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, 2003 or
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period
from_______________to____________
Commission File Number: 0-26954
CD&L, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3350958
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
80 Wesley Street 07606
South Hackensack, New Jersey (Zip Code)
(Address of principal executive offices)
(201) 487-7740
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
--- ---
The number of shares of common stock of the Registrant, par value $.001
per share, outstanding as of May 9, 2003 was 7,658,660.
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 17
Item 4 - Controls and Procedures 17
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 18
Signature 19
Certifications 20
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
March 31, December 31,
2003 2002
----------- ----------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,741 $ 1,452
Accounts receivable, net 16,001 14,909
Prepaid expenses and other current assets 2,262 2,119
-------- --------
Total current assets 20,004 18,480
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,069 1,233
GOODWILL, net 11,531 11,531
INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net 605 661
NOTE RECEIVABLE FROM STOCKHOLDER, net - -
OTHER ASSETS 2,038 1,916
-------- --------
Total assets $ 35,247 $ 33,821
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 1,575 $ -
Current maturities of long-term debt 2,968 3,442
Accounts payable, accrued liabilities and bank overdrafts 12,998 12,169
-------- --------
Total current liabilities 17,541 15,611
LONG-TERM DEBT, net of current maturities 12,939 14,041
OTHER LONG-TERM LIABILITIES 261 269
-------- --------
Total liabilities 30,741 29,921
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.001 par value; 30,000,000 shares
authorized; 7,688,027 shares issued at March 31, 2003 and
December 31, 2002 8 8
Additional paid-in capital 12,883 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (8,223) (8,829)
-------- --------
Total stockholders' equity 4,506 3,900
-------- --------
Total liabilities and stockholders' equity $ 35,247 $ 33,821
======== ========
See accompanying notes to condensed consolidated financial statements.
3
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Three Months Ended
March 31,
---------------------
2003 2002
-------- --------
Revenue $ 40,307 $ 38,549
Cost of revenue 33,043 30,621
-------- --------
Gross profit 7,264 7,928
-------- --------
Costs and Expenses:
Selling, general, and administrative expenses 6,528 6,954
Depreciation and amortization 217 299
Other (income), net (1,101) (50)
Interest expense 610 715
-------- --------
Total Costs and Expenses 6,254 7,918
-------- --------
Income before provision for income taxes 1,010 10
Provision for income taxes 404 4
-------- --------
Net income $ 606 $ 6
======== ========
Net income per share:
Basic $ .08 $ .00
======== ========
Diluted $ .07 $ .00
======== ========
Basic weighted average common shares outstanding 7,659 7,659
======== ========
Diluted weighted average common shares outstanding 8,170 8,167
======== ========
See accompanying notes to condensed consolidated financial statements.
4
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months
Ended March 31,
----------------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 606 $ 6
Adjustments to reconcile net income to net cash (used in) provided by
operating activities -
Non-cash extinguishment of debt (1,034) -
Gain on disposal of equipment and leasehold improvements (34) (21)
Depreciation, amortization and deferred financing amortization 272 343
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net (1,092) 1,373
Prepaid expenses and other current assets (143) (186)
Other assets (122) (41)
Increase (decrease) in -
Accounts payable, accrued liabilities and bank overdrafts 829 (755)
Other long-term liabilities (8) 147
------- -------
Net cash (used in) provided by operating activities (726) 866
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 36 46
Additions to equipment and leasehold improvements (54) (25)
------- -------
Net cash (used in) provided by investing activities (18) 21
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 1,575 -
Repayments of long-term debt (542) (708)
------- -------
Net cash provided by (used in) financing activities 1,033 (708)
------- -------
Net increase in cash and cash equivalents 289 179
CASH AND CASH EQUIVALENTS, beginning of period 1,452 1,165
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,741 $ 1,344
======= =======
See accompanying notes to condensed consolidated financial statements.
5
CD&L, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited financial statements at that date. Certain
reclassifications have been made to the March 31, 2002 condensed
consolidated statement of operations to conform to the current period
presentation. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months
ended March 31, 2003 are not necessarily indicative of the results that
may be expected for any other interim period or for the year ending
December 31, 2003. For further information, refer to the consolidated
financial statements and footnotes thereto included in the CD&L, Inc.
(the "Company" or "CD&L") Form 10-K for the year ended December 31,
2002.
