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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from .................... to ....................
Commission file number 0-26954
CD&L, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3350958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Wesley Street
South Hackensack, New Jersey 07606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 487-7740
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
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 aggregate market value of voting common equity of the registrant held by
non-affiliates (for this purpose, persons and entities other than executive
officers, directors, and 5% or more shareholders) of the registrant, as of the
last business day of the registrant's most recently completed second fiscal
quarter (June 30, 2002), was $3,374,888.
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding was 7,658,660 and the aggregate market value of voting common equity
of the registrant held by non-affiliates of the registrant was $2,610,763 as of
April 17, 2003.
Documents Incorporated by Reference: The registrant intends to file a definitive
proxy statement pursuant to Regulation 14A within 120 days of the end of the
fiscal year ended December 31, 2002. Portions of such proxy statement are
incorporated by reference into Part III of this Form 10-K.
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CD&L, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
INDEX
Page(s)
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PART I
- ------
Item 1. Business Description ...................................................................... 3
Item 2. Properties.................................................................................11
Item 3. Legal Proceedings..........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders........................................12
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................13
Item 6. Selected Financial Data....................................................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................25
Item 8. Financial Statements and Supplementary Data................................................26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures....................................................54
PART III
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Item 10. Directors and Executive Officers of the Company............................................55
Item 11. Executive Compensation.....................................................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................55
Item 13. Certain Relationships and Related Transactions.............................................55
Item 14. Controls and Procedures....................................................................55
PART IV
- -------
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................56
SIGNATURES .................................................................................................59
CERTIFICATIONS ............................................................................................60
2
PART I
Statements and information presented within this Annual Report on Form
10-K for CD&L, Inc. (the "Company", "CD&L", or "we") include certain statements
that may be deemed to be "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E
of the Exchange Act. These forward-looking statements include, but are not
limited to, statements about our plans, objectives, expectations and intentions
and other statements contained in this report that are not historical facts.
When used in this report, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks" and "estimates" and similar expressions are
generally intended to identify forward-looking statements. These statements are
based on certain assumptions and analyses made by the Company in light of its
experience and perception of historical trends, current conditions, expected
future developments and other factors it believes are appropriate in the
circumstances. Such statements are subject to a number of assumptions, risks and
uncertainties, including the risk factors (Item 1. Business Description - Risk
Factors) discussed below, general economic and business conditions, the business
opportunities (or lack thereof) that may be presented to and pursued by the
Company, changes in law or regulations and other factors, many of which are
beyond the control of the Company. Readers are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in the forward-looking
statements. All subsequent written or oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified by these factors.
Item 1. Business Description
Overview
We are one of the leading national full-service providers of
customized, same-day, time-critical, delivery services to a wide range of
commercial, industrial and retail customers. Our services are provided
throughout the United States, but concentrated on the East Coast.
In conjunction with our initial public offering in November 1995 we
acquired 11 time-critical ground and air delivery businesses that operated in 52
cities across the United States. As of December 31, 2002, we had acquired 15
additional time-critical ground and air delivery businesses and sold the ground
courier operations in the Mid-West, one of the contract logistics operations and
the Company's air courier division.
We offer the following delivery services:
o rush delivery service, typically consisting of delivering
time-sensitive packages, such as critical parts, emergency
medical devices and legal and financial documents from
point-to-point on an as-needed basis;
o routed services, providing, on a recurring and often daily
basis, deliveries from pharmaceutical suppliers to pharmacies,
from manufacturers to retailers, and the inter-branch
distribution of financial documents in a commingled system;
o facilities management, including providing and supervising
mailroom personnel, mail and package sorting, internal
delivery and outside local messenger services; and
o dedicated contract logistics, providing a comprehensive
solution to major corporations that want the control,
flexibility and image of an in-house fleet with all the
economic benefits of outsourcing.
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. (See Note 9 of Notes to
Consolidated Financial Statements for additional information on the Company's
debt).
3
Our Industry
The same-day delivery industry is serviced by a fragmented system of
thousands of companies that include only a small number of large regional or
national operators. The industry has been impacted by the following:
o Outsourcing and Vendor Consolidation. Commercial and
industrial businesses, which choose same-day delivery
services, sometimes prefer concentrating on their core
business by outsourcing non-core activities. These businesses
seek single-source solutions for their regional and national
same-day delivery needs rather than utilizing a number of
smaller, local delivery companies. At the same time, some
larger national and international companies are looking toward
decentralized distribution systems.
o Heightened Customer Expectations. Increasing customer demand
for specialized services such as customized billing, enhanced
tracking, storage, inventory management and just-in-time
delivery capabilities favor companies with greater resources
to devote to providing those services. The use of facsimile
technology and the Internet have increased the speed at which
the processing of information and transactions occur such that
the requirements for immediate delivery of a wide range of
critical items has become commonplace.
Our Services
We provide our customers with a full range of customized, same-day,
time-critical, delivery service options.
Rush. In providing rush delivery services, or services on demand, our messengers
and drivers respond to customer requests for the immediate pick-up and delivery
of time-sensitive packages. We generally offer one-, two- and four-hour service,
on a 7-days-a-week, 24-hours-a-day basis. Our typical customers for rush service
include commercial and industrial companies, health care providers and service
providers such as accountants, lawyers, advertising and travel agencies and
public relations firms.
Scheduled. Our scheduled delivery services are provided on a recurring and often
daily basis. We typically pick up or receive large shipments of products, which
are then sorted, routed and delivered. These deliveries are made in accordance
with a customer's specific schedule that generally provides for deliveries to be
made at particular times. Typical routes may include deliveries from
pharmaceutical suppliers to pharmacies, from manufacturers to retailers, the
inter-branch distribution of financial documents, payroll data and other
time-critical documents for banks, financial institutions and insurance
companies. We also provide these services to large retailers for home delivery,
including large cosmetic companies, door-to-door retailers, catalog retailers,
home health care distributors and other direct sales companies.
Facilities Management. We provide complete mailroom management services, by
offering customized solutions that include absorbing the entire mailroom
function. This includes mail meter management, messenger delivery services, main
entrance personnel and management personnel.
Dedicated Contract Logistics. We offer efficient and cost-effective dedicated
delivery solutions, such as fleet replacement solutions, dedicated delivery
systems and transportation systems management services. These services provide
major health care providers, office product companies, retailers and financial
institutions with the control, flexibility and image of an in-house fleet and
with all of the economic benefits of outsourcing.
Our Internal Operations
We operate from 57 leased facilities and 33 customer owned facilities
in 21 states. The size of each facility varies, but typically includes dedicated
dispatch and order entry functions as well as delivery personnel. We accomplish
coordination and deployment of our delivery personnel either through
communications systems linked to our computers, through pagers, mobile data
units, or by radio or telephone. A dispatcher coordinates shipments for delivery
within a specific time frame. We route a shipment according to its type and
weight, the geographic distance between its origin and destination and the time
allotted for its delivery. In the case of scheduled deliveries, we design routes
to minimize the unit costs of the deliveries and to enhance route density. We
continue to deploy new hardware and software systems designed to enhance the
capture, routing, tracking and reporting of deliveries throughout our network.
To further improve customer service, we offer customers the opportunity to
access this information via the Internet.
4
Sales and Marketing
We believe that a direct sales force most effectively reaches
customers for same-day, time-critical delivery services and, accordingly, we do
not currently engage in mass media advertising. We market directly to individual
customers by designing and offering customized service packages after
determining their specific delivery and distribution requirements. We are
implementing a coordinated major account strategy by building on established
relationships with regional and national customers.
