreement for
$22.5 million. The Company's short-term borrowings on its line of credit for the
years ended December 31 are as follows:
1999 1998 1997
---- ---- ----
End of year balance $7,188 $13,577 $7,360
Maximum amount outstanding during the year 14,600 13,600 8,300
Average balance outstanding during the year 5,600 7,800 8,100
Weighted average borrowing cost during the year 9.8% 9.1% 9.4%
In November 1998, CDL and First Union Commercial Corporation ("First Union")
modified an agreement entered into in July 1997, establishing a revolving credit
facility (the "First Union Agreement"). The First Union Agreement increased the
original credit facility from $15 million to $22.5 million, provided CDL with an
equipment acquisition term loan facility of up to $2.5 million and modified
other terms and conditions. Credit availability is based on eligible amounts of
accounts receivable, as defined, up to a maximum amount of $22.5 million and is
secured by substantially all of the assets, including certain cash balances,
accounts receivable, equipment and leasehold improvements and general
intangibles of the Company and its subsidiaries. The First Union Agreement
provides for both fixed and variable rate loans. Interest rates on fixed rate
borrowings are based on LIBOR (which was 6.00% at December 31, 1999), plus 1.5%
to 2%. Variable rate borrowings are based on First Union's prime lending rate
(which was 8.25% at December 31, 1999), minus .25% to plus .25%. Based on
eligible accounts receivable at December 31, 1999, $8.2 million of the credit
facility and $2.5 million of the equipment acquisition term loan facility was
available for future borrowings.
Under the terms of the First Union Agreement, the Company is required to
maintain certain financial ratios and comply with other financial conditions.
The First Union Agreement also prohibits the Company from incurring certain
additional indebtedness, limits certain investments, advances or loans and
restricts substantial asset sales, capital expenditures and cash dividends. At
December 31, 1999 the Company was in compliance with all loan covenants.
Long-Term Debt -
On January 29, 1999, the Company completed a $15 million private
placement of senior subordinated notes and warrants with three financial
institutions. The notes bear interest at 12% per annum and are subordinate to
all senior debt including the Company's credit facility with First Union. Under
the terms of the notes, the Company is required to maintain certain financial
ratios and comply with other financial conditions for which the Company was in
compliance as of December 31, 1999. The notes mature on January 29, 2006 and may
be prepaid by the Company under certain circumstances. The warrants expire on
January 19, 2009 and are exercisable at any time prior to expiration at a price
of $.001 per equivalent share of common stock for an aggregate of 506,250 shares
of the Company's stock, subject to additional adjustments. The Company has
recorded the fair value of the warrants of $1,265,000 as a credit to additional
paid-in-capital and a debt discount on the senior subordinated notes. The
Company used the proceeds to finance acquisitions and to reduce outstanding
short-term borrowings.
Long-term debt consists of the following (in thousands) -
December 31,
-----------------------------
1999 1998
-------------- -------------
12% Senior Subordinated Notes, net of unamortized discount of $1.1 million $13,900 $ -
10% and 8% Subordinated Convertible Debentures (a) 729 890
Capital lease obligations due through August 2001 with interest at rates
ranging from 5.3% to 15.2% and secured by the related property. 1,174 1,802
Seller-financed debt on acquisitions, payable in annual and quarterly
installments through August, 2003. Interest is payable at rates ranging
between 6% and 7% and one of the notes requires monthly payments based on
collected revenues through May 2003 with interest imputed at the
rate of 9%. 9,187 5,859
Various equipment and vehicle notes payable to banks and finance
companies due through March 2003 with interest ranging from 8% to
12.5% and secured by various assets of certain subsidiaries. 369 818
Debt due to former owners, their relatives, and employees of businesses
acquired with weekly and quarterly principal and interest payments through
September 2001 together with interest at rates ranging from 8% to 10%. 39 195
-------------- -------------
25,398 9,564
Less - Current maturities (2,523) (3,181)
-------------- -------------
$22,875 $6,383
============== =============
(a) In September 1995, the Company issued $2 million in the aggregate principal
amount of its 8% Subordinated Convertible Debentures (the " 8% Debentures"). On
April 1, 1998 the Company converted $740,000 of the $2 million of the 8%
Debentures to 10% Subordinated Convertible Debentures (the "10% Debentures") and
issued $150,000 of additional 10% Debentures. The remaining 8% Debentures,
totaling $1.26 million were repaid in August 1998. On August 1, 1999, the 10%
Debentures were further amended extending the maturity date to August 21, 2001
and reducing the conversion price to $5.00 per share. An additional $150,000 of
10% Debentures were issued at that time and $311,250 of 10% Debentures were
repaid. The outstanding $728,750 of 10% Debentures are convertible into the
Company's common stock at a conversion price of $5.00 per share, accrue interest
at 10% per annum payable quarterly and mature on August 21, 2001. The 10%
Debentures are redeemable, in whole or in part, without premium or penalty by
the Company at any time on or after August 18, 2000 or by the holder at any time
on or after August 21, 2000, and are classified as current.