(2) STOCK BASED COMPENSATION
In December 2002, Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148") was issued and became effective in 2002. This
Statement amends SFAS No. 123 "Accounting for Stock-Based
Compensation," ("SFAS 123") to provide alternative methods of
transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based compensation. The Company has
elected to continue to recognize stock-based compensation using the
intrinsic value method and has incorporated the additional disclosure
requirements of SFAS 148.
The Company has adopted the disclosure provisions of SFAS 148. As a
result, under the provisions of SFAS 123, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in
accounting for its stock option plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Pro
forma information regarding net income and earnings per share is
required, and has been determined as if the Company had accounted for
its stock options under the fair value method. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for the three
months ended March 31, 2003 and 2002-
2003 2002
---------- -----------
Weighted average fair value $0.52 $0.44
Risk-free interest rate 4.30% 4.30%
Volatility factor 101% 101%
Expected life 7 years 7 years
Dividend yield None None
---------- -----------
6
The pro forma information regarding net income and earnings per share
is as follows (in thousands)-
For the Three Months
Ended
March 31,
2003 2002
------- -------
Net income, as reported $ 606 $ 6
Stock-based employee compensation expense
determined under fair value based method
for all awards, net of related tax effects (2) (39)
------- ------
Pro forma net income (loss) $ 604 ($ 33)
======= ======
Net income (loss) per share:
Basic, as reported $.08 $.00
Diluted, as reported $.07 $.00
Basic, pro forma $.08 ($.00)
Diluted, pro forma $.07 ($.00)
(3) SHORT-TERM BORROWINGS:
As of June 27, 2002 CD&L and Summit Business Capital Corporation, doing
business as Fleet Capital - Business Finance Division, entered into an
agreement establishing a revolving credit facility (the "Fleet
Facility") of $15,000,000. The Fleet Facility replaced a revolving
credit facility with First Union Commercial Corporation established in
July 1997. The Fleet Facility expires on June 27, 2005 and provides
CD&L with standby letters of credit, prime rate based loans at the
bank's prime rate, as defined, plus 25 basis points (4.50% at March 31,
2003) and LIBOR based loans at the bank's LIBOR, as defined, plus 225
basis points (3.57% at March 31, 2003). Credit availability is based on
eligible amounts of accounts receivable, as defined, up to a maximum
amount of $15,000,000 and is secured by substantially all of the
assets, including certain cash balances, accounts receivable,
equipment, leasehold improvements and general intangibles of the
Company and its subsidiaries. During the three months ended March 31,
2003, the maximum borrowings outstanding under the Fleet Facility were
approximately $1,575,000 and the outstanding borrowings as of March 31,
2003 were approximately $1,575,000. As of March 31, 2003, the Company
had borrowing availability of $2,323,000 under the Fleet Facility,
after adjusting for restrictions related to outstanding standby letters
of credit of $7,000,000 and minimum availability requirements.
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial
conditions. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. See "Waivers and Amendments" below in
Note 4.
(4) LONG-TERM DEBT:
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes and warrants (the "Senior
Notes") with three financial institutions. The Senior Notes originally
bore interest at 12.0% per annum and are subordinate to all senior debt
including the Company's Fleet Facility. Under the terms of the Senior
Notes, as amended, the Company is required to maintain certain
financial ratios and comply with other financial conditions contained
in the Senior Notes agreement. See "Waivers and Amendments" below.
7
The Senior Notes mature on January 29, 2006 and may be prepaid by the
Company under certain circumstances. The warrants expire January 19,
2009 and are exercisable at any time prior to expiration at a price of
$.001 per equivalent share of common stock for an aggregate of 506,250
shares of the Company's stock, subject to additional adjustments. The
Company has recorded the fair value of the warrants of $1,265,000 as a
credit to additional paid-in-capital and a debt discount on the Senior
Notes. The Company used the proceeds to finance acquisitions and to
reduce outstanding short-term borrowings. As of August 17, 2000,
November 21, 2000, March 30, 2001, May 30, 2001, August 20, 2001,
November 19, 2001, April 12, 2002, June 28, 2002 and April 23, 2003,
the Company and the note holders modified the Senior Subordinated Loan
Agreement (the "Senior Note Agreement") entered into on January 29,
1999. The Senior Note Agreement, as amended, provides for scheduled
repayments of $250,000 at the end of each calendar quarter beginning in
the first quarter of 2003 and ending in the fourth quarter of 2005.
