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 June 30, 2004 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from_______________
to____________
Commission File Number: 0-26954
CD&L, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3350958
(State or other jurisdiction of
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 August 13, 2004 was 7,658,660.
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004
INDEX
PAGE
----
PART I - Financial Information
ITEM 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited)
and December 31, 2003 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 17
ITEM 4 - Controls and Procedures 17
PART II - Other Information
ITEM 6 - Exhibits and Reports on Form 8-K 18
SIGNATURE 19
CERTIFICATIONS 20
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
June 30, 2004 December 31, 2003
----------------- ------------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,298 $1,697
Accounts receivable, net 19,603 18,786
Prepaid expenses and other current assets 1,993 4,068
----------------- ------------------
Total current assets 23,894 24,551
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,300 1,446
GOODWILL 11,531 11,531
INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net 1,845 437
OTHER ASSETS 1,110 2,387
----------------- ------------------
Total assets $39,680 $40,352
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $5,220 $5,767
Current maturities of long-term debt 471 2,585
Accounts payable, accrued liabilities and bank overdrafts 14,092 14,392
----------------- ------------------
Total current liabilities 19,783 22,744
LONG-TERM DEBT, net of current maturities 10,070 11,785
OTHER LONG-TERM LIABILITIES 222 240
----------------- ------------------
Total liabilities 30,075 34,769
----------------- ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; 393,701 shares issued and outstanding 4,000 -
Common stock, $.001 par value; 30,000,000 shares
authorized; 7,688,027 shares issued at June 30, 2004 and
December 31, 2003 8 8
Additional paid-in capital 12,728 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (6,969) (7,146)
----------------- ------------------
Total stockholders' equity 9,605 5,583
----------------- ------------------
Total liabilities and stockholders' equity $39,680 $40,352
================= ==================
See accompanying notes to condensed consolidated financial statements.
3
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
--------------- ------------- ------------- ---------------
Revenue $49,257 $40,887 $95,739 $81,194
Cost of revenue 39,894 33,149 77,779 66,192
--------------- ------------- ------------- ---------------
Gross profit 9,363 7,738 17,960 15,002
--------------- ------------- ------------- ---------------
Costs and Expenses:
Selling, general and
administrative expenses 8,000 6,607 15,535 13,135
Depreciation and amortization 274 189 494 406
Other expense (income), net 623 (65) 612 (1,166)
Interest expense 453 637 1,024 1,247
--------------- ------------- ------------- ---------------
Total Costs and Expenses 9,350 7,368 17,665 13,622
--------------- ------------- ------------- ---------------
Income before provision for income taxes 13 370 295 1,380
Provision for income taxes 5 148 118 552
--------------- ------------- ------------- ---------------
Net income $8 $222 $177 $828
=============== ============= ============= ===============
Net income per share:
Basic $.00 $.03 $.02 $.11
=============== ============= ============= ===============
Diluted $.00 $.03 $.01 $.10
=============== ============= ============= ===============
Basic weighted average common
shares outstanding 7,659 7,659 7,659 7,659
=============== ============= ============= ===============
Diluted weighted average common
shares outstanding 12,570 8,165 10,404 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 Six Months Ended
June 30,
-----------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $177 $828
Adjustments to reconcile net income to net cash provided by (used in)
operating activities -
Non-cash extinguishment of debt - (1,034)
Gain on disposal of equipment and leasehold improvement (6) (62)
Depreciation, amortization and deferred financing amortization 621 517
Deferred financing charge/OID write-off 628 -
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net (817) (753)
Prepaid expenses and other current assets 2,075 (609)
Other assets (350) (221)
(Decrease) increase in -
Accounts payable, accrued liabilities and bank overdrafts (300) (66)
Other long-term liabilities (18) 47
-------------- --------------
Net cash provided by (used in) operating activities 2,010 (1,353)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 3 68
Additions to equipment and leasehold improvements (211) (153)
-------------- --------------
Net cash used in investing activities (208) (85)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) proceeds from short-term borrowings (547) 3,099
Repayments of long-term debt (1,205) (1,111)
Proceeds from long-term debt 1,000 -
Deferred financing costs (449) -
-------------- --------------
Net cash (used in) provided by financing activities (1,201) 1,988
-------------- --------------
Net increase in cash and cash equivalents 601 550
CASH AND CASH EQUIVALENTS, beginning of period 1,697 1,452
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $2,298 $2,002
============== ==============
See accompanying notes to condensed consolidated financial statements.
