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, 2005
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_
Indicate by check mark whether the Registrant is a shell company (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 14, 2005 was 10,012,479.
1
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2005
INDEX
PAGE
----
PART I - Financial Information
ITEM 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited)
and December 31, 2004 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2005 and 2004 (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 5 - Other Information 19
ITEM 6 - Exhibits 19
SIGNATURE 20
CERTIFICATIONS 21
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
September 30, December 31,
2005 2004
------------------ ------------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,112 $617
Accounts receivable, net 26,122 21,548
Prepaid expenses and other current assets 5,340 4,854
------------------ ------------------
Total current assets 32,574 27,019
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,640 1,627
GOODWILL, net 11,531 11,531
INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net
1,425 1,737
OTHER ASSETS 1,797 828
------------------ ------------------
Total assets $48,967 $42,742
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $7,708 $4,809
Current maturities of long-term debt 3,178 487
Accounts payable, accrued liabilities and bank
overdrafts 15,125 13,660
------------------ ------------------
Total current liabilities 26,011 18,956
LONG-TERM DEBT, net of current maturities 6,792 9,812
OTHER LONG-TERM LIABILITIES 1,667 1,370
------------------ ------------------
Total liabilities 34,470 30,138
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares authorized; 393,701 shares
issued at September 30, 2005 and December 31, 2004 4,000 4,000
Common stock, $.001 par value; 30,000,000 shares
authorized; 9,385,678 shares issued at September 30, 2005 9 9
and December 31, 2004
Additional paid-in capital 14,320 14,320
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (3,670) (5,563)
------------------ ------------------
Total stockholders' equity 14,497 12,604
------------------ ------------------
Total liabilities and stockholders' equity $48,967 $42,742
================== ==================
See accompanying notes to condensed consolidated financial statements.
3
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
--------------- ------------- ------------- ---------------
Revenue $57,135 $49,705 $163,696 $145,444
Cost of revenue 46,077 40,338 131,490 118,116
--------------- ------------- ------------- ---------------
Gross profit 11,058 9,367 32,206 27,328
--------------- ------------- ------------- ---------------
Costs and Expenses:
Selling, general and
administrative expenses 9,288 7,863 27,257 23,397
Depreciation and amortization 274 272 824 767
Other (income) expense, net (20) (11) (30) 601
Interest expense 393 423 1,149 1,447
--------------- ------------- ------------- ---------------
Total Costs and Expenses 9,935 8,547 29,200 26,212
--------------- ------------- ------------- ---------------
Income before provision for income taxes 1,123 820 3,006 1,116
Provision for income taxes 283 328 1,112 446
--------------- ------------- ------------- ---------------
Net income $840 $492 $1,894 $670
=============== ============= ============= ===============
Net income per share (Note 6):
Basic $.09 $.06 $.20 $.09
=============== ============= ============= ===============
Diluted $.05 $.03 $.11 $.05
=============== ============= ============= ===============
Basic weighted average common
shares outstanding 9,356 7,659 9,356 7,659
=============== ============= ============= ===============
Diluted weighted average common
shares outstanding 20,288 18,336 20,263 13,048
=============== ============= ============= ===============
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,
--------------------------------
2005 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,894 $670
Adjustments to reconcile net income to net cash used in operating
activities -
Gain on disposal of equipment and leasehold improvements (16) (16)
Depreciation and amortization, including amortization of deferred
financing costs 896 905
Deferred financing charge/original issue discount (OID) write-off - 628
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net (4,574) (1,824)
Prepaid expenses and other current assets (486) 1,195
Other assets (969) (389)
(Decrease) increase in -
Accounts payable, accrued liabilities and bank overdrafts 1,465 (1,514)
Other long-term liabilities 297 (29)
-------------- --------------
Net cash used in operating activities (1,493) (374)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 32 21
Additions to equipment and leasehold improvements (614) (383)
-------------- --------------
Net cash used in investing activities (582) (362)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net of repayments 2,899 1,096
Repayments of long-term debt (329) (1,330)
Proceeds from long-term debt - 1,000
Deferred financing costs - (510)
-------------- --------------
Net cash provided by financing activities 2,570 256
-------------- --------------
Net increase (decrease) in cash and cash equivalents 495 (480)
CASH AND CASH EQUIVALENTS, beginning of period 617 1,697
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $1,112 $1,217
============== ==============
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, 2004 has been
derived from the audited financial statements at that date. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended
September 30, 2005 are not necessarily indicative of the results that
may be expected for any other interim period or for the year ending
December 31, 2005. 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,
2004.
