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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................... to ....................
Commission file number 0-26954
CD&L, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3350958
State or other jurisdiction of (I.R.S. Employer
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, 2003), was $3,343,185.
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 $6,718,638 as of
April 7, 2004.
Documents Incorporated by Reference: None
================================================================================
CD&L, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
INDEX
Page(s)
-------
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.................................27
Item 8. Financial Statements and Supplementary Data................................................28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures....................................................59
Item 9A. Controls and Procedures....................................................................59
PART III
Item 10. Directors and Executive Officers of the Company............................................60
Item 11. Executive Compensation.....................................................................62
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................65
Item 13. Certain Relationships and Related Transactions.............................................66
Item 14. Principal Accountant Fees and Services.....................................................66
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................67
SIGNATURES ........................................................................................71
CERTIFICATIONS ........................................................................................72
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.
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.
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 broad 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.
Routed and 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 scanned, sorted, routed and delivered. These
deliveries are made in accordance with a customer's predetermined schedule that
generally provides for deliveries to be made at specific 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 performing 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 67 leased facilities and 34 customer owned facilities
in 22 states and with various managed agents in all other 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 have
implemented 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
service performance, dedicated resources, 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, 2003, 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 a net loss on the disposition of the Company's air
delivery business of $465,000 (net of benefit for income taxes of $240,000)
accounted for as discontinued operations for the year ended December 31, 2001.
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 $1,034,000 (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 was that the Company assigned the
Note Receivable to GMV in exchange for a release on the CDL/Gold Note payable,
so that the Company was relieved of its $1,034,000 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 $1,034,000 during the year ended December 31, 2003, included
as a component of other (income) expense, net on the consolidated statement of
operations.
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, to First Choice Courier and
Distribution, Inc. ("First Choice"). 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. The
new quarterly payment schedule commenced 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.
Subsequently, on March 1, 2004, the Company consummated a transaction
providing for the repurchase of certain Indiana-based assets and liabilities
sold to First Choice in June 2001. The acquisition, including the release of
certain non-compete agreements, we believe will support and enhance our business
growth opportunities in Indiana. Consideration paid for the repurchase includes
cancellation of the Promissory Note owed by First Choice of approximately
$1,600,000 plus a three year contingent earn-out based on future net revenue
generated by the accounts repurchased.
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.
6
Safety
We seek to ensure that all of our 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.
Employees and Independent Contractors
As of December 31, 2003, we employed approximately 1,433 full-time and
part-time people, 188 as drivers, 547 as messengers, 520 in operations, 132 in
clerical and administrative positions, 21 in sales, 19 in information technology
and 6 in executive management. We are not a party to any collective bargaining
agreements. We also had agreements with approximately 2,450 independent
contractors as of December 31, 2003. 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.
We have an accumulated deficit of ($7,146,000) as of December 31, 2003.
Although we were in compliance with our Senior Notes debt covenants at December
31, 2003, we were anticipating non-compliance with certain covenants in 2004 and
beyond. Additionally, based on our cash flow projections, we would be unlikely
able to pay the $9,000,000 balloon payment on the Senior Notes due to be paid in
January 2006. Subsequently, on April 14, 2004, we restructured our senior debt
and related covenants. The restructuring includes an agreement among us, our
lenders and certain members of CD&L management and others which improves the
Company's short-term liquidity and reduces interest expense. See Liquidity and
Capital Resources section in Item 7. and Notes to Consolidated Financial
Statements Note 17 - Subsequent Events. There can be no assurances that our
lenders will agree to waive any future covenant violations, if any, continue to
renegotiate and modify the terms of our loans, or further extend the maturity
date, should it become necessary to do so. Further, there can be no assurances
that we will be able to meet our revenue, cost or income projections, upon which
the debt covenants are based.
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 currently employ 171 full-time and 17 part-time 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 employee driver
subject to applicable deductibles and carry umbrella coverage up to $5,000,000
in the aggregate. However, claims against us may exceed the amounts of available
insurance coverage. We also contract with approximately 2,450 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. With regards to
independent contractors, the Company carries umbrella coverage of $5,000,000
($2,000,000 before March 1, 2004) in the aggregate.
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, 2003:
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 1,757,697 shares at a
weighted average exercise price of $3.04 per share,
of which options covering 1,756,031 shares were
exercisable as of December 31, 2003; and
o 2,242,303 shares available for future awards after
December 31, 2003.
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 157,500 shares at a
weighted average exercise price of $1.61 per share,
of which options covering 127,500 shares were
exercisable as of December 31, 2003; and
o 42,500 shares available for future awards after
December 31, 2003.
o 430,518 shares are issuable upon the exercise of outstanding
convertible notes at a weighted average exercise price of
$6.46 per share.
