UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2005 or
/ / Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period
from_______________to____________
Commission File Number: 0-26954
CD&L, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3350958
(State or other jurisdiction of (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 August 12, 2005 was 9,356,311.
1
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2005
INDEX
PAGE
----
PART I - Financial Information
ITEM 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of June 30, 2005 (unaudited)
and December 31, 2004 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2005 and 2004 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 17
ITEM 4 - Controls and Procedures 17
PART II - Other Information
ITEM 4 - Submission of Matters to a Vote of Security Holders 18
ITEM 6 - Exhibits 18
SIGNATURE 19
CERTIFICATIONS 20
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
June 30, December 31,
2005 2004
-------- --------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,826 $ 617
Accounts receivable, net 22,375 21,548
Prepaid expenses and other current assets 3,497 4,854
-------- --------
Total current assets 27,698 27,019
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,663 1,627
GOODWILL, net 11,531 11,531
INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net
1,521 1,737
OTHER ASSETS 1,262 828
-------- --------
Total assets $ 43,675 $ 42,742
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 3,494 $ 4,809
Current maturities of long-term debt 505 487
Accounts payable, accrued liabilities and bank overdrafts
14,977 13,660
-------- --------
Total current liabilities 18,976 18,956
LONG-TERM DEBT, net of current maturities 9,556 9,812
OTHER LONG-TERM LIABILITIES 1,485 1,370
-------- --------
Total liabilities 30,017 30,138
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000
shares authorized; 393,701 shares
issued at June 30, 2005
and December 31, 2004 4,000 4,000
Common stock, $.001 par value; 30,000,000 shares
authorized; 9,385,678 shares issued at June 30, 2005 and
December 31, 2004 9 9
Additional paid-in capital 14,320 14,320
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (4,509) (5,563)
-------- --------
Total stockholders' equity 13,658 12,604
-------- --------
Total liabilities and stockholders' equity $ 43,675 $ 42,742
======== ========
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 For the Six Months
Months Ended Ended
June 30, June 30,
------------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Revenue $ 54,207 $ 49,257 $ 106,562 $ 95,739
Cost of revenue 43,367 39,894 85,414 77,779
--------- --------- --------- ---------
Gross profit 10,840 9,363 21,148 17,960
--------- --------- --------- ---------
Costs and Expenses:
Selling, general and
administrative expenses 9,088 8,000 17,968 15,535
Depreciation and amortization 277 274 550 494
Other (income) expense, net (9) 623 (9) 612
Interest expense 366 453 756 1,024
--------- --------- --------- ---------
Total Costs and Expenses 9,722 9,350 19,265 17,665
--------- --------- --------- ---------
Income before provision for income taxes 1,118 13 1,883 295
Provision for income taxes 492 5 829 118
--------- --------- --------- ---------
Net income $ 626 $ 8 $ 1,054 $ 177
========= ========= ========= =========
Net income per share:
Basic $ .07 $ .00 $ .11 $ .02
========= ========= ========= =========
Diluted $ .04 $ .00 $ .06 $ .02
========= ========= ========= =========
Basic weighted average common
shares outstanding 9,356 7,659 9,356 7,659
========= ========= ========= =========
Diluted weighted average common
shares outstanding 20,248 12,570 20,251 10,404
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements
4
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended
June 30,
------------------------------
2005 2004
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,054 $ 177
Adjustments to reconcile net income to net cash provided by operating
activities -
Gain on disposal of equipment and leasehold improvements (5) (6)
Depreciation and amortization, including amortization of deferred
financing costs 606 621
Deferred financing charge/original issue discount (OID) write-off -- 628
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net (827) (817)
Prepaid expenses and other current assets 1,357 2,075
Other assets (434) (350)
(Decrease) increase in -
Accounts payable, accrued liabilities and bank overdrafts 1,317 (300)
Other long-term liabilities 115 (18)
------- -------
Net cash provided by operating activities 3,183 2,010
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 22 3
Additions to equipment and leasehold improvements (443) (211)
------- -------
Net cash used in investing activities (421) (208)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term borrowings, net of proceeds (1,315) (547)
Repayments of long-term debt (238) (1,205)
Proceeds from long-term debt -- 1,000
Deferred financing costs -- (449)
------- -------
Net cash used in financing activities (1,553) (1,201)
------- -------
Net increase in cash and cash equivalents 1,209 601
CASH AND CASH EQUIVALENTS, beginning of period 617 1,697
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,826 $ 2,298
======= =======
See accompanying notes to condensed consolidated financial statements.
