UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2003
or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period
from_______________to____________
Commission File Number: 0-26954
CD&L, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3350958
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
80 Wesley Street 07606
South Hackensack, New Jersey (Zip Code)
(Address of principal executive offices)
(201) 487-7740
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
--- ---
The number of shares of common stock of the Registrant, par value $.001
per share, outstanding as of November 7, 2003 was 7,658,660.
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 18
Item 4 - Controls and Procedures 18
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 19
Signature 20
Certifications 21
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
September 30, December 31,
2003 2002
--------------- ---------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,066 $ 1,452
Accounts receivable, net 17,274 14,909
Prepaid expenses and other current assets 5,013 2,119
--------------- ---------------
Total current assets 23,353 18,480
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 863 1,233
GOODWILL 11,531 11,531
DEFERRED FINANCING COSTS, net 493 661
OTHER ASSETS 2,216 1,916
--------------- ---------------
Total assets $ 38,456 $ 33,821
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 5,026 $ --
Current maturities of long-term debt 2,665 3,442
Accounts payable, accrued liabilities and bank overdrafts 13,091 12,169
--------------- ---------------
Total current liabilities 20,782 15,611
LONG-TERM DEBT, net of current maturities 12,173 14,041
OTHER LONG-TERM LIABILITIES 331 269
--------------- ---------------
Total liabilities 33,286 29,921
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 7,688,027 shares issued at September 30, 2003 and
December 31, 2002 8 8
Additional paid-in capital 12,883 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (7,559) (8,829)
--------------- ---------------
Total stockholders' equity 5,170 3,900
--------------- ---------------
Total liabilities and stockholders' equity $ 38,456 $ 33,821
=============== ===============
See accompanying notes to condensed consolidated financial statements.
3
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Revenue $ 40,846 $ 38,921 $ 122,040 $ 116,355
Cost of revenue 32,549 31,240 98,741 92,514
--------------- --------------- --------------- ---------------
Gross profit 8,297 7,681 23,299 23,841
--------------- --------------- --------------- ---------------
Selling, general and
administrative expenses 7,042 6,136 20,177 19,485
Depreciation and amortization 171 308 577 916
Other income, net (285) (49) (1,451) --
Interest expense 633 650 1,880 2,061
--------------- --------------- --------------- ---------------
7,561 7,045 21,183 22,462
--------------- --------------- --------------- ---------------
Income before provision for income taxes 736 636 2,116 1,379
Provision for income taxes 294 255 846 552
--------------- --------------- --------------- ---------------
Net income $ 442 $ 381 $ 1,270 $ 827
=============== =============== =============== ===============
Net income per share:
Basic $ .06 $ .05 $ .17 $ .11
=============== =============== =============== ===============
Diluted $ .05 $ .05 $ .16 $ .10
=============== =============== =============== ===============
Basic weighted average common
shares outstanding 7,659 7,659 7,659 7,659
=============== =============== =============== ===============
Diluted weighted average common
shares outstanding 8,175 8,166 8,169 8,167
=============== =============== =============== ===============
See accompanying notes to condensed consolidated financial statements.
4
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-----------------------------------
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,270 $ 827
Adjustments to reconcile net income to net cash (used in) provided by
operating activities -
Non-cash extinguishment of debt (1,034) --
Gain on disposal of equipment (90) (53)
Depreciation, amortization and deferred financing amortization 878 1,172
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net (2,365) 451
Prepaid expenses and other current assets (2,894) 188
Other assets (300) 67
Increase in -
Accounts payable, accrued liabilities and bank overdrafts 922 709
Other long-term liabilities 62 141
--------------- ---------------
Net cash (used in) provided by operating activities (3,551) 3,502
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 94 136
Additions to equipment and leasehold improvements (208) (470)
--------------- ---------------
Net cash used in investing activities (114) (334)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 5,026 589
Repayments of long-term debt (1,747) (3,023)
Deferred financing costs -- (150)
--------------- ---------------
Net cash provided by (used in) financing activities 3,279 (2,584)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (386) 584
CASH AND CASH EQUIVALENTS, beginning of period 1,452 1,165
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 1,066 $ 1,749
=============== ===============
See accompanying notes to condensed consolidated financial statements.
5
CD&L, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited financial statements at that date. Certain
reclassifications have been made to the September 30, 2002 condensed
consolidated statements of operations and cash flows to conform to the
current period presentation. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results
for the three and nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for any
other interim period or for the year ending December 31, 2003. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the CD&L, Inc. (the "Company" or "CD&L")
Form 10-K for the year ended December 31, 2002.
(2) STOCK-BASED COMPENSATION:
In December 2002, Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148") was issued and became effective in 2002. This
Statement amends SFAS No. 123 "Accounting for Stock-Based
Compensation," ("SFAS 123") to provide alternative methods of
transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based compensation. The Company has
elected to continue to recognize stock-based compensation using the
intrinsic value method and has incorporated the additional disclosure
requirements of SFAS 148.