Many of the services we provide, such as facilities management,
dedicated contract logistics and routed delivery services are determined on the
basis of competitive bids. However, we believe that quality and service
capabilities are also important competitive factors. We derive a substantial
portion of our revenues from customers with whom we have entered into contracts.
Competition
The market for our delivery services is highly competitive. We
believe that the principal competitive factors in the markets in which we
compete are reliability, quality, breadth of service offerings, technology and
price. We compete on all of those factors. Most of our competitors in the
time-critical, same-day, delivery market are privately held companies that
operate in only one location or within a limited service area. Our services are
available 24-hours-a-day, 7-days-a-week.
Acquisitions and Sales of Businesses
We were formed as a Delaware corporation in June 1994. As of December
31, 2002, we had acquired 26 same-day time-critical delivery businesses,
including the 11 companies that we acquired simultaneously with the commencement
of our operations in November 1995. We paid approximately $67,800,000
($29,600,000 in cash and 2,935,702 shares of our common stock) to acquire the 11
founding companies. In addition to the acquisition of those companies, we
acquired certain additional assets from two companies in transactions that we
accounted for as purchases. Those acquired assets were not material.
In 1996, we acquired five additional businesses that had
approximately $15,600,000 in aggregate annual revenues. We paid approximately
$3,300,000 to acquire those companies using a combination of cash,
seller-financed debt and shares of our common stock. Subsequently, the aggregate
purchase price paid for those companies was reduced by approximately $616,000
because the actual revenues of some of the acquired companies did not reach the
revenues projected by the sellers. We accounted for each of the 1996
acquisitions as purchases.
In 1997, we did not make any acquisitions and instead focused on
internal growth. Consistent with our change of strategic focus, in January 1997
we sold our contract logistics subsidiary back to its founder in exchange for
137,239 shares of our common stock. In connection with that sale, we recorded a
gain of approximately $816,000 before the effect of Federal and state income
taxes.
In December 1997, we sold our direct mail business for $850,000 in
cash and notes. In connection with that sale, we recorded a gain of
approximately $23,000 net of Federal and state income taxes of approximately
$15,000. Subsequently, in 1999 the company to which we sold our direct mail
business went out of business and defaulted on their note and the Company wrote
off the remaining balance of the note of $661,868.
In 1998, we acquired four same-day, time-critical delivery businesses
that had aggregate annual revenues of approximately $25,100,000. We paid
approximately $14,500,000 for the businesses consisting of a combination of
cash, shares of our common stock and seller-financed debt. We accounted for each
of the 1998 acquisitions as purchases.
In 1999, we acquired four same-day, time-critical delivery businesses
that had aggregate annual revenues of approximately $24,800,000. We paid
approximately $12,700,000 for the businesses consisting of a combination of
cash, shares of our common stock and seller-financed debt. The acquisitions were
accounted for as purchase transactions. Under the terms of the purchase
agreements, additional payments of approximately $600,000 were made in 2000 and
2001 upon the accomplishment of certain financial objectives.
5
On December 1, 2000, we made a strategic decision to dispose of our
air delivery business. On March 30, 2001, we consummated a transaction providing
for the sale of certain assets and liabilities of Sureway Air Traffic
Corporation, Inc. ("Sureway"), our air delivery business. The selling price for
the net assets was approximately $14,150,000 and was comprised of $11,650,000 in
cash, a subordinated promissory note (the "Note Receivable") for $2,500,000 and
contingent cash payments based upon the ultimate development of certain
liabilities retained by us. The financial position, operating results and the
provision for loss on the disposition of the Company's air delivery business
have been segregated from continuing operations and classified as discontinued
operations in the accompanying consolidated financial statements.
The Company reported net losses of $0, $465,000 and $1,419,000 from
discontinued operations for the years ended December 31, 2002, 2001 and 2000,
respectively (including provisions for losses on the disposition of the assets
of the Company's air delivery business, (net of benefit for income taxes of $0,
$240,000 and $125,000) of $0, $465,000 and $2,807,000, respectively).
In February 1999, the Company became obligated for seller-financed
acquisition debt of $1,650,000 related to the acquisition of Gold Wings (See
Note 4 of Notes to Consolidated Financial Statements). 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"), Richard Gold (a principal
of GMV) ("Gold") and his affiliates, and Global Delivery Systems LLC ("Global")
and its subsidiary, Sureway Worldwide LLC ("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 in the first quarter of 2003.
On June 14, 2001, the Company consummated a transaction providing
for the sale of all the outstanding stock of National Express, Inc., the
Company's ground courier operations in the Mid-West. The selling price was
approximately $2,530,000 and was comprised of $880,000 in cash and a
subordinated promissory note (the "Promissory Note") for $1,650,000.
As of March 14, 2003, the Promissory Note was amended to defer the
interest and principal payments due on December 14, 2002 and March 14, 2003. A
new quarterly payment schedule will commence on June 14, 2003 with interest only
payments at a new interest rate at 9.0% per annum. Upon the earlier of June 14,
2004 or the maker of the Promissory Note meeting certain financial benchmarks,
principal payments shall resume and the interest rate will prospectively revert
back to 7.0% per annum. The final balloon payment of approximately $1,100,000
plus any remaining principal or unpaid interest remains due on June 14, 2006.
Regulation
Our delivery operations are subject to various state and local
regulations and, in many instances, we require permits and licenses from state
authorities. To a limited degree, state and local authorities have the power to
regulate the delivery of certain types of shipments and operations within
certain geographic areas. Interstate and intrastate motor carrier operations are
also subject to safety requirements prescribed by the U.S. Department of
Transportation ("DOT") and by state departments of transportation. If we fail to
comply with applicable regulations, we could face substantial fines or possible
revocation of one or more of our operating permits.
Safety
We seek to ensure that all of our employee drivers meet safety
standards established by us and our insurance carriers as well as the U.S. DOT.
In addition, where required by the DOT, state or local authorities, we require
that our independent contractors meet certain specified safety standards. We
review prospective drivers in an effort to ensure that they meet applicable
requirements.
6
Employees and Independent Contractors
As of December 31, 2002, we employed approximately 1,425 people, 782
as drivers or messengers, 470 in operations, 133 in clerical and administrative
positions, 14 in sales, 19 in information technology and 7 in executive
management. We are not a party to any collective bargaining agreements. We also
had agreements with approximately 2,230 independent contractors as of December
31, 2002. We have not experienced any work stoppages and believe that our
relationship with our employees and independent contractors is good.
Risk Factors
You should carefully consider the following factors as well as the
other information in this report before deciding to invest in shares of our
common stock.
We have limited capital resources.
The Company has an accumulated deficit of ($8,829,000) as of December
31, 2002. In addition, 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. (See Note 9 of Notes to
Consolidated Financial Statements for additional information on the Company's
debt). 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.
As of December 31, 2002, we had total cash on hand and borrowing
ability of $3,890,000 under our revolving credit facility, after adjusting for
the restrictions for outstanding letters of credit and minimum availability
requirements. We believe that cash flows from operations and the Company's
borrowing capacity after the debt modifications referred to below, 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.
Price competition could reduce the demand for our service.
The market for our services has been extremely competitive and is
expected to be so for the foreseeable future. Price competition is often
intense, particularly in the market for basic delivery services where barriers
to entry are low.
Claims above our insurance limits, or significant increases in our insurance
premiums, may reduce our profitability.