5
CD&L, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
condensed consolidated balance sheet at December 31, 2004 has been
derived from the audited financial statements at that date. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30,
2005 are not necessarily indicative of the results that may be expected
for any other interim period or for the year ending December 31, 2005.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the CD&L, Inc. (the "Company" or
"CD&L") Form 10-K for the year ended December 31, 2004.
(2) STOCK-BASED COMPENSATION
In December 2002, Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148") was issued and became effective in 2002. This
Statement amends SFAS No. 123 "Accounting for Stock-Based
Compensation," ("SFAS 123") to provide alternative methods of
transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based compensation. The Company has
elected to continue to recognize stock-based compensation using the
intrinsic value method and has incorporated the additional disclosure
requirements of SFAS 148.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
in accounting for its stock option plans. The Company's stock options
have all been issued with their exercise price at market value at the
date of grant. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Pro forma information regarding
net income and net income per share is required under the provisions of
SFAS 123, and has been determined as if the Company had accounted for
its stock options under the fair value method. The Company will be
adopting SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)") during
the first quarter of 2006. At that time, compensation expense related
to the Company's stock-based employee compensation plans will be
recorded over the service period in the financial statements, as
required by SFAS 123(R).
The fair value for these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for the three and six months ended June 30, 2005 and 2004:
For the Three Months For the Six Months Ended
Ended June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
Risk-free interest rate 3.8% 3.3% 3.5% 3.3%
Volatility factor 38% 140% 47% 115%
Expected life 7 years 7 years 7 years 7 years
Dividend yield None None None None
6
The pro forma information regarding net income (loss) and net income
(loss) per share is as follows (in thousands, except per share data)-
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
Net income, as reported $626 $8 $1,054 $177
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects
(146) (330) (265) (334)
------------ ------------- ------------ ------------
Pro forma net income (loss) $480 ($322) $789 ($157)
============ ============= ============ ============
Net income (loss) per share:
Basic, as reported $.07 $.00 $.11 $.02
Diluted, as reported $.04 $.00 $.06 $.01
Basic, pro forma $.05 ($.04) $.08 ($.02)
Diluted, pro forma $.03 ($.04) $.05 ($.02)
(3) SHORT-TERM BORROWINGS:
Short-term borrowings totaled $3,494,000 and $4,809,000 as of June 30,
2005 and December 31, 2004, respectively. At December 31, 2004,
short-term borrowings consisted of a line of credit balance of
$4,190,000 and $619,000 of outstanding borrowings related to the
insurance financing arrangements entered into in 2004. There were no
balances related to the insurance financing arrangements at June 30,
2005.
As of June 27, 2002, CD&L and Summit Business Capital Corporation,
doing business as Fleet Capital - Business Finance Division ("Summit"),
entered into an agreement establishing a revolving credit facility (the
"Fleet Facility") of $15,000,000. The Fleet Facility, which was due to
expire on June 27, 2005 but was extended through December 31, 2005,
provides CD&L with standby letters of credit, prime rate based loans at
the bank's prime rate, as defined, plus 25 basis points and LIBOR based
loans at the bank's LIBOR, as defined, plus 225 basis point. The
Company is currently negotiating a replacement of the Fleet Facility.
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. As of June 30,
2005, the maximum borrowings outstanding under the Fleet Facility were
$4,786,000 and the outstanding borrowings as of June 30, 2005 were
$3,494,000. As of June 30, 2005, the Company had total cash on hand and
borrowing availability of $6,848,000 under the Fleet Facility, after
adjusting for restrictions related to outstanding standby letters of
credit of $5,748,000 and minimum availability requirements.
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial
conditions. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. The Company was in compliance with its
debt covenants, as amended, as of June 30, 2005.
(4) LONG-TERM DEBT:
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes and warrants (the "Senior
Notes") with three financial institutions. The Senior Notes originally
bore interest at 12.0% per annum and were subordinate to all senior
debt including the Company's Fleet Facility. For a description of the
Fleet Facility, see "Liquidity and Capital Resources". Under the terms
of the Senior Notes, as amended, the Company was required to maintain
certain financial ratios and comply with other financial conditions
contained in the Senior Notes agreement.