Such payments increase to $312,500 if the Company meets certain
availability benchmarks under the Fleet Facility, as defined. The
interest rate on the $3,000,000 of the notes scheduled to be repaid
would be reduced to 10% on a prospective basis if the Company makes a
voluntary principal repayment of $750,000 at any time prior to
maturity.
Waivers and Amendments -
At December 31, 2002 and March 31, 2003, the Company did not comply
with the Minimum Earnings, Fixed Charge Coverage Ratio and Cash Flow
Leverage Ratio covenants, as defined, at one or both dates. On April
23, 2003, the Company obtained waivers from its lenders for the
covenant violations and renegotiated certain covenants and modified
certain terms of its revolving credit facility and senior subordinated
notes.
Seller-Financed Debt -
On March 30, 2001, pursuant to an Asset Purchase Agreement dated as of
March 7, 2001, Sureway Worldwide, LLC ("Sureway Worldwide"), a
wholly-owned subsidiary of Global Delivery Systems, LLC ("Global"),
purchased certain assets from a subsidiary of CD&L. As part of the
payment price for such assets, Sureway Worldwide issued to CD&L a
promissory note in the original principal amount of $2,500,000
guaranteed by Global (the "Note Receivable"). Such note and the
guaranty were subordinated to Sureway Worldwide's and Global's
obligations to its secured lender. No payments had been made to CD&L on
the Note Receivable since issuance. CD&L wrote-off the entire amount of
the Note Receivable on December 31, 2001 based on management's
determination that the note would not be collected.
On February 16, 1999, the Company and its subsidiary, Sureway Air
Traffic Corporation, Inc. ("Sureway"), entered into and consummated an
asset and stock purchase agreement with Victory Messenger Service,
Inc., Richard Gold ("Gold"), Darobin Freight Forwarding Co., Inc.
("Darobin"), and The Trust Created Under Paragraph Third of the Last
Will and Testament of Charles Gold (the "Trust"), (collectively "Gold
Wings"), whereby Sureway purchased all of the outstanding shares of the
capital stock of Darobin and certain of the assets and liabilities of
the other sellers. In conjunction therewith, the Company became
obligated for seller-financed acquisition debt of $1,650,000. As of
February 28, 2003, the note had a remaining principal balance of
approximately $1,000,000 (the "CDL/Gold Note").
On February 28, 2003, the Company completed a series of related
transactions with GMV Express, Inc. ("GMV"), Gold (a principal of GMV)
and his affiliates, and Global and its subsidiary, Sureway Worldwide.
The net effect of the transactions with Global, Sureway Worldwide, GMV
and Gold is that the Company assigned the Note Receivable to GMV in
exchange for a release on the CDL/Gold Note payable, so that the
Company is now relieved of its $1,000,000 liability for the CDL/Gold
Note and the Company has no further rights to the Note Receivable. In
addition, the Company received payments from Sureway Worldwide and
Global of approximately $117,000 ($72,000 in settlement of disputed
claims and $45,000 for other amounts due) and provided Gold with a
release covering claims of breach of certain non-competition
agreements. As a result of this transaction, the Company recorded a
gain of approximately $1,000,000 during the three month period ended
March 31, 2003, included within other income, net.
8
(5) GOODWILL, INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS:
On June 30, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") was issued. SFAS 142 eliminated goodwill amortization over
its estimated useful life. However, goodwill is subject to at least an
annual assessment for impairment by applying a fair-value based test.
Additionally, acquired intangible assets must be separately recognized
if the benefit of the intangible asset is obtained through contractual
or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the
acquirer's intent to do so. Intangible assets with definitive lives are
amortized over their useful lives. The statement required that by
June 30, 2002, a company must establish its fair value benchmarks in
order to test for impairment. The Company adopted SFAS 142 effective
January 1, 2002. For purposes of performing the fair-value based test
of goodwill, the Company has determined that it has one reporting unit.
This reporting unit is consistent with its single operating segment,
which management determined is appropriate under the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). During 2002, a transitional goodwill
impairment test was performed and the Company determined that there was
no impairment of goodwill. Further, as required by SFAS 142, an annual
impairment test was completed at the end of fiscal 2002 and the Company
determined that there was no impairment. Fair value was determined by
two methods:
1. Present value of future estimated cash flows, including a
determination of a terminal value.
2. Market capitalization utilizing quoted market prices of the
Company's common stock.