We utilize the services of approximately 260 employee drivers. From
time to time some of those drivers are involved in automobile accidents. We
currently carry liability insurance of $1,000,000 for each driver accident,
subject to applicable deductibles (generally $350,000 per occurrence) and carry
umbrella coverage up to $10,000,000 in the aggregate. However, claims against us
may exceed the amounts of available insurance coverage. We also contract with
approximately 2,230 independent contractor drivers. In accordance with Company
policy, all independent contractor drivers are required to maintain liability
coverage as well as workers' compensation or occupational accident insurance. If
we were to experience a material increase in the frequency or severity of
accidents, liability claims or workers' compensation claims, or unfavorable
resolutions of claims, our operating results could be materially affected.
7
As a same-day delivery company, our ability to service our clients effectively
is often dependent upon factors beyond our control.
Our revenues and earnings are especially sensitive to events that are
beyond our control that affect the same-day delivery services industry,
including:
o extreme weather conditions;
o economic factors affecting our significant customers;
o mergers and consolidations of existing customers;
o U.S. business activity; and
o the levels of unemployment.
Our reputation will be harmed, and we could lose customers, if the information
and telecommunications technologies on which we rely fail to adequately perform.
Our business depends upon a number of different information and
telecommunication technologies as well as the ability to develop and implement
new technology enabling us to manage and process a high volume of transactions
accurately and timely. Any impairment of our ability to process transactions in
this way could result in the loss of customers and diminish our reputation.
Governmental regulation of the transportation industry, particularly with
respect to our independent contractors, may substantially increase our operating
expenses.
From time to time, federal and state authorities have sought to assert
that independent contractors in the transportation industry, including those
utilized by us, are employees rather than independent contractors. We believe
that the independent contractors that we utilize 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. If, as a result of changes in laws, regulations,
interpretations or enforcement by federal or state authorities, we become
required to pay for and administer added benefits to independent contractors,
our operating costs could substantially increase.
Shareholders will experience dilution when we issue the additional shares of
common stock that we are permitted or required to issue under convertible notes,
options and warrants.
We are permitted, and in some cases obligated, to issue shares of
common stock in addition to the common stock that is currently outstanding. If
and when we issue these shares, the percentage of the common stock currently
issued and outstanding will be diluted. The following is a summary of additional
shares of common stock that we have currently reserved for issuance as of
December 31, 2002:
o 506,250 shares are issuable upon the exercise of outstanding
warrants at an exercise price of $.001 per share.
o 4,000,000 shares are issuable upon the exercise of options or other
benefits under our employee stock option plan, consisting of:
o outstanding options to purchase 1,806,153 shares at a weighted
average exercise price of $3.09 per share, of which options
covering 1,770,987 shares were exercisable as of December 31,
2002; and
o 2,193,847 shares available for future awards after December 31,
2002.
8
o 200,000 shares are issuable upon the exercise of options or other
benefits under our independent director stock option plan,
consisting of:
o outstanding options to purchase 127,500 shares at a weighted
average exercise price of $1.85 per share, of which options
covering 127,500 shares were exercisable as of December 31, 2002;
and
o 72,500 shares available for future awards after December 31,
2002.
o 458,083 shares are issuable upon the exercise of outstanding
convertible notes at a weighted average exercise price of $6.47 per
share.
Our success is dependent on the continued service of our key management
personnel.
Our future success depends, in part, on the continued service of our
key management personnel. If certain employees were unable or unwilling to
continue in their present positions, our business, financial condition,
operating results and future prospects could be materially adversely affected.
If we fail to maintain our governmental permits and licenses, we may be subject
to substantial fines and possible revocation of our authority to operate our
business in certain jurisdictions.
Our delivery operations are subject to various state, local and federal
regulations that in many instances require permits and licenses. If we fail to
maintain required permits or licenses, or to comply with applicable regulations,
we could be subject to substantial fines or our authority to operate our
business in certain jurisdictions could be revoked.
Our certificate of incorporation, by-laws, shareholder rights plan and Delaware
law contain provisions that could discourage a takeover that current
shareholders may consider favorable.
Provisions of our certificate of incorporation, by-laws and our
shareholder rights plan, as well as Delaware law, may discourage, delay or
prevent a merger or acquisition that you may consider favorable. These
provisions of our certificate of incorporation and by-laws:
o establish a classified board of directors in which only a portion of
the total number of directors will be elected at each annual meeting;
o authorize the Board of Directors to issue preferred stock;
o prohibit cumulative voting in the election of directors;
o limit the persons who may call special meetings of stockholders;
o prohibit stockholder action by written consent; and
o establish advance notice requirements for nominations for the election
of the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
In addition, we have adopted a Stockholder Protection Rights Plan in
order to protect against offers to acquire us that our Board of Directors
believes to be inadequate or not otherwise in our best interests. There are,
however, certain possible disadvantages to having the Plan in place, which might
adversely impact us. The existence of the Plan may limit our flexibility in
dealing with potential acquirers in certain circumstances and may deter
potential acquirers from approaching us.
9
Executive Management
Albert W. Van Ness, Jr., 60, has served as the Chairman of the Board,
Chief Executive Officer and Director of CD&L since January 1997. He was formerly
the President and Chief Operating Officer of Club Quarters, LLC, a privately
held hotel management company and remains a member partner. In the early
nineties, Mr. Van Ness served as Director of Managing People & Productivity, a
senior management consulting firm. During most of the eighties, Mr. Van Ness
held various executive positions with Cunard Line Limited, a passenger ship and
luxury hotel company, including Executive Vice President and Chief Operating
Officer of the Cunard Leisure Division and Managing Director and President of
the Hotels and Resorts Division. Earlier in his career Mr. Van Ness served as
the President of Seatrain Intermodal Services, Inc., a cargo shipping company.
Mr. Van Ness held various management positions at the start of his professional
life with Ford Motor Company, Citibank and Hertz. Mr. Van Ness majored in
Sociology and Economics and received a B.A. and M.A. degree and completed his
coursework towards his doctorate in Economics. He attended Duke University,
Northern State University, South Dakota State University and Syracuse
University.
William T. Brannan, 55, has served as President, Chief Operating
Officer and Director of CD&L since November 1994. From January 1991 until
October 1994, Mr. Brannan served as President, Americas Region - US Operations,
for TNT Express Worldwide, a major European-based overnight express delivery
company. Mr. Brannan has more than 25 years of experience in the transportation
and logistics industry.
Michael Brooks, 49, has served as Director of the Company since
December 1995 and as Group Operations President since December 2000. Mr. Brooks
previously had been the President of Silver Star Express, Inc., a subsidiary of
the Company, since November 1995. Prior to the merger of Silver Star Express,
Inc. into the Company, Mr. Brooks was President of Silver Star Express, Inc.
since 1988. Mr. Brooks has more than 25 years of experience in the same-day
delivery and distribution industries. In addition, Mr. Brooks is currently a
Member of the Express Carriers Association and various other transportation
associations.
Russell J. Reardon, 53, has served as Vice President - Chief
Financial Officer since November 1999. Mr. Reardon previously had been Vice
President - Treasurer of CD&L since January 1999. Prior thereto, from September
1998 until January 1999 Mr. Reardon was Chief Financial Officer and Secretary of
Able Energy, Inc. a regional energy retailer. From April 1996 until June 1998,
Mr. Reardon was Chief Financial Officer and Secretary of Logimetrics, Inc. a
manufacturer of broad-band wireless communication devices. He earned an
accounting degree and an MBA in Finance from Fairleigh Dickinson University.
Mark T. Carlesimo, 49, has served as Vice President - General Counsel
and Secretary of CD&L since September 1997. From July 1983 until September 1997,
Mr. Carlesimo served as Vice President of Legal Affairs of Cunard Line Limited.