The Company has adopted the disclosure provisions of SFAS 148. As a
result, under the provisions of SFAS 123, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in
accounting for its stock option plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Pro
forma information regarding net income and earnings per share is
required, and has been determined as if the Company had accounted for
its stock options under the fair value method. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for the three and
nine months ended September 30, 2003 and 2002-
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Weighted average fair value $ 0.46 $ 0.45 $ 0.39 $ 0.45
Risk-free interest rate 4.00% 4.30% 4.20% 4.30%
Volatility factor 142% 101% 99% 101%
Expected life 7 years 7 years 7 years 7 years
Dividend yield None None None None
6
The pro forma information regarding net income and earnings per share
is as follows (in thousands, except per share data)-
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net income, as reported $ 442 $ 381 $ 1,270 $ 827
Stock-based employee compensation
expense determined under fair
value based method for all awards,
net of related tax effects (1) (6) (2) (69)
--------------- --------------- --------------- ---------------
Pro forma net income $ 441 $ 375 $ 1,268 $ 758
=============== =============== =============== ===============
Net income per share:
Basic, as reported $ .06 $ .05 $ .17 $ .11
Diluted, as reported $ .05 $ .05 $ .16 $ .10
Basic, pro forma $ .06 $ .05 $ .17 $ .10
Diluted, pro forma $ .05 $ .05 $ .16 $ .09
(3) SHORT-TERM BORROWINGS:
As of June 27, 2002 CD&L and Summit Business Capital Corporation, doing
business as Fleet Capital - Business Finance Division, entered into an
agreement establishing a revolving credit facility (the "Fleet
Facility") of $15,000,000. The Fleet Facility replaced a revolving
credit facility with First Union Commercial Corporation established in
July 1997. The Fleet Facility expires on June 27, 2005 and provides
CD&L with standby letters of credit, prime rate based loans at the
bank's prime rate, as defined, plus 25 basis points (4.25% at September
30, 2003) and LIBOR based loans at the bank's LIBOR, as defined, plus
225 basis points (3.37% at September 30, 2003). Credit availability is
based on eligible amounts of accounts receivable, as defined, up to a
maximum amount of $15,000,000 and is secured by substantially all of
the assets, including certain cash balances, accounts receivable,
equipment, leasehold improvements and general intangibles of the
Company and its subsidiaries. During the nine months ended September
30, 2003, the maximum borrowings outstanding under the Fleet Facility
were approximately $3,518,000 and the outstanding borrowings as of
September 30, 2003 were approximately $2,829,000. As of September 30,
2003, the Company had borrowing availability of $1,978,000 under the
Fleet Facility, after adjusting for restrictions related to outstanding
standby letters of credit of $7,000,000 and minimum availability
requirements.
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial
conditions. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. Pursuant to a modification agreement
with its lender, the Company was in compliance with its debt covenants
as of September 30, 2003.
Insurance Financing Agreements -
In connection with the renewal of certain of the Company's insurance
policies, CD&L entered into four agreements to arrange for the
financing of annual insurance premiums. A total of $3,236,000 was
financed through these arrangements. Monthly payments, including
interest, amount to $328,000. The interest rates range from 3.50% to
4.75% and the notes mature in March and April 2004. The related annual
insurance premiums were paid to the various insurance companies at the
beginning of each policy year. All outstanding debt amounts at
September 30, 2003 are included in short-term borrowings. The
corresponding prepaid insurance has been recorded in prepaid expenses
and other current assets.
7
(4) LONG-TERM DEBT:
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes and warrants (the "Senior
Notes") with three financial institutions. The Senior Notes originally
bore interest at 12.0% per annum and are subordinate to all senior debt
including the Company's Fleet Facility. Under the terms of the Senior
Notes, as amended, the Company is required to maintain certain
financial ratios and comply with other financial conditions contained
in the Senior Notes agreement. Pursuant to a modification agreement
with its lender, the Company was in compliance with the Senior Notes
covenants as of September 30, 2003.
The Senior Notes mature on January 29, 2006 and may be prepaid by the
Company under certain circumstances. The warrants expire January 19,
2009 and are exercisable at any time prior to expiration at a price of
$.001 per equivalent share of common stock for an aggregate of 506,250
shares of the Company's stock, subject to additional adjustments. The
Company has recorded the fair value of the warrants of $1,265,000 as a
credit to additional paid-in-capital and a debt discount on the Senior
Notes. The Company used the proceeds to finance acquisitions and to
reduce outstanding short-term borrowings. As of August 17, 2000,
November 21, 2000, March 30, 2001, May 30, 2001, August 20, 2001,
November 19, 2001, April 12, 2002, June 28, 2002, April 23, 2003
and November 13, 2003, the Company and the note holders modified the
Senior Subordinated Loan Agreement (the "Senior Note Agreement")
entered into on January 29, 1999. The Senior Note Agreement, as
amended, provides for scheduled repayments of $250,000 at the end of
each calendar quarter beginning in the first quarter of 2003 and ending
in the fourth quarter of 2005. Such payments increase to $312,500 if
the Company meets certain availability benchmarks under the Fleet
Facility, as defined. The interest rate on the $3,000,000 of the notes
scheduled to be repaid through 2005 would be reduced to 10% on a
prospective basis if the Company makes a voluntary principal repayment
of $750,000 at any time prior to maturity.
