UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission File No.: 0-26954
CONSOLIDATED DELIVERY & LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3350958
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
380 Allwood Road
Clifton, New Jersey 07012
(973) 471-1005
(Address, including Zip Code, and telephone number, including area code, of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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 aggregate market value of voting stock held by nonaffiliates of the
registrant was $21,079,156 as of March 12, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Outstanding as of March 12, 1999
Common Stock, $.001 par value 7,043,702
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, 1998.
PART I
Statements and information presented within this Annual Report on Form 10-K
for Consolidated Delivery & Logistics, Inc. (the " Company", "CDL") 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. All statements, other than statements of
historical facts, included in this Annual Report that address activities, events
or developments that the Company expects, believes or anticipates will or may
occur in the future, including, but not limited to, such matters as future
business development, business strategies, expansion and growth of the Company's
operations and other such matters are 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
Consolidated Delivery & Logistics, Inc. was founded in June 1994 to create
a national, full service, time critical ground and air delivery and logistics
company. In November 1995, in conjunction with the Company's initial public
offering (the "IPO" , "Offering") the Company acquired eleven time critical
ground and air delivery businesses in fifty-two cities across the United States.
Subsequent to the IPO and through December 31, 1998, the Company acquired eleven
additional time critical ground and air delivery businesses in fourteen cities.
See "--Recent Acquisitions."
The Company is a leading provider of customized time critical delivery
services to a wide range of commercial, industrial and retail customers. The
Company's ground delivery operations are concentrated on the East Coast and in
the Midwest with a strategic presence on the West Coast. The Company's air
delivery services are provided throughout the United States and to major cities
around the world.
The Company's ground delivery services are generally divided between rush
delivery, dedicated contract logistics, routed services and facilities
management. Rush delivery service typically consists of delivering
time-sensitive packages, such as critical machine parts or emergency medical
devices, point-to-point on an as needed basis. Routed service provides, 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. Dedicated contract logistics service
provides 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.
The Company's air delivery services are generally divided into customized
heavy freight, next-flight-out and international shipments. Customized heavy
freight service typically involves the movement of heavyweight and oversize
shipments from businesses such as printers and computer distributors who require
extra handling, late cut-off times or time-definite delivery windows. Next
flight out service provides such businesses as advertising agencies and
entertainment companies the ability to ship their product on the next available
flight to be delivered directly to their customer. International service
provides companies the ability to have additional attention, shorter transit
time or time-definite delivery windows anywhere in the world.
Industry Overview
The ground and air delivery industry in the United States is composed
largely of companies providing same-day, next-day and two-day services. The
Company primarily services the same-day, time critical delivery market. In
contrast, the next-day and two-day delivery markets are dominated by large
national entities, such as United Parcel Service, Inc. ("UPS") and FedEx Corp.
("FedEx").
The Company believes 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. The Company believes that
several factors, including the following, are driving the growth and
consolidation of the industry:
Outsourcing and Vendor Consolidation. Commercial and industrial concerns,
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. The Company believes that significant opportunities exist for larger
regional or national carriers that are able to provide a full range of services
to such businesses.
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 such services. The use of facsimile and
the internet have increased the processing of information and transactions 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
New Market Opportunities. The significant growth in Internet, catalog,
at-home shopping and in-home medical care present substantial expansion
opportunities for companies capable of economically providing more customized
and reliable services.
Services
The Company provides a full range of customized, time-critical ground and
air delivery service options.
Ground Delivery
Rush. In providing rush or service on demand, CDL messengers and drivers
respond to customer requests for immediate pick up and delivery of
time-sensitive packages. The Company generally offers one-, two- and four-hour
service, seven days a week, twenty-four hours a day. Typical customers include
commercial and industrial companies, hospitals and service providers such as
accountants, lawyers, advertising and travel agencies and public relations
firms.
Scheduled. The Company's scheduled delivery services are provided on a
recurring and often daily basis. The Company typically picks up or receives
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. The Company also provides 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. The Company provides mailroom management
services, including the provision and supervision of mailroom personnel, mail
and package sorting, internal delivery and outside local messenger services.
Typical customers include commercial enterprises and professional firms.
Dedicated Contract Logistics. CDL offers efficient and cost effective
dedicated delivery solutions, including, but not limited to, 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" with all of the economic benefits of outsourcing.
Air Services
The Company provides next-flight-out (rush) and scheduled air courier
and airfreight services to its customers, both domestically and internationally.
The services provided include arranging for (i) the transportation of a shipment
from the customer's location to the airport, (ii) air transportation, and (iii)
the delivery of the shipment to its ultimate destination. In order to meet the
needs of its customers, the Company has established relationships with many
major airlines and large airfreight companies from which the Company purchases
cargo space on an as-needed basis.
Operations
Overview
The Company's Ground and Air Divisions are currently managed and
evaluated separately. The divisions have operations centers staffed by
dispatchers, as well as order entry and other operations personnel. The Ground
and Air Divisions operate from fifty eight leased facilities in twenty two
states across the country.
Ground Delivery
Coordination and deployment of delivery personnel is accomplished
either through communications systems linked to the Company's computers, through
pagers, by radio or telephone. A dispatcher coordinates shipments for delivery
within a specific time frame. Shipments are routed according to the type and
weight of the shipment, the geographic distance between the origin and
destination and the time allotted for the delivery. In the case of scheduled
deliveries, routes are designed to minimize the unit costs of the deliveries and
to enhance route density. The Company is currently installing new hardware and
software systems designed to enhance and centralize the reporting and tracking
of shipments through the ground system as well as to simplify the process of
designing and scheduling delivery routes. See Year 2000 Compliance in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Air Services
The Company's air courier and airfreight service begins with a customer
placing an order, which is then dispatched for pickup. A tracking number is
assigned to the shipment and entered into the Company's computer system. The
shipment is then routed based on delivery specifications, destination and timing
considerations. At the final destination, a "proof of delivery" is obtained to
conclude and confirm the delivery, at which time the customer is invoiced.
Sales and Marketing
The Company believes that a direct sales force most effectively reaches
its customers for same-day, time critical delivery services and, accordingly,
the Company does not currently engage in mass media advertising. The Company
markets directly to individual customers by designing and offering customized
service packages after determining a customer's specific delivery and
distribution requirements. The Company is implementing a coordinated "major
account" strategy by building on established relationships with regional and
national customers. The Company also employs certain direct response marketing
techniques.
Many of the services provided by the Company, such as facilities
management, dedicated contract logistics and routed delivery services, are
determined on the basis of competitive bids. However, the Company believes that
quality and service capabilities are also important competitive factors. In
certain instances, the Company has obtained business by offering a superior
level of service, even though it was not the low bidder for a particular
contract. The Company derives a substantial portion of its revenues from
customers with whom it has entered into contracts. Virtually all scheduled
dedicated vehicle and facilities management services are provided pursuant to
contracts. Most of these contracts may be terminated by the customer on
relatively short notice without penalty.
Competition
The market for the Company's delivery service is highly competitive.
The Company believes that the principal competitive factors in the markets in
which it competes are reliability, quality, breadth of service and price. CDL
competes on all such factors. Most of the Company's competitors in the
time-critical ground and air delivery market are privately held companies that
operate in only one location or in a limited service area.
However, there is a growing trend toward consolidation in the industry.
In addition to the time-critical delivery services provided by CDL,
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. In contrast, the Company specializes
in on-demand, next-flight-out deliveries or services which, by their nature, are
not governed by rigid time schedules. If a customer is unable to meet a network
provider's established deadline, the Company 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. The Company's services are available
twenty-four hours a day, seven days a week.
The Company obtains space on scheduled airline flights to provide its
air services and accordingly does not have to acquire or maintain an expensive
fleet of airplanes. As a result, the Company can provide a more flexible,
specialized service to its customers without incurring the high fixed overhead
that the larger network providers must incur.
Acquisitions and Divestitures
In November 1995 the Company commenced operations simultaneously with
the acquisition of eleven companies providing same-day delivery and logistics
services. The aggregate consideration paid by the Company was approximately
$29.6 million in cash and 2,935,702 shares of Common Stock, par value $.001 per
share (the "Common Stock"), for an aggregate value of approximately $67.8
million. In addition to the acquisition of the eleven companies, CDL acquired
certain additional assets from two companies in transactions accounted for as
purchases. The assets acquired in those transactions were not material to CDL.
In 1996, the Company acquired five additional businesses aggregating
approximately $15.6 million in annual revenues. The aggregate purchase price
paid by the Company for these businesses was approximately $3.3 million,
consisting of a combination of cash, seller-financed debt and shares of Common
Stock. The purchase price was subsequently reduced by approximately $616,000 due
to actual revenue not reaching projected revenue as stipulated in the purchase
agreements. Each of the transactions has been accounted for as a purchase.
In 1997, the Company did not make any acquisitions and instead focused
on internal growth. Consistent with the change in strategic focus, in January
1997, the Company sold its contract logistics subsidiary to David Mathia, its
founder and president, in exchange for 137,239 shares of the Company's common
stock. In connection with the sale, the Company recorded a gain of approximately
$816,000 before the effect of Federal and state income taxes. During December
1997, the Company sold its direct mail business for $850,000 in cash and notes.
In connection with the sale, the Company 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 1998 the Company acquired four additional same-day, time critical
delivery businesses with aggregate annual revenues of approximately $25.1
million. The aggregate purchase price paid for these businesses was $14.5
million consisting of a combination of cash, shares of Common Stock, and
seller-financed debt. Each of the transactions has been accounted for as a
purchase. - See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In February 1999 CDL acquired an air delivery company with annual
revenues of approximately $14.9 million. The acquisition was accounted for as a
purchase. The price paid for this business was approximately $5.9 million
consisting of a combination of cash, shares of Common Stock and seller financed
debt. Under the terms of the agreement there is the potential for up to $520,000
to be paid upon the accomplishment of certain financial and operational
objectives.