(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 Company will be
adopting SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)") during
the first quarter of 2006. At that time, compensation expense related
to the Company's stock-based employee compensation plans will be
recorded over the service period in the financial statements, as
required by SFAS 123(R).
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, 2005 and
2004:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
Risk-free interest rate 3.90% 4.41% 3.86% 4.14%
Volatility factor 46% 82% 46% 101%
Expected life 5.5 years 7.0 years 5.2 years 7.0 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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
Net income, as reported $840 $492 $1,894 $670
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (72) (109) (330) (443)
------------ ------------- ------------ ------------
Pro forma net income $768 $383 $1,564 $227
============ ============= ============ ============
Net income per share:
Basic, as reported $.09 $.06 $.20 $.09
Diluted, as reported $.05 $.03 $.11 $.05
Basic, pro forma $.08 $.05 $.17 $.03
Diluted, pro forma $.04 $.03 $.10 $.02
(3) SHORT-TERM BORROWINGS:
At September 30, 2005, short-term borrowings totaled $7,708,000
consisting of a line of credit balance of $6,528,000 and $1,180,000 of
outstanding borrowings related to the insurance financing arrangements
discussed below. At September 30, 2004, short-term borrowings totaled
$6,863,000 consisting of a line of credit balance of $5,785,000 and
$1,078,000 of outstanding borrowings related to the insurance financing
arrangements entered into in 2004.
As of June 27, 2002, CD&L and Summit Business Capital Corporation,
doing business as Fleet Capital - Business Finance Division ("Summit"),
entered into an agreement establishing a revolving credit facility (the
"Fleet Facility") of $15,000,000. The Fleet Facility, which was due to
expire on June 27, 2005 but was extended through December 31, 2005,
provides CD&L with standby letters of credit, prime rate based loans at
the bank's prime rate, as defined, plus 25 basis points (7.0% at
September 30, 2005) and LIBOR based loans at the bank's LIBOR, as
defined, plus 225 basis points. The Company is in negotiations for an
extension or replacement of the Fleet Facility on a long-term basis.
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. Maximum
borrowings outstanding under the Fleet Facility during the nine months
ended September 30, 2005 were $7,420,000 and the outstanding borrowings
as of September 30, 2005 were $6,528,000. As of September 30, 2005, the
Company had total cash on hand and borrowing availability of $4,817,000
under the Fleet Facility, after adjusting for restrictions related to
outstanding standby letters of credit of $4,582,000 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 September 30, 2005.
7
Insurance Financing Agreements -
In connection with the renewal of certain of the Company's insurance
policies, CD&L entered into an agreement to finance annual insurance
premiums. A total of $1,676,000 was financed through this arrangement
as of July 30, 2005. Monthly payments, including interest, amount to
$171,000. The interest rate is 4.75% and the note matures in May 2006.
The related annual insurance premiums were paid to the various
insurance companies at the beginning of each policy year. The
outstanding debt of $1,180,000 as of September 30, 2005 is included in
short-term borrowings. The corresponding prepaid insurance has been
recorded in prepaid expenses and other current assets.