The aggregate annual principal maturities of debt (excluding capital lease
obligations) as of December 31, 1999 are as follows (in thousands) -
2000 $1,611
2001 4,991
2002 2,255
2003 1,467
2004 13,900
-------------
Total $24,224
=============
The Company leases certain transportation and office equipment under capital
lease agreements that expire at various dates. At December 31, 1999, minimum
annual payments under capital leases, including interest, are as follows (in
thousands) -
2000 $906
2001 194
2002 74
----------
Total minimum payments 1,174
Less - Amounts representing interest (61)
----------
Net minimum payments 1,113
Less - Current portion of obligations under capital leases (912)
----------
Long-term portion of obligations under capital leases $201
==========
(10) EMPLOYEE BENEFIT PLANS:
The Company adopted a 401(k) retirement plan during 1996 and merged all of the
existing subsidiary plans into the newly adopted plan. Substantially all
employees are eligible to participate in the plan and are permitted to
contribute between 1% and 20% of their annual salary. The Company has the right
to make discretionary contributions that will be allocated to each eligible
participant. The Company did not make discretionary contributions for the years
ended December 31, 1999, 1998 and 1997.
(11) INCOME TAXES:
Federal and state income tax provision (benefit) for the years ended December
31, 1999, 1998 and 1997 are as follows (in thousands) -
1999 1998 1997
-------- -------- -------
Federal-
Current $1,106 $797 $723
Deferred 488 300 (35)
State 301 319 200
------- -------- -------
$1,895 $1,416 $888
========= ======== =======
The differences in Federal income taxes provided and the amounts determined by
applying the Federal statutory tax rate (34%) to income (loss) from continuing
operations before income taxes for the years ended December 31, 1999, 1998 and
1997, result from the following (in thousands) -
1999 1998 1997
---------------- ---------------- ------------------
Tax at statutory rate $1,602 $1,267 $865
Add (deduct) the effect of-
State income taxes 199 211 132
Nondeductible expenses and other, net 94 (62) (109)
---------------- --------------- ----------------
State income taxes $1,895 $1,416 $888
================ ================ ==================
The components of deferred income tax assets and liabilities, are as follows
(in thousands) -
December 31,
-----------------------------------
1999 1998
---------------- ---------------
Deferred income tax assets -
Allowance for doubtful accounts $782 $753
Reserves and other, net 94 903
---------------- ---------------
Total deferred income tax assets $876 $1,656
================ ===============
Deferred income tax liabilities -
Trade receivables discount $(341) $(507)
Accumulated depreciation and amortization (338) (391)
Cash to accrual differences (216) (288)
Other (730) (731)
---------------- ---------------
---------------- ---------------
Total deferred income tax liabilities $(1,625) ($1,917)
================ ===============
Net deferred tax (liability) asset $(749) $(261)
================ ===============
(12) REPORTABLE SEGMENTS:
CDL presently has two reportable segments: Air and Ground. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Separate management of each segment is required
because each business unit is subject to different cost and delivery parameters.
The Company has announced plans to re-align its business operations and is
presently evaluating the effect if any, this change will have on its reportable
segments.