Regulation
The Company's delivery operations are subject to various state and
local regulations and, in many instances, 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 United
States Department of Transportation (the "DOT") and by State Departments of
Transportation. The Company's failure to comply with the applicable regulations
could result in substantial fines or possible revocation of one or more of the
Company's operating permits.
Safety
The Company seeks to ensure that all employee drivers meet safety
standards established by the Company and its insurance carriers as well as the
DOT. In addition, where required by the DOT or state or local authorities, the
Company requires independent owner/operators utilized by the Company to meet
certain specified safety standards. The Company reviews prospective drivers in
an effort to ensure that they meet applicable requirements.
Employees and Independent Contractors
At December 31, 1998, the Company employed approximately 3,500 people,
2,400 as drivers or messengers, 600 in operations, 300 in clerical and
administrative positions, 60 in sales and 140 in management. The Company is not
a party to any collective bargaining agreements, although the Company is subject
to union organizing activity from time to time. The Company also had contracts
with approximately 1,400 independent contractor drivers as of December 31, 1998.
The Company has not experienced any work stoppages and believes that its
relationship with its employees and independent contractor drivers is good. See
"Risk Factors - Independent Contractors and Employee Owner/Operators."
Risk Factors
In reading this report, you should consider the following risks
carefully. The risks described below are not the only ones that we face.
Additional risks about which we do not yet know or that we currently think are
immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our common stock could decline due to
any of these risks. You should also refer to the other information set forth in
this Report. This Report contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases you
can identify forward-looking statements by terminology such as "may," "will,"
"expect," "believe," "intend," "anticipate," "estimate," or similar words. These
statements are only predictions and are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results and events may vary materially from those
discussed in the forward looking statements. We discuss risks and uncertainties
that might cause such a difference below and elsewhere in this Report.
Limited Combined Operating History
We conducted no operations and generated no revenue prior to our IPO in
November, 1995. At that time, we acquired eleven companies in the same-day
delivery and logistics business. Since then, we have acquired several additional
businesses. Prior to their acquisition by us, the companies that we have
acquired were operated as independent entities. The process of integrating the
operations of these businesses into our business may involve unforeseen
difficulties and may require a significant amount of our financial and other
resources, including management time. We cannot assure you that we will be able
to integrate the operations of these businesses successfully into our
operations. In addition, to manage the combined enterprise on a profitable basis
we must conform all acquired companies into certain necessary common systems and
procedures, including computer and accounting systems. We cannot be certain that
we will successfully institute these common systems and procedures for all
acquired companies. Our inability to integrate or successfully manage the
companies we have acquired or acquire in the future could have a material
adverse effect on our business, financial condition and results of operations.
Ability to Manage Growth
We expect to expend significant time and effort in expanding our
business and acquiring other businesses. This growth may place a significant
strain on our resources. We cannot be certain that our systems, procedures and
controls will be adequate to support our operations as they expand. Any future
growth also will impose significant additional responsibilities on members of
our senior management, including the need to identify, recruit and integrate new
senior level managers and executives. We cannot be certain that we can identify
and retain such additional managers and executives. As a result, we cannot
assure you that we will be able to expand our business or manage any future
growth effectively and profitably.
Risks Related to Our Acquisition Strategy
In 1997 we made no acquisitions. One of our strategies for 1998,
however, was to increase our revenues and profitability and expand our markets
through the acquisition of selected companies in the same-day ground and air
delivery business. The Company added 4 such businesses in 1998 and intends to
continue its acquisition activity into 1999. Consistent with that plan, CDL
acquired an air delivery company in February 1999. We may not, however, be able
to identify, acquire or manage profitable additional businesses or integrate
successfully any acquired businesses without substantial costs, delays or other
operational or financial problems. Acquisitions involve a number of special
risks, including:
o Possible adverse effects on our operating results and the timing of those
results; o Diversion of management's attention; o Dependence on retaining,
hiring and training of key personnel; o Risks associated with unanticipated
problems or legal liabilities; and o The realization of intangible assets.
Some or all of these additional risks could have a material adverse affect on
our business, financial condition and results of operations, especially in the
fiscal quarters immediately following the acquisition. If we are unable to
acquire additional same-day delivery companies or integrate those businesses
successfully, our ability to expand our operations and increase our revenues and
profitability could be reduced significantly.
Risks Related to Acquisition Financing
We cannot readily predict the timing, size and success of our
acquisition efforts or the capital we will need for these efforts. We currently
intend to finance future acquisitions by using a combination of our common
stock, notes and cash. If the common stock does not maintain a sufficient market
value, or if the owners of the businesses we wish to acquire are unwilling to
accept common stock as part of the purchase price, we may be required to use
more of our cash resources, if available, to maintain our acquisition program.
Using cash for acquisitions limits our financial flexibility and makes us more
likely to seek additional capital through borrowing money or selling stock. The
Company completed a $15 million private placement of senior subordinated notes
and warrants in January 1999 to be used primarily to finance acquisitions.The
Company may not be able to obtain the additional cash we will need for our
future acquisition program on acceptable terms, or at all. This could have a
material adverse effect on our business, financial condition and results of
operations. In addition, our Revolving Credit Facility currently restricts our
ability to make acquisitions.
Risks Associated With the Same-Day Delivery Industry; General Economic
Conditions
Our revenues and earnings are especially sensitive to events that
affect the delivery services industry, including:
o Extreme weather conditions;
o Equipment failures
o Economic factors affecting our significant customers;
o Increases in fuel prices; and
o Shortages of or disputes with labor.
Any of these factors could make it more difficult for us to service our clients
effectively.
Demand for our services may also be negatively impacted by down turns
in the level of general economic activity and employment
Dependence on Technology
Our business is dependent upon several different information and
telecommunications technologies. We have entered into a contract with Computer
Associates, Inc. in March, 1999 to develop new software to facilitate order
processing and tracking. If we are not able to process transactions accurately
and quickly, we may lose our customers and our reputation may be diminished. We
intend to integrate these separate operating systems of our subsidiaries into an
integrated company-wide system. We may encounter unexpected delays and costs in
integrating and converting these systems. We may be unable to complete our
software development plan in a timely or economic manner. In addition, the
developed software may fail to perform the order processing and tracking
services contemplated by our information technology strategy or customer demand
for the intended software applications may decrease or be insufficient to
support the technology related capital investment we make. This could have a
material adverse effect on our business, financial condition or results of
operations.
Independent Contractors and Employee Owners/Operators
Federal and state authorities have from time to time asserted that
independent contractors in the transportation industry, including those used by
the Company, are employees rather than independent contractors. We believe that
the independent contractors we use are not employees under existing
interpretations of Federal and state laws. Federal and state authorities could
challenge this position and laws, including tax laws, and interpretations of
various laws, may change. If the Company were required to pay for and administer
added benefits to independent contractors, our operating costs could
substantially increase. In addition, certain of our employees own and operate
their own vehicles. The Company is presently undergoing an employment tax
examination by the Internal Revenue Service (the "IRS"). The examination covers
certain payments made during the 1995, 1996 and 1997 tax years to employee owner
operators for all or a portion of the costs of operating their vehicles in the
course of their employment. The Company believes that these arrangements do not
represent additional compensation to those employees. However, there can be no
assurance that the IRS will not seek to recharacterize some or all of such
payments as additional compensation. If such amounts were recharacterized, the
Company could have to pay additional employment-related taxes on such amounts.
Claims Exposure
We use approximately 3,800 independent contractor and employee drivers
in our business. These drivers are involved in accidents from time to time. We
currently carry liability insurance of $1,000,000 for each accident (subject to
applicable deductibles). We also carry umbrella coverage up to $25 million and
require our independent contractors to maintain liability insurance of at least
the minimum amounts required by state and Federal law. We cannot guarantee that
claims against us will not exceed the amount of coverage. If there were a
material increase in the frequency or severity of accidents, liability claims or
workers compensation claims against us, or unfavorable resolutions of those
claims, our operating results could be materially adversely affected.
Significant increases in insurance costs could reduce our profitability.
Shares Eligible For Future Sales
Sale of a large number of shares of our common stock in the market
could cause the market price of the common stock to drop. As of March 12, 1999,
7,043,702 shares of common stock were issued and outstanding. In addition,
2,042,833 shares of common stock were issuable upon the exercise or conversion
of stock options, convertible notes or debentures and the Company's employee
stock purchase plan, 1,442,439 of which have been registered for resale by the
holders and are freely tradable upon issuance and 600,394 of which are subject
to registration rights pursuant to which the holders can cause the Company to
register those shares for resale. Sale in the market of substantial amounts of
common stock, or the perception that sales might occur, could adversely affect
the market price of the common stock. If all of these shares were issued they
would represent 29% of the Company's issued and outstanding shares. Any sales of
these shares may make it more difficult for us to sell equity securities in the
future when and at a price that we deem appropriate.
Reliance on Key Personnel
Our future success will depend in part upon the continued service of
our senior management and on the senior management of companies that we acquire
in the future. If any of these people decide not to continue in their employment
with us, or if we are unable to attract and retain other skilled employees, our
business could be adversely affected.
Competition
We believe that the markets for the same-day ground and air delivery
services we provide are highly competitive. Price competition is often intense,
especially in the market for basic delivery services. We compete with a large
number of other air delivery and ground courier service entities. While we
believe that we compete effectively with these other entities, we cannot
guarantee that we will be able to maintain our competitive position in our
principal markets.