5
CD&L, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
condensed consolidated balance sheet at December 31, 2003 has been
derived from the audited financial statements at that date. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30,
2004 are not necessarily indicative of the results that may be expected
for any other interim period or for the year ending December 31, 2004.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the CD&L, Inc. (the "Company" or
"CD&L") Form 10-K for the year ended December 31, 2003.
(2) STOCK BASED COMPENSATION
In December 2002, Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148") was issued and became effective in 2002. This
Statement amends SFAS No. 123 "Accounting for Stock-Based
Compensation," ("SFAS 123") to provide alternative methods of
transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based compensation. The Company has
elected to continue to recognize stock-based compensation using the
intrinsic value method and has incorporated the additional disclosure
requirements of SFAS 148.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
in accounting for its stock option plans. The Company's stock options
have all been issued with their exercise price at market value at the
date of grant. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Pro forma information regarding
net income and net income per share is required under the provisions of
SFAS 123, and has been determined as if the Company had accounted for
its stock options under the fair value method. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for the three and
six months ended June 30, 2004 and 2003:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
Weighted average fair value $1.00 $0.36 $0.95 $0.35
Risk-free interest rate 4.00% 4.30% 4.00% 4.30%
Volatility factor 140% 86% 115% 68%
Expected life 7 years 7 years 7 years 7 years
Dividend yield None None None None
6
The pro forma information regarding net income and net income per share
is as follows (in thousands, except per share data)-
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
Net income, as reported $8 $222 $177 $828
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (330) (1) (334) 1
------------ ------------- ------------ ------------
Pro forma net (loss) income ($322) $221 ($157) $829
============ ============= ============ ============
Net income (loss) per share:
Basic, as reported $.00 $.03 $.02 $.11
Diluted, as reported $.00 $.03 $.01 $.10
Basic, pro forma ($.04) $.03 ($.02) $.11
Diluted, pro forma ($.04) $.03 ($.02) $.10
(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 June 30,
2004) and LIBOR based loans at the bank's LIBOR, as defined, plus 225
basis points (3.62% at June 30, 2004). Credit availability is based on
eligible amounts of accounts receivable, as defined, up to a maximum
amount of $15,000,000 and is secured by substantially all of the
assets, including certain cash balances, accounts receivable,
equipment, leasehold improvements and general intangibles of the
Company and its subsidiaries. During the six months ended June 30,
2004, the maximum borrowings outstanding under the Fleet Facility were
$6,482,000 and the outstanding borrowings as of June 30, 2004 were
$5,220,000. As of June 30, 2004, the Company had total cash on hand and
borrowing availability of $4,574,000 under the Fleet Facility, after
adjusting for restrictions related to outstanding standby letters of
credit of $6,515,000 and minimum availability requirements.
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial
conditions. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. The Company was in compliance with its
debt covenants, as amended, as of June 30, 2004.
Insurance Financing Agreements -
In connection with the renewal of certain of the Company's insurance
policies, CD&L entered into four agreements to arrange for the
financing of annual insurance premiums. A total of $3,236,000 was
financed through these arrangements. The interest rates ranged from
3.50% to 4.75% and the notes matured in March and April 2004. The
related annual insurance premiums were paid to the various insurance
companies at the beginning of each policy year. There was no
outstanding debt related to the insurance financing arrangement as of
June 30, 2004.
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 was required to maintain certain
financial ratios and comply with other financial conditions contained
in the Senior Notes agreement.
