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 March 31, 2006 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 (I.R.S. Employer
incorporation or organization) 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934)
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |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 May 15, 2006 was 10,017,479.
1
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006
INDEX
PAGE
----
PART I - Financial Information
ITEM 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of March 31,
2006 (unaudited) and December 31, 2005 3
Condensed Consolidated Statements of Income for
the Three Months Ended March 31, 2006
and 2005 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2006
and 2005 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 3 - Quantitative and Qualitative Disclosures
about Market Risk 20
ITEM 4 - Controls and Procedures 20
PART II - Other Information
ITEM 1A - Risk Factors 21
ITEM 6 - Exhibits 21
SIGNATURE 22
CERTIFICATIONS 23
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
March 31, December 31,
2006 2005
---------- ------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 777 $ 837
Accounts receivable, net 26,991 26,376
Prepaid expenses and other current assets 3,329 4,048
-------- --------
Total current assets 31,097 31,261
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 3,449 3,438
GOODWILL, net 11,531 11,531
OTHER INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net 1,176 1,185
OTHER ASSETS 945 932
-------- --------
Total assets $ 48,198 $ 48,347
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 8,829 $ 8,921
Current maturities of long-term debt 532 552
Accounts payable, accrued liabilities and bank overdrafts 15,247 15,423
-------- --------
Total current liabilities 24,608 24,896
LONG-TERM DEBT, net of current maturities 5,154 5,292
OTHER LONG-TERM LIABILITIES 1,766 1,775
-------- --------
Total liabilities 31,528 31,963
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; 393,701 shares issued and outstanding at
March 31, 2006 and December 31, 2005 4,000 4,000
Common stock, $.001 par value; 30,000,000 shares
authorized; 10,046,846 and 10,041,846 shares issued at March
31, 2006 and December 31, 2005, respectively 10 10
Additional paid-in capital 15,689 15,592
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (2,867) (3,056)
-------- --------
Total stockholders' equity 16,670 16,384
-------- --------
Total liabilities and stockholders' equity $ 48,198 $ 48,347
======== ========
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
Ended March 31,
--------------------------
2006 2005
-------- --------
Revenue $ 60,439 $ 52,355
Cost of revenue 49,233 42,046
-------- --------
Gross profit 11,206 10,309
-------- --------
Costs and Expenses:
Selling, general, and administrative expenses 10,192 8,880
Depreciation and amortization 318 274
Other income, net (16) (1)
Interest expense 356 391
-------- --------
Total Costs and Expenses 10,850 9,544
-------- --------
Income before provision for income taxes 356 765
Provision for income taxes 167 337
-------- --------
Net income $ 189 $ 428
======== ========
Net income per share:
Basic $ .02 $ .05
======== ========
Diluted $ .01 $ .03
======== ========
Basic weighted average common shares outstanding 10,014 9,356
======== ========
Diluted weighted average common shares outstanding 19,775 20,253
======== ========
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 Three Months
Ended March 31,
------------------------
2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 189 $ 428
Adjustments to reconcile net income to net cash provided by operating
activities -
Gain on disposal of equipment and leasehold improvements (4) --
Depreciation, amortization and deferred financing amortization 336 301
Stock-based compensation expense 95 --
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net (615) 494
Prepaid expenses and other current assets 719 248
Other assets (13) (244)
Increase (decrease) in -
Accounts payable and accrued liabilities (176) 2,136
Other long-term liabilities (9) 87
------- -------
Net cash provided by operating activities 522 3,450
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 18 17
Additions to equipment and leasehold improvements (263) (106)
------- -------
Net cash used in investing activities (245) (89)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term borrowings, net (92) (2,312)
Repayments of long-term debt (158) (118)
Issuance of common stock 2 --
Deferred financing costs (89) --
------- -------
Net cash used in financing activities (337) (2,430)
------- -------
Net increase (decrease) in cash and cash equivalents (60) 931
CASH AND CASH EQUIVALENTS, beginning of period 837 617
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 777 $ 1,548
======= =======
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, 2005 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 months ended March 31, 2006
are not necessarily indicative of the results that may be expected for
any other interim period or for the year ending December 31, 2006. 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, 2005.