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 were subordinate to all senior
debt including the Company's Fleet Facility. For a description of the
Fleet Facility, see "Liquidity and Capital Resources". 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 $11,000,000 of principal on the
Senior Notes. On April 14, 2004, an agreement was reached among the
Company, BNP Paribas ("Paribas"), Exeter Venture Lenders, L.P. ("Exeter
Venture"), and Exeter Capital Partners IV, L.P. ("Exeter Capital") and
together with Exeter Venture and Paribas (the "Original Note holders")
and certain members of CD&L management and others (the "Investors") as
to the financial restructuring of the Senior Notes. The Original Note
holders agreed to convert a portion of the existing debt due from CD&L
into equity and to modify the terms of the Senior Notes if the
Investors purchased a portion of the note and accepted similar
modifications. The nature of the restructuring was as follows:
(a) The Original Note holders exchanged Senior Notes in the
aggregate principal amount of $4,000,000 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 $4,000,000. 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 average closing price for the Company's
common stock for the 5 days prior to the closing. Holders of
the Preferred Stock have the right to elect two directors.
(b) The Original Note holders and the Company amended the terms of
the remaining $7,000,000 principal balance of the Senior
Notes, and then exchanged the amended notes for the new 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 $3,000,000 and the Series B
Convertible Subordinated Notes ("Series B Convertible Notes")
in the principal amount of $4,000,000 (collectively, the
"Convertible Notes"). The loan agreement that governed the
Senior Notes 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. The principal amount of the Convertible Notes 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. As the interest on the Convertible Notes increases
over the term of the notes, the Company records the associated
interest expense on a straight-line basis using a blended rate
of 10.71%, giving rise to accrued interest over the early term
of the Convertible Notes. 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 common stock for the 5 days
prior to the closing, and $2.032 for the Series B Convertible
Notes).
8
Subsequently, on October 31, 2005, the Company retired the
Series B Convertible Notes that were issued to Paribas, Exeter
Capital and Exeter Venture. The principal amount of the Series
B Convertible Notes totaled $4,000,000 as of that date. See
Note 8 - Subsequent Event.
(c) The Investors purchased the Series A Convertible Notes from
the Original Note holders for a price of $3,000,000.
(d) The Company issued an additional $1,000,000 of Series A
Convertible Notes to the Investors for an additional payment
of $1,000,000, the proceeds of which were used to reduce
short-term debt.
(e) The Investors, the Original Note holders 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
may be registered for resale with the Securities and Exchange
Commission (the "SEC"). Subsequently, on August 2, 2005, the
Company filed a registration statement to register 15,527,579
shares for resale on Form S-3 with the SEC. The registration
statement was declared effective on August 11, 2005.
The Company cannot be compelled to redeem the Preferred Stock for cash
at any time.
As a result of the debt restructuring described above, the Company has
taken a charge of $628,000 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 of the notes.
Costs incurred relative to the aforementioned transactions amounted to
approximately $592,000. Of this amount, $420,000 has been accounted for
as deferred financing costs and is being amortized over the term of the
new financing agreements. The remaining $172,000 has been accounted for
as a reduction of additional paid-in capital. These amounts have been
allocated based on the proportion of debt to equity raised in the
aforementioned transactions.
Long-term debt consists of the following (in thousands) -
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------------ -----------------
Series A Convertible Subordinated Notes $4,000 $4,000
Series B Convertible Subordinated Notes 4,000 4,000
Capital lease obligations due through July 2007 with
interest at rates ranging from 8.0% to 11.5% and
collateralized by the related property. 3 5
Seller-financed debt on acquisitions, payable in monthly
installments through May 2009. Interest is payable at
rates ranging between 7.0% and 9.0%. 1,967 2,294
------------------ -----------------
9,970 10,299
Less - Current maturities (3,178) (487)
------------------ -----------------
$6,792 $9,812
================== =================
9
(5) 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 $730,000 and $774,000 as of September 30, 2005 and December
31, 2004, 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.