Seller-Financed Debt -
On March 30, 2001, pursuant to an Asset Purchase Agreement dated as of
March 7, 2001, Sureway Worldwide, LLC ("Sureway Worldwide"), a
wholly-owned subsidiary of Global Delivery Systems, LLC ("Global"),
purchased certain assets from a subsidiary of CD&L. As part of the
payment price for such assets, Sureway Worldwide issued to CD&L a
promissory note in the original principal amount of $2,500,000
guaranteed by Global (the "Note Receivable"). Such note and the
guaranty were subordinated to Sureway Worldwide's and Global's
obligations to its secured lender. No payments had been made to CD&L on
the Note Receivable since issuance. CD&L wrote-off the entire amount of
the Note Receivable on December 31, 2001 based on management's
determination that the note would not be collected.
On February 16, 1999, the Company and its subsidiary, Sureway Air
Traffic Corporation, Inc. ("Sureway"), entered into and consummated an
asset and stock purchase agreement with Victory Messenger Service,
Inc., Richard Gold ("Gold"), Darobin Freight Forwarding Co., Inc.
("Darobin"), and The Trust Created Under Paragraph Third of the Last
Will and Testament of Charles Gold (the "Trust"), (collectively "Gold
Wings"), whereby Sureway purchased all of the outstanding shares of the
capital stock of Darobin and certain of the assets and liabilities of
the other sellers. In conjunction therewith, the Company became
obligated for seller-financed acquisition debt of $1,650,000. As of
February 28, 2003, the note had a remaining principal balance of
$1,034,000 (the "CDL/Gold Note").
On February 28, 2003, the Company completed a series of related
transactions with GMV Express, Inc. ("GMV"), Gold (a principal of GMV)
and his affiliates, and Global and its subsidiary, Sureway Worldwide.
The net effect of the transactions with Global, Sureway Worldwide, GMV
and Gold is that the Company assigned the Note Receivable to GMV in
exchange for a release on the CDL/Gold Note payable, so that the
Company is now relieved of its $1,034,000 liability for the CDL/Gold
Note and the Company has no further rights to the Note Receivable. In
addition, the Company received payments from Sureway Worldwide and
Global of approximately $117,000 ($72,000 in settlement of disputed
claims and $45,000 for other amounts due) and provided Gold with a
release covering claims of breach of certain non-competition
agreements. As a result of this transaction, the Company recorded a
gain of $1,034,000 which is included within other income, net.
8
(5) GOODWILL AND DEFERRED FINANCING COSTS:
On June 30, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") was issued. SFAS 142 eliminated goodwill amortization over
its estimated useful life. However, goodwill is subject to at least an
annual assessment for impairment by applying a fair-value based test.
Additionally, acquired intangible assets must be separately recognized
if the benefit of the intangible asset is obtained through contractual
or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the
acquirer's intent to do so. Intangible assets with definitive lives are
amortized over their useful lives. The Company adopted SFAS 142
effective January 1, 2002. For purposes of performing the fair-value
based test of goodwill, the Company has determined that it has one
reporting unit. This reporting unit is consistent with its single
operating segment, which management determined is appropriate under the
provisions of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). During 2002, a
transitional goodwill impairment test was performed and the Company
determined that there was no impairment of goodwill. Further, as
required by SFAS 142, an annual impairment test was completed at the
end of fiscal 2002 and the Company determined that there was no
impairment. Fair value was determined by two methods:
1. Present value of future estimated cash flows, including a
determination of a terminal value.
2. Market capitalization utilizing quoted market prices of the
Company's common stock.
The adoption of SFAS 142 did not result in the recognition of an
impairment of goodwill. However, changes in business conditions could
result in impairment in the future. Examples of changes in business
conditions include, but are not limited to, bankruptcy or loss of a
significant customer, a significant adverse change in regulatory
factors, a loss of key personnel, increased levels of competition from
companies with greater financial resources than the Company and margin
erosion caused by our inability to increase prices to our customers at
the same rate that our costs increase.
Deferred financing costs totaled $493,000 as of September 30, 2003 (net
of accumulated amortization of $845,000). Amortization of deferred
financing costs for the three months ended September 30, 2003 and 2002
was approximately $56,000 and $57,000, respectively and $168,000 and
$153,000 for the nine months ended September 30, 2003 and 2002,
respectively. Amortization of deferred financing costs has been
recorded as interest expense.