Subsequent to the financial restructuring on April 14, 2004 (See Liquidity and
Capital Resources section in Item 7. and Notes to Consolidated Financial
Statements Note 17 - Subsequent Events):
o 3,937,008 shares are issuable upon the conversion of the new
convertible investor notes at a weighted average exercise
price of $1.016 per share.
o 1,968,504 shares are issuable upon the conversion of the
Amended Paribas Convertible Subordinated Notes at a weighted
average exercise price of $2.032 per share.
o 3,937,010 shares are issuable upon the conversion of the
Series A Preferred Stock at a weighted average exercise price
of $1.016 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.
9
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. Further, as a result of the April 14,
2004 restructuring, on a fully diluted basis, the executive officers and
directors of the Company will own 61.7% of the Company's common stock on a fully
diluted basis (excluding out-of-the-money stock options) and Paribas and Exeter
collectively will own 45.6% of the Company's common stock on a fully diluted
basis (excluding out-of-the-money stock options). (Note: The sum of individual
beneficial ownership percentages can exceed 100% due to the nature of the
calculation which assumes total outstanding shares and the exercise of all
convertible instruments for any individual shareholder without regard to
exercise of similar instruments by any other shareholder.) Such concentration of
ownership may also deter potential acquirers from approaching us.
10
Item 2. Properties
As of December 31, 2003, the Company operated from 67 leased facilities
(not including 34 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.......................................... 19
Florida........................................... 8
California........................................ 7
New Jersey........................................ 6
Maine............................................. 3
North Carolina.................................... 3
Louisiana......................................... 2
Ohio.............................................. 2
Oklahoma.......................................... 2
Pennsylvania...................................... 2
Tennessee......................................... 2
Indiana........................................... 1
Massachusetts..................................... 1
South Carolina.................................... 1
Washington........................................ 1
Arkansas.......................................... 1
Connecticut....................................... 1
Georgia........................................... 1
Maryland.......................................... 1
New Hampshire..................................... 1
Texas............................................. 1
Vermont........................................... 1
---------------
Total 67
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, 2003, the Company owned or leased approximately 170
vehicles of various types, which are operated by drivers employed by the
Company. The Company also utilizes 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 $6,973,000, for the year ended December 31, 2003. 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 had 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, 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 provide satisfactory evidence to
support his ability to pay the Brana Note, the Company maintained a $2,800,000
reserve against the receivable.
In an effort to resolve all outstanding disputes between Mr. Brana and
the Company, a settlement agreement was executed in December 2003. Pursuant to
the agreement, the Company has returned to Mr. Brana the 357,301 shares of CD&L
common stock previously held by the Company as collateral for the Brana Note. In
addition, the agreement provided for an exchange of releases between the
parties. In connection with this agreement, the Brana Note was written off as of
December 31, 2003. Mr. Brana's employment with the Company 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 $885,000 and $325,000 as of December 31, 2003 and 2002, respectively.
Also from time to time, federal and state authorities have sought to
assert that independent contractors in the transportation industry, including
those utilized by 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. The following table
sets forth the high and low closing sales prices for the Common Stock for 2002
and 2003.