(6) 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2005 2004 2005 2004
------------ ---------- ------------ -----------
Basic weighted average
common shares outstanding 9,356 7,659 9,356 7,659
Effect of dilutive securities:
Stock options and warrants 946 835 1,016 796
Seller financed convertible notes 143 - 48 -
Convertible preferred stock 3,937 3,937 3,937 2,625
Subordinated convertible debentures 5,906 5,905 5,906 1,968
------------ ---------- ------------ -----------
Diluted weighted average common shares
outstanding 20,288 18,336 20,263 13,048
============ ========== ============ ===========
10
A reconciliation of net income as reported to net income as adjusted
for the effect of dilutive securities follows (in thousands)-
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2005 2004 2005 2004
------------ ---------- ------------ -----------
Net income, as reported $840 $492 $1,894 $670
Effect of dilutive securities:
Interest on seller financed convertible notes 12 - 12 -
Interest on subordinated convertible debentures 128 128 385 43
------------ ---------- ------------ -----------
Net income, as adjusted for the effect of
dilutive securities $980 $620 $2,291 $713
============ ========== ============ ===========
The following potentially dilutive common shares were excluded from the
computation of diluted net income per share because the exercise price
was greater than the average market price of common shares or the
assumed conversion would have increased net income per share (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -----------------------------
2005 2004 2005 2004
-------------- ------------ ------------ ------------
Stock options and warrants 2,315 1,790 1,529 1,771
Seller financed convertible notes 25 205 129 215
Subordinated convertible debentures - - - 1,968
(7) PROVISION FOR INCOME TAXES:
The provision for income taxes for the three and nine month periods
ended September 30, 2005 has been reduced by federal income tax refunds
received in the third quarter of 2005 of approximately $301,000 related
to our 2002 and 2003 federal income tax filings, which had not been
accrued in those periods.
(8) SUBSEQUENT EVENT:
On October 31, 2005, the Company retired the Series B Convertible Notes
that were issued to Paribas, Exeter Capital and Exeter Venture in
connection with the Company's financial restructuring on April 14,
2004. The principal amount of the Series B Convertible Notes was
$4,000,000 as of the retirement date. The portion of the Series B
Convertible Notes held by Paribas was satisfied by a cash payment of
$2,666,667 principal and $40,000 of accrued interest through October
31, 2005. As such, the $2,666,667 principal amount has been included in
current maturities of long-term debt in the accompanying condensed
consolidated balance sheet. Exeter Venture and Exeter Capital
(collectively "Exeter") held the remaining $1,333,333 of the Series B
Convertible Notes. Exeter exercised their right of conversion of their
notes (at the conversion price of $2.032 per share) and as such, the
Company issued to Exeter a total of 656,168 shares of the Company's
common stock. In addition, a cash payment of $20,000 was made to Exeter
relating to accrued interest through October 31, 2005. The $1,333,333
principal amount related to Exeter remains classified as long-term debt
in the accompanying condensed consolidated balance sheet.
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 2004 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 Company is one of the leading national full-service providers of
customized, same-day, time-critical, delivery services to a wide range
of commercial, industrial and retail customers. Our services are
provided throughout the United States. The Company currently operates
in a single-business segment and thus additional disclosures under
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information, are not required.
We offer the following delivery services:
o Rush delivery services, typically consisting of delivering
time-sensitive packages, such as critical parts, emergency
medical devices and legal and financial documents from
point-to-point on an as-needed basis;
o Distribution services, providing same-day delivery for many
pharmaceutical and office supply wholesalers, from
manufacturers to retailers and inter-branch distribution of
financial documents in a commingled system;
o Facilities management, including providing and supervising
mailroom personnel, mail and package sorting, internal
delivery and outside local messenger services; and
o Dedicated contract logistics, providing a comprehensive
solution to major corporations that want the control,
flexibility and image of an in-house fleet with the economic
benefits of outsourcing.
Our revenue consists primarily of charges to our customers for delivery
services. Our customers are billed as the services are rendered, mostly
on a weekly basis. Recurring charges related to facilities management
or contract logistics services are typically billed on a monthly basis.
The Company's recent revenue growth has been attributable to expansion
of our current customer base into new geographical areas. We have
always had a strong presence in the Northeast and Southeast regions of
the country. As a result of the Company's nationwide business
development program, we have doubled our revenue volume on the West
coast during the nine months ended September 30, 2005 compared to the
same period for 2004. Our goal for the next year is to focus on
expanding our footprint even further and gain a strategic presence in
the central U.S.