Air Ground Total
Revenue from external customers
1999 $66,056 $158,498 $224,564
1998 55,547 130,192 185,739
1997 56,545 114,957 171,502
Intersegment revenue
1999 118 1,683 1,801
1998 71 1,568 1,639
1997 226 2,006 2,232
Interest expense
1999 931 2,235 3,216
1998 373 873 1,246
1997 377 767 1,144
Depreciation and amortization
1999 801 3,628 4,429
1998 556 2,565 3,121
1997 415 1,856 2,271
Segment profit (loss)
1999 966 1,945 2,911
1998 497 1,814 2,311
1997 71 1,586 1,657
Segment assets
1999 19,893 48,676 68,569
1998 11,489 40,599 52,088
1997 15,041 21,118 36,159
Expenditures for segment assets
1999 1,120 1,303 2,423
1998 637 1,608 2,245
1997 281 910 1,191
The CDL Air Division derives its revenue from the provision of customized heavy
freight, next flight out and international shipments whereby package movement is
by air generally on scheduled airline flights. CDL ground delivery services are
provided to customers by a CDL driver in a vehicle either on a rush basis or on
a regularly scheduled route basis. Air revenue is generally measured by package
while ground delivery revenue is generally measured by the number of stops
involved.
Intersegment revenue results from the provision of ground service for the
pick-up or delivery of packages for delivery to airports or from airports to
customers. The Air division also provides delivery by air of time critical
material for ultimate distribution by ground based drivers. Management evaluates
the performance of each segment based on its overall contribution to the
Company's net income after factoring in the allocation of interest as well as an
intersegment charge of 2% of segment revenue for overall general and
administrative expenses.
(13) COMMITMENTS AND CONTINGENCIES:
Operating Leases -
The Company leases its office and warehouse facilities under noncancellable
operating leases, which expire at various dates through January 2004. The
approximate minimum rental commitments of the Company, under existing agreements
as of December 31, 1999, are as follows (in thousands) -
2000 $2,750
2001 2,377
2002 1,479
2003 651
2004 437
Rent expense related to operating leases amounted to approximately $13.8
million, $12.7 million and $13.1 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Litigation -
In February 1996, Liberty Mutual Insurance Company ("Liberty Mutual") filed an
action against Securities Courier Corporation ("Securities"), a subsidiary of
the Company, Mr. Vincent Brana and certain other parties in the United States
District Court for the Southern District of New York alleging, among other
things, that Securities Courier had fraudulently obtained automobile liability
insurance from Liberty Mutual in the late 1980s and early 1990s at below market
rates. This suit, which claims common law fraud, fraudulent inducement, unjust
enrichment and violations of the civil provisions of the Federal RICO statute,
among other things, seeks an unspecified amount of compensatory and punitive
damages from the defendants, as well as attorneys' fees and other expenses.
Three additional defendants were added by way of a second amended complaint on
April 9, 1998. Securities and Mr. Brana have filed cross claims against each of
these additional defendants and certain original defendants who had acted as
insurance brokers for certain of the policies at issue. Under the terms of its
acquisition of Securities, the Company has certain rights to indemnification
from Mr. Brana. In connection with the indemnification, Mr. Brana has entered
into a Settlement Agreement and executed a Promissory Note in the amount of up
to $500,000 or such greater amount as may be due for any defense costs or award
arising out of this suit. Mr. Brana originally delivered 100,000 shares of CDL
common stock to the Company as collateral for the note which was due on December
1, 2000. Because of the increased costs in defending the suit Mr. Brana
delivered an additional 50,000 shares of CDL common stock to the Company and the
Company agreed to extend the due date until December 1, 2002. In April 1999 a
motion for summary judgement was filed and denied by the Court in December 1999.
The plaintiff subsequently filed a Third Amended Complaint for breach of
contract and additional claims for quantum meruit. The parties are presently
participating in court-ordered non-binding mediation in an attempt to resolve
this litigation which extends the time to respond to the Third Amended Complaint
until thirty days after completion of the final mediation session, subject to
the Court's approval. Mediation sessions are scheduled through March 2000. Due
to the continuing legal costs in defending this suit, Mr. Brana has agreed to
deliver 200,000 additional shares of CDL common stock to the Company on or
before May 31, 2000. The Company does not believe that an adverse determination
in this matter would result in a material adverse effect on the consolidated
financial position or results of operations of the Company.
The Company and its subsidiaries are from time to time, parties to litigation
arising in the normal course of their business, most of which involves claims
for personal injury and property damage incurred in connection with their
operations. Management believes that none of these actions, including the above
action, will have a material adverse effect on the financial position or results
of operations of the Company and its subsidiaries.