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
2003 Low High
---- --- ----
First Quarter $0.48 $0.59
Second Quarter $0.34 $0.55
Third Quarter $0.44 $0.94
Fourth Quarter $0.65 $1.06
On April 7, 2004, the last reported sale price of the Common Stock was
$0.99 per share. As of April 7, 2004, there were approximately 272 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 and
the new Senior Subordinated Convertible Notes. 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 years ended December 31, 2002 and 2003 is derived from our audited
consolidated financial statements, which are included elsewhere herein. The
selected consolidated financial data set forth below for the year ended December
31, 2001, which are included herein, and for the years ended December 31, 1999
and 2000 and as of December 31, 1999, 2000, and 2001, 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,
-----------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------ ------------- ------------- -------------- ---------------
Revenue $158,380 $170,079 $160,544 $157,232 $166,083
Gross profit 35,175 34,463 32,704 30,080 32,735
Selling, general and
administrative expenses 27,123 33,978 26,881 25,492 28,136
Goodwill impairment - - 3,349 - -
Depreciation and amortization 3,672 3,355 2,476 1,173 756
Other expense (income), net 80 2,438 4,685 206 (1,496)
Interest expense 2,731 3,060 2,897 2,734 2,534
Income (loss) from
continuing operations 950 (6,229) (5,804) 285 1,683
Discontinued operations:
Income from discontinued
operations, net of income
taxes 1,961 1,388 - - -
Provision for loss on
disposal of assets, net
of income taxes - (2,807) (465) - -
Net income (loss) $2,911 ($7,648) ($6,269) $285 $1,683
Basic income (loss) per
share:
-Continuing operations $.13 ($.84) ($.76) $.04 $.22
-Discontinued operations .27 (.19) (.06) - -
------------ ------------- ------------- -------------- ---------------
-Net income (loss) $.40 ($1.03) ($.82) $.04 $.22
============ ============= ============= ============== ===============
Diluted income (loss) per share:
-Continuing operations $.12 ($.84) ($.76) $.03 $.21
-Discontinued operations .25 (.19) (.06) - -
------------ ------------- ------------- -------------- ---------------
-Net income (loss) $.37 ($1.03) ($.82) $.03 $.21
============ ============= ============= ============== ===============
Basic weighted average shares
outstanding 7,214 7,430 7,659 7,659 7,659
Diluted weighted average
shares outstanding 7,868 7,430 7,659 8,167 8,174
Balance Sheet Data: CD&L, Inc. and Subsidiaries (1)
-----------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------ -------------- ------------- ------------- ---------------
Working capital (deficit) $5,989 ($3,430) $4,923 $2,869 $1,807
Equipment and leasehold
improvements, net 4,321 2,841 1,961 1,233 1,446
Goodwill and other intangible
assets, net 22,375 20,666 12,252 12,192 11,968
Total assets 62,513 57,785 35,481 33,821 40,352
Total debt 32,353 34,686 20,595 17,483 20,137
Stockholders' equity $17,369 $9,884 $3,615 $3,900 $5,583
(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.
2004 Restructuring of Senior Notes Debt
At December 31, 2003, the Company was indebted to Paribas and Exeter
(collectively "Paribas") in the sum of approximately $11,000,000 pursuant to a
subordinated note bearing interest at 12% per annum (see Senior Notes in Note
9). On April 14, 2004, an agreement was reached among the Company, Paribas and
certain members of CD&L management and others ("Investors") as to the financial
restructuring of the Senior Notes. Paribas agreed to convert a portion of its
existing debt due from CD&L into equity and to modify the terms of its
subordinated note if the Investors purchase a portion of the note and accept
similar modifications. The nature of the restructuring is as follows:
(a) Paribas exchanged notes in the aggregate principal amount of
$4.0 million for shares of the Series A Convertible Redeemable
Preferred Stock of the Company, par value $.001 per share
("Preferred Stock") with a liquidation preference of $4.0
million. The Preferred Stock is convertible into an aggregate
of 4,000,000 shares of Common Stock, does not pay dividends
(unless dividends are declared and paid on the Common Stock),
and is redeemable by the Company for the liquidation value.
Holders of the Preferred Stock will have the right to elect
two directors.
(b) Paribas and the Company amended the terms of the $7.0 million
balance of the Notes, and then exchanged the original notes
for the amended and restated notes, which consist of two
series of convertible notes, the Series A Convertible
Subordinated Notes (the "Series A Converible Notes") in the
principal amount of $3.0 million and the Series B Convertible
Subordinated Notes ("Series B Convertible Notes") in the
principal amount of $4.0 million (collectively, the
"Convertible Notes"). The Loan Agreement was amended and
restated to reflect the terms of the substituted Series A
Convertible Notes and the Series B Convertible Notes,
including the elimination of most financial covenants.
Principal is due in a balloon payment at the maturity date of
April 14, 2011. The Convertible Notes bear interest at a rate
of 9% for the first two years of the term, 10.5% for the next
two years, and 12% for the final three years of the term. The
terms of the two series of Convertible Notes are identical
except for the conversion price ($1.016 for the Series A
Convertible Notes, the average closing price for the Company's
shares for the 5 days prior to the closing, and $2.032 for the
Series B Convertible Notes).
(c) The Investors purchased the Series A Convertible Notes from
Paribas for a purchase price of $3.0 million.
(d) The Company issued an additional $1.0 million of Series A
Convertible Notes to the Investors for an additional payment
of $1.0 million, the proceeds of which were used to reduce
short-term debt.
15
(e) The Investors, Paribas and the Company entered into a
Registration Rights Agreement pursuant to which the shares of
the Company's common stock issuable upon conversion of the
Preferred Stock and the Convertible Notes will be registered
for resale with the Securities and Exchange Commission.