7
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 Noteholders")
and certain members of CD&L management and others (the "Investors") as
to the financial restructuring of the Senior Notes. The Original
Noteholders agreed to convert a portion of the existing debt due from
CD&L into equity and to modify the terms of the Senior Notes if the
Investors purchased a portion of the note and accepted similar
modifications. The nature of the restructuring is as follows:
(a) The Original Noteholders exchanged Senior Notes in the
aggregate principal amount of $4,000,000 for shares of the
Series A Convertible Redeemable Preferred Stock of the
Company, par value $.001 per share ("Preferred Stock"), with a
liquidation preference of $4,000,000. The Preferred Stock is
convertible into 3,937,008 shares of Common Stock, does not
pay dividends (unless dividends are declared and paid on the
Common Stock) and is redeemable by the Company for the
liquidation value. The conversion price is $1.016 per share
which was equal to the average closing price for the Company's
common stock for the 5 days prior to the closing. Holders of
the Preferred Stock have the right to elect two directors.
(b) The Original Noteholders and the Company amended the terms of
the remaining $7,000,000 principal balance of the Senior
Notes, and then exchanged the amended notes for the new notes,
which consist of two series of convertible notes, the Series A
Convertible Subordinated Notes (the "Series A Convertible
Notes") in the principal amount of $3,000,000 and the Series B
Convertible Subordinated Notes ("Series B Convertible Notes")
in the principal amount of $4,000,000 (collectively, the
"Convertible Notes"). The loan agreement that governed the
Senior Notes was amended and restated to reflect the terms of
the substituted Series A Convertible Notes and the Series B
Convertible Notes, including the elimination of most financial
covenants. The principal amount of the Convertible Notes is
due in a balloon payment at the maturity date of April 14,
2011. The Convertible Notes bear interest at a rate of 9% for
the first two years of the term, 10.5% for the next two years
and 12% for the final three years of the term and will be paid
quarterly. 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).
(c) The Investors purchased the Series A Convertible Notes from
the Original Note holders for a price of $3,000,000.
(d) The Company issued an additional $1,000,000 of Series A
Convertible Notes to the Investors for an additional payment
of $1,000,000, the proceeds of which were used to reduce
short-term debt.
(e) The Investors, the Original Note holders and the Company
entered into a Registration Rights Agreement pursuant to which
the shares of the Company's common stock issuable upon
conversion of the Preferred Stock and the Convertible Notes
may be registered for resale with the Securities and Exchange
Commission (the "SEC"). Subsequently, on August 2, 2005, the
Company filed a registration statement to register 15,527,579
shares for resale on Form S-3 with the SEC. The registration
statement was declared effective on August 11, 2005.
The Company cannot be compelled to redeem the Preferred Stock for cash
at any time. As the interest on the Convertible Notes increases over
the term of the Convertible Notes, the Company records the associated
interest expense on a straight-line basis, giving rise to accrued
interest over the early term of the Convertible Notes.
As a result of the debt restructuring described above, the Company has
taken a charge of $628,000 recorded in other expense in the second
quarter of 2004, representing the unamortized balance of the original
issue discount and deferred financing costs related to the original
private placement of the Senior Notes.
8
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.
Long-term debt consists of the following (in thousands) -
JUNE 30, DECEMBER 31,
2005 2004
------------------ -----------------
Series A Convertible Subordinated Notes $4,000 $4,000
Series B Convertible Subordinated Notes 4,000 4,000
Capital lease obligations due through July 2007 with
interest at rates ranging from 8.0% to 11.5% and
collateralized by the related property. 4 5
Seller-financed debt on acquisitions, payable in monthly
installments through May 2009. Interest is payable at
rates ranging between 7.0% and 9.0%.
2,057 2,294
------------------ -----------------
10,061 10,299
Less - Current maturities (505) (487)
------------------ -----------------
$9,556 $9,812
================== =================
(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 $774,000 as of June 30, 2005 and December 31, 2004.