(2) STOCK-BASED COMPENSATION
As of March 31, 2006, the Company maintains certain stock-based
compensation plans that are described in Note 12 to the Consolidated
Financial Statements included in the Company's 2005 Annual Report on
Form 10-K. Under these plans, the Company may grant stock options to
employees and directors of the Company. The Company may grant up to a
maximum of 4,000,000 options under the Employee Stock Compensation
Program (the "ESCP") and up to a maximum of 500,000 options under the
2002 Stock Option Plan for Independent Directors (the "Director Plan").
At March 31, 2006, options available for grant under the ESCP and the
Director Plan total 2,000,000 and 251,000, respectively. The 2,000,000
options available for grant under the ESCP are subject to ratification
at the June 2006 annual stockholder meeting.
Prior to January 1, 2006, as permitted under SFAS No. 123, "Accounting
for Stock-Based Compensation," ("SFAS 123"), compensation cost for
employee and director stock options was recognized using the intrinsic
value method described in APB No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Effective January 1, 2006, the Company adopted
the fair-value recognition provisions of SFAS No. 123(R), "Share-Based
Payment," ("SFAS 123R") and Securities and Exchange Commission Staff
Accounting Bulletin No. 107. Under SFAS 123R, the fair value of options
granted is amortized over the related service period. SFAS 123R was
adopted using the modified prospective transition method; therefore,
prior periods have not been restated. Compensation expense recognized
in the three months ended March 31, 2006 includes compensation cost for
all share-based payments granted to employees and directors prior to,
but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123.
Compensation cost for any share-based payments granted subsequent to
January 1, 2006 will be based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R.
Stock options are granted with exercise prices not less than the fair
market value of the Company's common stock at the time of grant and
with an exercise term not to exceed 10 years. Generally, stock options
granted under the ESCP become exercisable in three installments over a
period of two years. Stock options granted under the Director Plan
generally become exercisable after one year. Option awards usually
provide for accelerated vesting upon retirement, death or disability.
During the three months ended March 31, 2006 and 2005, the Company
granted 0 and 100,000 options, respectively.
6
As a result of adopting SFAS 123R, our income before taxes and net
income for the three months ended March 31, 2006 are $95,000 and
$50,000 lower, respectively, than if we had continued to account for
stock-based compensation under APB 25. This resulted in a decrease in
our reported basic and diluted net income per share of $.00 and $.01,
respectively, for the three months ended March 31, 2006. Compensation
expense is recognized in the selling, general and administrative
expenses line items of the accompanying condensed consolidated
statements of income on a ratable basis over the vesting periods. These
awards have been classified as equity instruments, and as such, a
corresponding increase of $95,000 has been reflected in additional
paid-in capital in the accompanying balance sheet as of March 31, 2006.
There were no capitalized stock-based compensation costs at March 31,
2006 and 2005. As of March 31, 2006, there was $151,000 of total
unrecognized compensation cost related to non-vested stock options to
be recognized over a weighted-average period of 1.75 years.
The intrinsic values of options exercised during the three months ended
March 31, 2006 and 2005 were not significant. The total cash received
from the exercise of stock options was $2,000 and $0 for the three
months ended March 31, 2006 and 2005, respectively, and is classified
as financing cash flows in the accompanying Statements of Cash Flows.
New shares of the Company's common stock are issued upon exercise of
the options. Prior to the adoption of SFAS 123R, any tax benefits of
deductions resulting from the exercise of stock options would have been
presented as operating cash flows in the statements of cash flows. SFAS
123R requires that cash flows from tax benefits attributable to tax
deductions in excess of the compensation cost recognized for those
options (excess tax benefits) be classified as financing cash flows.
The Company did not have any significant excess tax benefits for the
three months ended March 31, 2006.