In addition, the Company has agreed to commence a rights offering to its common
stockholders as soon as practical, and in any event prior to January 14, 2005,
whereby the common shareholders of the Company shall have the right to acquire
at least $2 million of additional shares of common stock of the Company in the
aggregate at a price equal to the conversion price of the Series A Convertible
Notes.
The following summarized unaudited pro forma financial information was prepared
assuming that the restructuring of the Senior Notes debt occurred on December
31, 2003 (in thousands):
As Reported Adjustment Pro Forma
----------------------- --------------- ----------------
Total assets $40,234 $- $40,234
======================= =============== =================
Liabilities
Current liabilities
Short-term borrowings 5,767 (1,000) (a) 4,767
Current maturities of long-term debt 2,585 (1,000) (a) 1,585
Accounts payable and accrued liabilities 14,201 (151) (b) 14,050
----------------------- --------------- -----------------
Total current liabilities 22,553 (2,151) 20,402
----------------------- --------------- -----------------
Long-term liabilities
Long-term debt 11,785 (1,624) (a)(b) 10,161
Other long-term liabilities 313 - 313
----------------------- --------------- -----------------
Total liabilities 34,651 (3,775) 30,876
----------------------- --------------- -----------------
Stockholders' equity
Preferred stock - 4,000 (a) 4,000
Common stock 8 - 8
Additional paid-in capital 12,883 - 12,883
Treasury stock (162) - (162)
Accumulated deficit (7,146) (225) (b) (7,371)
----------------------- --------------- -----------------
Total stockholders' equity 5,583 3,775 9,358
----------------------- --------------- -----------------
Total liabilities and stockholders' equity $40,234 $- $40,234
======================= =============== =================
(a) Represents the initial entry to record the restructuring: (i) the
conversion of $4,000,000 of long-term debt into Preferred Stock, (ii)
the issuance of $4,000,000 of long-term debt to Investors, and (iii)
the repayment of $1,000,000 of current maturities of long-term debt and
$2,000,000 of long-term debt related to the original Paribas Senior
Notes.
(b) Represents the write-off of the unamortized debt discount balance of
$376,000 as of December 31, 2003 related to the original Senior Notes
and the related tax effect.
The Company has reviewed SFAS 150 with respect to this transaction and has
determined that the Preferred Shares issued are properly treated as equity, as
the shares are not mandatorily redeemable at any time. As the interest on the
Investor Notes and the new Paribas note increase over the term of the notes, the
Company will record the associated interest expense on a straight-line basis,
which will give rise to accrued interest over the early term of the notes.
16
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 "Sureway Note Receivable") for
$2,500,000 and contingent cash payments based upon the ultimate development of
certain liabilities retained by us. The Sureway 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
Sureway 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 (income) expense, net) in the fourth quarter of
2001 to write-off the Sureway 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 a net loss on the disposition of the Company's air
delivery business of $465,000 (net of benefit for income taxes of $240,000)
accounted for as discontinued operations for the year ended December 31, 2001.
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 $1,034,000 (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 was that the Company assigned the
Sureway Note Receivable to GMV in exchange for a release on the CDL/Gold Note
payable, so that the Company was relieved of its $1,034,000 liability for the
CDL/Gold Note and the Company has no further rights to the Sureway 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 $1,034,000 during the year ended
December 31, 2003.
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, insurance reserves, income taxes and
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
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. As of December 31, 2003, the Company has estimated that an allowance
for doubtful accounts of $872,000 is needed to cover the current receivable
base. As a result of this estimate, the Company recorded $629,000 of expense in
2003 related to the provision for doubtful accounts. 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. This policy is consistent with prior years and as such, the
increase in revenue from 2002 relates solely to additional sales volume.
17
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, a
discounted cash flow and terminal value computation, market capitalization and
peer group equity transactions. The discounted cash flow and terminal value
computation is based on management's estimates of future operations. During
2003, an annual impairment test was performed and the Company determined that
there was no impairment of goodwill. As such, there was no impact on the 2003
statement of operation related to goodwill. 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 insures certain of its risks through insurance policies,
but retains risk as a result of its deductibles related to such insurance
policies. The Company's deductible for workers' compensation is $500,000 per
loss ($350,000 prior to May 1, 2003). The deductible for employee health medical
costs is $150,000 per loss ($125,000 prior to March 1, 2002). Effective July 1,
2003, automobile liability coverage is maintained for covered vehicles through a
fully-insured indemnity program with no deductible ($350,000 deductible prior to
July 1, 2003). 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. The Company's estimated cumulative reported
losses for workers' compensation and automobile liability claims for the period
January 1, 1999 through December 31, 2003 amounted to $13,844,000 for losses and
$7,363,000 for administrative and reinsurance costs, all of which has been
funded to the Company's insurance carrier. Additionally, as of December 31,
2003, the Company has accrued approximately $2 million for estimated losses
incurred but not reported. The Company has also accrued $372,000 for incurred
but unpaid employee health medical costs as of December 31, 2003.