Earlier in his career, Mr. Carlesimo served as Staff Counsel to Seatrain Lines,
Inc., a cargo shipping company and was engaged in the private practice of law.
Mr. Carlesimo received a B.A. in Economics from Fordham University in 1975 and
received his law degree from Fordham University School of Law in 1979. Mr.
Carlesimo is a Member of the Bar of the states of New York and New Jersey.
Anthony Guzzo, 30, was appointed Vice President - Controller in March
2003. Prior to his appointment, Mr. Guzzo served as the Company's Treasurer
since January 2001. Mr. Guzzo previously had been the Company's Director of
Financial Reporting since June 2000 and before that was a manager in the
Consumer Products and Services Division of Arthur Andersen LLP.
10
Item 2. Properties
As of December 31, 2002, the Company operated from 57 leased
facilities (not including 33 customer-owned facilities). These facilities are
principally used for operations, general and administrative functions and
training. In addition, several facilities also contain storage and warehouse
space. The table below summarizes the location of the Company's current leased
facilities.
State Number of Leased Facilities
- ----- ---------------------------
New York.......................................... 17
Florida........................................... 7
New Jersey........................................ 5
California........................................ 4
North Carolina.................................... 3
Louisiana......................................... 3
Maine............................................. 2
Ohio.............................................. 2
Oklahoma.......................................... 2
Indiana........................................... 1
Massachusetts..................................... 1
Pennsylvania...................................... 1
South Carolina.................................... 1
Tennessee......................................... 1
Washington........................................ 1
Arkansas.......................................... 1
Connecticut....................................... 1
Georgia........................................... 1
Maryland.......................................... 1
Texas............................................. 1
Vermont........................................... 1
--------
Total 57
The Company's corporate headquarters is located at 80 Wesley Street,
South Hackensack, New Jersey. The Company believes that its properties are
generally well maintained, in good condition and adequate for its present needs.
Furthermore, the Company believes that suitable additional or replacement space
will be available when required.
As of December 31, 2002, the Company owned or leased approximately
400 vehicles of various types, which are operated by drivers employed by the
Company. The Company also hires independent contractors who provide their own
vehicles and are required to carry at least the minimum amount of insurance
required by law.
The Company's aggregate rental expense, primarily for facilities, was
approximately $6,747,000, for the year ended December 31, 2002. See Note 12 to
the Company's Consolidated Financial Statements.
11
Item 3. Legal Proceedings
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 December 31, 2002 and 2001, the Company had a receivable due from
Mr. Brana totaling $2,800,000. As of December 31, 2002, 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
has recorded 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.
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves 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 $325,000 and $575,000 as of December 31, 2002 and 2001, 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 us, are employees rather than independent contractors. We
believe that the independent contractors that we utilize 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been trading on the American Stock
Exchange under the symbol "CDV" since February 23, 1999. Prior to that date, the
Company's Common Stock was included for quotation on the Nasdaq National Market
under the symbol "CDLI." The following table sets forth the high and low closing
sales prices for the Common Stock for 2001 and 2002.
2001 Low High
---- --- ----
First Quarter $0.37 $1.25
Second Quarter $0.33 $0.62
Third Quarter $0.40 $0.62
Fourth Quarter $0.30 $0.49
2002 Low High
---- --- ----
First Quarter $0.38 $0.61
Second Quarter $0.44 $0.70
Third Quarter $0.40 $0.58
Fourth Quarter $0.46 $0.62
On April 17, 2003, the last reported sale price of the Common Stock was
$0.41 per share. As of March 17, 2003, there were approximately 284 shareholders
of record of Common Stock.
Dividends
The Company has not declared or paid any dividends on its Common
Stock. The Company currently intends to retain earnings to support its growth
strategy and does not anticipate paying dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, results of operations, current and anticipated
cash needs and plans for expansion. The Company's ability to pay cash dividends
on the Common Stock is also limited by the terms of its revolving credit
facility. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.
13
Item 6. Selected Financial Data
The selected consolidated financial data set forth below as of and
for the year ended December 31, 2002 is derived from our consolidated financial
statements audited by Deloitte & Touche LLP, independent auditors, which are
included elsewhere herein. The selected consolidated financial data set forth
below for the years ended December 31, 2000 and 2001 and as of December 31,
2001, which are included herein, and for the years ended December 31, 1998 and
1999 and as of December 31, 1998, 1999, and 2000, which are not included herein,
are derived from our consolidated financial statements audited by Arthur
Andersen LLP, independent public accountants who have ceased operations. The
selected consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements and related notes thereto
and with Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this report.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Statement of Operations Data:
CD&L, Inc. and Subsidiaries (1)
-------------------------------------------------------------------------------------
For The Year Ended December 31,
-------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Revenue $130,121 $158,380 $170,079 $160,544 $157,232
Gross profit 27,709 35,175 34,463 32,704 30,080
Selling, general and
administrative expenses 22,121 27,123 33,978 26,881 25,492
Goodwill impairment - - - 3,349 -
Depreciation and amortization 2,589 3,672 3,355 2,476 1,173
Other expense, net 48 80 2,438 4,685 206
Interest expense 1,218 2,731 3,060 2,897 2,734
Income (loss) from
continuing operations 1,075 950 (6,229) (5,804) 285
Discontinued operations:
Income from discontinued
operations, net of income
taxes 1,236 1,961 1,388 - -
Provision for loss on
disposal of assets, net
of income taxes - - (2,807) (465) -
Net income (loss) $ 2,311 $ 2,911 ($ 7,648) ($ 6,269) $ 285
Basic income (loss) per
share:
-Continuing operations $ .16 $ .13 ($ .84) ($ .76) $ .04
-Discontinued operations .19 .27 (.19) (.06) -
-------- -------- -------- -------- --------
-Net income (loss) $ .35 $ .40 ($ 1.03) ($ .82) $ .04
======== ======== ======== ======== ========
Diluted income (loss) per share:
-Continuing operations $ .16 $ .12 ($ .84) ($ .76) $ .03
-Discontinued operations .18 .25 (.19) (.06) -
-------- -------- -------- -------- --------
-Net income (loss) $ .34 $ .37 ($ 1.03) ($ .82) $ .03
======== ======== ======== ======== ========
Basic weighted average shares
outstanding 6,662 7,214 7,430 7,659 7,659
Diluted weighted average
shares outstanding 6,839 7,868 7,430 7,659 8,167
Balance Sheet Data: CD&L, Inc. and Subsidiaries (1)
-------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Working capital (deficit) ($ 4,196) $ 5,989 ($ 3,430) $ 4,923 $ 2,869
Equipment and leasehold
improvements, net 5,299 4,321 2,841 1,961 1,233
Goodwill and other intangible
assets, net 15,931 22,375 20,666 12,252 12,192
Total assets 46,890 62,513 57,785 35,481 33,821
Total debt 23,141 32,353 34,686 20,595 17,483
Stockholders' equity $ 11,407 $ 17,369 $ 9,884 $ 3,615 $ 3,900
(1) During 2000, the Company discontinued its air operations and subsequently
disposed of them in 2001. Accordingly, the operating results and loss on
disposition of the air delivery business have been classified as
discontinued operations for the periods presented.
14
Item 7. 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 Item 1. Business Description - Risk
Factors. Because of these and other reasons, the Company's actual results may
vary materially from management's current expectations.
Overview
The 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.