Sales Agency Agreements -
The Company has entered into sales agency agreements with independent
contractors with varying terms to perform courier services on behalf of the
Company. The independent contractors provide marketing and sales services and
the Company provides the resources to perform courier services. In connection
with these transactions the Company retains from the independent contractors a
fee for services rendered of approximately 10% of revenues. The profit on these
sales net of the Company's fees for its services are remitted back to the
independent contractors as payment for marketing and sales services rendered.
Sales agency charges totaled $3.4 million, $4.2 million and $4.7 million in
1999, 1998 and 1997, respectively.
Earn-Outs
Certain of the companies acquired by CDL are eligible to earn additional
amounts, consisting of a combination of cash and notes payable, as adjustments
to the purchase prices paid for those companies. At December 31, 1999, the
Company had recorded an accrual for the estimated earn-outs for Goldwings,
Westwind and Skycab in the amounts of $520,000, $700,000 and $100,000, in
connection with recording their respective acquisitions. Due to applicable
targets not being met, the earnouts for Everready Express and Manteca
Enterprises were reduced by $242,000 and $679,000, respectively. The Company
recorded an increase in purchase price for a settlement reached in connection
with the acquisition of Metro Courier in the amount of $167,000.
(14) Stock Option Plans:
The Company has two stock option plans under which employees and
independent directors may be granted options to purchase shares of Company
Common Stock at or above the fair market value at the date of grant.
Options generally vest in one to four years and expire in 10 years.
Employee Stock compensation Program -
In September 1995, the Board of Directors adopted, and the stockholders
of the Company approved the Company's Employee Stock Compensation Program (the
"Employee Stock Compensation Program"). The Employee Stock Compensation Program
authorizes the granting of incentive stock options, non-qualified supplementary
options, stock appreciation rights, performance shares and stock bonus awards to
key employees of the Company, including those employees serving as officers or
directors of the Company. The Company initially reserved 1,400,000 shares of
Common Stock for issuance in connection with the Employee Stock Compensation
Program. In June 1998 the Board of Directors adopted and the stockholders of the
Company approved an additional 500,000 shares for issuance under the Employee
Stock Compensation Program. The Employee Stock Compensation Program is
administered by a committee of the Board of Directors (the "Administrators")
made up of directors who are disinterested persons. Options and awards granted
under the Employee Stock Compensation Program will have an exercise or payment
price as established by the Administrators provided that the exercise price of
incentive stock options may not be less than the fair market value of the
underlying shares on the date of grant. Unless otherwise specified by the
Administrators, options and awards will vest in four equal installments on the
first, second, third and fourth anniversaries of the date of grant.
1995 Stock Option Plan for Independent Directors -
In September 1995, the Board of Directors adopted, and the stockholders
of the Company approved, the Company's 1995 Stock Option Plan for Independent
Directors (the "Director Plan"). The Director Plan authorizes the granting of
non-qualified stock options to non-employee directors of the Company. The
Company has reserved 100,000 shares of Common Stock for issuance in connection
with the Director Plan. The Director Plan is administered by a committee of the
Board of Directors (the "Committee"), none of whom will be eligible to
participate in the Director Plan. The Director Plan provided for an initial
grant of an option to purchase 1,500 shares of Common Stock upon election as a
director of the Company, a second option to purchase 1,000 shares of Common
Stock upon the one-year anniversary of such director's election and subsequent
annual options for 500 shares of Common Stock upon the anniversary of each year
of service as a director. In June of 1998 the stockholders of the Company
approved amendments to the Director Plan. The amendments replaced the annual
stock option grants of the original plan with quarterly grants of 1,250 shares
of stock options on the first trading day of each fiscal quarter commencing on
October 1, 1997. In August of 1998 and February of 1999, the Committee approved
further amendments to the Plan. These amendments replaced the time period to
exercise vested options after a participating director has served as a director
for a period of three consecutive years or more. The Director Plan was amended
to provide that in the event any holder, who has served as a director for three
or more consecutive years, shall cease to be a director for any reason,
including removal with or without cause or death or disability, all options (to
the extent exercisable at the termination of the director's service) shall
remain exercisable by the holder or his lawful heirs, executors or
administrators until the expiration of the ten year period following the date
such options were granted.