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. The Company utilizes a tax rate of 40% in all years presented in
the statements of operations.
18
Results of Operations 2003 Compared with 2002
The following discussion compares the year ended December 31, 2003 and the year
ended December 31, 2002.
Income and Expense as a Percentage of Revenue
For the Years Ended
December 31,
-----------------------------
2003 2002
------------ ------------
Revenue 100.0% 100.0%
Gross profit 19.7% 19.1%
Selling, general and
administrative expenses 16.9% 16.2%
Depreciation and amortization 0.5% 0.7%
Other (income) expense, net (0.9%) 0.1%
Interest expense 1.5% 1.7%
Net income 1.0% 0.2%
Revenue
Revenue for the year ended December 31, 2003 increased by $8,851,000, or 5.6%,
to $166,083,000 from $157,232,000 for the year ended December 31, 2002. An
increase in volume from new and existing customers contributes to such revenue
increase, partially offset by certain price reductions granted to extend
customer contracts. The revenue growth reflects the launch of our nationwide
business development program and our ability to expand into new markets with our
existing customer base.
Cost of Revenue
Cost of revenue consists primarily of employee and independent contractor
delivery costs, other direct pick-up and delivery costs and the costs of
dispatching drivers and messengers. These costs increased by $6,196,000, or
4.9%, from $127,152,000 for 2002 to $133,348,000 in 2003. Stated as a percentage
of revenue, these costs decreased to 80.3% for 2003 compared to 80.9% for 2002.
The decrease in cost of revenue stated as a percentage of revenue is due
primarily to increased utilization of independent contractors. While the cost of
this labor is more expensive (delivery costs increased by 2.6% as a percentage
of revenue), workers compensation insurance costs and company delivery vehicle
expenses have decreased by 2.3% and 1.1% as a percentage of revenue,
respectively. The decrease in insurance costs is partially attributable to the
change in auto liability coverage to a fully-insured indemnity program in July
2003. This net reduction in cost of sales as a percentage of revenue is
partially offset by additional cargo claims of approximately $800,000.
Selling, General and Administrative Expense ("SG&A")
SG&A includes 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 increased by $2,644,000, or
10.4%, from $25,492,000 in 2002 to $28,136,000 in 2003. As a percentage of
revenue, SG&A increased to 16.9% in 2003 compared to 16.2% of revenue in 2002.
The increase in SG&A is due primarily to the following factors:
o A $794,000 increase in the provision for doubtful accounts.
Refer to the "Liquidity and Capital Resources" section of Item
7. of this Annual Report for discussion of the increased
accounts receivable balance at December 31, 2003.
o A $672,000 increase in professional fees, primarily related to
an increase in the legal accrual related to certain unresolved
claims.
o A $516,000 increase in premises rent due to the addition of 13
leased facilities during 2003.
o Additional increases in SG&A are primarily attributable to an
increase in property and corporate umbrella insurance costs,
office maintenance and expenses, data communications, computer
costs and other indirect expenses.
19
o The above factors are partially offset by a $861,000 reduction
in compensation expense which includes reduced staffing, lower
incentive compensation and the reversal of previously recorded
severance benefits.
Depreciation and Amortization
Depreciation and amortization decreased by $417,000, or 35.5%, from $1,173,000
for 2002 to $756,000 for 2003. Factors driving such reduction include the full
depreciation of certain computer equipment and vehicles, coupled with reduced
capital expenditures in 2001 and 2002.
Other (Income) Expense, Net
Other (income) expense, net had a net change of $1,702,000, to $1,496,000 of
income in 2003 from $206,000 of expense in 2002. The Company recorded a gain
included in other (income) expense, net of $1,034,000 during the year ended
December 31, 2003 as a result of the exchange of the Sureway Note Receivable
discussed elsewhere herein. Also included in other income for 2003 is a $220,000
World Trade Center Recovery Grant received by one of the Company's New York City
facilities and $149,000 of interest income on the Mid-West note receivable
discussed in Note 4. The expense in 2002 related to a $300,000 increase in the
allowance for the shareholder note receivable.
Interest Expense
Interest expense decreased by $200,000 from $2,734,000 in 2002 to $2,534,000 in
2003. This decrease was primarily due to the extinguishment of the CDL/Gold Note
in the first quarter of 2003 and the reduction of interest rates on certain
seller-financed debt which was renegotiated in April 2002.