At March 31, 2004, the Company owed $11.0 million on the Senior Notes.
On April 14, 2004, an agreement was reached among the Company, Paribas
and Exeter (collectively "Paribas") and certain members of CD&L
management and others ("Investors") as to the financial restructuring
of the Senior Notes. Paribas agreed to convert a portion of its
existing debt due from CD&L into equity and to modify the terms of its
subordinated note if the Investors purchased a portion of the note and
accepted similar modifications. The nature of the restructuring is as
follows:
(a) Paribas exchanged notes in the aggregate principal amount of $4.0
million for shares of the Series A Convertible Redeemable Preferred
Stock of the Company, par value $.001 per share ("Preferred Stock")
with a liquidation preference of $4.0 million. The Preferred Stock is
convertible into 3,937,008 shares of Common Stock, does not pay
dividends (unless dividends are declared and paid on the Common Stock)
and is redeemable by the Company for the liquidation value. The
conversion price is $1.016 per share which was equal to the market
price of the Company's common stock on the date of the transaction.
Holders of the Preferred Stock have the right to elect two directors.
(b) Paribas and the Company amended the terms of the $7.0 million balance
of the Notes, and then exchanged the original notes for the amended and
restated notes, which consist of two series of convertible notes, the
Series A Convertible Subordinated Notes (the "Series A Convertible
Notes") in the principal amount of $3.0 million and the Series B
Convertible Subordinated Notes ("Series B Convertible Notes") in the
principal amount of $4.0 million (collectively, the "Convertible
Notes"). The Loan Agreement was amended and restated to reflect the
terms of the substituted Series A Convertible Notes and the Series B
Convertible Notes, including the elimination of most financial
covenants. Principal is due in a balloon payment at the maturity date
of April 14, 2011. The Convertible Notes bear interest at a rate of 9%
for the first two years of the term, 10.5% for the next two years and
12% for the final three years of the term and will be paid quarterly.
The terms of the two series of Convertible Notes are identical except
for the conversion price ($1.016 for the Series A Convertible Notes,
the average closing price for the Company's shares for the 5 days prior
to the closing and $2.032 for the Series B Convertible Notes).
(c) The Investors purchased the Series A Convertible Notes from Paribas for
a purchase price of $3.0 million.
(d) The Company issued an additional $1.0 million of Series A Convertible
Notes to the Investors for an additional payment of $1.0 million, the
proceeds of which were used to reduce short-term debt.
(e) The Investors, Paribas and the Company entered into a Registration
Rights Agreement pursuant to which the shares of the Company's common
stock issuable upon conversion of the Preferred Stock and the
Convertible Notes will be registered for resale with the Securities and
Exchange Commission ("SEC").
In addition, the Company has agreed to commence a rights offering to its
common stockholders as soon as practical, and in any event prior to January
14, 2005, whereby the common shareholders of the Company shall have the right
to acquire at least $2 million of additional shares of common stock of the
Company in the aggregate at a price equal to the conversion price of the
Series A Convertible Notes.
8
The Company cannot be compelled to redeem the Preferred Stock for cash at any
time. As the interest on the Investor Notes and the new Paribas note increase
over the term of the notes, the Company will record the associated interest
expense on a straight-line basis, which will give rise to accrued interest
over the early term of the notes.
As a result of the debt restructuring described above, the Company has taken
a charge of $0.6 million recorded in other expense in the second quarter of
2004, representing the unamortized balance of the original issue discount and
deferred financing costs related to the original private placement.
Costs incurred relative to the aforementioned transactions amounted to
approximately $463,000. Of this amount, $308,000 has been accounted for as
deferred financing costs and is being amortized over the term of the new
financing agreements. The remaining $155,000 has been accounted for as a
reduction in paid-in capital. These amounts have been allocated based on the
proportion of debt to equity raised in the aforementioned transactions.