Permits and Licensing
Our delivery operations are subject to various state, local and
Federal regulations that in many instances require permits and licenses. Our
failure to maintain required permits or licenses or to comply with these laws
and regulations could subject us to substantial fines or could lead to the
revocation of our authority to conduct certain of our operations.
No Future Dividends
We do not anticipate paying cash dividends on our shares of common
stock in the foreseeable future. We intend to retain any future earnings for use
in our business. Our Revolving Credit Facility limits our ability to pay
dividends on our common stock.
Effect of Certain Charter Provisions
Certain provisions of our Certificate of Incorporation and By-Laws, as
currently in effect, as well as Delaware law, could discourage potential
acquisition proposals, delay or prevent a change in control of the Company or
limit the price that certain investors may be willing to pay in the future for
our common stock. Our Certificate of Incorporation permits our Board of
Directors to issue shares of preferred stock without further stockholder action.
The existence of this preferred stock could discourage a third party from
attempting to obtain control of the Company and may also cause the market price
of the common stock to drop. We have no current plans to issue shares of
preferred stock. In addition, Section 203 of the Delaware General Corporation
law restricts certain persons from engaging in business combinations with us.
Our current By-Laws provide for a staggered board of directors, which means that
only one-third of the board will be elected at each annual meeting of
stockholders
Item 2. Properties -
As of December 31, 1998, the Company operated from fifty-eight leased
facilities (excluding six 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 (excluding the sales agent locations):
State Number of Facilities
- - ----- --------------------
New York.......................................... 16
Florida........................................... 8
New Jersey........................................ 6
North Carolina.................................... 4
Massachusetts..................................... 3
California........................................ 2
Illinois.......................................... 2
Louisiana......................................... 2
Ohio.............................................. 2
Alabama........................................... 1
Arizona........................................... 1
Connecticut....................................... 1
Georgia........................................... 1
Indiana........................................... 1
Maine............................................. 1
Maryland.......................................... 1
Missouri.......................................... 1
New Hampshire..................................... 1
South Carolina.................................... 1
Tennessee......................................... 1
Virginia.......................................... 1
Washington........................................ 1
The Company's corporate headquarters are located in Clifton, 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, 1998, the Company owned or leased approximately 75
cars and 550 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,
1998 was approximately $12.7 million. See Note 13 to the Company's Consolidated
Financial Statements.
Item 3. Legal Proceedings
On March 19, 1997, a purported class action complaint, captioned
Gapszewicz v. Consolidated Delivery & Logistics, Inc., et al. (97 Civ. 1939),
was filed in the United States District Court for the Southern District of New
York (the "Court") against the Company, certain of the Company's present and
former executive officers, and the co-managing underwriters of the Company's
IPO. The gravamen of the complaint is that the Company's registration statement
for the Offering contained misstatements and omissions of material fact in
violation of the Federal securities laws and that the Company's Financial
statements included in the registration statement were false and misleading and
did not fairly reflect the Company's true financial condition. The complaint
seeks the certification of a class consisting of purchasers of the Company's
Common Stock from November 21, 1995 through February 27, 1997, rescission of the
Offering, attorneys' fees and other damages. In April 1997, five other
complaints containing allegations identical to the Gapszewicz complaint were
filed in the same Federal court against the Company. On May 27, 1997, these six
complaints were consolidated into a single action entitled "In re Consolidated
Delivery & Logistics, Inc. Securities Litigation." On July 16, 1997, the Company
and the underwriter defendants filed a motion to dismiss the complaint. In
response, the plaintiffs filed an amended complaint on October 20, 1997. A
motion to dismiss the amended complaint was filed by the Company and the
underwriter defendants on December 15, 1997. The motion was denied on May 11,
1998. On October 7, 1998 a Stipulation and Agreement of Settlement (the
"Settlement Agreement") was entered into by the parties providing for a
Settlement Fund of $1.5 million. The Court issued a preliminary order approving
the terms of the settlement on October 19, 1998. Mailing of Notice and Proof of
Claims to class members under the terms of the Settlement Agreement was
completed by October 23, 1998. The Court issued an Order and Final Judgement
formally approving the settlement on February 11, 1999. The Plaintiff's time to
appeal the Order and Judgement expired on March 15, 1999 and this matter is now
concluded. The full amount of the settlement is covered by the Company's
applicable insurance; accordingly the settlement will not have a material
adverse effect on the Company's financial position or results of operations.
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 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. 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 together with interest calculated at a rate equivalent to
the rate charged the Company by its senior lender and due on December 1, 2000.
The Promissory Note is further secured by 100,000 shares of CDL Common Stock.
Discovery is currently pending and as a result the Company is unable to make a
determination as to the merits of the claim. 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 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,
including the actions described above, 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
Through February 19, 1999 the Company's Common Stock was included for
quotation on the Nasdaq National Market under the symbol "CDLI." Effective
February 23, 1999 the Company's Common Stock began trading on the American Stock
Exchange under the symbol "CDV". The following table sets forth the high and low
sales prices for the Common Stock for 1997 and 1998:
1997 Low High
First Quarter $1.88 $5.00
Second Quarter $1.63 $4.00
Third Quarter $2.13 $3.63
Fourth Quarter $2.19 $4.00
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
On March 12, 1999, the last reported sale price of the Common Stock
was $3.50 per share. As of March 12, 1999, there were approximately 140
shareholders of record of Common Stock and, based on security position listings,
the Company believes there were approximately 1,600 beneficial holders of the
Common Stock.
On December 8, 1998, the Company issued 206,185 shares of stock in
connection with the acquisition of certain assets of Manteca Enterprises, Inc.
and related companies. The issuance was exempt from registration under Section
4(2) of the Securities Act.
On February 16, 1999, the Company issued 200,000 shares of common
stock in connection with the acquisition of certain assets of the Gold Wings
Trust and related companies. The issuance was exempt from registration under
Section 4(2) of 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. was founded in June 1994. In
November 1995, simultaneously with the closing of the Company'sOffering,
separate wholly owned subsidiaries of CDL merged (the "Merger") with each of the
eleven 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 year ended
December 31, 1994 and for the nine month period ended September 30, 1995 and the
balance sheet data as of December 31, 1994 are 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 the Company's consolidated
statement of operations for the years ended December 31, 1996, 1997 and 1998 and
with respect to the Company's consolidated balance sheet as of December 31, 1997
and 1998 have been derived from the Company'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
Companies (4) Consolidated Delivery & Logistics, Inc. and Subsidiaries
--------------------------- ---------------------------------------------------------------------
For The For The
Year Nine Months For the Pro
Ended Ended For The Year Forma Period
December September Ended Ended For The Years Ended
31, 30, December 31, December 31,
December 31,
---------------------------------------
1994 1995 1995 (3) 1995 (1)(2) 1996 1997 1998
------------ ------------- ------------ -------------- ------------ ------------ -------------
Revenue $136,555 $109,168 $37,322 $146,490 $163,090 $171,502 $185,739
Gross profit 42,315 33,162 11,337 44,499 41,010 41,654 43,677
Operating income (loss) 2,107 3,971 578 4,549 (1,468) 2,702 4,847
Income (loss) from
C continuing 867 2,112 (26) 2,086 (854) 1,657 2,311
operations (5)
Net income (loss) $721 $2,182 ($195) $1,987 ($683) $459 $2,311
Basic income (loss) per
share:
Continuing operations ($.02) $.32 ($.13) $.25 $.35
-Net income (loss) ($.10) $.30 ($.10) $.07 $.35
============ ============== ============ ============ =============
Diluted income (loss) per
Share
-Continuing operations ($.02) $.31 ($.13) $.25 $.34
-Net income (loss) ($.10) $.29 ($.10) $.07 $.34
============ ============== ============ ============ =============
Balance Sheet Data:
Combined
Founding
Companies Consolidated Delivery & Logistics, Inc. and Subsidiaries
------------------------------------------------------------------
December 31, December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
--------------- ---------------- -------------- -------------- ----------------
Working capital (deficit) $3,668 $7,948 $5,472 $2,519 ($4,196)
Equipment and leasehold
Improvements, net 3,023 3,582 3,857 5,667 6,630
Total assets 23,642 31,856 35,001 36,159 52,088
Long-term debt, net of
current maturities 1,164 3,027 3,415 2,240 6,383
Stockholders' equity 5,568 8,311 8,730 8,614 11,407
(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 are
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
Company's actual results varying 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 1997 the Company made no acquisitions
and instead concentrated on improving operating efficiencies. During 1998, the
Company refocused its acquisition efforts and acquired four same-day ground
delivery businesses. See "Business-Recent Acquisitions." Each of these
acquisitions has been accounted for using the purchase method of accounting. On
December 31, 1997, the Company sold certain assets of its direct mail business.
Accordingly, the financial position, results of operations and cash flows of the
Company's direct mail business have been reclassified as discontinued operations
in the accompanying consolidated financial statements. The Company's results in
1997 were also impacted by the sale of its contract logistics subsidiary which
accounted for $4.6 million in revenue for 1996 and $400,000 to the date of its
sale in January 1997. The Company's historical results of operations reflect the
results of the acquired businesses and the reclassification referred to above;
therefore, the historical operating results of the Company for the periods
presented are not necessarily comparable.
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") include 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. SG&A decreased by $2.2 million before consideration of the additional
$1.2 million of SG&A due to the companies acquired in 1998, reflecting the
Company's continuing consolidation efforts. 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 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 reduced 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.
Results of Operations 1997 Compared with 1996
Revenue increased $8.4 million, or 5.2%, from $163.1 million in 1996
to $171.5 million for the year ended December 31, 1997.