Estimated amortization of deferred financing costs for the years ended
December 31 (in thousands)-
2003 $224
2004 224
2005 199
2006 14
9
(6) NOTE RECEIVABLE FROM STOCKHOLDER:
In February 1996, Liberty Mutual Insurance Company ("Liberty Mutual")
filed an action against Securities Courier Corporation ("Securities"),
a subsidiary of the Company, Mr. Vincent Brana, an employee of the
Company, and certain other parties in the United States District Court
for the Southern District of New York. Under the terms of its
acquisition of Securities, the Company had certain rights to
indemnification from Mr. Brana. In connection with the indemnification,
Mr. Brana has entered into a settlement agreement and executed a
promissory note (the "Brana Note") in such amount as may be due for any
defense costs or award arising out of this suit. Mr. Brana has agreed
to repay the Company on December 1, 2003, together with interest
calculated at a rate per annum equal to the rate charged the Company by
its senior lender. Mr. Brana delivered 357,301 shares of CD&L common
stock to the Company as collateral for the Brana Note. On September 8,
2000 the parties entered into a settlement agreement in which
Securities and Mr. Brana agreed to pay Liberty Mutual $1,300,000. An
initial payment of $650,000 was made by Securities on October 16, 2000,
$325,000 plus interest at a rate of 10.5% per annum was paid in monthly
installments ending July 1, 2001 and the balance of $325,000 plus
interest at a rate of 12.0% per annum was paid in monthly installments
ending July 1, 2002.
At September 30, 2003 and December 31, 2002, the Company had a
receivable due from Mr. Brana totaling $2,800,000. As of September 30,
2003 and December 31, 2002, considering the market value of the
collateral, the settlement being negotiated below, and Mr. Brana's
failure to provide satisfactory evidence to support his ability to pay
the Brana Note, the Company maintained a $2,800,000 reserve against the
receivable.
In an effort to resolve all outstanding disputes between Mr. Brana and
the Company, a settlement agreement is currently being negotiated. If
an agreement is reached, the Company would return to Mr. Brana the
357,301 shares of CD&L common stock held by the Company as collateral
for the $2,800,000 note, and provide certain releases for claims that
the Company may have against him. Mr. Brana's employment with the
Company was terminated on September 1, 2002, and he has served as a
paid consultant since that time.
(7) LITIGATION:
The Company is, from time to time, a party to litigation arising in the
normal course of its business, including claims for uninsured personal
injury and property damage incurred in connection with its same-day
delivery operations. In connection therewith, the Company has recorded
reserves of $465,000 and $325,000 as of September 30, 2003 and December
31, 2002, respectively.
Also from time to time, federal and state authorities have sought to
assert that independent contractors in the transportation industry,
including those utilized by CD&L, are employees rather than independent
contractors. The Company believes that the independent contractors that
it utilizes are not employees under existing interpretations of federal
and state laws. However, federal and state authorities have and may
continue to challenge this position. Further, laws and regulations,
including tax laws, and the interpretations of those laws and
regulations, may change.
Management believes that none of these actions, including the actions
described above, will have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
10
(8) INCOME PER SHARE:
Basic earnings per share represents net income divided by the weighted
average shares outstanding. Diluted earnings per share represents net
income divided by the weighted average shares outstanding adjusted for
the incremental dilution of potentially dilutive common shares.
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows
(in thousands)-
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Basic weighted average
common shares outstanding 7,659 7,659 7,659 7,659
Effect of dilutive securities:
Stock options and warrants 516 507 510 508
--------------- --------------- --------------- ---------------
Diluted weighted average
common shares
outstanding 8,175 8,166 8,169 8,167
=============== =============== =============== ===============
The following potentially dilutive common shares were excluded from the
computation of diluted Earnings per Share because the exercise or
conversion price was greater than the average market price of common
shares (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Stock options and warrants 1,877 1,931 1,899 1,913
Seller financed convertible notes 431 475 431 475
(9) NEW ACCOUNTING PRONOUNCEMENT:
In January 2003, Interpretation No. 46 of the Financial Accounting
Standards Board, "Consolidation of Variable Interest Entities" ("FIN
46") was issued. The Company does not believe that it has any
relationships with variable interest entities that will be subject to
the requirements of FIN 46.
(10) RELATED PARTY TRANSACTIONS:
Effective as of February 1, 2003, the Company has leased its former
vehicle repair facility to a company whose principal is a shareholder
and former executive of the Company. During the three and nine months
ended September 30, 2003, the Company made payments for vehicle
maintenance and repairs of approximately $52,300 and $186,300,
respectively. During the first nine months of 2003, the Company sold 63
vehicles for approximately $40,350 to this company. Additionally, the
Company has recorded rental income from this company of approximately
$9,000 and $24,000 during the three and nine months ended September 30,
2003, respectively. Refer to the 2002 Form 10-K for additional
discussion of related party transactions.