Also from time to time, federal and state authorities have sought to
assert that independent contractors in the transportation industry,
including those utilized by CD&L, are employees rather than independent
contractors. The Company believes that the independent contractors that
it utilizes are not employees under existing interpretations of federal
and state laws. However, federal and state authorities have and may
continue to challenge this position. Further, laws and regulations,
including tax laws, and the interpretations of those laws and
regulations, may change.
Management believes that none of these actions, including the actions
described above, will have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
(6) NET INCOME PER SHARE:
Basic net income per share represents net income divided by the
weighted average shares outstanding. Diluted net income per share
represents net income divided by the weighted average shares
outstanding adjusted for the incremental dilution of potentially
dilutive common shares. A reconciliation of weighted average common
shares outstanding to weighted average common shares outstanding
assuming dilution follows (in thousands)-
9
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2005 2004 2005 2004
------------ ---------- ------------ -----------
Basic weighted average
common shares outstanding 9,356 7,659 9,356 7,659
Effect of dilutive securities:
Stock options and warrants 1,049 974 1,052 777
Convertible preferred stock 3,937 3,937 3,937 1,968
Subordinated convertible debentures 5,906 - 5,906 -
------------ ---------- ------------ -----------
Diluted weighted average common shares
outstanding 20,248 12,570 20,251 10,404
============ ========== ============ ===========
A reconciliation of net income as reported to net income as adjusted
for the effect of dilutive securities follows (in thousands)-
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2005 2004 2005 2004
------------ ---------- ------------ -----------
Net income, as reported $626 $8 $1,054 $177
Effect of dilutive securities:
Interest on subordinated convertible debentures
129 - 257 -
------------ ---------- ------------ -----------
Net income, as adjusted for the effect of
dilutive securities $755 $8 $1,311 $177
============ ========== ============ ===========
The following potentially dilutive common shares were excluded from the
computation of diluted net income per share because the exercise or
conversion price was greater than the average market price of common
shares (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2005 2004 2005 2004
-------------- ------------ ------------ ------------
Stock options and warrants 1,135 1,760 1,135 1,762
Seller financed convertible notes 175 213 180 220
Subordinated convertible debentures
- 5,905 - 2,953
10
(7) NEW ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 154, Accounting Changes and Error
Corrections ("SFAS 154"). This new standard replaces APB Opinion No.
20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements. Among other changes, SFAS 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented
based on the new accounting principle, unless it is impracticable to do
so. SFAS 154 also provides that (1) a change in method of depreciating
or amortizing a long-lived nonfinancial asset be accounted for as a
change in estimate (prospectively) that was effected by a change in
accounting principle, and (2) correction of errors in previously issued
financial statements should be termed a "restatement." The new standard
is effective for accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Company is provided a "safe harbor" for forward-looking statements
contained in this report by the Private Securities Litigation Reform
Act of 1995. The Company may discuss forward-looking information in
this report such as its expectations for future performance, growth and
acquisition strategies, liquidity and capital needs and its future
prospects. Actual results may not necessarily develop as the Company
anticipates due to many factors including, but not limited to, the
timing of certain transactions, unexpected expenses encountered, the
effect of economic and market conditions, the impact of competition and
the factors listed in the Company's 2004 Report on Form 10-K and other
SEC filings. Because of these and other reasons, the Company's actual
results may vary materially from management's current expectations.
OVERVIEW
The condensed consolidated financial statements of the Company
including all related notes, which appear elsewhere in this report,
should be read in conjunction with this discussion of the Company's
results of operations and its liquidity and capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to
accounts receivable, intangible assets, insurance reserves, income
taxes and contingencies. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. For a discussion of the Company's critical accounting
policies, see the Company's Annual Report on Form 10-K for 2004.
12
RESULTS OF OPERATIONS
INCOME AND EXPENSE AS A PERCENTAGE OF REVENUE
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2005 2004 2005 2004
---------------- -------------- ------------- --------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross profit 20.0% 19.0% 19.9% 18.8%
Selling, general and
administrative expenses 16.7% 16.2% 16.9% 16.2%
Depreciation and amortization 0.5% 0.6% 0.5% 0.5%
Other (income) expense, net 0.0% 1.3% 0.0% 0.7%
Interest expense 0.7% 0.9% 0.7% 1.1%
Income before provision for income
taxes 2.1% 0.0% 1.8% 0.3%
Net income 1.2% 0.0% 1.0% 0.2%
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 2004
Revenue for the six months ended June 30, 2005 increased by
$10,823,000, or 11.3%, to $106,562,000 from $95,739,000 for the six
months ended June 30, 2004. The increase was due to an increase in
volume from new and existing customers. The revenue growth reflects the
success of the Company's nationwide business development program and
expansion into new markets with its existing customer base.