The fair value for options granted used in determining pro forma net
income below was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for the three
months ended March 31, 2005. There were no stock options granted during
the three months ended March 31, 2006.
For the Three
Months Ended
March 31,
2005
---------------------
Risk-free interest rate 3.7%
Volatility factor 46%
Expected life 4 years
Dividend yield None
The risk-free interest rate is based on reference to United States
Treasury securities with terms matching the expected term of the
subject options. The expected life of the first quarter 2005 option
grants was based on historical exercises and terminations. Due to the
insignificant number of stock option exercises during the past several
years, the Company has estimated the expected life of options granted
to be the midpoint between the average vesting term and the contractual
term. The expected volatility was based on an analysis of the
volatility of the Company's stock price using alternative historical
periods of time and alternative statistical measures of volatility
(exponential weighted moving average and the GARCH measure of
volatility). The expected dividend yield is zero.
7
Changes in outstanding options in the three months ended March 31, 2006
are as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Term (years) Value (2)
------------- ------------ -------------- --------------
Options outstanding at
December 31, 2005 4,249,000 $1.97
Granted - -
Exercised (5,000) $0.47
Canceled - -
------------
Options outstanding at March
31, 2006 4,244,000 $1.97 6.56 $3,712,000
============
Options exercisable at March
31, 2006 3,584,334 $2.06 6.19 $2,918,000
============
Options available for grant at
March 31, 2006 (1) 2,251,000
============
(1) Of this amount, 2,000,000 options are subject to ratification at the
June 2006 annual stockholder meeting.
(2) The aggregate intrinsic value has been calculated based on the
difference between the exercise price of in-the-money options versus
the Company's closing stock price as of March 31, 2006.
The table below presents the pro forma effect on net income and basic
and diluted net income per share if the Company had applied a fair
value recognition method instead of the intrinsic value method to
options granted under the Company's stock option plans for the three
months ended March 31, 2005. For purposes of this pro forma disclosure,
the value of the options is estimated using the Black-Scholes
option-pricing model and amortized to expense over the options' vesting
periods.
Three Months Ended March
31, 2005
--------------------------
Net income, as reported $428
Stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects (104)
--------------------------
Pro forma net income $324
==========================
Net income per share:
Basic, as reported $.05
Diluted, as reported $.03
Basic, pro forma $.03
Diluted, pro forma $.02
8
(3) SHORT-TERM BORROWINGS:
At March 31, 2006, short-term borrowings totaled $8,829,000 consisting
of a line of credit balance of $8,659,000 and $170,000 of outstanding
borrowings related to the insurance financing arrangements discussed
below. At December 31, 2005, short-term borrowings totaled $8,921,000
consisting of a line of credit balance of $8,080,000 and $841,000 of
outstanding borrowings related to the insurance financing arrangements
entered into in 2005.
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 which was due to expire
on June 27, 2005 but was extended through January 31, 2006, provided
CD&L with standby letters of credit, prime rate based loans at the
bank's prime rate, as defined, plus 25 basis points and LIBOR based
loans at the bank's LIBOR, as defined, plus 225 basis points. Credit
availability was based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15,000,000 and was 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.
As of January 31, 2006, CD&L and Bank of America, N.A. (successor by
merger to Fleet Capital Corporation) entered into a new agreement (the
"Bank of America Facility") which replaced the prior Fleet Facility.
The Bank of America Facility, which expires on September 30, 2008,
continues to provide CD&L with standby letters of credit, prime rate
based loans at the bank's prime rate, as defined (7.75% at March 31,
2006), and LIBOR based loans at the bank's LIBOR rate, as defined, plus
200 basis points. Credit availability is based on eligible amounts of
accounts receivable, as defined, up to a maximum amount of $20,000,000
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. The maximum borrowings outstanding under the Bank of
America Facility during the three months ended March 31, 2006 were
$9,617,000. As of March 31, 2006, the Company had total cash on hand
and borrowing availability of $5,057,000 under the Bank of America
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 Bank of America Facility, the Company is
required to maintain certain financial ratios and comply with other
financial conditions. The Bank of America 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 March 31, 2006.