Information regarding the Company's stock option plans is summarized below:
Weighted
Number Average
Of Exercise
Shares Price
------------------ -----------------
Shares under option:
Outstanding at December 31, 1996 562,568 $11.36
Granted 444,928 $3.85
Exercised - -
Canceled (99,373) $10.15
------------------
Outstanding at December 31, 1997 908,123 $ 7.80
Granted 302,203 $ 2.85
Exercised - -
Canceled (56,011) $11.81
------------------
Outstanding at December 31, 1998 1,154,315 $ 6.34
Granted 381,229 $ 3.15
Exercised - -
Canceled (75,225) $ 8.92
------------------
Outstanding at December 31, 1999 1,460,319 $5.33
==================
Options exercisable at:
December 31, 1997 576,592 $7.33
================== =================
December 31, 1998 915,378 $6.35
================== =================
December 31, 1999 1,099,297 $6.08
================== =================
At December 31, 1999, options available for grant under the Employee Stock
Compensation Plan and the Director Plan total 479,681 and 60,000, respectively.
The following summarizes information about option groups outstanding and
exercisable at December 31, 1999:
Outstanding Options Exercisable Options
------------------------------------------------------- ------------------------------------
Number Number
Outstanding Weighted Weighted Exercisable Weighted
Range of As of Average Average as of Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 1999 Life Price 1999 Price
- ------------------ ------------------ ---------------- ------------- ------------------ -------------
$2.31 - $4.75 1,020,381 8.20 $3.01 659,359 $2.99
$4.88 - $7.88 150,000 7.30 $6.25 150,000 $6.25
$13.00 289,938 5.28 $13.00 289,938 $13.00
- ------------------ ------------------ ---------------- ------------- ------------------ -------------
The Company adopted the provisions of SFAS 123 and has chosen to continue to
account for stock-based compensation using the intrinsic value method.
Accordingly, no compensation expense has been recognized for its stock-based
compensation plans. Pro forma information regarding net income (loss) and
earnings (loss) per share is required, and has been determined as if the Company
had accounted for its stock options under the fair value method. The fair value
for these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions for 1999, 1998 and 1997.
1999 1998 1997
----------- ---------- ----------
Weighted average fair value $2.33 $2.25 $1.50
Risk-free interest rate 6.00% 5.10% 5.60%
Volatility factor 76% 99% 55%
Expected life 7 years 5.5 years 5 years
Dividend Yield None None None
------------- ----------- -----------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net income (loss) and income (loss) per share were as follows (in
thousands except per share data):
1999 1998 1997
--------------- --------------- ------------
Net income (loss) - as reported $2,911 $2,311 $459
Net income (loss) - pro forma 2,494 1,812 (295)
Basic income (loss) per share :
- As reported .40 .35 .07
- Pro forma .35 .27 (.04)
Diluted income (loss) per share :
- As reported .37 .34 .07
- Pro forma .32 .26 (.04)
(15) EMPLOYEE STOCK PURCHASE PLAN
Effective April 1, 1998, CDL adopted an Employee Stock Purchase Plan (the
"Employee Purchase Plan") which was amended in 1999. The Employee Purchase Plan
permits eligible employees to purchase CDL common stock at 85% of the closing
market price on the last day prior to the commencement or the end of the
purchase period. The Employee Purchase Plan provides for the purchase of up to
500,000 shares of common stock. During 1999, 73,172 shares were issued under the
Employee Purchase Plan.
(16) SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On December 27, 1999, the Board of Directors of the Company announced the
declaration of a dividend of one right (a "Right") for each outstanding share of
Common Stock, of the Company held of record at the close of business on January
6, 2000, or issued thereafter and prior to the time at which they separate from
the Common Stock and thereafter pursuant to options and convertible securities
outstanding at the time they separate from the Common Stock. The Rights were
issued pursuant to a Stockholder Protection Rights Agreement, dated as of
December 27, 1999, between the Company and American Stock Transfer & Trust
Company, as Rights Agent. Each Right entitles its registered holder to purchase
from the Company, after the Separation Time, one one-hundredth of a share of
Participating Preferred Stock, par value $0.01 per share, for $27.00 (the
"Exercise Price"), subject to adjustment. The holders of Rights will, solely by
reason of their ownership of Rights, have no rights as stockholders of the
Company, including, without limitation, the right to vote or to receive
dividends.