Long-term debt consists of the following (in thousands) -
JUNE 30, DECEMBER 31,
2004 2003
---------------- -----------------
Senior Subordinated Notes, net of unamortized
discount of $0 and $377, respectively. $0 $10,623
Series A Convertible Subordinated Notes 4,000 -
Series B Convertible Subordinated Notes 4,000 -
Capital lease obligations due through October 2007 with
interest at rates ranging from 6.5% to 11.5% and secured
by the related property. 6 76
Seller-financed debt on acquisitions, payable in monthly
installments through June 2007. Interest is payable at
rates ranging between 7.0% and 11.0%. 2,535 3,671
---------------- -----------------
10,541 14,370
Less - Current maturities (471) (2,585)
---------------- -----------------
$10,070 $11,785
================ =================
(5) GOODWILL, OTHER INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS:
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). This Statement required that goodwill no
longer be amortized over its estimated useful life but tested for
impairment on an annual basis. As required by SFAS 142, annual impairment
tests were completed at the end of fiscal 2003 and 2002 and the Company
determined that there was no impairment.
The value of the Company's goodwill is significant relative to total assets
and stockholders' equity. The Company reviews goodwill for impairment on at
least an annual basis using several fair-value based tests, which include,
among others, a discounted cash flow and terminal value computation as well
as comparing the Company's market capitalization to the book value of the
Company. The discounted cash flow and terminal value computation is based
on management's estimates of future operations. Changes in business
conditions or interest rates could materially impact management's estimates
of future operations and consequently the Company's evaluation of fair
value, and this could result in an impairment of goodwill. Such impairment,
if any, could have a significant impact on the Company's reported results
from future operations and financial condition.
9
The majority of the purchase price of the Indiana acquisition on March 1,
2004 is related to the value of the customer list and is included as an
intangible asset in the June 30, 2004 consolidated balance sheet. This
asset is being amortized over 5 years. (See Note 8)
The costs incurred to obtain financing, including all related fees, are
included in intangible assets and deferred financing costs in the
accompanying consolidated balance sheets and are amortized as interest
expense over the life of the related financing, from 3 - 7 years. Such
costs are amortized over the term of the related debt agreements using the
straight line method, which approximates that of the effective interest
method.
Deferred financing costs totaled $500,000 as of June 30, 2004 (net of
accumulated amortization of $114,000). Amortization of deferred financing
costs for the six months ended June 30, 2004 was $65,000 compared to
$112,000 for the same period last year. Amortization of deferred financing
costs is recorded as interest expense. During the quarter ended June 30,
2004, $628,000 of deferred financing costs was written off in connection
with the refinancing of the Senior Notes. (See Note 4)
(6) LITIGATION:
The Company is, from time to time, a party to litigation arising in the
normal course of its business, including claims for uninsured personal
injury and property damage incurred in connection with its same-day
delivery operations. In connection therewith, the Company has recorded
reserves of $885,000 as of June 30, 2004 and December 31, 2003.
Also from time to time, federal and state authorities have sought to assert
that independent contractors in the transportation industry, including
those utilized by CD&L, are employees rather than independent contractors.
The Company believes that the independent contractors that it utilizes are
not employees under existing interpretations of federal and state laws.
However, federal and state authorities have and may continue to challenge
this position. Further, laws and regulations, including tax laws, and the
interpretations of those laws and regulations, may change.
Management believes that none of these actions, including the actions
described above, will have a material adverse effect on the consolidated
financial position or results of operations of the Company.
(7) NET INCOME PER SHARE:
Basic net income per share represents net income divided by the weighted
average shares outstanding. Diluted net income per share represents net
income divided by the weighted average shares outstanding adjusted for the
incremental dilution of potentially dilutive common shares.
