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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, 2004
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 stockholders) of the registrant computed by
reference to the price at which the registrant's common equity was last sold, as
of the last business day of the registrant's most recently completed second
fiscal quarter (June 30, 2004), was $14,055,281.
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding was 9,356,311 and the aggregate market value of voting common equity
of the registrant held by non-affiliates of the registrant was $16,588,948 as of
March 16, 2005.
DOCUMENTS INCORPORATED BY REFERENCE: The registrant intends to file a definitive
proxy statement pursuant to Regulation 14A within 120 days of the end of the
fiscal year ended December 31, 2004. Portions of such proxy statement are
incorporated by reference into Part III of this Form 10-K.
================================================================================
CD&L, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
INDEX
PAGE(S)
-------
PART I
Item 1. Business................................................................................... 3
Item 1A. Executive Officers of the Registrant....................................................... 11
Item 2. Properties................................................................................. 12
Item 3. Legal Proceedings.......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities............................................... 14
Item 6. Selected Financial Data.................................................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................. 28
Item 8. Financial Statements and Supplementary Data................................................ 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.................................................... 51
Item 9A. Controls and Procedures ................................................................... 51
Item 9B. Other Information.......................................................................... 52
PART III
Item 10. Directors and Executive Officers of the Company............................................ 53
Item 11. Executive Compensation..................................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters......................................................... 53
Item 13. Certain Relationships and Related Transactions............................................. 53
Item 14. Principal Accountant Fees and Services..................................................... 53
PART IV
Item 15. Exhibits and Financial Statement Schedules................................................. 54
SIGNATURES ........................................................................................... 58
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 Securities Exchange Act of 1934 (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 us in light of our experience and perception of historical
trends, current conditions, expected future developments and other factors we
believe 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 us, changes in laws or regulations and other
factors, many of which are beyond our control. 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 us or persons acting on our behalf are expressly
qualified by these factors.
ITEM 1. BUSINESS
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 distribution services, providing same-day delivery for many
pharmaceutical and office supply wholesalers, for
manufacturers to retailers and inter-branch distribution of
financial documents in a commingled system;
o facilities management, including providing and supervising
mailroom personnel, mail and package sorting, internal
delivery and outside local messenger services; and
o dedicated contract logistics, providing a comprehensive
solution to major corporations that want the control,
flexibility and image of an in-house fleet with the economic
benefits of outsourcing.
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 more and more seem to be choosing to
outsource their same-day delivery requirements as a result of
their evaluation of outsource solutions versus in-house
fleets.
o Competition. This highly fragmented industry remains fiercely
competitive regarding price points.
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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 distribution services are provided on a same-day
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 66 leased facilities and 27 customer-owned facilities
in 19 states and with various managed agents in most 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. 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.
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
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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, 2004, we had acquired 27 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 we wrote off the
remaining balance of the note of $662,000.
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. This sale was classified as discontinued operations
in the consolidated statement of operations for the year ended December 31,
2001.
In February 1999, we became obligated to repay seller-financed
acquisition debt of $1,650,000 related to our acquisition of Gold Wings (See
Note 3 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, we 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 we assigned the Note
Receivable to GMV in exchange for a release on the CDL/Gold Note payable, so
that we were relieved of our $1,034,000 liability for the CDL/Gold Note and we
had no further rights to the Note Receivable. In addition, we 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, we 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, we consummated a transaction providing for the
sale of all the outstanding stock of National Express, Inc., our 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 were to resume and the interest rate would prospectively
revert back to 7.0% per annum. The final balloon payment of approximately
$1,100,000 plus any remaining principal or unpaid interest remained due on June
14, 2006.
On March 1, 2004, we consummated a transaction providing for the
repurchase of certain Indiana-based assets and liabilities sold to First Choice
in June 2001. The acquisition included the release of certain noncompete
agreements. Consideration for the repurchase included cancellation of the
Promissory Note receivable 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. The majority of the purchase price of the Indiana
acquisition is related to the value of the customer list. An intangible asset of
$1,335,000 (net of $267,000 accumulated amortization) was included in the
December 31, 2004 consolidated balance sheet. This asset is being amortized over
5 years.
REGULATION
Our delivery operations are subject to various state and local
regulations and, in many instances, 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 contracted drivers meet safety standards
established by our customers and our insurance carriers as well as the DOT.
EMPLOYEES AND INDEPENDENT CONTRACTORS
As of December 31, 2004, we employed approximately 1,495 full-time and
part-time people, 137 as drivers, 565 as messengers, 597 in operations, 145 in
clerical and administrative positions, 23 in sales, 22 in information technology
and 6 in executive management. We are not a party to any collective bargaining
agreements. We also had agreements with approximately 2,817 independent
contractors as of December 31, 2004. We have not experienced any work stoppages
and believe that our relationship with our employees and independent contractors
is good.