11
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Disclosure Regarding Forward-Looking Statements
The Company is provided a "safe harbor" for forward-looking statements
contained in this report by the Private Securities Litigation Reform
Act of 1995. The Company may discuss forward-looking information in
this Report such as its expectations for future performance, growth and
acquisition strategies, liquidity and capital needs and its future
prospects. Actual results may not necessarily develop as the Company
anticipates due to many factors including, but not limited to the
timing of certain transactions, unexpected expenses encountered, the
effect of economic and market conditions, the impact of competition and
the factors listed in the Company's 2002 Report on Form 10-K and other
SEC filings. Because of these and other reasons, the Company's actual
results may vary materially from management's current expectations.
Overview
The condensed consolidated financial statements of the Company
including all related notes, which appear elsewhere in this report,
should be read in conjunction with this discussion of the Company's
results of operations and its liquidity and capital resources.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to
accounts and notes receivable, intangible assets, insurance reserves,
income taxes and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies reflect
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts and
notes receivable for estimated losses resulting from the inability of
its customers and debtors to make payments when due or within a
reasonable period of time thereafter. The Company estimates allowances
for doubtful accounts and notes receivable by evaluating past due aging
trends, analyzing customer payment histories and assessing market
conditions relating to its customers' operations and financial
condition. Such allowances are developed principally for specific
customers. If the financial condition of the Company's customers and
debtors were to deteriorate, resulting in an impairment of their
ability to make required payments, additional allowances may be
required.
Goodwill
The value of the Company's goodwill is significant relative to
total assets and stockholders' equity. The Company reviews goodwill for
impairment on at least an annual basis using several fair-value based
tests, which include, among others, a discounted cash flow and terminal
value computation. The discounted cash flow and terminal value
computation is based on management's estimates of future operations.
Changes in business conditions could materially impact management's
estimates of future operations and this could result in an impairment
of goodwill. Such impairment, if any, could have a significant impact
on the Company's consolidated operations and financial condition.
12
Examples of changes in business conditions include, but are not limited
to, bankruptcy or loss of a significant customer, a significant adverse
change in regulatory factors, a loss of key personnel, increased levels
of competition from companies with greater financial resources than the
Company and margin erosion caused by our inability to increase prices
to our customers at the same rate that our costs increase.
Insurance Reserves
The Company retains certain insurance risk through various
insurance policies. The Company's deductible for workers' compensation
is $500,000 per loss ($350,000 prior to May 1, 2003). The deductible
for employee health medical costs is $150,000 per loss ($125,000 prior
to March 1, 2002). Effective July 1, 2003, automobile liability
coverage is maintained for covered vehicles through a fully-insured
indemnity program with no deductible ($350,000 deductible prior to July
1, 2003). The Company reserves the estimated amounts of uninsured
claims and deductibles related to such insurance retentions for claims
that have occurred in the normal course of business. These reserves are
established by management based upon the recommendations of third-party
administrators who perform a specific review of open claims, which
include fully developed estimates of both reported claims and incurred
but not reported claims, as of the balance sheet date. Actual claim
settlements may differ materially from these estimated reserve amounts.
Income Taxes
The Company files income tax returns in every jurisdiction in
which it has reason to believe it is subject to tax. Historically, the
Company has been subject to examination by various taxing
jurisdictions. To date, none of these examinations have resulted in any
material additional tax. Nonetheless, any tax jurisdiction may contend
that a filing position claimed by the Company regarding one or more of
its transactions is contrary to that jurisdiction's laws or
regulations.
Results of Operations
Income and Expense as a Percentage of Revenue
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross profit 20.3% 19.7% 19.1% 20.5%
Selling, general and
administrative expenses 17.2% 15.8% 16.5% 16.7%
Depreciation and amortization 0.4% 0.8% 0.5% 0.8%
Other income, net (0.7%) (0.1%) (1.2%) 0.0%
Interest expense 1.5% 1.7% 1.5% 1.8%
Income before provision for income
taxes 1.8% 1.6% 1.7% 1.2%
Net income 1.1% 1.0% 1.0% 0.7%
13
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
Revenue for the three months ended September 30, 2003 increased by
$1,925,000, or 4.9%, to $40,846,000 from $38,921,000 for the three
months ended September 30, 2002. An increase in volume from new and
existing customers contributed to such revenue increase, partially
offset by certain price reductions granted to extend customer contracts.
Cost of revenue increased by $1,309,000, or 4.2%, to $32,549,000 for the
three months ended September 30, 2003 from $31,240,000 for the three
months ended September 30, 2002. Cost of revenue for the three months
ended September 30, 2003 represents 79.7% of revenues as compared to
80.3% for the same period in 2002. The increase in cost of revenue is
due primarily to the increase in revenue; however, the decrease in cost
of revenue as a percentage of revenue is due primarily to $180,000 in
reduced fuel costs and a $538,000 reduction in insurance expense. The
reduction in insurance expense is primarily due to a reduction in
reserves for incurred but not reported ("IBNR") losses as a result of
the Company adopting a fully-insured auto program. These reductions were
partially offset by approximately $327,000 in increased direct labor
costs as compared to the same period in 2002.