The Rights will separate from the Common Stock if any person or group (subject
to certain exceptions) becomes the beneficial owner of fifteen percent or more
of the Common Stock or any person or group (subject to certain exceptions) makes
a tender or exchange offer that would result in that person or group
beneficially owning fifteen percent or more of the Common Stock. Upon separation
of the Rights from the Common Stock, each Right (other than Rights beneficially
owned by the acquiring person or group, which Rights shall become void) will
constitute the right to purchase from the Company that number of shares of
Common Stock of the Company having a market price equal to twice the Exercise
Price for an amount equal to the Exercise Price. In addition, if a person or
group who has acquired beneficial ownership of fifteen percent or more of the
Common Stock controls the board of directors of the Company and the Company
engages in certain business combinations or asset sales, then the holders of the
Rights (other than the acquiring person or group) will have the right to
purchase common stock of the acquiring company having a market value equal to
two times the Exercise Price.
In certain circumstances, the board of directors may elect to exchange all of
the then outstanding Rights (other than Rights beneficially owned by the
acquiring person or group, which Rights become void) for shares of Common Stock
at an exchange ratio of one share of Common Stock per Right, appropriately
adjusted to reflect certain changes in the capital stock of the Company. In
addition, the board of directors may, prior to separation from the Common Stock,
redeem all (but not less than all) the then outstanding Rights at a price of
$.01 per Right. Unless redeemed, exchanged or amended on an earlier date, the
Rights will expire on the tenth anniversary of the record date.
(17) RELATED PARTY TRANSACTIONS:
Leasing Transactions -
Certain subsidiaries of the Company paid approximately $365,000, $530,000 and
$905,000 for the years ended December 31, 1999, 1998 and 1997, respectively, in
rent to certain directors, stockholders or Companies owned and controlled by
directors or stockholders of the Company. Rent is paid for office, warehouse
facilities and transportation equipment.
Receivable from Shareholder
In connection with his indemnification to CDL under the terms of CDL's
acquisition of Securities Courier Corporation ("Securities"), Mr. Vincent Brana
has entered into a settlement agreement and executed a promissory note in the
amount of $500,000 or such greater amount as may be due under the settlement
agreement. The Company has agreed to advance certain legal fees and expenses
related to certain litigation involving Securities, for which Mr. Brana has
indemnified CDL. At December 31, 1999 and 1998 the Company had a receivable due
from Mr. Brana totaling $1,315,000 and $599,000, respectively which is included
in Other Assets in the accompanying Consolidated Balance Sheet. Mr. Brana has
agreed to repay the Company on December 1, 2002, together with interest
calculated at a rate per annum equal to the rate charged the Company by its
senior lender. The Company holds 150,000 shares of common stock as security for
the Note and Mr. Brana has pledged an additional 200,000 shares of common stock
to be delivered to the Company on, or before May 31, 2000.
Administrative Fees and Other -
In connection with the Merger discussed in Note 1, stockholders of the acquired
businesses entered into five-year covenants-not-to-compete agreements with the
Company. Additionally, certain of the stockholders received employment contracts
which are all due to expire in November 2000.
The Company incurred sales commissions and consulting fees of $1.4 million in
1999, $1.9 million in 1998 and $1.3 million in 1997 to companies affiliated
through common ownership with directors or stockholders of the Company or to
former employees of the Company or its subsidiaries. As of December 31, 1999 and
1998, accrued expenses and other current liabilities included approximately
$185,000 and $168,000, respectively of sales commissions due to related parties.
See also Note 18 for restructuring charges to related parties.
(18) SALE OF SUBSIDIARY:
On January 31, 1997 the Company sold the stock of Distribution Solutions
International, Inc. (DSI), a subsidiary that provided contract logistics
services, to its former owner and president in exchange for 137,239 shares of
the Company's common stock, valued at approximately $4.38 per share (the closing
price of the Company's common stock on the sale date.) In connection with the
sale, the Company recorded a gain of approximately $816,000 before applicable
federal and state income taxes.
(19) RESTRUCTURING CHARGE:
During the fourth quarter of 1996, the Company recognized the impact of several
non-recurring charges totaling $1.4 million . The restructuring charge included
salary and contract settlements, abandonment of operating leases and other costs
associated with management headcount reduction and other consolidation issues.