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows (in thousands)-
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2004 2003 2004 2003
------------ --------- ------------ ----------
Basic weighted average
common shares outstanding 7,659 7,659 7,659 7,659
Effect of dilutive securities:
Stock options and warrants 974 506 777 508
Convertible preferred stock 3,937 - 1,968 -
------------ --------- ------------ ----------
Diluted weighted average common shares
Outstanding 12,570 8,165 10,404 8,167
============ ========= ============ ==========
10
The following potentially dilutive common shares were excluded from the
computation of diluted net income per share because the exercise or
conversion price was greater than the average market price of common shares
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------ ------------ ------------
Stock options and warrants 1,760 1,939 1,762 1,907
Seller financed convertible notes 213 431 220 431
Subordinated convertible debentures 5,905 - 2,953 -
(8) 2004 ACQUISITION:
On March 1, 2004, the Company consummated a transaction providing for the
repurchase of certain Indiana-based assets and liabilities sold to First
Choice in June 2001. The acquisition included the release of certain
non-compete agreements. Consideration for the repurchase included
cancellation of a certain note receivable owed by First Choice of
approximately $1.6 million plus a three-year contingent earn-out based on
future net revenue generated by the accounts repurchased. The majority of
the purchase price of the Indiana acquisition on March 1, 2004 is related
to the value of the customer list and is included as an intangible asset in
the June 30, 2004 consolidated balance sheet. This asset is being amortized
over 5 years.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Company is provided a "safe harbor" for forward-looking statements
contained in this report by the Private Securities Litigation Reform Act of
1995. The Company may discuss forward-looking information in this report
such as its expectations for future performance, growth and acquisition
strategies, liquidity and capital needs and its future prospects. Actual
results may not necessarily develop as the Company anticipates due to many
factors including, but not limited to, the timing of certain transactions,
unexpected expenses encountered, the effect of economic and market
conditions, the impact of competition and the factors listed in the
Company's 2003 Report on Form 10-K and other SEC filings. Because of these
and other reasons, the Company's actual results may vary materially from
management's current expectations.
OVERVIEW
The condensed consolidated financial statements of the Company including
all related notes, which appear elsewhere in this report, should be read in
conjunction with this discussion of the Company's results of operations and
its liquidity and capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On
an ongoing basis, the Company evaluates its estimates, including those
related to accounts and notes receivable, intangible assets, income taxes
and contingencies. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
11
The Company believes the following critical accounting policies reflect
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts and notes receivable
for estimated losses resulting from the inability of its customers and
debtors to make payments when due or within a reasonable period of time
thereafter. The Company estimates allowances for doubtful accounts and
notes receivable by evaluating past due aging trends, analyzing customer
payment histories and assessing market conditions relating to its
customers' operations and financial condition. Such allowances are
developed principally for specific customers. If the financial condition of
the Company's customers and debtors were to deteriorate, resulting in an
impairment of their ability to make required payments, additional
allowances may be required.
GOODWILL
The value of the Company's goodwill is significant relative to total assets
and stockholders' equity. The Company reviews goodwill for impairment on at
least an annual basis using several fair-value based tests, which include,
among others, a discounted cash flow and terminal value computation. The
discounted cash flow and terminal value computation is based on
management's estimates of future operations. Changes in business conditions
could materially impact management's estimates of future operations and
this could result in an impairment of goodwill. Such impairment, if any,
could have a significant impact on the Company's consolidated operations
and financial condition. Examples of changes in business conditions
include, but are not limited to, bankruptcy or loss of a significant
customer, a significant adverse change in regulatory factors, a loss of key
personnel, increased levels of competition from companies with greater
financial resources than the Company and margin erosion caused by the
Company's inability to increase prices to its customers at the same rate
that its 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. The deductible for employee health medical costs is $150,000 per
loss. Effective July 1, 2003, automobile liability coverage is maintained
for covered vehicles through a fully-insured indemnity program with no
deductible. 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.