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
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 0.8%.
Cost of Revenue
Cost of revenue consists primarily of employee and independent contractor
delivery costs, 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.
20
Selling, General and Administrative Expense ("SG&A")
SG&A includes 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.
Goodwill Impairment
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
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 were 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.
21
Other Expense
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 Sureway 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
Sureway 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) to First Choice Courier and
Distribution, Inc. ("First Choice") 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 commenced on June 14, 2003 with interest only
payments at a new interest rate at 9.0% per annum. The final balloon payment of
approximately $1,100,000 plus any remaining principal or unpaid interest was to
be due on June 14, 2006. On March 1, 2004, the Promissory Note was cancelled in
connection with the repurchase of certain assets and liabilities of First
Choice. See Note 17 - Subsequent Events.
Interest Expense
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.
Liquidity and Capital Resources
2004 Restructuring of Senior Notes Debt
At December 31, 2003, the Company was indebted to Paribas and Exeter
(collectively "Paribas") in the sum of approximately $11,000,000 pursuant to a
subordinated note bearing interest at 12% per annum (see Senior Notes in Note
9). On April 14, 2004, an agreement was reached among the Company, Paribas and
certain members of CD&L management and others ("Investors") as to the financial
restructuring of the Senior Notes. Paribas agreed to convert a portion of its
existing debt due from CD&L into equity and to modify the terms of its
subordinated note if the Investors purchase a portion of the note and accept
similar modifications. See Notes to Consolidated Financial Statements Note 17 -
Subsequent Events for further discussion of the restructuring arrangement.
The following tables summarize our contractual and commercial obligations as of
December 31, 2003:
Payments Due By Period
--------------------------------------------------------------------------------
Contractual Obligations 2008-
(in thousands) 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---------- -----
Long-term debt $2,514 $1,760 $9,439(a) $580 $- $14,293
Capital leases $72 $2 $2 $1 $- $77
Operating leases (Primarily for $3,615 $3,031 $2,280 $1,228 $660 $10,814
facilities)
(a) This information is as of December 31, 2003 and does not take into account
the April 14, 2004 financial restructuring.
22
Other Contractual Obligations:
The Company has entered into employment agreements with its key executives which
under certain change in control circumstances could result in a total cash
payments of as much as approximately $4 million. See Item 11. Employment
Agreements; Covenants-Not-To-Compete.
Amount of Commitment Expiration Per Period
-----------------------------------------------------------------------------------
Other Commercial Commitments 2008-
(in thousands) 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---------- -----
Working Capital Facility $- $15,000 $- $- $- $15,000
(Including Standby Letters of Credit)
Standby Letter of Credit $6,515 (A) (A) (A) (A) (A)
(A) The Company is required to provide a standby letter of credit per the terms
of its current captive insurance program. The values of future standby letters
of credit will vary depending on future insurance premiums.
The Company's working capital decreased by $1,062,000 from $2,869,000
as of December 31, 2002 to $1,807,000 as of December 31, 2003. The decrease is
primarily the result of a $4,536,000 increase in short-term borrowings on the
Company's line of credit and additional accrued liabilities of $2,218,000 at
December 31, 2003. These factors are partially offset by a $3,977,000 increase
in accounts receivable, net and a $857,000 decrease in current maturities of
long-term debt.
Cash and cash equivalents increased by $245,000 during 2003. Cash of
$2,396,000 was used in operating activities, primarily due to the prepayment of
$3,236,000 in insurance premiums during 2003 (see Insurance Financing
Arrangements below). Additional cash flow was used to support business growth
late in the year. Cash of $866,000 was used in investing activities, the
majority of which relates to the purchase and implementation of the Company's
new Peoplesoft financial system. Cash of $3,507,000 was provided by financing
activities as a result of the increased utilization of the Company's line of
credit.
Capital expenditures amounted to $968,000, $522,000 and $333,000 for
the years ended December 31, 2003, 2002 and 2001, respectively. These
expenditures relate primarily to enhanced and expanded information systems
capability and upgraded Company facilities in the ordinary course of business.
In December 2003, $349,000 was expended in connection with the purchase and
implementation of the Company's new PeopleSoft financial system which went live
January 1, 2004. Capital expenditures of approximately $1,000,000 are
anticipated for the year ending December 31, 2004.
Short-term borrowings -
At December 31, 2003, short-term borrowings totaled $5,767,000
consisting of a line of credit balance of $4,536,000 and $1,231,000 of
outstanding borrowings related to the insurance financing arrangements discussed
below. There were no short-term borrowings outstanding as of December 31, 2002.