Discontinued Operations
On December 1, 2000, we made a strategic decision to dispose of our
air delivery business and accordingly have restated the accompanying balance
sheets, statements of operations and statements of cash flows to reflect such as
discontinued operations. On March 30, 2001, we consummated a transaction
providing for the sale of certain assets and liabilities of Sureway Air Traffic
Corporation, Inc. ("Sureway"), our air delivery business. The selling price for
the net assets was approximately $14,150,000 and was comprised of $11,650,000 in
cash, a subordinated promissory note (the "Note Receivable") for $2,500,000 and
contingent cash payments based upon the ultimate development of certain
liabilities retained by us. The Note Receivable originally bore interest at the
rate of 10.0% per annum, with interest only payable in monthly installments. The
entire balance of principal, plus all accrued interest, was due and payable on
March 30, 2006. As of December 31, 2001 collection of the Note Receivable,
interest accrued thereon and certain other related receivables was in doubt.
Accordingly, the Company recorded a pre-tax charge of $2,500,000 (included in
Other expense, net) in the fourth quarter of 2001 to write-off the Note
Receivable. Additionally, the Company recorded a pre-tax charge of $705,000
(included in Discontinued Operations) in the fourth quarter of 2001 to write-off
certain other direct expenses incurred on behalf of Sureway subsequent to March
30, 2001 for which collection was in doubt and to true-up certain accruals that
were estimated in 2000 relative to the disposition of Sureway.
The Company reported net losses of $0, $465,000 and $1,419,000 from
discontinued operations for the years ended December 31, 2002, 2001 and 2000,
respectively (including provisions for losses on the disposition of the assets
of the Company's air delivery business, (net of benefit for income taxes of $0,
$240,000 and $125,000) of $0, $465,000 and $2,807,000, respectively).
In February 1999, the Company became obligated for seller-financed
acquisition debt of $1,650,000 related to the acquisition of Gold Wings (See
Note 4 of Notes to Consolidated Financial Statements). 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"), Richard Gold (a principal
of GMV) ("Gold") and his affiliates, and Global Delivery Systems LLC ("Global")
and its subsidiary, Sureway Worldwide LLC ("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 in the first quarter of 2003.
15
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.
Revenue Recognition
Revenue is recognized when pervasive evidence of an arrangement exists,
the price to the customer is fixed or determinable and collectibility is
reasonably assured. The Company interprets the timing of revenue recognition to
be when services are rendered to customers, and expenses are recognized as
incurred. This policy applies to all of the Company's same-day, time-critical
delivery service options, including Rush, Scheduled, Facilities Management and
Dedicated Contract Logistics. Certain customers pay in advance, giving rise to
deferred revenue.
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 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.
Insurance Reserves
The Company maintains certain insurance risk through insurance policies
with a $350,000 deductible for workers' compensation and 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.
16
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 has 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 2002 Compared with 2001
The following discussion compares the year ended December 31, 2002
and the year ended December 31, 2001, for continuing operations.
Income and Expense as a Percentage of Revenue
For the Years Ended
December 31,
-----------------------------
2002 2001
------------ ------------
Revenue 100.0% 100.0%
Gross profit 19.1% 20.4%
Selling, general and
administrative expenses 16.2% 16.7%
Goodwill Impairment 0.0% 2.1%
Depreciation and amortization 0.7% 1.5%
Other expense, net 0.1% 2.9%
Interest expense 1.7% 1.8%
Income (loss) from continuing
operations 0.2% (3.6)%
Revenue for the year ended December 31, 2002 decreased $3,312,000, or
2.1%, to $157,232,000 from $160,544,000 for the year ended December 31, 2001.
The decrease included approximately $4,500,000 in lost revenue due to the sale
of the Company's Mid-West operations on June 14, 2001. All other revenue
increased by $1,188,000, or 0.7%.
Cost of revenue consists primarily of payments to employee drivers
and independent contractors, agents, other direct pick-up and delivery costs and
the costs of dispatching drivers and messengers. These costs decreased $688,000,
or 0.5%, from $127,840,000 for 2001 to $127,152,000 in 2002. Stated as a
percentage of revenue, these costs increased to 80.9% for 2002 compared to 79.6%
for 2001. Excluding the $3,592,000 reduction due to the sale of the Company's
Mid-West operations, cost of revenue increased $2,904,000 or 2.3%. This reflects
increased direct messenger and driver costs of $6,352,000 and higher workers'
compensation and vehicle insurance of $442,000. These cost increases were
partially offset by the favorable impact on vehicle lease and operating costs of
$3,433,000 due to a reduction in Company owned vehicles and decreased uninsured
product-related claims and other costs of $457,000.
As a result of the above, gross profit decreased by $2,624,000, from
$32,704,000 in 2001 to $30,080,000 in 2002. As a percentage of revenue, gross
profit decreased to 19.1% in 2002 compared to 20.4% in 2001.
Selling, general and administrative expense ("SG&A") includes costs
incurred at the terminal level related to taking orders and administrative costs
related to such functions. Also included are costs to support the Company's
marketing and sales effort and the expense of maintaining information systems,
human resources, financial, legal and other corporate administrative functions.
SG&A decreased by $1,389,000, or 5.2%, from $26,881,000 in 2001 to $25,492,000
in 2002. As a percentage of revenue SG&A decreased to 16.2% in 2002 compared to
16.7% of revenue in 2001. Excluding the $690,000 decrease due to the sale of the
Company's Mid-West operations, SG&A decreased $699,000 or 2.7%. SG&A expense was
favorably impacted by reduced staffing costs of $637,000, lower facility and
communication costs of $451,000, lower bad debt expense of $286,000 and $183,000
in grants received related to the events of September 11, 2001. These were
partially offset by increased general insurance expenses of $464,000 and net
increases of $394,000 of other expense.
17
There was no goodwill impairment for 2002 compared to $3,349,000 for
2001. The charge taken in 2001 was the result of a comprehensive review of the
Company's intangible assets under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 121"). In
2001, as a result of recording significant losses on the dispositions of Sureway
and the Mid-West operations and as a result of inadequate cash flows from
certain acquired businesses due to the loss of customers, the Company determined
that the carrying amount of certain assets might not be fully recoverable. The
measurement of impairment losses recognized in 2001 is based on the difference
between the fair values, which were calculated based upon the present value of
projected future cash flows, and the carrying amounts of the assets.
Depreciation and amortization decreased by $1,303,000, or 52.6%, from
$2,476,000 for 2001 to $1,173,000 for 2002. The decrease was primarily
attributable to the adoption of SFAS 142, as discussed below. In addition, other
factors driving such reduction was the full depreciation of certain vehicles
held under a capital lease that ended during 2001 and reduced capital
expenditures in 2000, 2001 and 2002. On June 30, 2001, SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142") was issued. SFAS 142 eliminates
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 requires 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 an impairment of goodwill.
However, changes in business conditions could result in an impairment in the
future. Such impairment, if any, could have a significant impact on the
Company's 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.
Adoption of SFAS 142 increased pretax earnings by approximately $738,000 for the
year ended December 31, 2002 due to the cessation of goodwill amortization.
Other expense decreased by $4,479,000, to $206,000 in 2002 from
$4,685,000 in 2001. The 2002 expense includes a $300,000 increase in the
allowance for the shareholder note receivable. The 2001 expense is primarily due
to two transactions. As of December 31, 2001, the Company wrote-off the Note
Receivable received on March 30, 2001 amounting to $2,500,000 in the transaction
to dispose of certain assets and liabilities of Sureway, as collection of the
Note Receivable, interest accrued thereon and certain other related receivables
was in doubt. The Company also recorded a $2,283,000 loss on the sale of all of
the outstanding stock in National Express, Inc. (the Company's ground courier
operation in the Mid-West) on June 14, 2001. The selling price of the stock was
approximately $2,530,000 and was comprised of $880,000 in cash and a
subordinated promissory note (the "Promissory Note") for $1,650,000. The
Promissory Note originally bore interest at the rate of 7.0% per annum. The
Promissory Note, as amended on March 14, 2003, allows for the deferral of the
interest and principal payments due on December 14, 2002 and March 14, 2003. A
new quarterly payment schedule will commence on June 14, 2003 with interest only
payments at a new interest rate at 9.0% per annum. Upon the earlier of June 14,
2004 or the maker of the Promissory Note meeting certain financial benchmarks,
principal payments shall resume and the interest rate will prospectively revert
back to 7.0% per annum. The final balloon payment of approximately $1,100,000
plus any remaining principal or unpaid interest remains due on June 14, 2006.