The adoption of SFAS 142 did not result in the recognition of an
impairment of goodwill. However, changes in business conditions could
result in impairment in the future. Examples of changes in business
conditions include, but are not limited to, bankruptcy or loss of a
significant customer, a significant adverse change in regulatory
factors, a loss of key personnel, increased levels of competition from
companies with greater financial resources than the Company and margin
erosion caused by our inability to increase prices to our customers at
the same rate that our costs increase.
Intangible assets and deferred financing costs consist of the following
(in thousands)-
As of March 31, 2003
----------------------------------
Accumulated
Cost Amortization
--------- -------------
Deferred financing costs $1,338 $733
Other 58 58
--------- -------------
$1,396 $791
========= =============
Intangible asset amortization expense for the three months ended March
31, 2003 and 2002 was approximately $56,000 and $48,000, respectively.
Estimated intangible amortization expense for the years ended December
31 (in thousands)-
2003 $224
2004 224
2005 199
2006 14
9
(6) NOTE RECEIVABLE FROM STOCKHOLDER:
In February 1996, Liberty Mutual Insurance Company ("Liberty Mutual")
filed an action against Securities Courier Corporation ("Securities"),
a subsidiary of the Company, Mr. Vincent Brana, an employee of the
Company, and certain other parties in the United States District Court
for the Southern District of New York. Under the terms of its
acquisition of Securities, the Company had certain rights to
indemnification from Mr. Brana. In connection with the indemnification,
Mr. Brana has entered into a settlement agreement and executed a
promissory note (the "Brana Note") in such amount as may be due for any
defense costs or award arising out of this suit. Mr. Brana has agreed
to repay the Company on December 1, 2003, together with interest
calculated at a rate per annum equal to the rate charged the Company by
its senior lender. Mr. Brana delivered 357,301 shares of CD&L common
stock to the Company as collateral for the Brana Note. On September 8,
2000 the parties entered into a settlement agreement in which
Securities and Mr. Brana agreed to pay Liberty Mutual $1,300,000. An
initial payment of $650,000 was made by Securities on October 16, 2000,
$325,000 plus interest at a rate of 10.5% per annum was paid in monthly
installments ending July 1, 2001 and the balance of $325,000 plus
interest at a rate of 12.0% per annum was paid in monthly installments
ending July 1, 2002.
At March 31, 2003 and December 31, 2002, the Company had a receivable
due from Mr. Brana totaling $2,800,000. As of March 31, 2003,
considering the market value of the collateral and Mr. Brana's failure
to update and provide satisfactory evidence to support his ability to
pay the Brana Note, the Company maintained a $2,800,000 reserve against
the receivable.
In an effort to resolve all outstanding disputes between Mr. Brana and
the Company, a settlement agreement is currently being negotiated. If
an agreement is reached, the Company would return to Mr. Brana the
357,301 shares of CD&L common stock held by the Company as collateral
for the $2,800,000 note, and provide certain releases for claims that
the Company may have against him. Mr. Brana's employment with the
Company was terminated on September 1, 2002 and he has served as a paid
consultant since that time.
(7) LITIGATION:
The Company is, from time to time, a party to litigation arising in the
normal course of its business, including claims for uninsured personal
injury and property damage incurred in connection with its same-day
delivery operations. In connection therewith, the Company has recorded
reserves of $292,000 and $325,000 as of March 31, 2003 and December 31,
2002, respectively.
Also from time to time, federal and state authorities have sought to
assert that independent contractors in the transportation industry,
including those utilized by CD&L, are employees rather than independent
contractors. The Company believes that the independent contractors that
it utilizes are not employees under existing interpretations of federal
and state laws. However, federal and state authorities have and may
continue to challenge this position. Further, laws and regulations,
including tax laws, and the interpretations of those laws and
regulations, may change.
Management believes that none of these actions, including the actions
described above, will have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
(8) INCOME PER SHARE:
Basic earnings per share represents net income divided by the weighted
average shares outstanding. Diluted earnings per share represents net
income divided by the weighted average shares outstanding adjusted for
the incremental dilution of potentially dilutive common shares.
10
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows
(in thousands)-
Three Months Ended
March 31,
---------------------
2003 2002
-------- -------
Basic weighted average common
shares outstanding 7,659 7,659
Effect of dilutive securities:
Stock options and warrants 511 508
------- ------
Diluted weighted average common
shares outstanding 8,170 8,167
======= ======
The following potentially dilutive common shares were excluded from the
computation of diluted Earnings per Share because the exercise or
conversion price was greater than the average market price of common
shares (in thousands):
Three Months Ended
March 31,
--------------------
2003 2002
-------- -------
Stock options and warrants 1,884 1,940
Seller-financed convertible notes 431 508
(9) NEW ACCOUNTING PRONOUNCEMENT:
In January 2003, Interpretation No. 46 of the Financial Accounting
Standards Board, "Consolidation of Variable Interest Entities" ("FIN
46") was issued. The Company does not believe that it has any
relationships with variable interest entities that will be subject to
the requirements of FIN 46.