Air courier revenue increased $4.6 million, or 8.8%, and ground
delivery revenue increased $3.9 million, or 3.5%, for the year 1997 over the
year 1996. Air courier revenue benefited from the expansion and internal growth
of existing accounts as well as the full-year contribution of acquisitions made
by the Company during 1996. Ground delivery revenue increased by $3.9 million
from the addition of time service and facilities management revenue as a result
of previously disclosed acquisitions and the addition of several new contract
distribution routes in the pharmaceutical, electronic repair and office products
industries. The increases in ground delivery revenue discussed above were offset
by a decrease of $1.7 million in the Company's banking division due to continued
industry consolidation. Two of the Company's largest banking customers merged,
decreasing their branch network and the number of stops required.
Cost of revenue includes, among other things, payment to employee
drivers, owner operators and independent contractors as well as agents,
airfreight carriers, commercial airlines, and pick-up and delivery cost. These
costs increased by $7.7 million, or 6.3%, from $122.1 million for the year 1996
to $129.8 million for the year ended December 31, 1997. The increase in cost of
revenue is due to several factors that include significant start-up costs in
connection with new contracts added in the pharmaceutical and office products
distribution industries as well as an increase in costs necessary to support a
growing revenue base in ground delivery. The Company was impacted early in 1997
by airline fuel surcharges as well as a change in the general business mix that
reduced certain consolidation opportunities in selected airfreight shipments in
the Company's major markets.
As a result of the above, gross profit increased by $644,000, or 1.6%,
from $41.0 million for 1996 to $41.7 million for the year ended December 31,
1997. If the gross profit of the Company's contract logistics subsidiary were
not considered, gross profit would have increased by $1.4 million, or 3.5%, from
$40.2 million for 1996 to $41.6 million for 1997.
SG&A include salaries, sales commissions and travel to support the
Company's marketing and sales effort. Also included are the expenses of
maintaining the Company's information systems, human resources, financial,
legal, procurement and other administrative functions. SG&A decreased by $4.2
million, or 10.3%, from $40.9 million in 1996 to $36.7 million in 1997. The sale
of the Company's contract logistics subsidiary accounted for $1.4 million of the
decrease. In the fourth quarter of 1996, the Company recorded a special charge
of $1.4 million that included contract and salary settlements, abandonment of
operating leases and other costs associated with management headcount reduction
and other consolidation issues. The 1996 restructuring charge included in SG&A
resulted in a net reduction of SG&A costs of approximately $700,000 in 1997. The
balance of the reduction is principally the result of reduced salaries at the
operating regions due to internal consolidation. Depreciation and amortization
expense increased $700,00, or 43.8%, from $1.6 million in 1996 to $2.3 million
in 1997 primarily due to the replacement of a number of vehicles and the
Company's investment in computer system and related equipment.
As a result of the above, operating income increased for the year
ended December 31, 1997 by $4.2 million from a loss of $1.5 million in 1996 to
an operating profit of $2.7 million in 1997. When excluding the results of the
Company's contract logistics subsidiary that was sold in early 1997, operating
income would have increased $3.5 million. The gain recognized by the Company on
the aforementioned sale of its contract logistics subsidiary in January 1997
amounted to $816,000 before applicable taxes.
Interest expense increased by $339,000 from $805,000 in 1996 to $1.1
million for the year ended December 31, 1997. The increase is primarily due to
an overall increase in the level of borrowing by the Company during 1997
compared to 1996. To a lesser extent, the Company was also subject to interest
rate increases during the first quarter of 1997 with its previous lenders prior
to the establishment of its current Revolving Credit Facility (See Note 9 to the
accompanying consolidated financial statements).
Liquidity and Capital Resources
Working capital decreased by $6.7 million from $2.5 million at
December 31, 1997 to a deficit of $4.2 million at December 31, 1998. The
decrease is due primarily to the use of the Company's line of credit to finance
the businesses acquired during 1998. This results in a working capital decrease
because the Company is using short-term borrowing (its line of credit) to
finance the additions of non-current assets (primarily intangibles).
Cash and cash equivalents decreased $1.5 million to $295,000 at
December 31, 1998 from $1.8 million at December 31, 1997. Cash in the amount of
$5.0 million was provided by operations and $2.9 million from financing
activities which was used primarily to acquire four businesses for $7.2 million
and for the purchase of property and equipment (net of proceeds on disposition)
in the amount of $2.1 million.
Capital expenditures amounted to $2.2 million, $1.2 million and $1.3
million for the years ended December 31, 1998, 1997 and 1996, respectively.
These expenditures primarily upgraded and expanded computer system capability
and to expand and maintain Company facilities in the ordinary course of
business. In addition, CDL incurred a capital lease obligation of $2.5 million
during 1997 in connection with an agreement to lease 175 vehicles.
Under the terms of its agreement with its lenders, CDL is prohibited
from the payment of dividends without obtaining prior consent.
The Company completed a $15 million private placement of senior
subordinated notes and warrants on January 29, 1999. Proceeds will be used
primarily to finance acquisitions and to reduce outstanding short-term
borrowings. The notes mature in 2006 and bear interest at the rate of 12% per
annum. The notes were issued with detachable warrants subject to a Warrant
Agreement dated January 29, 1999.
Management believes that cash flows from operations, together with its
borrowing capacity (see Note 9 of the accompanying consolidated financial
statement) and the senior subordinated notes described above are sufficient to
support the Company's operations and general business and capital liquidity
requirements for the foreseeable future.
Recently Issued Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company has determined that the effect of this statement on the Company's
consolidated financial position and results of operations is immaterial.
Year 2000 Compliance
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. The Company does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial position or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance. The
Company is in the process of obtaining information concerning the Year 2000
compliance status of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers does not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.
The Company continues to implement its Year 2000 compliance program.
The following table provides a summary of the Company's progress in each of the
phases, estimated percentage complete and the anticipated completion date of
each phase:
Phase Definition Estimated % Estimated
Complete Complete Date
Awareness Generate awareness of the Y2K issue throughout the 100%
organization and establish compliance program.
Inventory Analyze all relevant hardware/application software/operating 100%
systems and networks for compliance
Inventory compliance Assess inventory and rectify all non-compliant components of
activity the inventory
Assessment, Prioritize hardware and software issues, initiate changes 80% 8/31/99
Conversion necessary to achieve compliance and test changes made for
Testing and actual compliance.
Implementation
Imbedded Technology Determine whether equipment with imbedded technology, such as 90% 8/31/99
PBX switches, elevators, alarm systems, etc. are Y2K
compliant. Analysis to date has identified limited exposure in
this area. Analysis of recent acquisitions continues.
Third-Party Interfaces Determine whether electronic interfaces with third parties are 70% 9/30/99
compliant. There are only a few such interfaces that will be
fully tested later in the year. If necessary, contingency
arrangements will be readily available, as the interfaces are
not "real-time".
Third-Party Determine whether third parties that provide material 70% 7/30/99
Relationships services/supplies are compliant. Feedback to date indicates
that companies with whom we have a material relationship are
well advanced in bringing their internal systems into
compliance. Less well defined is whether their Third Parties
are in compliance.
We will continue to cooperate in the exchange of information 50% 9/30/99
with material third parties in an effort to ensure their
compliance and/or assess the impact of their non-compliance.
Where the risk of non-compliance is serious we will
select alternate vendors.
The Company estimates that the cost of compliance will not exceed the
initial amount budgeted of $250,000.
Where practical the Company will develop contingency plans during the
coming months in an effort to ensure minimal disruption to our clients. A pilot
project in this regard is currently in development with a major client.
Inflation
Inflation has not had a material impact on the Company's results of
operations for the past three years.