12
RESULTS OF OPERATIONS
INCOME AND EXPENSE AS A PERCENTAGE OF REVENUE
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2004 2003 2004 2003
---------------- -------------- ------------- --------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross profit 19.0% 18.9% 18.8% 18.5%
Selling, general and
administrative expenses 16.2% 16.2% 16.2% 16.2%
Depreciation and amortization 0.6% 0.5% 0.5% 0.5%
Other expense (income), net 1.3% (0.2%) 0.6% (1.4%)
Interest expense 0.9% 1.6% 1.1% 1.5%
Income before provision for income
taxes 0.0% 0.9% 0.3% 1.7%
Net income 0.0% 0.5% 0.2% 1.0%
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2003
Revenue for the six months ended June 30, 2004 increased by $14.5 million,
or 17.9%, to $95.7 million from $81.2 million for the six months ended June
30, 2003. The increase was due to new customers as well as a higher volume
of business from existing customers. The revenue growth reflects the launch
of our nationwide business development program and our ability to expand
into new markets with our existing customer base.
Cost of revenue increased by $11.6 million, or 17.5%, to $77.8 million for
the six months ended June 30, 2004 from $66.2 million for the six months
ended June 30, 2003. Cost of revenue for the six months ended June 30, 2004
represented 81.2% of revenues as compared to 81.5% for the same period in
2003. The decrease in cost of revenue as a percent of revenue was due
primarily to insurance and claims expense which improved by 100 basis
points, partially offset by a 70 basis point increase in all other direct
delivery costs.
Selling, general and administrative expenses ("SG&A") increased by $2.4
million, or 18.3%, to $15.5 million for the six months ended June 30, 2004
from $13.1 million for the same period in 2003. The increase in SG&A was
primarily due to a $1.0 million increase in compensation expense as a
result of new hires and higher incentive compensation. All other increases
including rent, travel and entertainment, bad debt and computer related
costs totaled $1.4 million, net of $0.3 million savings in insurance. As a
percentage of revenue, SG&A remained unchanged at 16.2% for the six months
ended June 30, 2004 and 2003.
Depreciation and amortization increased by $0.1 million to $0.5 million or
21.7% of revenue for the six months ended June 30, 2004 from $0.4 million
for the same period in 2003.
13
Other expense, net, increased by $1.8 million to $0.6 million for the six
months ended June 30, 2004 from other income, net, of $ 1.2 million for the
same period in 2003. The 2004 year to date expense of $0.6 million was due
to the write-off of deferred financing costs and original issue discount
related to the original Senior Debt which was restructured on April 14,
2004. The Company recorded a gain included in other income, net, of $1.3
million during the first quarter of 2003 as a result of the exchange of the
Sureway note receivable. Refer to the 2003 Form 10-K for further
discussion.
Interest expense decreased by $0.2 million to $1.0 million for the six
months ended June 30, 2004 from $1.2 million for the same period in 2003.
This was due to the debt restructuring. (See Note - 4)
As a result of the factors discussed above, income before provision for
income taxes decreased by $1.1 million to $0.3 million for the six months
ended June 30, 2004 from $1.4 million for the six months ended June 30,
2003.
Provision for income taxes decreased by $0.5 million to $0.1 million for
the six months ended June 30, 2004 as compared to $0.6 million for the same
period in 2003. This was due to the drop in income before provision for
income taxes discussed above. The effective tax rate for both periods was
40%.
Net income declined by $0.6 million to $0.2 million for the six months
ended June 30, 2004 as compared to $0.8 million for the same period in
2003. This was due to the factors discussed above.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 2003
Revenue for the three months ended June 30, 2004 increased by $8.4 million,
or 20.5%, to $49.3 million from $40.9 million for the three months ended
June 30, 2003. The increase was due to an increase in volume from new and
existing customers. The revenue growth reflected the launch of the
Company's nationwide business development program and its ability to expand
into new markets with its existing customer base.
Cost of revenue increased by $6.8 million, or 20.3%, to $39.9 million for
the three months ended June 30, 2004 from $33.1 million for the three
months ended June 30, 2003. Cost of revenue for the three months ended June
30, 2004 represented 81.0% of revenue as compared to 81.1% for the same
period in 2003. The decrease in cost of revenue as a percent of revenue was
due primarily to insurance and claims costs which improved by 90 basis
points, partially offset by a 100 basis point increase in all other direct
delivery costs.