Cost of revenue increased by $7,635,000, or 9.8%, to $85,414,000 for
the six months ended June 30, 2005 from $77,779,000 for the six months
ended June 30, 2004. Cost of revenue for the six months ended June 30,
2005 represented 80.2% of revenues as compared to 81.2% for the same
period in 2004. The improved margin was due primarily to increased
route optimization, as new revenue provided higher density in existing
route structures. The increase in margin was offset partially by a
$384,000 increase in claims as compared to the same period in 2004.
Selling, general and administrative expenses ("SG&A") increased by
$2,433,000, or 15.7%, to $17,968,000 for the six months ended June 30,
2005 from $15,535,000 for the same period in 2004. Stated as a
percentage of revenue, SG&A was 16.9% as of June 30, 2005 and 16.2% as
of June 30, 2004. The increase in SG&A was primarily due to a
$1,622,000 increase in compensation expense as a result of increased
business development staffing and higher incentive compensation and a
$456,000 increase in rent expense as a result of additional properties
leased in the first half of 2005 as compared to the same period last
year. All other increases including travel and entertainment, repairs
and maintenance, costs of employee benefits and professional and
consulting fees totaled $1,050,000, partially offset by a decrease of
$695,000 in bad debt expense, resulting primarily from more effective
receivable management.
Depreciation and amortization was $550,000 as of June 30, 2005 as
compared to $494,000 for the same period in 2004. This increase
resulted from higher capital expenditures in 2005 and in the latter
part of 2004.
13
The Company experienced $9,000 of other income for the six months ended
June 30, 2005 compared with $612,000 of other expenses for the same
period in 2004, an improvement of $621,000. The 2004 expense of
$612,000 was due to the write-off of deferred financing costs and
original issue discount related to the original Senior Debt which was
restructured on April 14, 2004. Refer to the 2004 Form 10-K for further
discussion.
Interest expense decreased by $268,000 to $756,000 for the six months
ended June 30, 2005 from $1,024,000 for the same period in 2004. This
was primarily due to the debt restructuring in April 2004. See Note 4
in Notes to Condensed Consolidated Financial Statements.
As a result of the factors discussed above, income before provision for
income taxes increased by $1,588,000 to $1,883,000 for the six months
ended June 30, 2005 from $295,000 for the six months ended June 30,
2004.
Provision for income taxes increased by $711,000 to $829,000 for the
six months ended June 30, 2005 as compared to $118,000 for the same
period in 2004. This was due to the increase in income before provision
for income taxes discussed above. The effective tax rate for the six
months ended June 30, 2005 was 44% as compared to 40% as of June 30,
2004. The increase was a result of higher state income taxes.
Net income increased by $877,000 to $1,054,000 for the six months ended
June 30, 2005 as compared to $177,000 for the same period in 2004. This
was due to the factors discussed above.
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 2004
Revenue for the three months ended June 30, 2005 increased by
$4,950,000, or 10.1%, to $54,207,000 from $49,257,000 for the three
months ended June 30, 2004. The increase was due to an increase in
volume from new and existing customers. The revenue growth reflects the
success of the Company's nationwide business development program and
expansion into new markets with its existing customer base.
Cost of revenue increased by $3,473,000, or 8.7%, to $43,367,000 for
the three months ended June 30, 2005 from $39,894,000 for the three
months ended June 30, 2004. Cost of revenue for the three months ended
June 30, 2005 represented 80.0% of revenue as compared to 81.0% for the
same period in 2004. The decrease in cost of revenue as a percent of
revenue was due primarily to increased route optimization, as new
revenue provided higher density in existing route structures. The
increase in margin was offset partially by a $206,000 increase in
claims as compared to the same period in 2004.
SG&A increased by $1,088,000, or 13.6%, to $9,088,000 for the three
months ended June 30, 2005 from $8,000,000 for the same period in 2004.