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 exposures by using a combination of fixed and
variable rate debt. At December 31, 1998, the Company's debt consisted of
approximately $9.6 million of fixed rate debt with a weighted average interest
rate of 7.6% and $13.6 million of variable rate debt with a weighted average
interest rate of 7.5% The amount of variable rate debt fluctuates during the
year based on CDL's cash requirements. Maximum borrowings of variable rate debt
at any quarter end were $13.6 million. If interest rates on such variable rate
debt were to increase by 75 basis points (one-tenth of the rate at December 31,
1998), the impact, net of income taxes, to the Company's results of operations
and cash flows would be a decrease of approximately $100,000.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants...................................21
Consolidated Balance Sheets as of December 31, 1998 and 1997...............22
Consolidated Statements of Operations For The Years
Ended December 31, 1998, 1997 and 1996..................................23
Consolidated Statements of Changes in Stockholders'
Equity For The Years Ended December 31, 1998, 1997 and 1996..............24
Consolidated Statements of Cash Flows For The
Years Ended December 31, 1998, 1997 and 1996.............................25
Notes to Consolidated Financial Statements.................................26
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, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
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 24, 1999
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
ASSETS
December 31,
-------------------------------------
1998 1997
------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents, including $73 and $64 of restricted cash
in 1998 and 1997, respectively (Note 2) $295 $1,812
Accounts receivable, less allowance for doubtful accounts of $1,865
and $1,433 in 1998 and 1997, respectively (Note 9) 24,491 21,275
Deferred income taxes (Notes 2 and 11) 1,456 1,207
Prepaid expenses and other current assets (Note 5) 1,104 1,785
------------------ ------------------
Total current assets 27,346 26,079
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net (Notes 2 and 6)
6,630 5,667
INTANGIBLE ASSETS, net (Notes 2, 3 and 7) 16,491 3,098
SECURITY DEPOSITS AND OTHER ASSETS (Notes 4 and 16) 1,621 1,305
NONCURRENT ASSETS OF DISCONTINUED OPERATIONS (Note 4) - 10
------------------ ------------------
Total assets $52,088 $36,159
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 9) $13,577 $7,360
Current maturities of long-term debt (Note 9) 3,181 3,280
Accounts payable 6,281 6,515
Accrued expenses and other current liabilities (Notes 8 and 18) 7,271 6,141
Income taxes payable (Notes 2 and 11) 1,232 141
Deferred revenue (Note 2) - 71
Net liabilities of discontinued operations (Note 4) - 52
------------------ -------------------
Total current liabilities 31,542 23,560
------------------ -------------------
LONG-TERM DEBT, net of current maturities (Note 9) 6,383 2,240
------------------ -------------------
DEFERRED INCOME TAXES PAYABLE (Notes 2 and 11) 1,717 1,050
------------------ -------------------
OTHER LONG-TERM LIABILITIES (Note 18) 1,039 695
------------------ -------------------
COMMITMENTS AND CONTINGENCIES (Notes 13, 14 and 15)
STOCKHOLDERS' EQUITY (Notes 14 and 15):
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,
6,843,702 and 6,666,884 shares issued and outstanding in
1998 and 1997, respectively 7 7
Additional paid-in capital 9,670 9,026
Treasury stock, 29,367 shares at cost (162) -
Retained earnings (Accumulated deficit) 1,892 (419)
------------------ -------------------
Total stockholders' equity 11,407 8,614
------------------ -------------------
Total liabilities and stockholders' equity $52,088 $36,159
================== ===================
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 share data)
For the Years Ended December 31,
----------------------------------------------------------------
----------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- -------------------
Revenue (Note 2) $185,739 $171,502 $163,090
Cost of revenue 142,062 129,848 122,080
--------------------- ---------------------- ----------------
Gross profit 43,677 41,654 41,010
Selling, general and administrative expenses 35,709 36,681 40,919
Depreciation and amortization 3,121 2,271 1,559
--------------------- ---------------------- ----------------
Operating income (loss) 4,847 2,702 (1,468)
Other (income) expense
Gain on sale of subsidiary, net (Note 17) - (816) -
Interest expense 1,246 1,144 805
Other income, net (126) (171) (461)
--------------------- ---------------------- ----------------
--------------------- ---------------------- ----------------
Other expense, net 1,120 157 344
--------------------- ---------------------- ----------------
Income (loss) from continuing operations before
provision for (benefit from) income taxes 3,727 2,545 (1,812)
Provision for (benefit from) income taxes
(Notes 2 and 11) 1,416 888 (958)
--------------------- ---------------------- ---------------------
Income (loss) from continuing operations 2,311 1,657 (854)
--------------------- ---------------------- ---------------------
Discontinued operations (Note 4)
Income (loss) from discontinued operations, net of
income taxes - (1,221) 171
Gain on disposal of assets, net of provision for
income taxes - 23 -
--------------------- ---------------------- ---------------------
Income (loss) from discontinued operations - (1,198) 171
---------------------- ---------------------
=====================
Net income (loss) $2,311 $459 ($683)
===================== ====================== =====================
====================== =====================
Basic income (loss) per share:
Continuing operations $.35 $.25 ($.13)
Discontinued operations - (.18) .03
===================== ====================== =====================
Net income (loss) per share $.35 $.07 ($.10)
===================== ====================== =====================
Diluted income (loss) per share:
Continuing operations $.34 $.25 ($.13)
Discontinued operations - (.18) .03
--------------------- ---------------------- ---------------------
Net income (loss) per share $.34 $.07 ($.10)
===================== ====================== =====================
Basic weighted average common
Shares outstanding 6,662 6,672 6,678
===================== ====================== =====================
Diluted weighted average common
Shares outstanding 6,839 6,675 6,678
===================== ====================== =====================
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, 1998, 1997 AND 1996
(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, 1995 6,629,569 $7 $8,499 $- $(195) $8,311
Shares issued in connection with
acquisitions of businesses 166,221 - 1,102 - - 1,102
Net loss - - - - (683) (683)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 6,795,790 7 9,601 - (878) 8,730
Retirement of common stock
pursuant to sale of
subsidiary (137,239) - (600) - - (600)
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
pursuant to adjustment in
price of acquired company (29,367) - - (162) - (162)
Shares issued in connection with
acquisition of a business 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
========================================================================================
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: 1998 1997 1996
----------------- --------------- ---------------
Net income (loss) $2,311 $459 ($683)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
Operating activities -
(Gain) loss on disposal of equipment and leasehold improvements (21) (22) 29
Gain on sale of subsidiary - (816) -
(Income) loss from discontinued operations - 1,221 (171)
Gain on disposal of assets of discontinued operations - (23) -
Depreciation and amortization 3,121 2,271 1,559
Provision for doubtful accounts 1,151 1,117 1,315
Deferred income tax provision (benefit) 300 (35) (752)
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable (2,100) (2,005) (4,235)
Prepaid expenses and other current assets 630 (415) (477)
Other assets (298) (303) 513
Increase (decrease) in -
Accounts payable, accrued liabilities and income taxes payable 227 1,359 (1,518)
Other long-term liabilities (343) (236) 736
----------------- --------------- ---------------
Net cash provided by (used in) operating activities of
continuing operations 4,978 2,572 (3,684)
----------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and leasehold improvements (2,245) (1,191) (1,279)
Proceeds from sales of equipment and leasehold improvements 144 112 66
Proceeds from sale of assets of discontinued operations - 125 -
Purchases of businesses, net of cash acquired (7,233) - (1,176)
----------------- --------------- ---------------
Net cash used in investing activities (9,334) (954) (2,389)
----------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 6,217 160 4,397
Proceeds from long-term debt 150 - 113
Repayments of long-term debt (3,450) (1,393) (3,077)
Deferred financing costs (36) (125) (152)
----------------- --------------- ---------------
Net cash provided by (used in) financing activities 2,881 (1,358) 1,281
----------------- --------------- ---------------
CASH USED BY DISCONTINUED OPERATIONS (42) (205) (611)
----------------- --------------- ---------------
Net (decrease)increase in cash and cash equivalents (1,517) 55 (5,403)
CASH AND CASH EQUIVALENTS, beginning of year 1,812 1,757 7,160
================= =============== ===============
CASH AND CASH EQUIVALENTS, end of year $295 $1,812 $1,757
================= =============== ===============
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. was founded in June 1994. In November
1995, simultaneously with the closing of the it's initial public offering (the
"Offering") separate wholly owned subsidiaries of Consolidated Delivery &
Logistics, Inc. merged (the "Merger") with each of the eleven acquired
businesses. Consideration for the acquisition of these businesses consisted of a
combination of cash and common stock of Consolidated Delivery & Logistics, Inc.,
par value $0.001 per share. The assets and liabilities of the acquired
businesses at September 30, 1995 were recorded at their historical amounts.
Consolidated Delivery & Logistics, Inc. and Subsidiaries (the "Company" or
"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 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 two
to four 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 twenty-five years to forty years. Customer lists and non-compete agreements
are amortized over the estimated period to be benefited, generally from three to
five 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, various
accruals and reserves being deductible for tax purposes in future periods and
certain acquired businesses reporting on the cash basis for income tax purposes
prior to the Merger.
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 -
CDL follows Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" to calculate its earnings per share ("EPS"). 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:
1998 1997 1996
-------------- ------------- -------------
Basic weighted average common
shares outstanding 6,662,258 6,672,284 6,677,546
Effect of dilutive securities:
Stock options 175,249 2,656 -
Employee stock purchase plan 1,496 - -
-------------- ------------- -------------
Diluted weighted average common
shares outstanding 6,839,003 6,674,940 6,677,546
============== ============= =============
The following common stock equivalents were excluded from the computation of
diluted EPS because the exercise or conversion price was greater than the
average market price of common shares:
1998 1997 1996
---------- --------- ---------
Stock options 573,684 685,038 562,568
Subordinated convertible debentures 161,818 180,995 180,995
Seller financed convertible notes 685,470 - -
========== ========= =========
Recent Accounting Pronouncements-
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company has determined that the effect of this statement on the Company's
consolidated financial position and results of operations is immaterial.
Reclassifications -
Certain reclassifications have been made to the prior years' consolidated
financial statements in order to conform to the 1998 presentation.
(3) BUSINESS COMBINATIONS:
In July 1998, the Company acquired all of the assets and certain liabilities of
Metro Courier Network, Inc. ("Metro"), a provider of ground delivery services in
Massachusetts, Maine and New Hampshire. The purchase price was approximately
$4.4 million, consisting of $2.6 million in cash and a $1.8 million convertible
note (the "Note") plus certain contingent payments. The excess purchase price
over fair value of the underlying assets of $4.4 million was allocated to
goodwill and other intangible assets. The Note bears interest at the rate of 7%
per annum, with interest payable quarterly, is due July 2001 and is subordinate
to all indebtedness due or that may become due to the Company's senior lender,
First Union Commercial Corporation or its affiliates. The Note is convertible in
its entirety at the option of the holder at any time through July 1, 2001 into
fully paid shares of the Company's common stock at a conversion price of $7 per
share over a ninety-day period. In addition, the purchase agreement also
provided for a contingent earn-out of up to $1.5 million which has been amended
by an agreement dated January 7, 1999, which cancelled this contingent
obligation. The agreement required a purchase price adjustment of $180,000 which
will result in an adjustment to increase the excess of purchase price over fair
value of the net assets for this amount.