SIGNIFICANT CUSTOMER
For the year ended December 31, 2004, Cardinal Health accounted for
10.5% of the Company's revenue.
2004 RIGHTS OFFERING
In September 2004, we commenced a rights offering to holders, as of
August 31, 2004, of our common stock, options to purchase common stock and
certain notes convertible into common stock whereby these security holders had
the right to acquire up to 2,784,578 shares of our common stock in the aggregate
at a price equal to $1.016 per share, the conversion price of the Series A
Convertible Notes. The rights offering expired on October 15, 2004 and resulted
in the issuance of 1,697,651 shares of common stock, with gross proceeds to us
of approximately $1,724,000, excluding fees and costs that we incurred in the
rights offering.
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 MAY NOT BE ABLE TO FINANCE FUTURE NEEDS OR ADAPT OUR BUSINESS PLAN TO CHANGES
BECAUSE OF RESTRICTIONS PLACED ON US BY OUR CREDIT FACILITY, OUR OTHER SENIOR
DEBT AND THE INSTRUMENTS GOVERNING OUR OTHER DEBT.
We had an accumulated deficit of ($5,563,000) as of December 31, 2004.
On numerous occasions, we have had to amend and obtain waivers of the terms of
our credit facilities and senior debt as a result of covenant violations or
projected covenant violations or for other reasons. On April 14, 2004, we
restructured our senior debt. The restructuring included an agreement among us,
our lenders, members of CD&L management and others which improved our short-term
liquidity and reduced our interest expense. The restructuring eased the
financial covenants to which we are subject. However, if we were to fail to meet
such covenants in the future, there can be no assurances that our lenders will
agree to waive any future covenant violations, 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 and 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.
7
CLAIMS ABOVE OUR INSURANCE LIMITS, OR SIGNIFICANT INCREASES IN OUR INSURANCE
PREMIUMS, MAY REDUCE OUR PROFITABILITY.
We currently employ 118 full-time and 19 part-time employee drivers.
From time to time some of these 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.
However, claims against us may exceed the amounts of available insurance
coverage. We also contract with approximately 2,817 independent contractor
drivers. In accordance with our 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, we carry
umbrella coverage of $5,000,000 ($2,000,000 before March 1, 2004).
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 ability to purchase insurance coverage at reasonable prices;
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.
STOCKHOLDERS 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, 2004:
o 506,250 shares are issuable upon the exercise of outstanding warrants
at an exercise price of $.001 per share.
8
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 2,858,897 shares at a weighted
average exercise price of $2.29 per share, of which options
covering 1,988,900 shares were exercisable as of December 31,
2004; and
o 1,141,103 shares available for future awards after December
31, 2004.
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 200,000 shares at a weighted
average exercise price of $1.64 per share, of which options
covering 157,500 shares were exercisable as of December 31,
2004; and
o 100,000 shares available for future awards after December 31,
2004, subject to ratification at the June 2005 annual
stockholder meeting.
o 195,084 shares are issuable upon the exercise of outstanding
convertible notes at a weighted average exercise price of $6.16 per
share.
o 3,937,008 shares are issuable upon the conversion of the convertible
notes issued to investors as part of our April 2004 restructuring at a
weighted average exercise price of $1.016 per share.
o 1,968,504 shares are issuable upon the conversion of the Amended
Convertible Subordinated Notes issued to holders of our senior
subordinated notes as part of our April 2004 restructuring at a
weighted average exercise price of $2.032 per share.
o 3,937,010 shares are issuable upon the conversion of the outstanding
shares of our 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, BYLAWS, STOCKHOLDER RIGHTS PLAN AND DELAWARE
LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER THAT CURRENT
STOCKHOLDERS MAY CONSIDER FAVORABLE.
Provisions of our certificate of incorporation, bylaws and our
stockholder 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 bylaws:
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;
9
o prohibit stockholder action by written consent; and
o establish advance notice requirements for nominations for the election
of the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
In addition, we have adopted a Stockholder Protection Rights Plan (the
"Plan") in order to protect against offers to acquire us that our Board of
Directors believes inadequate or otherwise not to be 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. On April 14, 2004, an agreement
was reached among the Company, BNP Paribas ("Paribas"), Exeter Venture Lenders,
L.P. ("Exeter Venture") and Exeter Capital Partners IV, L.P. ("Exeter Capital")
and together with Exeter Venture and Paribas (the "Original Noteholders") and
certain members of CD&L management and others ("Investors") as to the financial
restructuring of the Senior Notes. As a result of this restructuring, on a fully
diluted basis, our executive officers and directors own 40.1% of our common
stock on a fully diluted basis (excluding out-of-the-money stock options) and
the Original Noteholders collectively own 40.7% of our 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 stockholder without regard to
exercise of similar instruments by any other stockholder.) Such concentration of
ownership may also deter potential acquirers from approaching us.