The increase in SG&A was primarily due to a $766,000 increase in
compensation expense as a result of additional business development
staffing and higher incentive compensation. All other increases,
primarily for rent, travel and entertainment, consulting fees and cost
of employee benefits totaled $912,000. The net increases were partially
offset by a $590,000 reduction in bad debt expense, resulting primarily
from more effective receivable management. Stated as a percentage of
revenue, SG&A increased by 0.5% to 16.7% for the three months ended
June 30, 2005 as compared to 16.2% for the same period in 2004.
Depreciation and amortization increased by $3,000, or 1.1%, to $277,000
for the three months ended June 30, 2005 from $274,000 for the same
period last year.
The Company experienced other income of $9,000 in the three months
ended June 30, 2005 compared with other expenses of $623,000 for the
same period in 2004, an improvement of $632,000. The 2004 other expense
resulted primarily from the $628,000 write-off of deferred financing
costs and original issue discount related to the original Senior Debt
which was restructured on April 14, 2004. See Note 4 in Notes to
Condensed Consolidated Financial Statements.
14
Interest expense decreased by $87,000 to $366,000 for the three months
ended June 30, 2005 as compared to $453,000 for the same period last
year primarily as a result of the April 14, 2004 debt restructuring.
As a result of the factors discussed above, income before provision for
income taxes increased by $1,105,000 to $1,118,000, for the three
months ended June 30, 2005, as compared to $13,000 for the same period
in 2004.
Provision for income taxes increased by $487,000 to $492,000 for the
three months ended June 30, 2005, as compared to $5,000 for the same
period in 2004. This was due to the increase in income before provision
for income taxes discussed above. The effective tax rate for the three
months ended June 30, 2005 was 44% as compared to 40% as of June 30,
2004. The increase was a result of higher state income taxes.
Net income increased by $618,000 to $626,000 for the three months ended
June 30, 2005 as compared to net income of $8,000 for the same period
in 2004. This was due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company was indebted to the Original Noteholders
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 the Company, the Original
Noteholders and the Investors as to the financial restructuring of the
Senior Notes. The Original Noteholders agreed to convert a portion of
the existing debt due from CD&L into equity and to modify the terms of
the Senior Notes if the Investors purchased a portion of the Senior
Notes and accepted similar modifications. The loan agreement that
governed the Senior Notes was amended and restated to reflect the terms
of the substituted Series A Convertible Notes and the Series B
Convertible Notes, including the elimination of most financial
covenants. At June 30, 2005, long-term debt included $4,000,000 of
Series A Convertible Notes and $4,000,000 of Series B Convertible
Notes. The principal amount of the Convertible Notes is due in a
balloon payment at the maturity date of April 14, 2011. The Convertible
Notes bear interest at a rate of 9% for the first two years of the
term, 10.5% for the next two years and 12% for the final three years of
the term, and interest is paid quarterly.
The Company's working capital increased by $659,000 from $8,063,000 as
of December 31, 2004 to $8,722,000 as of June 30, 2005. Cash and cash
equivalents increased by $1,209,000 to $1,826,000 as of June 30, 2005.
Cash of $3,183,000 was provided by operations, while $421,000 was used
in net investing activities and $1,553,000 was used in net financing
activities. Capital expenditures amounted to $443,000 and $211,000 for
the six months ended June 30, 2005 and 2004, respectively.
As of June 27, 2002, CD&L and Summit entered into an agreement
establishing the Fleet Facility. The Fleet Facility was due to expire
on June 27, 2005 but was extended through December 31, 2005. The
Company is in negotiations for an extension or replacement of the Fleet
Facility on a long-term basis. The Company believes the terms and
conditions will be at least as favorable as the current facility. It
provides CD&L with standby letters of credit, prime rate based loans at
the bank's prime rate, as defined, plus 25 basis points (6.5% at June
30, 2005) and LIBOR based loans at the bank's LIBOR, as defined plus
225 basis points. Credit availability is based on eligible amounts of
accounts receivable, as defined, up to a maximum amount of $15,000,000
and is collateralized by substantially all of the assets, including
certain cash balances, accounts receivable, equipment, leasehold
improvements and general intangibles of the Company and its
subsidiaries. During the six months ended June 30, 2005, the maximum
borrowings outstanding under the Fleet Facility were approximately
$4,786,000 and the outstanding borrowings as of June 30, 2005 were
approximately $3,494,000. As of June 30, 2005, the Company had total
cash on hand and borrowing availability of $6,848,000 under the Fleet
Facility, after adjusting for restrictions related to outstanding
standby letters of credit of $5,748,000 and minimum availability
requirements.