(10) RELATED PARTY TRANSACTIONS:
Effective as of February 1, 2003, the Company has leased its former
vehicle repair facility to Auto Depot, Inc. Mr. Vincent Brana, a
stockholder and the former President of the Company's Securities
Courier Corporation subsidiary, is a principal in Auto Depot, Inc.
During the three months ended March 31, 2003, the Company paid
approximately $61,000 for vehicle maintenance and repairs and sold 18
vehicles with a total value of approximately $8,700 to Auto Depot, Inc.
Additionally, the Company received approximately $6,000 in rent from
Auto Depot, Inc., during the three months ended March 31, 2003. Refer
to the 2002 Form 10-K for additional discussion of related party
transactions.
11
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Disclosure Regarding Forward-Looking Statements
The Company is provided a "safe harbor" for forward-looking statements
contained in this report by the Private Securities Litigation Reform
Act of 1995. The Company may discuss forward-looking information in
this Report such as its expectations for future performance, growth and
acquisition strategies, liquidity and capital needs and its future
prospects. Actual results may not necessarily develop as the Company
anticipates due to many factors including, but not limited to the
timing of certain transactions, unexpected expenses encountered, the
effect of economic and market conditions, the impact of competition and
the factors listed in the Company's 2002 Report on Form 10-K and other
SEC filings. Because of these and other reasons, the Company's actual
results may vary materially from management's current expectations.
Overview
The condensed consolidated financial statements of the Company
including all related notes, which appear elsewhere in this report,
should be read in conjunction with this discussion of the Company's
results of operations and its liquidity and capital resources.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to
accounts and notes receivable, intangible assets, income taxes and
contingencies. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies reflect
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts and
notes receivable for estimated losses resulting from the inability of
its customers and debtors to make payments when due or within a
reasonable period of time thereafter. The Company estimates allowances
for doubtful accounts and notes receivable by evaluating past due aging
trends, analyzing customer payment histories and assessing market
conditions relating to its customers' operations and financial
condition. Such allowances are developed principally for specific
customers. If the financial condition of the Company's customers and
debtors were to deteriorate, resulting in an impairment of their
ability to make required payments, additional allowances may be
required.
Goodwill
The value of the Company's goodwill is significant relative to
total assets and stockholders' equity. The Company reviews goodwill for
impairment on at least an annual basis using several fair-value based
tests, which include, among others, a discounted cash flow and terminal
value computation. The discounted cash flow and terminal value
computation is based on management's estimates of future operations.
Changes in business conditions could materially impact management's
estimates of future operations and this could result in an impairment
of goodwill. Such impairment, if any, could have a significant impact
on the Company's consolidated operations and financial condition.
Examples of changes in business conditions include, but are not limited
to, bankruptcy or loss of a significant customer, a significant adverse
change in regulatory factors, a loss of key personnel, increased levels
of competition from companies with greater financial resources than the
Company and margin erosion caused by our inability to increase prices
to our customers at the same rate that our costs increase.
12
Insurance Reserves
The Company retains certain insurance risk through insurance
policies with a $500,000 deductible for workers' compensation ($350,000
prior to May 1, 2003), a $350,000 deductible for automobile liability
($250,000 prior to July 1, 2002) and a $150,000 deductible for employee
health medical costs ($125,000 prior to March 1, 2002). The Company
reserves the estimated amounts of uninsured claims and deductibles
related to such insurance retentions for claims that have occurred in
the normal course of business. These reserves are established by
management based upon the recommendations of third-party administrators
who perform a specific review of open claims, which include fully
developed estimates of both reported claims and incurred but not
reported claims, as of the balance sheet date. Actual claim settlements
may differ materially from these estimated reserve amounts.
Income Taxes
The Company files income tax returns in every jurisdiction
in which it has reason to believe it is subject to tax. Historically,
the Company has been subject to examination by various taxing
jurisdictions. To date, none of these examinations have resulted in any
material additional tax. Nonetheless, any tax jurisdiction may contend
that a filing position claimed by the Company regarding one or more of
its transactions is contrary to that jurisdiction's laws or
regulations.