In August 1998, the Company acquired all of the outstanding shares of the
capital stock of KBD Services, Inc. ("KBD"), a provider of ground delivery
services in North and South Carolina. The purchase price was approximately $4.1
million consisting of $2.1 million in cash, a $1.5 million 7% subordinated
convertible note (the "KBD Note") and a $500,000, 7% contingent subordinated
convertible note (the "Contingent Note"). The excess purchase price over fair
value of the underlying assets of $3.5 million was allocated to goodwill. The
KBD Note is due August 5, 2003 with interest payable quarterly commencing
October 1, 1998 and is convertible in its entirety at the option of the holder
at any time through July 1, 2003 into fully paid shares of the Company's common
stock if the market price equals or exceeds $6 per share over a thirty day
period. The Contingent Note is subject to reduction or discharge if KBD's
earnings before interest and taxes are less than $700,000 for the year ending
July 31, 1999 and is due with interest on the finally determined principal on
November 1, 1999. The holder or the Company may convert the Contingent Note in
its entirety into fully paid shares of the Company's common stock at a
conversion price of $6 per share after September 16, 1999 and through October
20, 1999. The KBD Note and the Contingent Note are subordinate to all
indebtedness due or that may become due to the Company's senior lender, First
Union Commercial Corporation or its affiliates.
In September 1998, the Company acquired certain assets and assumed certain
liabilities of Eveready Express Corp. ("Eveready"), a provider of ground
delivery services in the New York City market. The purchase price for the assets
and certain non-compete agreements was $975,000, with $415,000 in cash and a
$560,000 subordinated contingent note (the "Eveready Contingent Note"). The
entire purchase price was allocated to goodwill and other intangible assets. The
Eveready Contingent Note bears interest at the rate of 6% per annum, with
semi-annual principal payments of $50,000 plus accrued interest commencing March
1999 and the remaining balance of principal and interest due September 2000. The
final determination of the purchase price and the Eveready Contingent Note will
be based upon the percentage of collected revenues earned by Eveready during the
one-year period following the closing. The Eveready Contingent Note is
subordinate to all indebtedness due or that may become due to the Company's
senior lender, First Union Commercial Corporation or its affiliates.
In December 1998, the Company acquired all of the outstanding shares of the
capital stock of First Choice Courier and Distribution Systems, Inc., Regional
Express II, Inc., Regional Express III, Inc., and Manteca Enterprises, Inc.
(collectively "First Choice Companies"). The purchase price was approximately
$5.0 million consisting of $2.9 million in cash including direct acquisition
costs, 206,185 shares of the Company's common stock (at $3.438 per share) and
$1.4 million in 7% subordinated convertible notes (the "Notes). The excess
purchase price over fair value of the underlying assets of $5.0 million was
allocated to goodwill. The Notes are due December 8, 2001 with interest payable
quarterly commencing February 28, 1999. At the option of either the holder or
CDL, under certain circumstances 50% of the principal amount of the Notes are
convertible into fully paid shares of CDL common stock at a conversion price of
$7 per share. The 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
$800,000 is payable based on the achievement of certain financial goals during
the three-year period following the closing.
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 and
contingent convertible notes payable into common stock will negatively affect
the Company's future earnings per share.
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 has been made on the basis of the estimated fair value. The
consolidated financial statements include the operating results of each business
from their respective dates of acquisition.
The following summarized unaudited pro forma financial information (in
thousands, except per share data) assumes that the Metro, KBD and First Choice
acquisitions were consummated on January 1, 1998 and 1997. 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.
For the Year For the Year
Ended Ended
December 31, 1998 December 31, 1997
------------------------- -------------------------
(Unaudited) (Unaudited)
Revenue $201,533 $190,984
Income from continuing operations 5,147 3,733
Net income $2,321 $1,040
Basic net income per share $.34 $.16
Diluted net income per share $.33 $.16
During 1996, the Company acquired certain businesses in transactions accounted
for as purchases. The total consideration paid in these transactions is
contingent upon future activity and is estimated to aggregate $3.3 million,
which consists of $2.2 million in cash, 75,312 shares of Common Stock at $8 per
share and 90,909 shares of Common Stock at $5.50 per share. The Company also
assumed approximately $185,000 of debt due to the former owners of one of the
acquired businesses and their relatives. Of this amount $3.1 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 $259,000 and $357,000 during 1998 and 1997,
respectively, 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 April 2000.
The results of the acquired businesses have been reflected in the accompanying
consolidated statements of operations since their respective acquisition dates.
The results of operations of the acquired businesses prior to their acquisitions
are not material to the Company's consolidated statements of operations.
(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 purchase
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 bears interest at the rate of 6% per annum, with interest only in
monthly installments during 1998. Commencing February 1, 1999 the Note
Receivable will be paid in equal monthly installments of $14,016 including
principal and interest through January 1, 2004. The Note Receivable is included
in prepaid expenses and other current assets ($117,000 at December 31, 1998) and
in security deposits and other assets ($608,000 and $725,000 at December 31,
1998 and 1997, respectively, in the accompanying consolidated balance sheets.
The Note Receivable is collateralized by a security interest in the purchaser's
accounts receivable, equipment and general intangibles. The security interest is
subordinate to the interest of the purchaser's majority shareholder.
Accordingly, the financial position, operating results and the gain on the
disposition of the Company's 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 were as
follows (in thousands) -
For the Years Ended December 31,
1997 1996
------------- ------------
Revenue $5,937 $7,959
============= ============
Income (loss) from discontinued
operations, net of income tax provision
(benefit) of ($811) and $114 in 1997
and 1996 ($1,221) $171
============= ============
Gain on disposal of assets, net of
income tax provision of $15 in 1997 $23 $ -
============= ============
The net liabilities of discontinued operations are comprised of the following
(in thousands) -
December 31,
1997
------------------
Current assets $3,829
Current liabilities (3,881)
------------------
Net current liabilities (52)
Equipment and leasehold improvements 10
==================
Net liabilities of discontinued
operations ($42)
==================
(5) PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following (in
thousands) -
December 31,
---------------------------------------------
1998 1997
-------------------- -------------------
Other receivables $478 $580
Prepaid supplies and equipment deposits 146 564
Prepaid insurance 151 227
Prepaid rent 119 75
Other 210 339
-------------------- -------------------
$1,104 $1,785
==================== ===================
(6) EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following (in thousands) -
December 31,
--------------------------------
Useful Lives 1998 1997
------------ ----------- --------------
Transportation and warehouse equipment 3-7 years $7,814 $6,603
Office equipment 3-7 years 6,203 4,443
Other equipment 5-7 years 1,018 811
Leasehold improvements Lease period 1,516 1,180
----------- --------------
16,551 13,037
Less - accumulated depreciation and amortization (9,921) (7,370)
----------- --------------
$6,630 $5,667
=========== ==============
Leased equipment under capitalized leases (included above) consists of the
following (in thousands) -
December 31,
--------------------------------
1998 1997
---------------- --------------
Equipment $3,635 $3,521
Less - accumulated amortization (1,835) (909)
---------------- --------------
$1,800 $2,612
================ ==============
The Company incurred capital lease obligations of $114,000 in 1998 for office
equipment and $2.5 million during 1997 in connection with an agreement to lease
175 delivery vehicles.
(7) INTANGIBLE ASSETS:
Intangible assets (see Note 3) consist of the following (in thousands) -
December 31,
-------------------------------
1998 1997
--------------- --------------
Goodwill $16,276 $2,992
Non Compete agreements 536 336
Customer lists 550 242
Other 161 118
--------------- --------------
17,523 3,688
Less - accumulated amortization (1,032) (590)
--------------- --------------
$16,491 $3,098
=============== ==============
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following (in
thousands) -
December 31,
-------------------------------
1998 1997
--------------- --------------
Payroll and related expenses $3,822 $3,088
Third-party delivery costs 1,605 1,525
Insurance 561 274
Professional fees 393 367
Interest 175 175
Marketing 101 71
Rent 50 151
Other 564 490
--------------- --------------
$7,271 $6,141
=============== ==============
(9) SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
Short-term borrowings -
At December 31, 1998 and 1997, the Company had line of credit agreements for
$22.5 million and $15 million, respectively. The Company's outstanding
borrowings on such lines of credit were approximately $13.6 million at December
31, 1998 and $7.4 million at December 31, 1997.
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 provides for
an increase in the original credit facility from $15 million to $22.5 million,
provides CDL with an equipment acquisition term loan facility of up to $2.5
million and modifies 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 5.07% at December 31, 1998),
plus 1.5% to 2%. Variable rate borrowings are based on First Union's prime
lending rate (which was 7.75% at December 31, 1998), minus .25% to plus .25%.
Based on eligible accounts receivable at December 31, 1998, $2.5 million of the
credit facility and $2.5 million of the equipment acquisition term loan facility
were 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, 1998, the Company was in compliance with all loan covenants.
Borrowings under the line of credit facility averaged approximately $7.8 million
with an average interest rate of 9.1% for the year ended December 31, 1998.
Maximum borrowings were $13.6 million for the same period.
Long-Term Debt -
Long-term debt consists of the following (in thousands) -
December 31,
---------------------------
1998 1997
------------ -------------
10% and 8% Subordinated Convertible Debentures (a) $890 $2,000
Capital lease obligations due through August 2001 with interest at rates ranging
from 5.3% to 15.2% and secured by the related property. 1,802 2,631
Seller-financed debt on acquisitions is payable in annual and quarterly
installments through August, 2003. Interest is payable at rates ranging
between 6.0% and 7.0% and one of the notes requires monthly payments based on
collected revenues through September 2000 with interest imputed at the rate of 5,859 611
9.0%.