15
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial
conditions. The Fleet Facility also prohibits the Company from
incurring certain additional indebtedness, limits certain investments,
advances or loans and restricts substantial asset sales, capital
expenditures and cash dividends. The Company was in compliance with its
debt covenants as of June 30, 2005.
The Company's risk of incurring uninsured losses increased in 2004 as a
result of increased deductibles retained by the Company in order to
reduce premiums in conjunction with the renewal of certain insurance
policies in 2004. There can be no assurances that the Company's risk
management policies and procedures will minimize future uninsured
losses or that a material increase in frequency or severity of
uninsured losses will not occur and adversely impact the Company's
future consolidated financial results.
The Company had an accumulated deficit of ($4,509,000) as of June 30,
2005. On numerous occasions, the Company has had to amend and obtain
waivers of the terms of its credit facilities and senior debt as a
result of covenant violations or for other reasons. On April 14, 2004,
the Company restructured its senior debt and related covenants. The
restructuring included an agreement among the Company, its lenders and
certain members of CD&L management and others which improved the
Company's short-term liquidity and reduced interest expense. The
restructuring eased the financial covenants to which the Company was
subject. However, if the Company were to fail to meet such covenants in
the future, there can be no assurances that the Company's lenders would
agree to waive any future covenant violations, renegotiate and modify
the terms of their loans, or further extend the maturity date, should
it become necessary to do so. Further, there can be no assurances that
the Company will be able to meet its revenue, cost or income
projections, upon which the debt covenants are based.
Management believes that cash flows from operations and its borrowing
capacity are sufficient to support the Company's operations and general
business and capital requirements through at least June 30, 2006. Such
conclusions are predicated upon sufficient cash flows from operations
and the continued availability of a revolving credit facility. The
risks associated with cash flows from operations are mitigated by the
Company's low gross profit margin. Unless extraordinary, decreases in
revenue should be accompanied by corresponding decreases in costs,
resulting in minimal impact to liquidity. The risks associated with the
revolving credit facility are as discussed above.
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.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the effect of changing interest rates. At
June 30, 2005, the Company's debt consisted of approximately
$10,060,000 of fixed rate debt with a weighted average interest rate of
8.59% and $3,494,000 of variable rate debt with a weighted average
interest rate of 5.93%. The variable rate debt consists of borrowings
of revolving line of credit debt at the bank's prime rate plus 25 basis
points (6.5% at June 30, 2005). If interest rates on variable rate debt
were to increase by 59 basis points (one-tenth of the weighted average
interest rate at June 30, 2005), the net impact to the Company's
results of operations and cash flows for the six months ended June 30,
2005 would be a decrease of income before provision for income taxes
and cash flows from operating activities of approximately $10,000.
Maximum borrowings of revolving line of credit debt during the six
months ended June 30, 2005 were $4,786,000.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the
Company's most recently completed fiscal quarter (the
Company's fourth fiscal quarter in the case of an annual
report) covered by this report, the Company carried out an
evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure
controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC rules and forms.
(b) Changes in internal controls over financial reporting. There
have been no changes in the Company's internal control over
financial reporting that occurred during the Company's last
fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial
reporting.
17
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders
On June 1, 2005, the Company held its annual meeting of stockholders.
The following sets forth a brief description of each matter which was acted
upon, as well as the votes cast for, against or withheld for each such matter,
and, where applicable, the number of abstentions and broker non-votes for each
matter:
1. Election of Directors.
Name of Director Votes For Withheld
------------------------ ----------- ---------
CLASS II
Jon F. Hanson 8,348,704 95,812
Michael Brooks 8,234,516 97,747
Matthew J. Morahan 8,348,704 95,812
2. Approval of the Amended and
Restated 2002 Stock Option Plan
for Independent
Directors.
Votes For: 2,303,796
Votes Against: 378,664
Abstentions: 7,595
Broker Non-Votes: 5,754,461
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.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 15, 2005 CD&L, INC.
By: \s\ Russell J. Reardon
-------------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
19