Costs incurred relative to the establishment of the Bank of America
Facility amounted to approximately $89,000. This has been accounted for
as deferred financing costs and is being amortized over the term of the
new financing agreement. As of March 31, 2006, the unamortized portion
of the deferred financing costs amounted to approximately $81,000.
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
$170,000. 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 amount of $170,000 at March 31, 2006 ($841,000 at
December 31, 2005) was included in short-term borrowings. The
corresponding prepaid insurance has been recorded in prepaid expenses
and other current assets.
9
(4) LONG-TERM DEBT:
On January 29, 1999, the Company completed a $15,000,000 private
placement of the senior subordinated notes (the "Senior Notes") and
warrants 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 $11,000,000 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 ("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 notes 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 3,937,010 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 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). The Series B Convertible
Notes were subsequently extinguished on October 31, 2005, as
described below.
(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.
10
(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 (3,937,010 shares) and the
Convertible Notes (3,937,008 shares for Series A and 1,968,504
shares for Series B) would be registered for resale with the
Securities and Exchange Commission ("SEC"). Subsequently, on
August 2, 2005, the Company filed the required registration
statement and 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.
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 in paid-in capital.
These amounts have been allocated based on the proportion of debt to
equity raised in the aforementioned transactions. These amounts were
subsequently adjusted due to the extinguishment of the Series B
Convertible Notes. As of March 31, 2006, remaining costs related to
this transaction amounted to approximately $337,000. Of this amount,
$225,000 continues to be amortized as a deferred financing cost and
$112,000 remains as a reduction of additional paid-in capital.
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 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. 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 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 warrants originally issued on January 29, 1999 remain
outstanding at March 31, 2006 at an exercise price of $.001 per
share (convertible into 506,250 shares of common stock). The
warrants expire in January 2009.
11
Long-term debt consisted of the following (in thousands) -
MARCH 31, 2006 DECEMBER 31, 2005
------------------- -------------------
Series A Convertible Subordinated Notes $4,000 $4,000
Capital lease obligation due October 2007 with interest
at 5.45% and collateralized by the related property. 4 7
Seller-financed debt on acquisitions, payable in monthly
installments through May 2009, convertible into 144,788
and 155,197 shares of common stock at March 31, 2006
and December 31, 2005, respectively, at a weighted
average exercise price of $6.15 per share. Interest
is payable at rates ranging between 7.0% and 9.0%. 1,682 1,837
------------------- -------------------
5,686 5,844
Less - Current maturities (532) (552)
------------------- -------------------
$5,154 $5,292
=================== ===================
(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 $555,000 as of March 31, 2006 and December 31, 2005.
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.
12
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows
(in thousands)-
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2006 2005
------------- -------------
Basic weighted average common
shares outstanding 10,014 9,356
Effect of dilutive securities:
Stock options and warrants 1,887 1,054
Convertible preferred stock 3,937 3,937
Subordinated convertible debentures 3,937 5,906
------------- -------------
Diluted weighted average common
Shares outstanding 19,775 20,253
============= =============
A reconciliation of net income as reported to net income as adjusted
for the effect of dilutive securities follows (in thousands)-
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2006 2005
------------- -------------
Net income, as reported $189 $428
Effect of dilutive securities:
Interest on subordinated convertible
debentures, net of tax 64 129
------------- -------------
Net income, as adjusted for the effect
of dilutive securities $253 $557
============= =============
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
MARCH 31,
---------------------------------
2006 2005
--------------- --------------
Stock options and warrants 713 1,135
Seller-financed convertible notes 145 185
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements typically are identified by use of
terms such as "may," "will," "should," "plan," "expect," "believe,"
"anticipate," "estimate" and similar expressions, although some
forward-looking statements are expressed differently. Forward-looking
statements represent our management's judgment regarding future events.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance
that such expectations will prove to be correct. All statements other
than statements of historical fact included in this report regarding
our financial position, business strategy, products, services, markets,
budgets, plans, or objectives for future operations are forward-looking
statements. We cannot guarantee the accuracy of the forward-looking
statements, and you should be aware that our actual results could
differ materially from those contained in the forward-looking
statements due to a number of factors, including the statements under
"Risk Factors" and "Critical Accounting Policies" detailed in our
annual report on Form 10-K for the year ended December 31, 2005, and
other reports filed with the Securities and Exchange Commission
("SEC").
Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all other documents filed by the
Company or with respect to its securities with the SEC are available
free of charge through our website at www.cdl.net. Information on our
website does not constitute a part of this report.
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. These 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.
The Company offers 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.
Revenue consists primarily of charges to the Company's customers for
delivery services. These 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 the expansion of its current customer base into new
geographical areas. The Company has always had a strong presence in the
Northeast and Southeast regions of the country. As a result of its
nationwide business development program, the Company has increased its
revenue volume on the West coast during the first quarter of 2006 by
61% as compared to the first quarter of 2005.
14
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. The Company has experienced an
overall increase in cost of revenue as a percent of revenue during the
first quarter of 2006 compared to the first quarter of 2005. The
reduced margin was due primarily to new business start-up costs and
competitive rate pressures. Our pricing to new and existing customers
has not kept pace with our increased driver costs. The significant
increase in fuel costs has required us to pay more to attract and
retain contract drivers.
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, the Company has experienced increased rent charges
and higher travel costs as a result of opening new facilities to
facilitate its recent expansion into new geographical locations. In
addition, the Company has increased its sales force and operating
personnel significantly in the West coast to manage the recent revenue
growth 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 2005.
New Accounting Standards and Pronouncements -
In December 2004, SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123(R)") was issued. SFAS 123(R) revises SFAS 123 and supersedes
APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS
123, as originally issued in 1995, established as preferable a fair
value-based method of accounting for share-based payment transactions
with employees. However, SFAS 123 as amended permitted entities the
option of continuing to apply the intrinsic value method under APB 25
that the Company had been using, as long as the footnotes to the
financial statements disclosed what net income would have been had the
preferable fair value-based method been used. SFAS 123(R) requires that
the compensation cost relating to all share-based payment transactions,
including employee stock options, be recognized in the historical
financial statements. That cost is measured based on the fair value of
the equity or liability instrument issued and amortized over the
related service period. The Company has adopted the guidance in SFAS
123(R) effective January 1, 2006. As such, the accompanying condensed
consolidated statement of income for the three months ended March 31,
2006 includes $95,000 of compensation expense in SG&A related to the
fair value of options granted to employees and directors under the
Company's stock-based employee compensation plans which is being
amortized over the service period in the financial statements, as
required by SFAS 123(R). These awards have been classified as equity
instruments, and as such, a corresponding increase of $95,000 has been
reflected in additional paid-in capital in the accompanying balance
sheet as of March 31, 2006.
15
RESULTS OF OPERATIONS
INCOME AND EXPENSE AS A PERCENTAGE OF REVENUE
For the Three Months Ended
March 31,
---------------------------------
2006 2005
-------------- ---------------
Revenue 100.0% 100.0%
Gross profit 18.5% 19.7%
Selling, general and
administrative expenses 16.8% 17.0%
Depreciation and amortization 0.5% 0.5%
Interest expense 0.6% 0.7%
Income before provision for income taxes 0.6% 1.5%
Net income 0.3% 0.8%
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2005
Revenue for the three months ended March 31, 2006 increased by
$8,084,000, or 15.4%, to $60,439,000 from $52,355,000 for the three
months ended March 31, 2005. This increase in revenue includes
$6,400,000 from existing customers and $3,100,000 from new customers.
These increases were partially offset by lost business of $1,400,000.