Cost of revenue consists primarily of independent contractor delivery
costs, other direct pick-up and delivery costs and the costs of
dispatching rush demand messengers. In addition, the cost of fuel is
included in cost of revenue. With the recent hurricanes in the
Southeast region, fuel prices spiked at the end of the third quarter.
While this did not have a material impact on the Company's third
quarter results, the increase in fuel prices may have an impact on our
future results.
12
Selling, general and administrative expense ("SG&A") includes the costs
to support the Company's sales effort and the expense of maintaining
facilities, information systems, financial, legal and other
administrative functions. While SG&A costs are not directly correlated
with revenue volume, we have experienced increased rent charges and
higher travel costs as a result of opening new facilities to facilitate
our recent expansion into new geographical locations. In addition, the
Company has increased its sales force and facilities management
personnel significantly in the West coast to manage the revenue growth
from 2005 along with the anticipated growth of the region going
forward.
The Company continues to invest in its infrastructure and is currently
in the development stage of implementing a state-of-the-art,
web-enabled, business information management system. It will provide
the scalability, availability and security required to manage the
future growth of driver, route, tracking and reporting components of
the Company's ground distribution services.
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 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. For a discussion of the Company's critical accounting
policies, see the Company's Annual Report on Form 10-K for 2004.
13
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,
---------------------------------- ---------------------------------
2005 2004 2005 2004
---------------- -------------- ------------- ----------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross profit 19.4% 18.8% 19.7% 18.8%
Selling, general and
administrative expenses 16.3% 15.8% 16.7% 16.1%
Depreciation and amortization 0.4% 0.5% 0.5% 0.5%
Other (income) expense, net (0.0%) (0.0%) (0.0)% 0.4%
Interest expense 0.7% 0.9% 0.7% 1.0%
Income before provision for income
taxes 2.0% 1.6% 1.8% 0.8%
Net income 1.5% 1.0% 1.2% 0.5%
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
Revenue for the nine months ended September 30, 2005 increased by
$18,252,000, or 12.5%, to $163,696,000 from $145,444,000 for the nine
months ended September 30, 2004. The majority of this increase relates
to expansion of our current customer base into new geographic
locations, primarily in the West and Southeast operating regions.
Cost of revenue increased by $13,374,000, or 11.3%, to $131,490,000 for
the nine months ended September 30, 2005 from $118,116,000 for the nine
months ended September 30, 2004. Cost of revenue for the nine months
ended September 30, 2005 represented 80.3% of revenues as compared to
81.2% for the same period in 2004. The improved margin was due
primarily to increased route optimization, as new revenue provided
higher density in existing route structures. In addition, there was a
reduction in insurance expense related to reimbursements from third
parties totaling $654,000. Of this amount, $300,000 related to an
agreement with Global Delivery Systems LLC ("GDS") to reimburse
insurance expenses that the Company paid on behalf of GDS (see Related
Party Transactions in Item 5 of this quarterly report). The increase in
margin was offset partially by a $799,000 increase in claims as
compared to the same period in 2004.
14
Selling, general and administrative ("SG&A") increased by $3,860,000,
or 16.5%, to $27,257,000 for the nine months ended September 30, 2005
from $23,397,000 for the same period in 2004. Stated as a percentage of
revenue, SG&A was 16.7% for the nine months ended September 30, 2005
and 16.1% for the nine months ended September 30, 2004. The increase in
SG&A was primarily due to the following:
Increase from 2004
(9 months)
---------------------
Compensation $1,830,000 18.4%
Rent 705,000 19.3%
Consulting Fees 414,000 120.4%
Travel and Entertainment 332,000 30.5%
All other net increases including payroll taxes, property, liability
and health insurance, repairs and maintenance, communications, medical
claims, personnel recruiting costs and computer related costs totaled
$1,434,000, partially offset by a $855,000 reduction in the provision
for doubtful accounts based on the historical effectiveness of our
receivables management.
Depreciation and amortization increased by $57,000 to $824,000 as
compared to $767,000 for the same period last year. This increase was
due to higher capital expenditures in 2005.