SG&A increased by $1.4 million, or 21.1%, to $8.0 million for the three
months ended June 30, 2004 from $6.6 million for the same period in 2003.
The increase in SG&A was primarily due to a $0.6 million increase in
compensation expense as a result of new hires and higher incentive
compensation. All other increases including rent, travel and entertainment,
bad debt and computer related costs totaled $1.0 million, net of $0.2
million savings in insurance. Stated as a percentage of revenue, SG&A
remained unchanged at 16.2% for the three months ended June 30, 2004 and
2003.
Depreciation and amortization increased by $0.1 million, or 45.0%, to $0.3
million for the three months ended June 30, 2004 from $0.2 million for the
same period in 2003.
Other expense, net, increased by $0.7 million to $0.6 million for the three
months ended June 30, 2004 from the other income, net, of $.1 million for
the same period in 2003. The expense of $0.6 million was due to the
write-off of deferred financing costs and original issue discount related
to the original Senior Debt which was restructured on April 14, 2004. (See
Note 4)
Interest expense decreased by $0.1 million to $0.5 million for the three
months ended June 30, 2004 as compared to $0.6 million for the same period
last year.
14
As a result of the factors discussed above, income before provision for
income taxes decreased by $0.4 million to $0.0 million, for the three
months ended June 30, 2004, as compared to the same period in 2003.
Provision for income taxes decreased by $0.1 million to $0.0 million for
the three months ended June 30, 2004, as compared to $0.1 million for the
same period in 2003. This was due to the decrease in income before
provision for income taxes discussed above. The effective rate for both
periods was 40.0%.
Net income decreased by $0.2 million to net income of $0.0 million for the
three months ended June 30, 2004 as compared to net income of $0.2 million
for the same period in 2003. This was due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
2004 RESTRUCTURING OF SENIOR NOTES DEBT
At March 31, 2004, the Company was indebted to Paribas in the sum of
$11,000,000 pursuant to a subordinated note bearing interest at 12% per
annum (see Senior Notes in Note 4). On April 14, 2004, an agreement was
reached among the Company, Paribas and certain members of CD&L management
and others ("Investors") as to the financial restructuring of the Senior
Notes. Paribas agreed to convert a portion of its existing debt due from
CD&L into equity and to modify the terms of its subordinated note if the
Investors purchased a portion of the note and accepted similar
modifications.
The following table summarizes the Company's long-term debt obligations as
of June 30, 2004:
LONG-TERM DEBT PAYMENTS DUE BY PERIOD (IN THOUSANDS)
---------------------------------------------------------------------------------------
2004 2005 2006 2007 2008-THEREAFTER TOTAL
---- ---- ---- ---- --------------- -----
Long-term debt $231 $486 $520 $526 $8,772 $10,535
Capital leases $2 $2 $2 $- $- $6
Operating leases -
(Primarily for facilities) $3,615 $3,031 $2,280 $1,228 $660 $10,814
The Company's working capital increased by $2,304,000 from $1,807,000 as of
December 31, 2003 to $4,111,000 as of June 30, 2004. Cash and cash
equivalents increased by $601,000 to $2,298,000 as of June 30, 2004. Cash
of $2,010,000 was provided by operations, while $208,000 was used by net
investing activities and $1,201,000 was used in net financing activities.
Capital expenditures amounted to $211,000 and $153,000 for the six months
ended June 30, 2004 and 2003, 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 June 30, 2004) and LIBOR based loans at the
bank's LIBOR, as defined, plus 225 basis points (3.62% at June 30, 2004).
Credit availability is based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15,000,000 and is secured by
substantially all of the assets, including certain cash balances, accounts
receivable, equipment, leasehold improvements and general intangibles of
the Company and its subsidiaries. During the six months ended June 30,
2004, the maximum borrowings outstanding under the Fleet Facility were
approximately $6,482,000 and the outstanding borrowings as of June 30, 2004
were approximately $5,220,000. As of June 30, 2004, the Company had total
cash on hand and borrowing availability of $4,574,000 under the Fleet
Facility, after adjusting for restrictions related to outstanding standby
letters of credit of $6,515,000 and minimum availability requirements.