Results of Operations
Income and Expense as a Percentage of Revenue
For the Three Months Ended
March 31,
---------------------------
2003 2002
----------- ------------
Revenue 100.0% 100.0%
Gross profit 18.0% 20.6%
Selling, general and
administrative expenses 16.2% 18.0%
Depreciation and amortization 0.5% 0.8%
Other (income), net (2.7%) (0.1%)
Interest expense 1.5% 1.9%
Income before provision for income
taxes 2.5% 0.0%
Net income 1.5% 0.0%
13
Three Months Ended March 31, 2003 Compared to the Three Months Ended
March 31, 2002
Revenue for the three months ended March 31, 2003 increased by $1.8
million, or 4.7%, to $40.3 million from $38.5 million for the three
months ended March 31, 2002. An increase in volume contributed to such
revenue increase, partially offset by certain price reductions granted
to extend customer contracts.
Cost of revenue increased by $2.4 million, or 7.8%, to $33.0 million
for the three months ended March 31, 2003 from $30.6 million for the
three months ended March 31, 2002. Cost of revenue for the three months
ended March 31, 2003 represents 82.0% of revenues as compared to 79.4%
for the same period in 2002. The increase in cost of revenue is due
primarily to the increase in revenue; however the increase in cost of
revenue as a percentage of revenue is due primarily to an increase in
labor costs as compared to the same period in 2002 and certain price
reductions referred to above.
Selling, general and administrative expenses ("SG&A") decreased by $0.5
million, or 7.1%, to $6.5 million for the three months ended March 31,
2003 from $7.0 million for the same period in 2002. Stated as a
percentage of revenue, SG&A decreased to 16.2% for the three months
ended March 31, 2003 as compared to 18.0% for the same period in 2002.
The decrease in SG&A is due primarily to a $0.3 million decrease in
bonuses earned, $0.2 million less in provision for bad debt and $0.2
million in reduced sales and marketing salaries as a result of the
reversal of previously recorded severance benefits, partially offset by
a $0.1 million increase in facility rent costs.
Depreciation and amortization decreased by $0.1 million, or 33.3%, to
$0.2 million for the three months ended March 31, 2003 from $0.3
million for the same period in 2002. Such reduction was primarily
caused by the full depreciation of certain vehicles held under a
capital lease that ended during 2002 and reduced capital expenditures
in 2000, 2001 and 2002.
Other income, net increased by $1.0 million to $1.1 million for the
three months ended March 31, 2003 from $0.1 million for the same period
in 2002 for the reasons discussed below.
On March 30, 2001, pursuant to an Asset Purchase Agreement dated as of
March 7, 2001, Sureway Worldwide, LLC ("Sureway Worldwide"), a
wholly-owned subsidiary of Global Delivery Systems, LLC ("Global"),
purchased certain assets from a subsidiary of CD&L. As part of the
payment price for such assets, Sureway Worldwide issued to CD&L a
promissory note in the original principal amount of $2,500,000
guaranteed by Global (the "Note Receivable"). Such note and the
guaranty were subordinated to Sureway Worldwide's and Global's
obligations to its secured lender. No payments had been made to CD&L on
the Note Receivable since issuance. CD&L wrote-off the entire amount of
the Note Receivable on December 31, 2001 based on management's
determination that the note would not be collected.
On February 16, 1999, the Company and its subsidiary, Sureway Air
Traffic Corporation, Inc. ("Sureway"), entered into and consummated an
asset and stock purchase agreement with Victory Messenger Service,
Inc., Richard Gold ("Gold"), Darobin Freight Forwarding Co., Inc.
("Darobin"), and The Trust Created Under Paragraph Third of the Last
Will and Testament of Charles Gold (the "Trust"), (collectively "Gold
Wings"), whereby Sureway purchased all of the outstanding shares of the
capital stock of Darobin and certain of the assets and liabilities of
the other sellers. In conjunction therewith, the Company became
obligated for seller-financed acquisition debt of $1,650,000. As of
February 28, 2003, the note had a remaining principal balance of
approximately $1,000,000 (the "CDL/Gold Note").
14
On February 28, 2003, the Company completed a series of related
transactions with GMV Express, Inc. ("GMV"), Gold (a principal of GMV)
and his affiliates, and Global and its subsidiary, Sureway Worldwide.