18
Interest expense decreased by $163,000 from $2,897,000 in 2001 to
$2,734,000 in 2002. The decrease is primarily attributable to decreased debt.
Total debt was $3,112,000 lower at December 31, 2002 compared to December 31,
2001. Principal payments of $1,750,000 and $1,040,000 on the senior subordinated
notes and seller-financed debt, respectively, comprised the majority of the debt
reduction.
Provision for income taxes increased by $1,970,000 from a benefit for
income taxes of $1,780,000 in 2001 to a provision for income taxes of $190,000
in 2002. The increase was caused by the increase in pre-tax income in 2002
compared to a loss in 2001.
Results of Operations 2001 Compared with 2000
The following discussion compares the year ended December 31, 2001
and the year ended December 31, 2000, for continuing operations.
Income and Expense as a Percentage of Revenue
For the Years Ended
December 31,
-----------------------------
2001 2000
------------ ------------
Revenue 100.0% 100.0%
Gross profit 20.4% 20.3%
Selling, general and
administrative expenses 16.7% 20.0%
Goodwill Impairment 2.1% 0.0%
Depreciation and amortization 1.5% 2.0%
Other expense, net 2.9% 1.4%
Interest expense 1.8% 1.8%
Loss from continuing operations (3.6)% (3.7)%
Revenue for the year ended December 31, 2001 decreased $9,535,000, or
5.6%, to $160,544,000 from $170,079,000 for the year ended December 31, 2000.
The decrease included approximately $6,300,000 in lost revenue due to the sale
of the Company's Mid-West operations on June 14, 2001. The balance of the
decrease in revenue is due to the Company's ongoing efforts to increase its
profit margins and eliminate less profitable business. As a result of a
portfolio review, contracts with certain customers that had unacceptable profit
margins were given notice of rate increases. If the rate increases were not
accepted, the contracts were terminated. This revenue loss was partially offset
by the effect of fuel surcharges and price increases implemented throughout 2000
that remained in effect for 2001.
Cost of revenue consists primarily of payments to employee drivers
and independent contractors, agents, other direct pick-up and delivery costs and
the costs of dispatching drivers and messengers. These costs decreased
$7,776,000, or 5.7%, from $135,616,000 for 2000 to $127,840,000 in 2001. Stated
as a percentage of revenue, these costs were flat, amounting to 79.6% for 2001
and 79.7% for 2000. Excluding the $5,296,000 reduction in cost of revenue
due to the sale of the Company's Mid-West operations, cost of revenue decreased
$2,480,000 or 2.0%. This reflects a reduction in vehicle lease and operating
costs of $3,253,000 and lower auto and workers' compensation expense of
$1,085,000, partially offset by higher labor costs of $887,000 and other net
cost increases of $971,000.
As a result of the above, gross profit decreased by $1,759,000, from
$34,463,000 in 2000 to $32,704,000 in 2001. As a percentage of revenue gross
profit was consistent, and amounted to 20.4% in 2001 and 20.3% in 2000.
19
SG&A includes costs incurred at the terminal level related to taking
orders and administrative costs related to such functions. Also included are
costs to support the Company's marketing and sales effort and the expense of
maintaining information systems, human resources, financial, legal and other
corporate administrative functions. SG&A decreased by $7,097,000, or 20.9%, from
$33,978,000 in 2000 to $26,881,000 in 2001. As a percentage of revenue SG&A
decreased to 16.7% in 2001 compared to 20.0% of revenue in 2000. Excluding the
$1,279,000 decrease due to the sale of the Company's Mid-West operations, SG&A
decreased $5,818,000 or 18.2%. SG&A expense was favorably impacted by reduced
staffing costs of $1,939,000, lower bad debt expense of $1,022,000, lower
professional fees of $636,000, lower legal expense of $454,000, reduced rent
expense of $372,000 and all other net expense reductions of $1,395,000. The
decrease in such costs is due primarily to both the Company's ongoing efforts to
reduce and better control such costs and certain non-recurring items recorded
during 2000, primarily the bad debt expense related to the bankruptcy of a
significant customer.
Goodwill impairment for 2001 was $3,349,000 compared to $0 for 2000.
The charge taken in 2001 was the result of a comprehensive review of the
Company's intangible assets under the provisions of SFAS 121. In 2001, as a
result of recording significant losses on the dispositions of Sureway and the
Mid-West operations and as a result of inadequate cash flows from certain
acquired businesses due to the loss of customers, the Company determined that
the carrying amount of certain assets might not be fully recoverable. The
measurement of impairment losses recognized in 2001 is based on the difference
between the fair values, which were calculated based upon the present value of
projected future cash flows, and the carrying amounts of the assets.
Depreciation and amortization decreased by $879,000, or 26.2%, from
$3,355,000 for 2000 to $2,476,000 for 2001. The decrease was primarily
attributable to the full depreciation of certain vehicles held under a capital
lease that ended during 2000 and reduced capital expenditures in 2000 and 2001.
Other expense increased by $2,247,000, to $4,685,000 in 2001 from
$2,438,000 in 2000. The 2001 expense is primarily due to two transactions. As of
December 31, 2001, the Company wrote-off the Note Receivable received on March
30, 2001 amounting to $2,500,000 in the transaction to dispose of certain assets
and liabilities of Sureway, as collection of the Note Receivable, interest
accrued thereon and certain other related receivables was in doubt. The Company
also recorded a $2,283,000 loss on the sale of all of the outstanding stock in
National Express, Inc., the Company's ground courier operation in the Mid-West,
on June 14, 2001. The selling price of the stock was approximately $2,530,000
and was comprised of $880,000 in cash and a subordinated promissory note (the
"Promissory Note") for $1,650,000. The Promissory Note originally bore interest
at the rate of 7.0% per annum. The Promissory Note, as amended on March 14,
2003, allows for the deferral of the interest and principal payments due on
December 14, 2002 and March 14, 2003. A new quarterly payment schedule will
commence on June 14, 2003 with interest only payments at a new interest rate at
9.0% per annum. Upon the earlier of June 14, 2004 or the maker of the Promissory
Note meeting certain financial benchmarks, principal payments shall resume and
the interest rate will prospectively revert back to 7.0% per annum. The final
balloon payment of approximately $1,100,000 plus any remaining principal or
unpaid interest remains due on June 14, 2006. The 2000 expense is primarily as a
result of recording a reserve related to a note receivable from a stockholder
related to the Company's funding of litigation defense and settlement expenses
in connection with the action filed by Liberty Mutual Insurance Company against
Securities Courier Corporation ("Securities"), a subsidiary of the Company, and
Mr. Vincent Brana, an employee of the Company. Under the terms of its
acquisition of Securities, the Company has 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")
due and payable on December 1, 2003. Mr. Brana delivered 357,301 shares of CD&L
common stock to the Company as collateral for the Brana Note. 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
recorded a $2,500,000 reserve against the note receivable.