Other income, net, increased by $631,000 to $30,000 of other income,
net for the nine months ended September 30, 2005 from other expense,
net, of $601,000 for the same period in 2004. The 2004 year to date
expense of $601,000 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. Refer to the 2004 Form 10-K
for further discussion.
Interest expense decreased by $298,000 to $1,149,000 for the nine
months ended September 30, 2005 from $1,447,000 for the same period in
2004. This was primarily due to the debt restructuring in April 2004.
See Note 4 in Notes to Condensed Consolidated Financial Statements.
As a result of the factors discussed above, income before provision for
income taxes increased by $1,890,000 to $3,006,000 for the nine months
ended September 30, 2005 from $1,116,000 for the same period last year.
Provision for income taxes increased by $666,000 to $1,112,000 for the
nine months ended September 30, 2005 as compared to $446,000 for the
same period in 2004. The tax rate for the nine months ended September
30, 2005 was 37.0% as compared to 40.0% for the same period in 2004.
This reduction in the tax rate was primarily due to tax refunds
received in the third quarter totaling $301,000 which related to our
2002 and 2003 federal tax filings. Before the impact of the tax refunds
received, the effective tax rate for the nine months ended September
30, 2005 was 47%.
Net income increased by $1,224,000 to $1,894,000 for the nine months
ended September 30, 2005 as compared to $670,000 for the same period in
2004. This was due to the factors discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2004
Revenue for the three months ended September 30, 2005 increased by
$7,430,000, or 14.9%, to $57,135,000 from $49,705,000 for the three
months ended September 30, 2004. The majority of this increase relates
to expansion of our current customer base into new geographic
locations, primarily in the West and Southeast operating regions.
15
Cost of revenue increased by $5,739,000, or 14.2%, to $46,077,000 for
the three months ended September 30, 2005 from $40,338,000 for the
three months ended September 30, 2004. Cost of revenue for the three
months ended September 30, 2005 represented 80.6% of revenue as
compared to 81.2% for the same period in 2004. The decrease in cost of
revenue as a percent of revenue was primarily due to a reduction in
insurance expense related to reimbursements from third parties totaling
$654,000. Of this amount, $300,000 related to an agreement with GDS to
reimburse insurance expenses that the Company paid on behalf of GDS
(see Related Party Transactions in Item 5 of this quarterly report).
This reduction in cost of revenue was partially offset by a $414,000
increase in claims expense.
SG&A increased by $1,425,000, or 18.1%, to $9,288,000 for the three
months ended September 30, 2005 from $7,863,000 for the same period in
2004. The increase in SG&A was primarily due to the following:
Increase from 2004
(3rd quarter)
-------------------
Compensation $327,000 9.1%
Rent 261,000 20.8%
Consulting Fees 210,000 180.8%
Travel and Entertainment 175,000 50.2%
All other increases totaled $612,000 partially offset by a $160,000
decrease in allowance for doubtful account based on the historical
effectiveness of our receivables management. Stated as a percentage of
revenue, SG&A increased to 16.3% for the three months ended September
30, 2005 from 15.8% for the same period in 2004.
Depreciation and amortization increased by $2,000 to $274,000 for the
three months ended September 30, 2005 from $272,000 for the same period
last year.
Other income, net, increased by $9,000 to $20,000 for the three months
ended September 30, 2005 from other income, net of $11,000 for the same
period in 2004
Interest expense decreased by $30,000 to $393,000 for the three months
ended September 30, 2005 as compared to $423,000 for the same period
last year.
As a result of the factors discussed above, income before provision for
income taxes increased by $303,000 to $1,123,000 for the three months
ended September 30, 2005, as compared to $820,000 for the same period
in 2004.
Provision for income taxes decreased by $45,000 to $283,000 for the
three months ended September 30, 2005, as compared to $328,000 for the
same period in 2004. The tax rate for the three months ended September
30, 2005 was 25.2% as compared to 40.0% for the same period in 2004.
This decrease in the provision was primarily due to tax refunds
received in the third quarter totaling $301,000 which related to our
2002 and 2003 federal income tax filings, which had not been accrued in
those periods.