The net effect of the transactions with Global, Sureway Worldwide, GMV
and Gold is that the Company assigned the Note Receivable to GMV in
exchange for a release on the CDL/Gold Note payable, so that the
Company is now relieved of its $1,000,000 liability for the CDL/Gold
Note and the Company has no further rights to the Note Receivable. In
addition, the Company received payments from Sureway Worldwide and
Global of approximately $117,000 ($72,000 in settlement of disputed
claims and $45,000 for other amounts due) and provided Gold with a
release covering claims of breach of certain non-competition
agreements. As a result of this transaction, the Company recorded a
gain of approximately $1,000,000 during the three month period ended
March 31, 2003, included within other income, net.
As a result of the factors discussed above, income before provision for
income taxes increased by $1.0 million for the three months ended March
31, 2003 as compared to the same period in 2002.
Provision for income taxes increased by $0.4 million for the three
months ended March 31, 2003 as compared to $0.0 million for the same
period in 2002. This was due to the increase in income before provision
for income taxes discussed above.
Net income improved by $0.6 million to net income of $0.6 million for
the three months ended March 31, 2003 as compared to net income of $0.0
million for the same period in 2002. This was due to the factors
discussed above.
Liquidity and Capital Resources
The Company's working capital decreased by $406,000 from $2,869,000 as
of December 31, 2002 to $2,463,000 as of March 31, 2003. The decrease
is primarily a result of cash used in operating activities. Cash and
cash equivalents increased by $289,000 to $1,741,000 as of March 31,
2003. Cash of $726,000 was used by operations, while $18,000 was used
by net investing activities and $1,033,000 was provided by net
financing activities. Capital expenditures amounted to $54,000 and
$25,000 for the three months ended March 31, 2003 and 2002,
respectively.
As of June 27, 2002 CD&L and Summit Business Capital Corporation, doing
business as Fleet Capital - Business Finance Division, entered into an
agreement establishing a revolving credit facility (the "Fleet
Facility") of $15,000,000. The Fleet Facility replaced a revolving
credit facility with First Union Commercial Corporation established in
July 1997. The Fleet Facility expires on June 27, 2005 and provides
CD&L with standby letters of credit, prime rate based loans at the
bank's prime rate, as defined, plus 25 basis points (4.50% at March 31,
2003) and LIBOR based loans at the bank's LIBOR, as defined, plus 225
basis points (3.57% at March 31, 2003). Credit availability is based on
eligible amounts of accounts receivable, as defined, up to a maximum
amount of $15,000,000 and is secured by substantially all of the
assets, including certain cash balances, accounts receivable,
equipment, leasehold improvements and general intangibles of the
Company and its subsidiaries. During the three months ended March 31,
2003, the maximum borrowings outstanding under the Fleet Facility were
approximately $1,575,000 and the outstanding borrowings as of March 31,
2003 were approximately $1,575,000. As of March 31, 2003, the Company
had borrowing availability of $2,323,000 under the Fleet Facility,
after adjusting for restrictions related to outstanding standby letters
of credit of $7,000,000 and minimum availability requirements.
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial
conditions. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. See "Waivers and Amendments" below.
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes and warrants (the "Senior
Notes") with three financial institutions. The Senior Notes originally
bore interest at 12.0% per annum and are subordinate to all senior debt
including the Company's Fleet Facility. Under the terms of the Senior
Notes, as amended, the Company is required to maintain certain
financial ratios and comply with other financial conditions contained
in the Senior Notes agreement. See "Waivers and Amendments" below.
15
The Senior Notes mature on January 29, 2006 and may be prepaid by the
Company under certain circumstances. The warrants expire January 19,
2009 and are exercisable at any time prior to expiration at a price of
$.001 per equivalent share of common stock for an aggregate of 506,250
shares of the Company's stock, subject to additional adjustments. The
Company has recorded the fair value of the warrants of $1,265,000 as a
credit to additional paid-in-capital and a debt discount on the Senior
Notes. The Company used the proceeds to finance acquisitions and to
reduce outstanding short-term borrowings. As of August 17, 2000,
November 21, 2000, March 30, 2001, May 30, 2001, August 20, 2001,
November 19, 2001, April 12, 2002, June 28, 2002 and April 23, 2003,
the Company and the note holders modified the Senior Subordinated Loan
Agreement (the "Senior Note Agreement") entered into on January 29,
1999. The Senior Note Agreement, as amended, provides for scheduled
repayments of $250,000 at the end of each calendar quarter beginning in
the first quarter of 2003 and ending in the fourth quarter of 2005.