Interest expense decreased by $163,000 from $3,060,000 in 2000 to
$2,897,000 in 2001. The decrease is primarily attributable to decreased
borrowings on the Company's revolving line of credit as a result of the sales of
Sureway and the Mid-West operations, partially offset by an increase in the
interest rates paid on the seller-financed debt from acquisitions.
Benefit for income taxes decreased by $359,000 from a benefit for
income taxes of $2,139,000 in 2000 to a benefit for income taxes of $1,780,000
in 2001. The decrease was caused by the decrease in pre-tax loss in 2001 and the
recording of a $2,283,000 capital loss with no related tax benefit recognized on
the sale of the stock of National Express, Inc., the Company's Mid-West
operations, on June 14, 2001, partially offset by the recording in 2000 of a
$1,000,000 valuation allowance against the deferred tax assets recorded by the
Company.
20
Liquidity and Capital Resources
The following tables summarize our contractual and commercial
obligations as of December 31, 2002:
Payments Due By Period
------------------------------------------------------------------
Contractual Obligations 2008-
(in thousands) 2003 2004-2005 2006-2007 Thereafter Total
---- --------- --------- ---------- -----
Long-term debt $3,148 $4,193 $9,839 $ - $17,180
Capital leases $ 312 $ 7 $ 3 $ - $ 322
Operating leases (Primarily for facilities) $2,896 $2,837 $ 931 $ - $ 6,664
Amount of Commitment Expiration Per Period
Other Commercial Commitments 2008-
(in thousands) 2003 2004-2005 2006-2007 Thereafter Total
---- --------- --------- ---------- -----
Working Capital Facility
(Including Standby Letters of Credit) $ - $15,000 $ - $ - $15,000
Standby Letters of Credit $ - $ 7,000 $ - $ - $ 7,000
The Company's working capital decreased by $2,054,000 from $4,923,000
as of December 31, 2001 to $2,869,000 as of December 31, 2002. The decrease is
primarily a result of increased current maturities of long-term debt of
$1,080,000, increased accrued expenses of $2,175,000 and reduced prepaid
expenses of $1,378,000 partially offset by a $1,146,000 reduction in accounts
payable and bank overdrafts.
Cash and cash equivalents increased by $287,000 during 2002. Cash of
$3,865,000 was provided from operating activities, $308,000 was used in
investing activities and $3,270,000 was used in financing activities,
principally to pay down debt.
Capital expenditures amounted to $522,000, $333,000 and $859,000 for
the years ended December 31, 2002, 2001 and 2000, respectively. These
expenditures relate primarily to enhanced and expanded information systems
capability, upgraded Company facilities in the ordinary course of business and
upgrading of the Company's automotive fleet in 2000. Capital expenditures of
approximately $800,000 are anticipated for the year ending December 31, 2003.
Short-term borrowings -
At December 31, 2002 and 2001, the Company had a line of credit
agreement for $15,000,000. The Company's short-term borrowings on its line of
credit are as follows for the years ended December 31 (in thousands) -
2002 2001
---- ----
Maximum amount outstanding during the year $1,800 $11,500
End of year balance - -
Average balance outstanding during the year 300 2,700
Weighted average borrowing cost during the year 11.0% 11.0%
Standby letters of credit, end of year balance 7,000 7,081
21
As of June 27, 2002 the Company 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 the Company with standby
letters of credit, prime rate based loans at the bank's prime rate, as defined,
plus 25 basis points and LIBOR based loans at the bank's LIBOR, as defined, plus
225 basis points. Credit availability 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 December 31, 2002, the Company had borrowing
availability of $2,438,000 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:
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:
The Senior Notes mature on January 29, 2006 and may be prepaid by the
Company under certain circumstances. The warrants expire on 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. (See Note 9 of Notes to
Consolidated Financial Statements for additional information on the Company's
debt).
22
Long-term debt consists of the following (in thousands) -
December 31,
--------------------------
2002 2001
------ ------
Senior Subordinated Notes, net of unamortized discount of $557 and $738,
respectively. $11,443 $13,012
Capital lease obligations due through October 2004 with interest at rates
ranging from 6.5% to 11.5% and secured by the related property. 303 609
Seller-financed debt on acquisitions, payable in monthly installments through
June 2007. Interest is payable at rates ranging between 7.0% and 11.0%.(a) 5,737 6,777
Various equipment and vehicle notes payable to banks and finance companies due
through July 2002 with interest ranging from 8.0% to 15.3% and secured by
various assets of certain subsidiaries. - 5
Debt due in settlement of certain litigation against the Company and certain
affiliates with principal and interest payments of $30,000 due monthly and
the entire balance of principal, plus all accrued interest, due on July 1,
2002. - 192
------- -------
17,483 20,595
Less - Current maturities (3,442) (2,362)
------- -------
$14,041 $18,233
======= =======
(a) In March 2001, the Company renegotiated the repayment terms of certain
seller-financed debt. Upon maturity, the individual notes were
converted into four year term loans with principal and interest
payments due monthly. The thirty-sixth payment was to be a balloon
payment of the remaining principal and interest due. In April 2002, the
Company renegotiated the repayment terms of certain seller-financed
debt. Effective with the July 2002 payments, the individual notes
convert into five year term loans with principal and interest payments
due monthly. The interest rate on seller-financed debt, as amended in
2002, is generally a floating interest rate with a floor of 7% and a
ceiling of 9%. The one note not renegotiated in 2002 has a balance of
$1,159,000 at December 31, 2002 and bears interest at a rate of 11.0%.
The aggregate annual principal maturities of debt (excluding capital
lease obligations) as of December 31, 2002 are as follows (in thousands) -
2003 $3,148
2004 2,432
2005 1,761
2006 9,258
2007 581
-------
Total $17,180
=======
The Company leases certain transportation and warehouse equipment
under capital lease agreements that expire at various dates. At December 31,
2002, minimum annual payments under capital leases, including interest, are as
follows (in thousands) -
2003 $312
2004 5
2005 2
2006 2
2007 1
----
Total minimum payments 322
Less - Amounts representing interest (19)
----
Net minimum payments 303
Less - Current portion of obligations under capital leases (294)
----
Long-term portion of obligations under capital leases $ 9
====
23
The Company has an accumulated deficit of ($8,829,000) as of
December 31, 2002. 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.
Accounting Standards to be Adopted in 2003
In June 2002, SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146") was issued. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. The provisions of SFAS 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. The adoption
of SFAS 146 is not expected to have a material impact on the financial position
or results of operations of the Company.
In November 2002, Interpretation No. 45 of the Financial Accounting
Standards Board ("FASB"), "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45") was issued. FIN 45 requires certain guarantees to be recorded at fair value
and requires a guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote. Generally, FIN
45 applies to certain types of financial guarantees that contingently require
the guarantor to make payments to the guaranteed party based on changes in an
underlying agreement that is related to an asset, liability, or an equity
security of the guaranteed party; performance guarantees involving contracts
which require the guarantor to make payments to the guaranteed party based on
another entity's failure to perform under an obligating agreement;
indemnification agreements that contingently require the guarantor to make
payments to an indemnified party based on changes in an underlying agreement
that is related to an asset, liability, or an equity security of the indemnified
party; or indirect guarantees of the indebtedness of others. The initial
recognition and initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Disclosure requirements under FIN 45 are effective for financial statements
ending after December 15, 2002 and are applicable to all guarantees issued by
the guarantor subject to FIN 45's scope, including guarantees issued prior to
FIN 45. The Company has evaluated the accounting provisions of the
interpretations and there was no material impact on its financial condition,
results of operations or cash flows for the period ended December 31, 2002.