Cost of revenue increased by $7,187,000, or 17.1%, to $49,233,000 for
the three months ended March 31, 2006 from $42,046,000 for the three
months ended March 31, 2005. Cost of revenue for the three months ended
March 31, 2006 represented 81.5% of revenue as compared to 80.3% for
the same period in 2005.
If the gross profit margin had remained the same as last year's 19.7%,
the $11,206,000 gross profit for the three months ended March 31, 2006
would have been $700,000 higher. The reduced margin was due primarily
to new business start-up costs and competitive rate pressures. Our
pricing to new and existing customers has not kept pace with our
increased driver costs. The significant increase in fuel costs has
required us to pay more to attract and retain contract drivers.
16
SG&A increased by $1,312,000, or 14.8%, to $10,192,000 for the three
months ended March 31, 2006 from $8,880,000 for the same period in
2005. Stated as a percentage of revenue, SG&A was 16.8% as of March 31,
2006 and 17.0% as of March 31, 2005. The increase in SG&A was due
primarily to the following:
Increase from
1st Qtr 2005
--------------------
Legal fees $276,000 183.9%
Compensation, other than stock-based 197,000 5.2%
Premises rent 158,000 10.9%
Computer costs 148,000 81.5%
Travel and entertainment 147,000 40.2%
Stock-based compensation 95,000 (1)
(1) The Company implemented SFAS 123(R) during the first
quarter of 2006. As such, there was no comparable
expense recorded in 2005.
The increase in legal fees related to various business development
initiatives. The increases in compensation (other than stock-based),
premises rent, computer costs and travel and entertainment all relate
primarily to additional facilities opened on the West coast and
Southeast region as a result of the expansion into new geographic
locations.
Depreciation and amortization was $318,000 as of March 31, 2006 as
compared to $274,000 for the same period in 2005. This increase
resulted from depreciation on the 2005 total fixed asset additions.
Interest expense decreased by $35,000 to $356,000 for the three months
ended March 31, 2006 as compared to $391,000 for the same period last
year. The reduction in interest was due to the extinguishment of the
Series B Convertible Notes in October 2005.
As a result of the factors discussed above, income before provision for
income taxes decreased by $409,000 to $356,000 for the three months
ended March 31, 2006 from $765,000 for the same period last year.
Provision for income taxes decreased by $170,000 to $167,000 for the
three months ended March 31, 2006 as compared to $337,000 for the same
period in 2005. This was due to the decrease in income before provision
for income taxes discussed above, partially offset by an increased
effective tax rate of 47% for the first quarter of 2006 as compared to
44% for the first quarter of 2005.
Net income decreased by $239,000 to $189,000 for the three months ended
March 31, 2006 as compared to $428,000 for the same period last year.
This was due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company was indebted to Paribas and Exeter in
the sum of $11.0 million 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 Paribas, Exeter and the
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 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. The Series B Convertible Notes
were subsequently extinguished on October 31, 2005. At March 31, 2006
and 2005, long-term debt included $4,000,000 of Series A Convertible
Notes. At March 31, 2005, long-term debt also included $4,000,000 of
Series B Convertible Notes.
17
The Company's working capital increased by $124,000 from $6,365,000 as
of December 31, 2005 to $6,489,000 as of March 31, 2006. Cash and cash
equivalents decreased by $60,000 to $777,000 as of March 31, 2006. Cash
of $522,000 was provided by operations primarily due to a $553,000
reduction in prepaid expenses relating to the insurance financing
arrangements. Cash of $245,000 was used in net investing activities for
capital expenditures discussed below and cash of $337,000 was used in
net financing activities primarily for the repayment of long-term debt.
Capital expenditures amounted to $263,000 and $106,000 for the three
months ended March 31, 2006 and 2005, respectively. Increased capital
expenditures in the first quarter of 2006 related to the purchase of
scanners and improving the functionality of our internal network.