Net income increased by $348,000 to $840,000 for the three months ended
September 30, 2005 as compared to net income of $492,000 for the same
period in 2004. This was due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company was indebted to the Original Note
holders 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 between the Company, the
Original Note holders and the Investors as to the financial
restructuring of the Senior Notes. The Original Note holders agreed to
convert a portion of the existing debt due from CD&L into equity and to
modify the terms of the Senior Notes if the Investors purchased a
portion of the Senior Notes and accepted similar modifications. The
loan agreement that governed the Senior Notes 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. At September 30, 2005, long-term debt included
$4,000,000 of Series A Convertible Notes and $4,000,000 of Series B
Convertible Notes. The principal amount of the Convertible Notes 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 interest is paid quarterly. Subsequently, on
October 31, 2005, the Company retired the Series B Convertible Notes.
See Note 8 - Subsequent Event in Notes to Condensed Consolidated
Financial Statements.
16
The Company's working capital decreased by $1,500,000 from $8,063,000
as of December 31, 2004 to $6,563,000 as of September 30, 2005. Cash
and cash equivalents increased by $495,000 to $1,112,000 as of
September 30, 2005. Cash of $1,493,000 was used in operations, while
$582,000 was used in net investing activities and $2,570,000 was
provided by net financing activities. Capital expenditures amounted to
$614,000 and $383,000 for the nine months ended September 30, 2005 and
2004, respectively.
As of June 27, 2002, CD&L and Summit entered into an agreement
establishing the Fleet Facility. The Fleet Facility was due to expire
on June 27, 2005 but was extended through December 31, 2005. The
Company is in negotiations for an extension or replacement of the Fleet
Facility on a long-term basis. The Company believes the terms and
conditions will be at least as favorable as the current facility. It
provides CD&L with standby letters of credit, prime rate based loans at
the bank's prime rate, as defined, plus 25 basis points (7.0% at
September 30, 2005) and LIBOR based loans at the bank's LIBOR, as
defined, plus 225 basis points. Credit availability is based on
eligible amounts of accounts receivable, as defined, up to a maximum
amount of $15,000,000 and is collateralized by substantially all of the
assets, including certain cash balances, accounts receivable,
equipment, leasehold improvements and general intangibles of the
Company and its subsidiaries. During the nine months ended September
30, 2005, the maximum borrowings outstanding under the Fleet Facility
were approximately $7,420,000 and the outstanding borrowings as of
September 30, 2005 were approximately $6,528,000. As of September 30,
2005, the Company had total cash on hand and borrowing availability of
$4,817,000 under the Fleet Facility, after adjusting for restrictions
related to outstanding standby letters of credit of $4,582,000 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 of September 30, 2005.
The Company's risk of incurring uninsured losses 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 had an accumulated deficit of ($3,670,000) as of September
30, 2005. On numerous occasions, the Company has had to amend and
obtain waivers of the terms of its credit facilities and senior debt as
a result of covenant violations or for other reasons. On April 14,
2004, the Company restructured its senior debt and related covenants.
The restructuring included an agreement among the Company, its lenders
and certain members of CD&L management and others which improved the
Company's short-term liquidity and reduced interest expense. The
restructuring eased the financial covenants to which the Company was
subject. However, if the Company were to fail to meet such covenants in
the future, there can be no assurances that the Company's lenders would
agree to waive any future covenant violations, 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 are sufficient to support the Company's operations and general
business and capital requirements through at least September 30, 2006.
Such conclusions are predicated upon sufficient cash flows from
operations and the continued availability of a revolving credit
facility. The risks associated with cash flows 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.