Various equipment and vehicle notes payable to banks and finance
companies due through March 2003 with interest ranging from 8.0% to
12.5% and secured by various assets of certain subsidiaries 818 133
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 8.0% to 10.0%. 195 145
------------ -------------
9,564 5,520
Less - Current maturities (3,181) (3,280)
============ =============
$6,383 $2,240
============ =============
(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 $1,260,000 were repaid in August 1998. The 10% Debentures are
convertible into common stock of the Company at a conversion price of $5.50 per
share, accrue interest at 10% per annum which is payable quarterly, mature on
August 21, 2000 and extend the initial repayment date by one year from August
1998 to August 1999. The 10% Debentures are redeemable by the Company, in whole
or in part, without premium or penalty at any time on or after August 18, 1999,
at their face amount plus accrued and unpaid interest, if any, to the date of
redemption. The 10% Debentures are redeemable at the option of the holder, in
whole but not in part, without premium or penalty, at any time after August 21,
1999. As a result, the 10% Debentures, totaling $890,000, have been classified
as current maturities of long-term debt.
The aggregate annual principal maturities of debt (excluding capital lease
obligations) as of December 31, 1998 are as follows (in thousands) -
1999 $2,158
2000 883
2001 3,242
2002 18
2003 1,461
-----------------
Total $7,762
=================
The Company leases certain transportation and office equipment under capital
lease agreements that expire at various dates. At December 31, 1998, minimum
annual payments under capital leases, including interest, are as follows (in
thousands) -
1999 $1,141
2000 773
2001 18
---------------
Total minimum payments 1,932
Less - Amounts representing interest (130)
---------------
Net minimum payments 1,802
Less - Current portion of obligations under capital leases (1,023)
---------------
Long-term portion of obligations under capital leases $779
===============
(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, 1998, 1997 and 1996.
(11) INCOME TAXES:
Federal and state income tax provision (benefit) for the years ended December
31, 1998, 1997 and 1996 are as follows (in thousands) -
1998 1997 1996
--------------- --------------- ----------
Federal-
Current $797 $723 ($60)
Deferred 300 (35) (752)
State 319 200 (146)
--------------- --------------- ----------
$1,416 $888 ($958)
=============== =============== ==========
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, 1998, 1997 and
1996, result from the following (in thousands) -
1998 1997 1996
------------- ------------- -----------
Tax at statutory rate $1,267 $865 ($616)
Add (deduct) the effect of -
State income taxes 211 132 (96)
Nondeductible expenses and other, net (62) (109) 65
Reduction of estimated taxes provided
in the prior Year - - (311)
------------- -------------- -----------
$1,416 $888 ($958)
============= ============== ============
The acquired businesses filed "short-period" Federal tax returns through
November 30, 1995. In connection with such filings the Company provided $400,000
during 1995 to cover any potential exposures related to the filings, which was
subsequently reduced by $311,000 in 1996.
The components of deferred income tax assets and liabilities are as follows (in
thousands) -
December 31,
-------------------------
1998 1997
----------- -----------
Deferred income tax assets -
Allowance for doubtful accounts $753 $633
Reserves and other, net 903 712
============ ============
Total deferred income tax assets $1,656 $1,345
============ ============
Deferred income tax liabilities -
Trade receivables discount $(507) $ -
Accumulated depreciation and amortization (391) (320)
Cash to accrual differences (288) (176)
Other (731) (692)
------------- -----------
Total deferred income tax liabilities ($1,917) ($1,188)
============= ============
Net deferred tax (liability) asset $(261) $157
============= ============
(12) REPORTABLE SEGMENTS:
Effective December 31, 1998, CDL implemented Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information", ("SFAS 131"). SFAS 131 requires a company to disclose reportable
segments based on the way management organizes its segments for making operating
decisions and assessing performance. CDL has two reportable segments: Air and
Ground. Separate management of each segment is required because each business
unit is subject to different cost and delivery parameters. Segment information
for 1998, 1997 and 1996 is as follows (in thousands).
Air Ground Total
Revenue from external customers
1998 $55,547 $130,192 $185,739
1997 56,545 114,957 171,502
1996 51,972 111,118 163,090
Intersegment revenue
1998 71 1,568 1,639
1997 226 2,006 2,232
1996 294 2,358 2,652
Interest expense
1998 373 873 1,246
1997 377 767 1,144
1996 257 548 805
Depreciation and amortization
1998 556 2,565 3,121
1997 415 1,856 2,271
1996 249 1,310 1,559
Segment profit (loss)
1998 497 1,814 2,311
1997 71 1,586 1,657
1996 5 (859) (854)
Segment assets
1998 11,489 40,599 52,088
1997 15,041 21,118 36,159
1996 14,434 20,567 35,001
Expenditures for segment assets
1998 637 1,608 2,245
1997 281 910 1,191
1996 304 975 1,279
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 for Corporate 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 times through January 2007. The
approximate minimum rental commitments of the Company, under existing agreements
as of December 31, 1998, are as follows (in thousands) -
1999 $4,274
2000 3,323
2001 2,427
2002 1,357
2003 955
Thereafter 1,488
Rent expense related to operating leases amounted to approximately $12.7
million, $13.1 million and $13.7 million for the years ended December 31, 1998,
1997 and 1996, 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.
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 together with
interest calculated at a rate equivalent to the rate charged the Company by its
senior lender and due on December 1, 2000. The Promissory Note is further
secured by 100,000 shares of CDL common stock. Discovery is currently pending
and as a result the Company is unable to make a determination as to the merits
of the claim. 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 is remitted back to the
independent contractors as payment for marketing and sales services rendered.
Sales agency charges totaled $4.2 million, $4.7 million and $3.8 million in
1998, 1997 and 1996, 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, 1998, the
Company recorded an accrual for the estimated earn-outs for KBD ($500,000
contingent note payable), Everready ($560,000 contingent note payable), and the
First Choice Companies ($687,000 payable in cash and included in other
liabilities in the accompanying financial statements).
(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 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 1998 and February 1999, the committee approved further
amendments to the Plan. These amendments, subject to shareholder approval at the
annual meeting, 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, 1995 395,000 $13.00
Granted 219,706 (1) $8.86
Exercised - -
Canceled (52,138) $13.00
--------
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
============
Options exercisable at:
December 31, 1996 131,037 $11.94
============ ========
December 31, 1997 576,592 $7.33
============ =========
December 31, 1998 915,378 $6.35
============ =========
(1) Includes 100,179 grants approved by the Compensation Committee of the Board
of Directors in January 1996 that were priced effective as of the date of
the Mergers (November 27, 1995).
At December 31, 1998, options available for grant under the Employee Stock
Compensation Plan and the Director Plan total 780,685 and 65,000, respectively.
The following summarizes information about option groups outstanding and
exercisable at December 31, 1998:
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 1998 Life Price 1998 Price
- - ------------------ ------------------ ---------------- ------------- ------------------ -------------
$2.31 -
$4.75 662,695 8.65 $2.95 502,674 $2.93
$4.88 -
$7.88 152,433 8.23 $6.24 151,433 $6.25
$13.00 339,187 6.69 $13.00 261,271 $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 1998, 1997 and 1996 -
1998 1997 1996
--------------- --------------- -------------
Weighted average fair value $2.25 $1.50 $3.06
Risk-free interest rate 5.10% 5.60% 6.50%
Volatility factor 99% 55% 37%
Expected life 5.5 years 5 years 7 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):
1998 1997 1996
--------------- --------------- -----------------
Net income (loss) - as reported $2,311 $459 ($683)
Net income (loss) - pro forma 1,812 (295) (1,399)
Basic income (loss) per share -
As reported .35 .07 (.10)
Pro forma .27 (.04) (.21)
Diluted income (loss) per share -
As reported .34 .07 (.10)
Pro forma .26 (.04) (.21)
(15) EMPLOYEE STOCK PURCHASE PLAN
Effective April 1, 1998, CDL adopted an Employee Stock Purchase Plan (the
"Employee Purchase Plan"). 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 of the purchase period. The Employee Purchase Plan
provides for the purchase of up to 500,000 shares of common stock. No shares
were issued under the Employee Purchase Plan in 1998.
(16) RELATED PARTY TRANSACTIONS:
Leasing Transactions -
Certain subsidiaries of the Company paid approximately $530,000, $905,000 and
$851,000 for the years ended December 31, 1998, 1997 and 1996, 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, which Mr. Brana has
indemnified CDL (see Note 13). At December 31, 1998 the Company had a receivable
due from Mr. Brana totalling $599,000, which is included in other assets in the
accompanying consolidated financial statements. Mr. Brana has agreed to repay
the Company on December 1, 2000, together with interest calculated at a rate per
annum equal to the rate charged the Company by its senior lender. The Company
holds 100,000 shares of common stock as security for the Note.
Administrative Fees and Other -
The Company incurred sales commissions and consulting fees of $1.9 million in
1998, $1.3 million in 1997 and $1.1 million in 1996 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, 1998 and
1997, accrued expenses and other current liabilities included approximately
$168,000 and $274,000, respectively, of accrued sales commissions due to related
parties. See Note 18 for restructuring charges that pertain to related parties.
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.
(17) 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. Revenue included in the accompanying
consolidated financial statements from the operation was approximately $400,000
and $4.6 million for the month of January 1997 and the year ended December 31,
1996 respectively. Operating losses were approximately $20,000 and $650,000 for
the month of January 1997 and the year ended December 31, 1996, respectively.
(18) 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, 1998, $275,000 was included in accrued expenses and $69,000 was
included in other liabilities and are payable to a former director and
stockholder of the Company or its subsidiaries. At December 31, 1997, $339,000
was included in accrued expenses and $344,000 was included in other liabilities,
of which $275,000 and $344,000, respectively, were payable to a former director
and stockholder of the Company or its subsidiaries.