In January 2003, Interpretation No. 46 of the FASB, "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.
Inflation
While inflation has not had a material impact on the Company's
results of operations for the last three years, recent fluctuations in fuel
prices can and do affect the Company's operating costs.
24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the effect of changing interest rates. At
December 31, 2002, the Company's debt consisted of approximately $13,462,000
(excluding unamortized discount of $557,000) of fixed rate debt with a weighted
average interest rate of 13.01% and $4,578,000 of variable rate debt with a
weighted average interest rate of 7.0%. The variable rate debt consists of seven
seller-financed notes with an interest rate of prime plus 200 basis points with
a minimum rate of 7% and maximum rate of 9%. Based on the average amounts
outstanding under the variable rate debt for 2002, a 100 basis point change in
interest rates would have resulted in an increase in interest expense of
approximately $50,000 in 2002. Maximum borrowings of revolving line of credit
debt at any quarter-end were $559,000.
25
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.................................................................................... 27
Previously issued Report of Independent Public Accountants...................................................... 29
Consolidated Balance Sheets as of December 31, 2002 and 2001.................................................... 30
Consolidated Statements of Operations For The Years Ended December 31, 2002, 2001 and
2000........................................................................................................ 31
Consolidated Statements of Changes in Stockholders' Equity For The Years Ended December 31,
2002, 2001 and 2000......................................................................................... 32
Consolidated Statements of Cash Flows For The Years Ended December 31, 2002, 2001 and
2000........................................................................................................ 33
Notes to Consolidated Financial Statements...................................................................... 34
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CD&L, Inc.:
We have audited the accompanying consolidated balance sheet of CD&L, Inc. and
subsidiaries (the "Company") as of December 31, 2002 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. Our audit also included the financial statement
schedule for the year ended December 31, 2002, listed in the Index at Item 15.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audit. The Company's consolidated financial statements and
financial statement schedules as of December 31, 2001, and for each of the two
years in the period then ended, before the restatement discussed in Note 18 and
the inclusion of the transitional disclosures discussed in Note 2 with respect
to Statement of Financial Accounting Standards ("SFAS") No.148, Accounting for
Stock Based Compensation-Transitional Disclosure and Amendments of SFAS No. 123
and in Note 7 with respect to SFAS No. 142, Goodwill and other Intangible Assets
to the consolidated financial statements were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements and stated that such 2001 and 2000 financial
statement schedules, when considered in relation to the 2001 and 2000 basic
consolidated financial statements taken as a whole, presented fairly, in all
material respects, the information set forth therein, in their report dated
February 26, 2002 (except with respect to the matters discussed in Note 9, as to
which the date is April 15, 2002).
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, such financial statement schedule for
the year ended December 31, 2002, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 7 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to conform SFAS No. 142.
As discussed above, the consolidated financial statements of the Company as of
December 31, 2001 and for each of the two years in the period ended December 31,
2001, were audited by other auditors who have ceased operations. As described in
Note 18, these consolidated financial statements have been restated to change
the classification of the write-off of a $2,500,000 note from discontinued
operations to continuing operations. We audited the adjustment that was applied
to the restated amounts reflected in the 2001 financial statements. Our
procedures included (1) agreeing the previously reported line items and
disclosure amounts included in the 2001 consolidated financial statements to a
Company analysis obtained from management (2) comparing restated amounts in the
analysis to supporting documentation and (3) testing the mathematical accuracy
of the analysis. In our opinion, such adjustment has been properly applied.
In addition, as described in Notes 2 and 7, the consolidated financial
statements of the Company as of December 31, 2001 and for each of the two years
in the period ended December 31, 2001 have been revised to include the
transitional disclosures required by SFAS No. 148 and SFAS No. 142,
respectively. Our audit procedures with respect to the transitional disclosures
included in Notes 2 and 7 with respect to 2001 and 2000 included (1) comparing
the amount of stock-based compensation expense to the Company's underlying
analysis obtained from management, (2) comparing the previously reported net
loss to the previously issued financial statements and the adjustments to
reported net loss representing stock based compensation and amortization expense
related to goodwill (including any related tax effects) recognized in those
periods, to the Company's underlying analysis obtained from management, and (3)
testing the mathematical accuracy of the reconciliation of adjusted net loss to
reported net loss and the related loss-per-share amounts. In our opinion, the
disclosures for 2001 and 2000 in Notes 2 and 7 are appropriate.
27
However, we were not engaged to audit, review or apply any procedures to the
2001 or 2000 consolidated financial statements of the Company other than with
respect to the restatement adjustment and transitional disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 or 2000 consolidated financial statements taken as a whole.
DELOITTE & TOUCHE LLP
New York, New York
April 3, 2003 (except with respect to the matters discussed in Note 9, as to
which the date is April 23, 2003)
28
This audit report of Arthur Andersen LLP, our former independent public
accountants, is a copy of the original report dated February 26, 2002 rendered
by Arthur Andersen LLP on our consolidated financial statements included in our
Form 10-K filed on April 16, 2002, and has not been reissued by Arthur Andersen
LLP since that date. Arthur Andersen reported on the 2001 consolidated financial
statements prior the restatement discussed in Note 18 and the transitional
disclosures discussed in Notes 2 and 7. We are including this copy of the Arthur
Andersen LLP audit report pursuant to Rule 2-02(e) of Regulation S-X under the
Securities Act of 1933.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CD&L, Inc.:
We have audited the accompanying consolidated balance sheets of CD&L, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CD&L, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statement schedules is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 26, 2002
(except with respect to the matters discussed in
Note 9, as to which the date is April 15, 2002)
29
CD&L, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31,
-----------------------
2002 2001
------- -------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,452 $ 1,165
Accounts receivable, less allowance for doubtful accounts of $492
and $951 in 2002 and 2001, respectively (Note 9) 14,909 15,077
Deferred income taxes (Notes 2 and 11) 1,535 221
Prepaid expenses and other current assets (Note 5) 584 1,962
------- -------
Total current assets 18,480 18,425
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net (Notes 2 and 6) 1,233 1,961
GOODWILL, net (Notes 2, 4 and 7) 11,531 11,531
INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net (Notes 2, 4 and 7)
661 721
NOTE RECEIVABLE FROM STOCKHOLDER, less allowance of $2,800 and $2,500 in 2002
and 2001, respectively (Notes 12 and 16) - 300
SECURITY DEPOSITS AND OTHER ASSETS (Note 4) 1,878 1,928
DEFERRED INCOME TAXES (Notes 2 and 11) 38 615
------- -------
Total assets $33,821 $35,481
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 9) $ - $ -
Current maturities of long-term debt (Notes 2 and 9) 3,442 2,362
Accounts payable and bank overdrafts ( bank overdrafts totaled $1,632 and
$2,524 in 2002 and 2001, respectively) 2,644 3,790
Accrued expenses and other current liabilities (Note 8) 9,525 7,350
------- -------
Total current liabilities 15,611 13,502
LONG-TERM DEBT, net of current maturities (Notes 2 and 9) 14,041 18,233
OTHER LONG-TERM LIABILITIES 269 131
------- -------
Total liabilities 29,921 31,866
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
STOCKHOLDERS' EQUITY (Notes 13, 14 and 15):
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 in 2002 and 2001 8 8
Additional paid-in capital 12,883 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (8,829) (9,114)
------- -------
Total stockholders' equity 3,900 3,615
------- -------
Total liabilities and stockholders' equity $33,821 $35,481
======= =======
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
30
CD&L, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Years Ended December 31,
--------------------------------------------------
2002 2001 2000
-------- -------- --------