Such payments increase to $312,500 if the Company meets certain
availability benchmarks under the Fleet Facility, as defined. The
interest rate on the $3,000,000 of the notes scheduled to be repaid
would be reduced to 10% on a prospective basis if the Company makes a
voluntary principal repayment of $750,000 at any time prior to
maturity.
Waivers and Amendments -
At December 31, 2002 and March 31, 2003, the Company did not comply
with the Minimum Earnings, Fixed Charge Coverage Ratio and Cash Flow
Leverage Ratio covenants, as defined, at one or both dates. On April
23, 2003, the Company obtained waivers from its lenders for the
covenant violations and renegotiated certain covenants and modified
certain terms of its revolving credit facility and senior subordinated
notes.
Self-Insurance -
The Company's risk of incurring uninsured losses has increased in 2003
as a result of increased deductibles retained by the Company in order
to reduce premiums in conjunction with the renewal of certain insurance
policies in 2003. There can be no assurances that the Company's risk
management policies and procedures will minimize future uninsured
losses or that a material increase in frequency or severity of
uninsured losses will not occur and adversely impact the Company's
future consolidated financial results.
The Company has an accumulated deficit of ($8,223,000) as of March 31,
2003. There can be no assurances that the Company's lenders will agree
to waive any future covenant violations, if any, continue to
renegotiate and modify the terms of their loans, or further extend the
maturity date, should it become necessary to do so. Further, there can
be no assurances that the Company will be able to meet its revenue,
cost or income projections, upon which the debt covenants are based.
Management believes that cash flows from operations and its borrowing
capacity, after the debt modifications referred to above, are
sufficient to support the Company's operations and general business and
capital requirements for at least the next twelve months. Such
conclusions are predicated upon sufficient cash flow from operations
and the continued availability of a revolving credit facility. The
risks associated with cash flow from operations are mitigated by the
Company's low gross profit margin. Unless catastrophic, decreases in
revenue should be accompanied by corresponding decreases in costs,
resulting in minimal impact to liquidity. The risks associated with the
revolving credit facility are as discussed above.
Inflation
While inflation has not had a material impact on the Company's results
of operations for the periods presented herein, recent fluctuations in
fuel prices can and do affect the Company's operating costs.
16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the effect of changing interest rates. At
March 31, 2003, the Company's debt consisted of approximately
$13,052,000 (excluding unamortized discount of $512,000) of fixed rate
debt with a weighted average interest rate of 13.2% and $4,942,000 of
variable rate debt with a weighted average interest rate of 6.2%. The
variable rate debt consists of six seller-financed notes with an
interest rate of prime plus 200 basis points with a minimum rate of
7.0% and maximum rate of 9.0% and $1,575,000 of borrowings of revolving
line of credit debt. If interest rates on variable rate debt were to
increase by 62 basis points (one-tenth of the rate at March 31, 2003),
the net impact to the Company's results of operations and cash flows
for the three month period ended March 31, 2003 would be a decrease of
approximately $8,000. Maximum borrowings of revolving line of credit
debt during the three months ended March 31, 2003 were $1,575,000.
Item 4 - Controls and Procedures
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief
Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), of
the effectiveness of the Company's disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Commission
rules and forms. Subsequent to the date of their evaluation, there were
no significant changes in the Company's internal controls, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
17
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 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.
99.2 Certification of Russell J. Reardon Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed during the first
quarter of 2003.
o Report on Form 8-K filed on February 28, 2003 concerning the
assignment of the Sureway Note receivable in exchange for a
release on the CDL/Gold Note payable.
o Report on Form 8-K filed on May 2, 2003 concerning the May 1,
2003 press release announcing 2002 fiscal year earnings.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 20, 2003 CD&L, INC.
By: \s\ Russell J. Reardon
------------------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
19
CERTIFICATION
I, Albert W. Van Ness, Jr., certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of CD&L, Inc.;
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant,
and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly Report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in the internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: May 20, 2003
\s\ Albert W. Van Ness, Jr.
--------------------------
Albert W. Van Ness, Jr.
Chief Executive Officer
20
CERTIFICATION
I, Russell J. Reardon, certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of CD&L, Inc.;
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant,
and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in the internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: May 20, 2003
\s\ Russell J. Reardon
----------------------------------
Russell J. Reardon
Chief Financial Officer
21