(19) SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes for the years ended December 31, 1998,
1997 and 1996 was as follows (in thousands) -
1998 1997 1996
---------------- -------------- --------------
Interest $1,246 $1,024 $831
Income taxes 778 245 878
----------------- -------------- --------------
Supplemental schedule of noncash financing activities for the years ended
December 31, 1998, 1997 and 1996 was as follows (in thousands) -
1998 1997 1996
----------- --------- ----------
Capital lease obligations incurred $114 $2,700 $202
Seller financed debt related to purchase of businesses 5,670 50 1,929
Debt and capital leases assumed in connection with acquisitions
1,699 - -
Issuance of common stock in connection with purchases
of businesses 644 25 1,102
Adjustment of purchase price for businesses
previously acquired 259 357 -
Note receivable issued in connection with disposal of
assets of discontinued operations - 725 -
(20) SUBSEQUENT EVENTS:
Stock Options
On January 4, 1999 CDL granted 200,000 stock options under its Employee Stock
Compensation Plan.
Senior Subordinated Notes and Warrants
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 Commercial Corporation.
Under the terms of the notes, the Company is required to maintain certain
financial ratios and comply with other financial conditions. The notes mature on
January 29, 2006 and may be prepaid by the Company under certain circumstances.
The warrants expire January 19, 2009 and are exercisable at any time prior to
expiration at a price of $.001 per equivalent share of common stock for an
aggregate of 506,250 shares of the Company's stock, subject to additional
adjustments. The Company plans to use the proceeds to finance acquisitions as
they arise and for general working capital purposes.
Acquisition
On February 16, 1999, CDL entered into and consummated an asset and stock
purchase agreement (the "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. 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. CDL financed the acquisition using proceeds
from its revolving credit facility with First Union Commercial Corporation.
The following summarized unaudited pro forma financial information (in thousands
except per share data) assumes that the Gold Wings acquisition was consummated,
the senior subordinated notes and warrants were issued and the acquisitions
discussed in Note 3 occurred on January 1, 1998. This information is not
necessarily indicative of the results CDL would have obtained had these events
actually occurred or of CDL's actual or future results.
For the Year
Ended
December 31, 1998
-------------------------
(Unaudited)
Revenue $216,435
Income from continuing operations 4,592
Net income $1,988
Basic net income per share $.26
Diluted net income per share $.26
Exchange Listing -
As of February 23, 1999, shares of the Company's common stock began trading on
the American Stock Exchange under the symbol CDV. The Company's stock formerly
traded on the Nasdaq National Market under the symbol CDLI.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
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
The following table sets forth certain information as of March 12,
1999 concerning each of the Company's executive officers:
Name Age Position
Albert W. Van Ness, Jr. 56 Chairman of the Board, Chief Executive
Officer, Acting Chief Financial Officer
and Director
William T. Brannan 50 President, Chief Operating Officer and
Director
Joseph J. Leonhard 47 Vice President - Controller
Mark Carlesimo 45 General Counsel
Russell J. Reardon 48 Vice President - Treasurer
Andrew B. Kronick 35 Vice President - Sales and Marketing
Robin Dennis 46 Vice President - Information Technology
Michael Brooks 44 Southeast Region Manager
Randy Catlin 52 Air Division Manager
Robert Wyatt 40 Northeast Region Manager
Albert W. Van Ness, Jr. has served as the Chairman of the Board, Chief
Executive Officer and Director of CDL since February 1997 and Acting Chief
Financial Officer since May, 1998. 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 twenty three years of experience in the transportation and logistics
industry.
Joseph J. 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.
Russell J. Reardon was appointed Vice President - Treasurer of CDL in
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. From April 1996 until February 1998 Mr. Reardon was Chief Financial
Officer, Secretary and Vice President - Finance of Logimetrics, Inc.
Andrew B. Kronick was appointed Vice President - Sales and Marketing
of CDL in January 1999. Prior thereto Mr. Kronick served as General Manager and
Vice President-Business Development for the Company's Northeast Region. From
August, 1991 until its merger into the Company, Mr. Kronick was Vice President
of Click Courier Systems.
Robin Dennis was appointed Vice President - Information Technology of
CDL in January 1999. 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 twenty four
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
thirty one 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.
Robert Wyatt has been the Northeast Region Manager since November
1997, Manhattan Region Manager since August 1996 and President of Olympic
Courier Systems, Inc. a subsidiary of the Company since November 1995. From
December 1995 until November 1997, Mr. Wyatt served as Director of the Company.
Prior thereto, Mr. Wyatt was co-founder and President of certain of the
companies comprising Orbit/Lightspeed Courier Systems, Inc. , a former
subsidiary of the Company which has been merged into Olympic. Mr. Wyatt has
fourteen years of experience in the same-day delivery industry. He currently
serves on the Board of Directors of the Messenger Courier Association of the
Americas. Mr. Wyatt has also served as the President of the New York State
Messenger and Courier Association.
Item 11. Executive Compensation
The Company hereby incorporates by reference the applicable
information from its definitive proxy statement for its 1999 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 1999 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 1999 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
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CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES:
Schedule II - Consolidated Valuation and Qualifying Accounts -
For the years ended December 31, 1998, 1997 and 1996..................S-1
All other schedules called for by Regulation S-X are not submitted
because either 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) Reports on Form 8-K
Report on Form 8-K/A filed on October 19, 1998 concerning the Company's
acquisition of all of the capital stock of KBD Services, Inc.
Report on Form 8/K filed on December 11, 1998 concerning the amendment
of the Company'scredit facility with First Union Commercial Corporation
increasing credit availability from $15 million to $25 million.
Report on Form 8/K filed on December 22, 1998 concerning the Company's
acquisition of all of the capital stock of First Choice Courier and
Distribution Systems, Inc. and related companies.
Report on Form 8-K filed on February 26, 1999 concerning the Company's
purchase of certain assets and stock by Sureway Air Traffic Corporation
of the Gold Wings Companies (including a Trust).
Report on Form 8-K filed on February 26, 1999 concerning the Company's
completion of $15 million private placement of senior subordinated
notes and warrants.
(c) 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. (filed as Exhibit
3.2 to the Company's Registration Statement
on Form S-1 (File No. 33-97008) and
incorporated herein by reference).
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).
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
(filed as Exhibit 10. 2 to the Company's
Registration Statement on Form S-1 (File No.
33-97008) and incorporated herein by
reference).
10.3 Employment Agreement, dated as of February
5, 1997, with Albert W. Van Ness, Jr.
10.4 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).
10.5 Amendment, dated April 11, 1996, to
Employment Agreement, with John Mattei
(filed as Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1996 (File No.
0-26954) and incorporated herein by
reference).
10.6 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).
10.7 Employment Agreement, dated as of September
8, 1995, with Joseph G. Wojak (filed as
Exhibit 10.7 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 William T. Beaury (filed as
Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File No. 33-97008)
and incorporated herein by reference).
10.9 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).
10.10 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).
10.11 Asset Purchase Agreement dated December 31,
1997 by and among Consolidated Delivery &
Logistics, Inc., Mimatar Corporation and
Sureway Logistics Corporation (filed as
Exhibit 10.1 to the Company's Report on Form
8-K filed on January 15, 1998 and
incorporated herein by reference).
10.12 Promissory Note dated December 31, 1997 by
and between Mimatar Corporation and Sureway
Logistics Corporation (filed as Exhibit 10.2
to the Company's Report on Form 8-K filed on
January 15, 1998 and incorporated herein by
reference).
10.13 Consulting Agreement, dated July 27, 1997,
by and between Clayton/National Courier
Systems, Inc., and Labe Leibowitz.
10.14 Amendment, dated December 23, 1997, to
Employment Agreement, with Al Van Ness, Jr.
10.15 Employment Agreement, dated as of September
15, 1995, with Robert Wyatt (filed as
Exhibit 10.35 to the Company's Registration
Statement on Form S-1 (File No. 33-97008)
and incorporated herein by reference).
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 29, 1999.
CONSOLIDATED DELIVERY & LOGISTICS, INC.
By: /s/ Albert W. Van Ness, Jr.
Albert W. Van Ness, Jr.,
Chairman of the Board, Chief Executive
and Acting 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 27, 1998.
Signature Capacity
/s/ Albert W. Van Ness, Jr. Chairman of the Board, Chief Executive
Albert W. Van Ness, Jr. and Acting Chief Financial Officer
(Principal Executive, Financial and
Accounting Officer) and Director
/s/ William T. Brannan President, Chief Operating Officer and
William T. Brannan Director
/s/ Michael Brooks Director
Michael Brooks
/s/ Randall Catlin Director
Randall Catlin
/s/ Jon F. Hanson Director
Jon F. Hanson
/s/ Labe Leibowitz Director
Labe Leibowitz
/s/ Marilu Marshall Director
Marilu Marshall
/s/ Kenneth W. Tunnell Director
Kenneth W. Tunnell
/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, 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
============= =========== ============== ============== ==============
For the year ended
December 31, 1996 -
Allowance for doubtful
Accounts $1,249 $1,315 ($966) $ - $1,598
============= =========== ============== ============== ==============
(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
10.13 Consulting Agreement, dated July 27, 1997,
by and between Clayton/National Courier
Systems, Inc., and Labe Leibowitz. 2
10.14 Amendment, dated December 23, 1997, to
Employment Agreement, with Al Van Ness, Jr. 6
11.1 Statement Regarding Computation of Net
Income (Loss) Per Share 9
21.1 List of Subsidiaries of Consolidated
Delivery & Logistics, Inc. 10
23.1 Consent of Independent Public Accountants 11
25.1 Power of Attorney 12
27.1 Financial Data Schedule (for electronic
submission only) 13