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 which was due to expire
on June 27, 2005 but was extended through January 31, 2006, provided
CD&L with standby letters of credit, prime rate based loans at the
bank's prime rate, as defined, plus 25 basis points and LIBOR based
loans at the bank's LIBOR, as defined, plus 225 basis points. Credit
availability was based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15,000,000 and was 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.
As of January 31, 2006, CD&L and Bank of America, N.A. (successor by
merger to Fleet Capital Corporation) entered into a new agreement (the
"Bank of America Facility") which replaced the prior Fleet Facility.
The Bank of America Facility, which expires on September 30, 2008,
continues to provide CD&L with standby letters of credit, prime rate
based loans at the bank's prime rate, as defined (7.75% at March 31,
2006), and LIBOR based loans at the bank's LIBOR rate, as defined, plus
200 basis points. Credit availability is based on eligible amounts of
accounts receivable, as defined, up to a maximum amount of $20,000,000
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. The maximum borrowings outstanding under the Bank of
America Facility during the three months ended March 31, 2006 were
$9,617,000. As of March 31, 2006, the Company had total cash on hand
and borrowing availability of $5,057,000 under the Bank of America
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 Bank of America Facility, the Company is
required to maintain certain financial ratios and comply with other
financial conditions. The Bank of America 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 March 31, 2006.
Costs incurred relative to the establishment of the Bank of America
Facility amounted to approximately $89,000. This has been accounted for
as deferred financing costs and is being amortized over the term of the
new financing agreement. As of March 31, 2006, the unamortized portion
of the deferred financing costs amounted to approximately $81,000.
The Company retains a risk of incurring uninsured losses. 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.
18
The Company had an accumulated deficit of ($2,867,000) as of March 31,
2006. 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 March 31, 2007. 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.
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.
19
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the effect of changing interest rates. At
March 31, 2006, the Company's debt consisted of approximately
$5,856,000 of fixed rate debt with a weighted average interest rate of
8.30% and $8,659,000 of variable rate debt with a weighted average
interest rate of 7.54%. The variable rate debt consists of borrowings
of revolving line of credit debt at the bank's prime rate (7.75% at
March 31, 2006). If interest rates on variable rate debt were to
increase by 75 basis points (one-tenth of the weighted average interest
rate at March 31, 2006), the net impact to the Company's results of
operations and cash flows for the three months ended March 31, 2006
would be a decrease of income before provision for income taxes and
cash flows from operating activities of approximately $16,000. Maximum
borrowings of revolving line of credit debt during the three months
ended March 31, 2006 were $9,617,000.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the
Company's most recently completed fiscal quarter 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 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.
20
PART II - OTHER INFORMATION
---------------------------
ITEM 1A - Risk Factors
Aside from the risk factor noted below, there have not been any
material changes in the risk factors that were previously disclosed in
Item 1A to Part I of the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
BASED ON CURRENT DISCUSSIONS WITH THE SEC, WE MAY BE REQUIRED TO AMEND
PRIOR FILINGS.
The SEC has asked the Company to provide additional support for its
accounting for the March 1, 2004 transaction wherein the Company
repurchased certain Indiana-based assets and liabilities originally
sold to First Choice Courier in June 2001. Consideration for the
repurchase included cancellation of a promissory note receivable owed
by First Choice plus a three year contingent earn-out based on retained
revenue. The majority of the purchase price related to the value of the
First Choice customer list. An intangible asset of $1,602,000 was
recorded as of the purchase date. The asset is being amortized over
five years. The SEC is questioning if all, or part, of the purchase
price should have been accounted for as forgiveness of debt. The
Company disagrees with that position and believes its accounting for
the transaction is correct.
If however, after review and discussion, the SEC does not ultimately
agree with the Company's accounting, the Company may be required to
amend prior years filings.
The Company will be communicating with the SEC subsequent to this
filing to resolve this issue.
ITEM 6 - Exhibits
(a) Exhibits
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.
21
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: May 15, 2006 CD&L, INC.
By: \s\ Russell J. Reardon
----------------------
Russell J. Reardon
Vice President and
Chief Financial Officer