23
As of June 27, 2002 CD&L and Summit Business Capital Corporation, doing
business as Fleet Capital - Business Finance Division, entered into an agreement
establishing a revolving credit facility (the "Fleet Facility") of $15,000,000.
The Fleet Facility replaced a revolving credit facility with First Union
Commercial Corporation established in July 1997. The Company's short-term
borrowings on its line of credit are as follows for the years ended December 31
(in thousands) -
2003 2002 2001
---- ---- ----
Maximum amount outstanding during the year $5,618 $1,800 $11,500
End of year balance 4,536 - -
Average balance outstanding during the year 1,600 300 2,700
Weighted average borrowing cost during the year 11.0% 11.0% 11.0%
Standby letters of credit, end of year balance 6,515 7,000 7,081
The Fleet Facility expires on June 27, 2005 and provides CD&L with
standby letters of credit, prime rate based loans at the bank's prime rate, as
defined, plus 25 basis points (4.25% at December 31, 2003) and LIBOR based loans
at the bank's LIBOR, as defined, plus 225 basis points (3.37% at December 31,
2003). Credit availability is based on eligible amounts of accounts receivable,
as defined, and is secured by substantially all of the assets, including certain
cash balances, accounts receivable, equipment, leasehold improvements and
general intangibles of the Company and its subsidiaries. During the year ended
December 31, 2003, the maximum borrowings outstanding under the Fleet Facility
were approximately $5,618,000 and the outstanding borrowings as of December 31,
2003 were approximately $4,536,000. As of December 31, 2003, the Company had
total cash on hand and borrowing availability of $2,697,000 under the Fleet
Facility, after adjusting for restrictions related to outstanding standby
letters of credit of $6,515,000 and minimum availability requirements.
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial conditions.
The Fleet Facility also prohibits the Company from incurring certain additional
indebtedness, limits certain investments, advances or loans and restricts
substantial asset sales, capital expenditures and cash dividends. The Company
was in compliance with its Fleet debt covenants as of December 31, 2003.
Insurance Financing Agreements -
In connection with the renewal of certain of the Company's insurance
policies, CD&L entered into four agreements to arrange for the financing of
annual insurance premiums. A total of $3,236,000 was financed through these
arrangements. Monthly payments, including interest, amount to $328,000. The
interest rates range from 3.50% to 4.75% and the notes mature in March and April
2004. The related annual insurance premiums were paid to the various insurance
companies at the beginning of each policy year. Outstanding debt amounts at
December 31, 2003 of $1,231,000 are included in short-term borrowings. The
corresponding prepaid insurance has been recorded in prepaid expenses and other
current assets.
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. Although we were in
compliance with our Senior Notes debt covenants at December 31, 2003, we were
anticipating non-compliance with certain covenants in 2004 and beyond.
Additionally, based on our cash flow projections, we would be unlikely able to
pay the $9,000,000 balloon payment on the Senior Notes due to be paid in January
2006. Subsequently, on April 14, 2004, we restructured our senior debt and
related covenants. The restructuring includes an agreement among us, our lenders
and certain members of CD&L management and others which improves the Company's
short-term liquidity and reduces interest expense. See Note 17 - Subsequent
Events for pro forma financial information.
24
Long-term debt consists of the following (in thousands) -
December 31,
--------------------------------------
2003 2002
------------------- ------------------
Senior Subordinated Notes, net of unamortized discount of $377 and $557,
respectively. $10,623 $11,443
Capital lease obligations due through October 2004 with interest at rates
ranging from 6.5% to 11.5% and secured by the related property. 76 303
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) 3,671 5,737
------------------- ------------------
14,370 17,483
Less - Current maturities (2,585) (3,442)
------------------- ------------------
$11,785 $14,041
=================== ==================
(a) 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 $761,000 at December 31, 2003 and bears interest at a
rate of 11.0%.
The aggregate annual principal maturities of debt (excluding capital
lease obligations) as of December 31, 2003 are as follows (in thousands) -
2004 $2,514
2005 1,760
2006 9,439
2007 580
2008 -
-------------------
Total $14,293
===================
The Company leases certain transportation and warehouse equipment under
capital lease agreements that expire at various dates. At December 31, 2003,
minimum annual payments under capital leases, including interest, are as follows
(in thousands) -
2004 $72
2005 2
2006 2
2007 1
2008 -
----------
Total minimum payments 77
Less - Amounts representing interest (1)
----------
Net minimum payments 76
Less - Current portion of obligations under capital leases (71)
----------
Long-term portion of obligations under capital leases $5
==========
The Company has an accumulated deficit of ($7,146,000) as of December
31, 2003. There can be no assurances that the Company's lenders will agree to
waive any future covenant violations, if any, continue to renegotiate and modify
the terms of their loans, or further extend the maturity date, should it become
necessary to do so. Further, there can be no assurances that the Company will be
able to meet its revenue, cost or income projections, upon which the debt
covenants are based.