Selling, general and administrative expenses ("SG&A") increased by
$906,000, or 14.8%, to $7,042,000 for the three months ended September
30, 2003 from $6,136,000 for the same period in 2002. Stated as a
percentage of revenue, SG&A increased to 17.2% for the three months
ended September 30, 2003 as compared to 15.8% for the same period in
2002. The increase in SG&A is due to a variety of factors including a
$311,000 increase in provision for doubtful accounts, an increase of
$131,000 in premises rent and $125,000 in additional legal expenses.
Depreciation and amortization decreased by $137,000, or 44.5%, to
$171,000 for the three months ended September 30, 2003 from $308,000 for
the same period in 2002. Such reduction was primarily caused by the full
depreciation of certain vehicles held under a capital lease that ended
during 2002 and reduced capital expenditures in 2001, 2002 and 2003.
Other income, net increased to $285,000 for the three months ended
September 30, 2003 from $49,000 for the same period in 2002. This
increase was primarily due to a $220,000 World Trade Center Recovery
Grant received by one of our New York City facilities.
As a result of the factors discussed above, income before provision for
income taxes increased by $100,000 for the three months ended September
30, 2003 as compared to the same period in 2002.
Provision for income taxes increased by $39,000 for the three months
ended September 30, 2003 as compared to the same period in 2002. This
was due to the increase in income before provision for income taxes
discussed above. The effective tax rate for both periods was 40%.
Net income increased by $61,000 to net income of $442,000 for the three
months ended September 30, 2003 as compared to net income of $381,000
for the same period in 2002. This was due to the factors discussed
above.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended
September 30, 2002
Revenue for the nine months ended September 30, 2003 increased by
$5,685,000, or 4.9%, to $122,040,000 from $116,355,000 for the nine
months ended September 30, 2002. An increase in volume from new and
existing customers contributed to such revenue increase, partially
offset by certain price reductions granted to extend customer contracts.
Cost of revenue increased by $6,227,000, or 6.7%, to $98,741,000 for the
nine months ended September 30, 2003 from $92,514,000 for the nine
months ended September 30, 2002. Cost of revenue for the nine months
ended September 30, 2003 represents 80.9% of revenues as compared to
79.5% for the same period in 2002. The increase in cost of revenue is
due primarily to the increase in revenue; however, the increase in cost
of revenue as a percentage of revenue is due primarily to certain price
reductions referred to above, an increase in direct labor costs as
compared to the same period in 2002 and increased cargo claims of
$797,000 as a result of the increased deductibles. These increases were
partially offset by reduced fuel costs of $574,000 and an $831,000
reduction in insurance expense. The reduction in insurance expense is
primarily due to a reduction in reserves for IBNR losses as a result of
the Company adopting a fully-insured auto program.
14
Selling, general and administrative expenses ("SG&A") increased by
$692,000, or 3.6%, to $20,177,000 for the nine months ended September
30, 2003 from $19,485,000 for the same period in 2002. Stated as a
percentage of revenue, SG&A decreased to 16.5% for the nine months
ended September 30, 2003 as compared to 16.7% for the same period in
2002. The decrease in SG&A is due primarily to a reduction in
compensation expense of $1,167,000 which includes reduced staffing,
lower incentive compensation and the reversal of previously recorded
severance benefits. This reduction in SG&A is partially offset by a
$388,000 increase in facility rent costs and an increase of $379,000 in
provision for doubtful accounts.
Depreciation and amortization decreased by $339,000, or 37.0%, to
$577,000 for the nine months ended September 30, 2003 from $916,000 for
the same period in 2002. Such reduction was primarily caused by the
full depreciation of certain vehicles held under a capital lease that
ended during 2002 and reduced capital expenditures in 2001, 2002 and
2003.
Other income, net increased to $1,451,000 for the nine months ended
September 30, 2003 for the reasons discussed below.
On March 30, 2001, pursuant to an Asset Purchase Agreement dated as of
March 7, 2001, Sureway Worldwide, LLC ("Sureway Worldwide"), a
wholly-owned subsidiary of Global Delivery Systems, LLC ("Global"),
purchased certain assets from a subsidiary of CD&L. As part of the
payment price for such assets, Sureway Worldwide issued to CD&L a
promissory note in the original principal amount of $2,500,000
guaranteed by Global (the "Note Receivable"). Such note and the
guaranty were subordinated to Sureway Worldwide's and Global's
obligations to its secured lender. No payments had been made to CD&L on
the Note Receivable since issuance. CD&L wrote-off the entire amount of
the Note Receivable on December 31, 2001 based on management's
determination that the note would not be collected.