17
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the effect of changing interest rates. At
September 30, 2005, the Company's debt consisted of approximately
$11,151,000 of fixed rate debt with a weighted average interest rate of
8.20% and $6,528,000 of variable rate debt with a weighted average
interest rate of 6.18%. The variable rate debt consists of borrowings
of revolving line of credit debt at the bank's prime rate plus 25 basis
points (7.0% at September 30, 2005). If interest rates on variable rate
debt were to increase by 62 basis points (one-tenth of the weighted
average interest rate at September 30, 2005), the net impact to the
Company's results of operations and cash flows for the nine months
ended September 30, 2005 would be a decrease of income before provision
for income taxes and cash flows from operating activities of
approximately $30,000. Maximum borrowings of revolving line of credit
debt during the nine months ended September 30, 2005 were $7,420,000.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the
Company's most recently completed fiscal quarter (September
30, 2005) 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. The purpose of this
evaluation is to determine whether 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 rules and forms. Based
on this evaluation and the matters discussed below, management
determined that its disclosure controls and procedures were
not effective as of September 30, 2005.
During the preparation of this Form 10-Q, the Company's
independent registered public accounting firm identified a
material weakness with respect to management's knowledge and
application of generally accepted accounting principles.
Specifically, errors were identified which related to the
Company's accounting for certain non-routine transactions,
including; gain contingencies, investment banking fees,
unsupported reserves and non-capitalization of internal
information technology costs. In light of these errors
management performed additional analyses and other
post-closing procedures to ensure that our consolidated
financial statements are prepared in accordance with generally
accepted accounting principles in the United States (U.S.
GAAP). Accordingly, management believes that the consolidated
financial statements included in this report fairly present in
all material respects our financial position, results of
operations and cash flows for the periods presented.
In order to remedy the material weakness noted above, the
Company will be enhancing its knowledge of generally accepted
accounting principles and their application to properly
account for non-routine transactions.
(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 5 - Other Information
RELATED PARTY TRANSACTIONS:
The Company has entered into a consulting agreement with one of its directors,
Thomas E. Durkin III, pursuant to which Mr. Durkin will provide consulting
services to the Company with respect to business and financial matters.
He will focus on merger and acquisition activities, including, developing
strategies, evaluating, structuring and negotiating potential transactions and
otherwise assisting the chief executive officer with respect to such matters. In
consideration for his services, the Company paid Mr. Durkin a fee of $75,000 on
or about July 1, 2005 and agreed to pay him $125 per hour for his services under
the agreement. In addition, if the chief executive officer requests Mr. Durkin
to work on a particular transaction, Mr. Durkin will become entitled to receive
upon consummation of such a transaction a success fee of at least $300,000 plus
such other amount, if any, as may be authorized by the chief executive officer
and the board or an appropriate committee thereof. The consulting agreement is
terminable on 30 days written notice.
On or about September 30, 2005, the Company entered into a settlement agreement
with Global Delivery Systems LLC, a New York limited liability company ("GDS")
arising from disputes under an Asset Purchase Agreement dated as of March 7,
2001 (the "Agreement") pursuant to which the Company sold its former
next-flight-out air delivery and related ground service business to an affiliate
of GDS. Under the Agreement, GDS had agreed to indemnify the Company from and
against certain costs and to reimburse it for certain insurance losses. The
Company asserted that it was due approximately $807,000 under the insurance
reimbursement provisions of the Agreement and GDS disagreed with the claim.
Pursuant to the Settlement Agreement, the Company and GDS have agreed that the
Company will release GDS in exchange for the sum of $300,000, to be paid to the
Company pursuant to the terms of a promissory note bearing interest at eight
percent (8%) per annum, payments of interest only due quarterly commencing
January 1, 2006 to the date of maturity, and with the balance of principal and
interest due and payable to the Company on September 30th, 2008. The Note is
secured by certain accounts receivable and insurance accounts of GDS. William
Beaury, a principal of GDS, is a 50% owner of an entity which owns approximately
6% of the outstanding common stock of the Company.
ITEM 6 - Exhibits
(a) Exhibits
10.1 Consulting Agreement, dated as of July 1, 2005, with Thomas E.
Durkin III.
31.1 Certification of Albert W. Van Ness, Jr. Pursuant to Exchange
Act Rules 13a-14(a) and 15d-14(a), 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- 14(a) and 15d-14(a), 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
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 21, 2005 CD&L, INC.
By: \s\ Russell J. Reardon
------------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
20