Management believes that cash flows from operations and its borrowing
capacity, after the debt restructuring 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 extraordinary,
decreases in revenue should be accompanied by corresponding decreases in costs,
resulting in minimal impact to liquidity. The risks associated with the
revolving credit facility are as discussed above.
25
New Accounting Standards and Pronouncements
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 are subject
to the requirements of FIN 46.
In April 2003, SFAS No, 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149") was issued. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133 "Accounting
for Derivative Instruments and Hedging Activities". The Company does not have
any derivative instruments or hedging activities that are subject to the
requirements of SFAS 149.
In May 2003, SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150")
was issued. This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). As of December 31, 2003, the Company did not have any financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 were followed in determining the equity classification of preferred
shares issued in relation to the debt restructuring as disclosed in the pro
forma financial information in Note 17 - Subsequent Events.
In December 2003, FASB Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("Revised 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 the Revised FIN 46.
In December 2003, SFAS No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("Revised SFAS 132") was
issued. This Statement revises employers' disclosures about pension plans and
other postretirement benefit plans. The provisions of the Revised SFAS 132 is
effective for financial statements with fiscal years ending after December 15,
2003. The adoption of the Revised SFAS 132 is not expected to have a material
impact on the financial position or results of operations of the Company.
26
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the effect of changing interest rates. At
December 31, 2003, the Company's debt consisted of approximately $13,069,000
(excluding unamortized discount of $377,000) of fixed rate debt with a weighted
average interest rate of 12.53% and $7,446,000 of variable rate debt with a
weighted average interest rate of 5.32%. The variable rate debt consists of six
seller-financed notes with an interest rate of prime plus 200 basis points with
a minimum rate of 7.0% and maximum rate of 9.0% and $4,536,000 of borrowings of
revolving line of credit debt. If interest rates on variable rate debt were to
increase by 53 basis points (one-tenth of the weighted average interest rate at
December 31, 2003), the net impact to the Company's results of operations and
cash flows for the year ended December 31, 2003 would be a decrease of
approximately $40,000. Maximum borrowings of revolving line of credit debt
during the year ended December 31, 2003 were $5,618,000.
27
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report....................................................................................29
Previously issued Report of Independent Public Accountants......................................................31
Consolidated Balance Sheets as of December 31, 2003 and 2002....................................................32
Consolidated Statements of Operations For The Years Ended December 31, 2003, 2002 and
2001........................................................................................................33
Consolidated Statements of Changes in Stockholders' Equity For The Years Ended December 31,
2003, 2002 and 2001.........................................................................................34
Consolidated Statements of Cash Flows For The Years Ended December 31, 2003, 2002 and
2001........................................................................................................35
Notes to Consolidated Financial Statements......................................................................36
28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CD&L, Inc.:
We have audited the accompanying consolidated balance sheets of CD&L, Inc. and
subsidiaries (the "Company") as of December 31, 2003 and 2002 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. Our audit also included the financial statement
schedule for the years ended December 31, 2003 and 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 audits. The Company's consolidated
financial statements and financial statement schedule for the year ended
December 31, 2001, before the restatement discussed in Note 19 and the inclusion
of the disclosures discussed in Note 2 with respect to Statement of Financial
Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation-
Transition and Disclosure 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 financial statement schedules, when
considered in relation to the 2001 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 audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CD&L, Inc. and subsidiaries as of
December 31, 2003 and 2002, and the results of their operations and their cash
flows for the years 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 years ended December 31, 2003 and 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 with SFAS No. 142.
As discussed above, the consolidated financial statements of the Company for the
year ended December 31, 2001, were audited by other auditors who have ceased
operations. As described in Note 19, 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 for the year ended December 31, 2001 have been revised
to include the disclosures required by SFAS No. 148 and SFAS No. 142,
respectively. Our audit procedures with respect to the disclosures included in
Notes 2 and 7 with respect to 2001 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 in Notes 2 and 7 are appropriate.
29
However we were not engaged to audit, review or apply any procedures to the 2001
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 consolidated
financial statements taken as a whole.
DELOITTE & TOUCHE LLP
New York, New York
March 26, 2004 (except with respect to the matters discussed in Notes 15 and 17,
as to which the date is April 14, 2004)
30
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 to the restatement discussed in Note 19 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