On February 16, 1999, the Company and its subsidiary, Sureway Air
Traffic Corporation, Inc. ("Sureway"), entered into and consummated an
asset and stock purchase agreement with Victory Messenger Service,
Inc., Richard Gold ("Gold"), Darobin Freight Forwarding Co., Inc.
("Darobin"), and The Trust Created Under Paragraph Third of the Last
Will and Testament of Charles Gold (the "Trust"), (collectively "Gold
Wings"), whereby Sureway purchased all of the outstanding shares of the
capital stock of Darobin and certain of the assets and liabilities of
the other sellers. In conjunction therewith, the Company became
obligated for seller-financed acquisition debt of $1,650,000. As of
February 28, 2003, the note had a remaining principal balance of
$1,034,000 (the "CDL/Gold Note").
On February 28, 2003, the Company completed a series of related
transactions with GMV Express, Inc. ("GMV"), Gold (a principal of GMV)
and his affiliates, and Global and its subsidiary, Sureway Worldwide.
The net effect of the transactions with Global, Sureway Worldwide, GMV
and Gold is that the Company assigned the Note Receivable to GMV in
exchange for a release on the CDL/Gold Note payable, so that the
Company is now relieved of its $1,034,000 liability for the CDL/Gold
Note and the Company has no further rights to the Note Receivable. In
addition, the Company received payments from Sureway Worldwide and
Global of approximately $117,000 ($72,000 in settlement of disputed
claims and $45,000 for other amounts due) and provided Gold with a
release covering claims of breach of certain non-competition
agreements. As a result of this transaction, the Company recorded a
gain of $1,034,000 during the nine month period ended September 30,
2003, included within other income, net.
Additional sources of other income for the nine months ended September
30, 2003 related to a $220,000 World Trade Center Recovery Grant
received by one of our New York City facilities, $112,000 of interest
income from our Midwest Note and $90,000 of gain on disposal of
equipment.
15
As a result of the factors discussed above, income before provision for
income taxes increased by $737,000 for the nine months ended June 30,
2003 as compared to the same period in 2002.
Provision for income taxes increased by $294,000 for the nine months
ended September 30, 2003 as compared to the same period in 2002. This
was due to the increase in income before provision for income taxes
discussed above. The effective tax rate for both periods was 40%.
Net income improved by $443,000 to net income of $1,270,000 for the
nine months ended September 30, 2003 as compared to net income of
$827,000 for the same period in 2002. This was due to the factors
discussed above.
Liquidity and Capital Resources
The Company's working capital decreased by $298,000 from $2,869,000 as
of December 31, 2002 to $2,571,000 as of September 30, 2003. The
decrease is primarily a result of cash used in operating activities.
Cash and cash equivalents decreased by $386,000 to $1,066,000 as of
September 30, 2003. Cash of $3,551,000 was used by operations while
$114,000 was used by net investing activities and $3,279,000 was
provided by net financing activities. Cash used by operations and cash
provided by net financing activities was primarily the result of the
$3,236,000 in insurance financing arrangements discussed in Note 3.
Capital expenditures amounted to $208,000 and $470,000 for the nine
months ended September 30, 2003 and 2002, respectively.
As of June 27, 2002 CD&L and Summit Business Capital Corporation, doing
business as Fleet Capital - Business Finance Division, entered into an
agreement establishing a revolving credit facility (the "Fleet
Facility") of $15,000,000. The Fleet Facility replaced a revolving
credit facility with First Union Commercial Corporation established in
July 1997. The Fleet Facility expires on June 27, 2005 and provides
CD&L with standby letters of credit, prime rate based loans at the
bank's prime rate, as defined, plus 25 basis points (4.25% at September
30, 2003) and LIBOR based loans at the bank's LIBOR, as defined, plus
225 basis points 3.37% at September 30, 2003). Credit availability is
based on eligible amounts of accounts receivable, as defined, up to a
maximum amount of $15,000,000 and is secured by substantially all of
the assets, including certain cash balances, accounts receivable,
equipment, leasehold improvements and general intangibles of the
Company and its subsidiaries. During the nine months ended September
30, 2003, the maximum borrowings outstanding under the Fleet Facility
were approximately $3,518,000 and the outstanding borrowings as of
September 30, 2003 were approximately $2,829,000. As of September 30,
2003, the Company had borrowing availability of $1,978,000 under the
Fleet Facility, after adjusting for restrictions related to outstanding
standby letters of credit of $7,000,000 and minimum availability
requirements.
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial
conditions. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. Pursuant to a modification agreement
with its lender, the Company was in compliance with its debt covenants
as of September 30, 2003.
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes and warrants (the "Senior
Notes") with three financial institutions. The Senior Notes originally
bore interest at 12.0% per annum and are subordinate to all senior debt
including the Company's Fleet Facility. Under the terms of the Senior
Notes, as amended, the Company is required to maintain certain
financial ratios and comply with other financial conditions contained
in the Senior Notes agreement. Pursuant to a modification agreement
with its lender, the Company was in compliance with the Senior Notes
covenants as of September 30, 2003.