At December 31, 1999, $68,750 was included in other liabilities payable to a
former director and stockholder of the Company or its subsidiaries. At December
31, 1998, $275,000 was included in accrued expenses and $69,000 was included in
other liabilities payable to a former director and stockholder of the Company or
its subsidiaries.
(20) SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes for the years ended December 31, 1999,
1998 and 1997 was as follows (in thousands) -
1999 1998 1997
-------- ------- -------
Interest $3,151 $1,246 $1,024
Income taxes $2,752 778 245
-------- -------- -------
Supplemental schedule of noncash financing activities for the years ended
December 31, 1999, 1998 and 1997 was as follows (in thousands) -
1999 1998 1997
Capital lease obligations incurred $564 $114 $2,700
Seller financed debt related to purchase
of businesses 3,533 5,670 50
Debt and capital leases assumed in
connection with acquisitions 1,779 1,699 -
Issuance of common stock in connection
with purchases of businesses 401 644 25
Adjustment of purchase price for businesses
previously acquired 660 259 357
Note receivable issued in connection with disposal
of assets of discontinued operations - - 725
(21) SUBSEQUENT EVENTS:
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Company
The Company hereby incorporates by reference the applicable information
from its definitive proxy statement for its 1999 Annual Meeting of Stockholders,
except for certain information relating to the Company's executive officers
which is provided below.
Executive Officers
Information with respect to the Executive Officers of the Company is
set forth under the caption "Executive Management" contained in Part 1, Item 1
of this report and are incorporated herein by reference.
Item 11. Executive Compensation
The Company hereby incorporates by reference the applicable information
from its definitive proxy statement for its 2000 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company hereby incorporates by reference the applicable information
from its definitive proxy statement for its 2000 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
The Company hereby incorporates by reference the applicable information
from its definitive proxy statement for its 2000 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See Item 8. Financial Statements and Supplementary Data.
(a)(2) Financial Statement Schedules
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES:
Schedule II - Consolidated Valuation and Qualifying Accounts -
For the years ended December 31, 1999, 1998, and 1997...................S-1
All other schedules called for by Regulation S-X are not submitted
because they are not applicable or not required or because the required
information is not material or is included in the financial statements or notes
thereto.
(a)(3) Exhibits
The Exhibits listed in (c) below are filed herewith.
(b) Exhibits
Exhibit Description
Number
3.1 Second Restated Certificate of Incorporation of Consolidated
Delivery & Logistics, Inc. (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 33-97008) and
incorporated herein by reference).
3.2 Amended and Restated By-laws of Consolidated Delivery &
Logistics, Inc. amended through November 6, 1997
4.1 Form of certificate evidencing ownership of Common Stock of
Consolidated Delivery & Logistics, Inc. (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (File No.
33-97008) and incorporated herein by reference).
4.2 Instruments defining the rights of holders of the Company's
long-term debt (not filed pursuant to Regulation S-K Item
601((b)(4)(iii); to be furnished to the Commission upon request).
4.3 Consolidated Delivery & Logistics, Inc. Shareholder Protection
Rights Agreement (filed as Exhibit 4.1 to the Company's Form 8-K
dated December 27, 1999 and incorporated herein by reference)
10.1 Consolidated Delivery & Logistics, Inc. Employee Stock
Compensation Program (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (File No. 33-97008) and
incorporated herein by reference).
10.2 Consolidated Delivery & Logistics, Inc. 1995 Stock Option Plan
for Independent Directors as amended and restated through March
31, 1999(filed as Exhibit A to the Company's 1999 Proxy Statement
and incorporated herein by reference).
10.3 Loan and Security Agreement, dated July 14, 1997 By and Between
First Union Commercial Corporation and Consolidated Delivery &
Logistics, Inc. and Subsidiaries (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1997 and incorporated herein by reference).
10.4 Employment Agreement, dated as of September 8, 1995, with William
T. Brannan (filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (File No. 33-97008) and incorporated herein
by reference).
10.5 Amendment to Loan and Security Agreement, dated September 30,
1997 By and Between First Union Commercial Corporation and
Consolidated Delivery & Logistics, Inc. and Subsidiaries (filed
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997 and incorporated
herein by reference).