15
Under the terms of the Fleet Facility, the Company is required to maintain
certain financial ratios and comply with other financial conditions. The
Fleet Facility also prohibits the Company from incurring certain additional
indebtedness, limits certain investments, advances or loans and restricts
substantial asset sales, capital expenditures and cash dividends. The
Company was in compliance with its debt covenants, as amended, as of
June 30, 2004.
The Company's risk of incurring uninsured losses has increased in 2004 as a
result of increased deductibles retained by the Company in order to reduce
premiums in conjunction with the renewal of certain insurance policies in
2004. There can be no assurances that the Company's risk management
policies and procedures will minimize future uninsured losses or that a
material increase in frequency or severity of uninsured losses will not
occur and adversely impact the Company's future consolidated financial
results.
The Company has an accumulated deficit of ($6,969,000) as of June 30, 2004.
There can be no assurances that the Company's lenders will agree to waive
any future covenant violations, if any, continue to renegotiate and modify
the terms of their loans, or further extend the maturity date, should it
become necessary to do so. Further, there can be no assurances that the
Company will be able to meet its revenue, cost or income projections, upon
which the debt covenants are based.
Management believes that cash flows from operations and its borrowing
capacity, after the debt modifications referred to above, are sufficient to
support the Company's operations and general business and capital
requirements for at least the next twelve months. Such conclusions are
predicated upon sufficient cash flow from operations and the continued
availability of a revolving credit facility. The risks associated with cash
flow from operations are mitigated by the Company's low gross profit
margin. Unless extraordinary, decreases in revenue should be accompanied by
corresponding decreases in costs, resulting in minimal impact to liquidity.
The risks associated with the revolving credit facility are as discussed
above.
INFLATION
While inflation has not had a material impact on the Company's results of
operations for the periods presented herein, recent fluctuations in fuel
prices can and do affect the Company's operating costs.
16
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the effect of changing interest rates. At
June 30, 2004, the Company's debt consisted of approximately $8.0
million of fixed rate debt with a weighted average interest rate of
9.0% and $7.8 million of variable rate debt with a weighted average
interest rate of 5.2%. The variable rate debt consists of
seller-financed notes with an interest rate of prime plus 200 basis
points with a minimum rate of 7.0% and maximum rate of 9.0% and
borrowings of revolving line of credit debt. If interest rates on
variable rate debt were to increase by 52 basis points (one-tenth of
the rate at June 30, 2004), the net impact to the Company's results of
operations and cash flows for the six month period ended June 30, 2004
would be a decrease of income before provision for income taxes and
cash flows from operating activities of approximately $20,000. Maximum
borrowings of revolving line of credit debt during the six months ended
June 30, 2004 were $6.5 million.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the Company's
most recently completed fiscal quarter (the Company's fourth fiscal
quarter in the case of an annual report) covered by this report,
the Company carried out an evaluation, with the participation of
the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-15. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the Securities
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting. There have
been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter to
which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Section 302 Certification of Albert W. Van Ness, Jr.
31.2 Section 302 Certification of Russell J. Reardon
32.1 Certification of Albert W. Van Ness, Jr. Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Russell J. Reardon Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed during the
second quarter of 2004.
o Report on Form 8-K filed on April 15, 2004 concerning the
April 15, 2004 press release announcing fiscal year 2003
earnings.
o Report on Form 8-K filed on April 16, 2004, concerning
the April 16, 2004 press release announcing the debt
restructuring.
o Report on Form 8-K filed on May 24, 2004 concerning the
May 20, 2004 press release announcing first quarter
earnings for the 2004 fiscal year.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 16, 2004 CD&L, INC.
By: \s\ Russell J. Reardon
----------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
19