16
The Senior Notes mature on January 29, 2006 and may be prepaid by the
Company under certain circumstances. The warrants expire January 19,
2009 and are exercisable at any time prior to expiration at a price of
$.001 per equivalent share of common stock for an aggregate of 506,250
shares of the Company's stock, subject to additional adjustments. The
Company has recorded the fair value of the warrants of $1,265,000 as a
credit to additional paid-in-capital and a debt discount on the Senior
Notes. The Company used the proceeds to finance acquisitions and to
reduce outstanding short-term borrowings. As of August 17, 2000,
November 21, 2000, March 30, 2001, May 30, 2001, August 20, 2001,
November 19, 2001, April 12, 2002, June 28, 2002, April 23, 2003 and
November 13, 2003; the Company and the note holders modified the Senior
Subordinated Loan Agreement (the "Senior Note Agreement") entered into
on January 29, 1999. The Senior Note Agreement, as amended, provides
for scheduled repayments of $250,000 at the end of each calendar
quarter beginning in the first quarter of 2003 and ending in the fourth
quarter of 2005. Such payments increase to $312,500 if the Company
meets certain availability benchmarks under the Fleet Facility, as
defined. The interest rate on the $3,000,000 of the notes scheduled to
be repaid through 2005 would be reduced to 10% on a prospective basis
if the Company makes a voluntary principal repayment of $750,000 at any
time prior to maturity.
Self-Insurance -
The Company's risk of incurring uninsured losses has increased in 2003
as a result of increased deductibles retained by the Company in order
to reduce premiums in conjunction with the renewal of certain insurance
policies in 2003. This risk may be mitigated to some extent as the
Company entered into fully insured auto liability insurance programs
during the third quarter of 2003. There can be no assurances that the
Company's risk management policies and procedures will minimize future
uninsured losses or that a material increase in frequency or severity
of uninsured losses will not occur and adversely impact the Company's
future consolidated financial results.
The Company has an accumulated deficit of ($7,559,000) as of September
30, 2003. There can be no assurances that the Company's lenders will
agree to waive any future covenant violations, if any, continue to
renegotiate and modify the terms of their loans, or further extend the
maturity date, should it become necessary to do so. Further, there can
be no assurances that the Company will be able to meet its revenue,
cost or income projections, upon which the debt covenants are based.
Management believes that cash flows from operations and its borrowing
capacity, after the debt modifications referred to above, are
sufficient to support the Company's operations and general business and
capital requirements for at least the next twelve months. Such
conclusions are predicated upon sufficient cash flow from operations
and the continued availability of a revolving credit facility. The
risks associated with cash flow from operations are mitigated by the
Company's low gross profit margin. Unless extraordinary, decreases in
revenue should be accompanied by corresponding decreases in costs,
resulting in minimal impact to liquidity. The risks associated with the
revolving credit facility are as discussed above.
Inflation
While inflation has not had a material impact on the Company's results
of operations for the periods presented herein, recent fluctuations in
fuel prices can and do affect the Company's operating costs.
17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the effect of changing interest rates. At
September 30, 2003, the Company's debt consisted of approximately
$14,418,000 (excluding unamortized discount of $422,000) of fixed rate
debt with a weighted average interest rate of 11.9% and $5,857,000 of
variable rate debt with a weighted average interest rate of 5.7%. The
variable rate debt consists of six seller-financed notes with an
interest rate of prime plus 200 basis points with a minimum rate of
7.0% and maximum rate of 9.0% and $2,829,000 of borrowings of revolving
line of credit debt. If interest rates on variable rate debt were to
increase by 57 basis points (one-tenth of the rate at September 30,
2003), the net impact to the Company's results of operations and cash
flows for the nine month period ended September 30, 2003 would be a
decrease of approximately $25,000. Maximum borrowings of revolving line
of credit debt during the nine months ended September 30, 2003 were
$3,518,000.
Item 4 - Controls and Procedures
(a) Disclosure controls and procedures. As of the end of the
Company's most recently completed fiscal quarter (the
Company's fourth fiscal quarter in the case of an annual
report) covered by this report, the Company carried out an
evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure
controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting. There
have been no changes in the Company's internal control over
financial reporting that occurred during the Company's last
fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial
reporting.
18
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Albert W. Van Ness, Jr. Pursuant to
Exchange Act Rules 13a-15e and 15d-15e, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Russell J. Reardon Pursuant to
Exchange Act Rules 13a-15e and 15d-15e, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Albert W. Van Ness, Jr. Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Russell J. Reardon Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed during
the third quarter of 2003.
o Report on Form 8-K filed on August 19, 2003
concerning the August 19, 2003 press release
announcing second quarter earnings for the 2003
fiscal year.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2003 CD&L, INC.
By: \s\ Russell J. Reardon
-------------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
20