10.6 Employment Agreement, dated as of September 15, 1995, with
Michael Brooks (filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (File No. 33-97008) and
incorporated herein by reference).
10.7 Employment Agreement, dated as of September 15, 1995, with Jeremy
Weinstein (filed as Exhibit 10.34 to the Company's Registration
Statement on Form S-1 (File No. 33-97008) and incorporated herein
by reference).
10.8 Employment Agreement, dated as of September 15, 1995, with Randy
Catlin (filed as Exhibit 10.15 to the Company's Registration
Statement on Form S-1 (File No. 33-97008) and incorporated herein
by reference).
10.9 Senior Subordinated Loan Agreement dated as of January 29, 1999
with Paribas Capital Funding, LLC, Exeter Venture Lenders, L.P.
and Exeter Capital Partners IV, L.P., (filed as Exhibit 99.3 to
the Company's Current Report on Form 8-K/A and incorporated
herein by reference)
10.10 Warrant Agreement dated as of January 29, 1999 with Paribas
Capital Funding, LLC, Exeter Venture Lenders, L.P. and
Exeter Capital Partners IV, L.P. (filed as Exhibit 99.4 to the
Company's Current Report on Form 8-K/A filed on July 23,
1999 and incorporated herein by reference)
10.11 Employment Agreement dated as of January 5, 2000 with Albert W.
Van Ness, Jr.
11.1 Statement Regarding Computation of Net Income (Loss) Per Share.
21.1 List of subsidiaries of Consolidated Delivery & Logistics, Inc.
23.1 Consent of Independent Public Accountants
25.1 Power of Attorney
27.1 Financial Data Schedule (for electronic submission only)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 24, 2000.
CONSOLIDATED DELIVERY & LOGISTICS, INC.
By: /s/Russell J. Reardon
Russell J. Reardon
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on March 24, 2000.
Signature Capacity
/s/ Albert W. Van Ness, Jr. Chairman of the Board, Chief Executive Officer (Principal
Albert W. Van Ness, Jr. Executive Officer) and Director
/s/ William T. Brannan * President, Chief Operating Officer and Director
William T. Brannan
/s/ Russell J. Reardon * Vice President, Chief Financial Officer (Principal Financial
Russell J. Reardon and Accounting Officer)
/s/ Michael Brooks * Director
Michael Brooks
/s/ Randall Catlin * Director
Randall Catlin
/s/ Jon F. Hanson * Director
Jon F. Hanson
/s/ John Simourian * Director
John Simourian
/s/ Marilu Marshall * Director
Marilu Marshall
/s/ Thomas E. Durkin * Director
Thomas E. Durkin
/s/ John S. Wehrle * Director
John S. Wehrle
*By: ___/s/ Albert W. Van Ness, Jr.
Albert W. Van Ness, Jr.,
Attorney-in-Fact
Schedule II
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance Charged Balance
at To Costs Write-offs at End
Beginning And Net of of
Description of Period Expenses Recoveries Other (a) Period
For the year ended
December 31, 1999 -
Allowance for doubtful
Accounts $1,865 $ 973 $(899) - $1,939
================ ============== ================ ============== ==============
For the year ended
December 31, 1998 -
Allowance for doubtful
Accounts $1,433 $1,151 $(873) $154 $1,865
================ ============== ================ ============== ==============
For the year ended
December 31, 1997 -
Allowance for doubtful
Accounts $1,598 $1,117 ($1,282) - $1,433
================ ============== ================ ============== ==============
(a) Represents allowance for doubtful accounts of acquired companies.
The accompanying notes to consolidated financial statements are an integral part of this schedule.
INDEX TO EXHIBITS
Exhibits Page
3.2 Amended and Restated By-Laws of Consolidated
Delivery & Logistics, Inc. through November
6, 1997. 2
10.11 Employment Agreement dated January 5, 2000
with Albert W. Van Ness, Jr. 16
11.1 Statement Regarding Computation of Net Income
(Loss) Per Share 28
21.1 List of Subsidiaries of Consolidated Delivery
& Logistics, Inc. 30
23.1 Consent of Independent Public Accountants 31
25.1 Power of Attorney 32
27.1 Financial Data Schedule (for electronic
submission only) 33