AVAILABLE INFORMATION
The Company's Internet website address is www.cdl.net. The Company will make
available, free of charge at the "Investor Relations" portion of its website,
its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, and all amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after such reports are electronically filed with,
or furnished to, the Securities and Exchange Commission ("SEC"). Such
information is available in print to any stockholder who requests it from the
Company.
10
ITEM 1A. OFFICERS OF THE REGISTRANT
Albert W. Van Ness, Jr., 62, has served as the Chairman of the Board,
Chief Executive Officer and Director of CD&L since January 1997. He was formerly
the President and Chief Operating Officer of Club Quarters, LLC, a privately
held hotel management company and remains a member partner. In the early
nineties, Mr. Van Ness served as Director of Managing People & Productivity, a
senior management consulting firm. During most of the eighties, Mr. Van Ness
held various executive positions with Cunard Line Limited, a passenger ship and
luxury hotel company, including Executive Vice President and Chief Operating
Officer of the Cunard Leisure Division and Managing Director and President of
the Hotels and Resorts Division. Earlier in his career, Mr. Van Ness served as
the President of Seatrain Intermodal Services, Inc., a cargo shipping company.
Mr. Van Ness held various management positions at the start of his professional
life with Ford Motor Company, Citibank and Hertz. Mr. Van Ness majored in
Sociology and Economics and received a B.A. and M.A. degree and completed his
coursework towards his doctorate in Economics. He attended Duke University,
Northern State University, South Dakota State University and Syracuse
University.
William T. Brannan, 56, has served as President, Chief Operating
Officer and Director of CD&L since November 1994. From January 1991 until
October 1994, Mr. Brannan served as President, Americas Region - US Operations,
for TNT Express Worldwide, a major European-based overnight express delivery
company. Prior to that, Mr. Brannan spent 10 years with United Parcel Service
where he served as Vice President and General Manager of UPS Truck Leasing, a
wholly-owned UPS subsidiary which was formed by Mr. Brannan in 1981. Mr. Brannan
has more than 25 years of experience in the transportation and logistics
industry.
Michael Brooks, 51, has served as Director of CD&L since December 1995
and as Group Operations President since December 2000. Mr. Brooks previously had
been the President of Silver Star Express, Inc., a subsidiary of CD&L, since
November 1995. Prior to the merger of Silver Star Express, Inc. into CD&L, Mr.
Brooks was President of Silver Star Express, Inc. since 1988. Mr. Brooks has
more than 25 years of experience in the same-day delivery and distribution
industries. In addition, Mr. Brooks is currently a Member of the Express
Carriers Association and various other transportation associations.
Russell J. Reardon, 55, has served as Vice President - Chief Financial
Officer of CD&L since November 1999. Mr. Reardon previously had been Vice
President - Treasurer of CD&L since January 1999. Prior thereto, from September
1998 until January 1999, Mr. Reardon was Chief Financial Officer and Secretary
of Able Energy, Inc., a regional energy retailer. From April 1996 until June
1998, Mr. Reardon was Chief Financial Officer and Secretary of Logimetrics,
Inc., a manufacturer of broad-band wireless communication devices. He earned an
accounting degree and an MBA in Finance from Fairleigh Dickinson University.
Mark T. Carlesimo, 51, has served as Vice President - General Counsel
and Secretary of CD&L since September 1997. From July 1983 until September 1997,
Mr. Carlesimo served as Vice President of Legal Affairs of Cunard Line Limited.
Earlier in his career, Mr. Carlesimo served as Staff Counsel to Seatrain Lines,
Inc., a cargo shipping company and was engaged in the private practice of law.
Mr. Carlesimo received a B.A. in Economics from Fordham University in 1975 and
received his law degree from Fordham University School of Law in 1979. Mr.
Carlesimo is a Member of the Bar of the states of New York and New Jersey.
James J. Cosentino, 50, was appointed Vice President - Corporate
Controller of CD&L in May 2003. Prior to his appointment, Mr. Cosentino held
several financial management positions with both publicly and privately owned
companies. From 1980 through 1992, he was with the Macmillan Publishing Company
and more recently, from 1996 to 2002, he was the Controller of Prestige Window
Fashions. Mr. Cosentino earned his undergraduate degree from Westminster College
and an MBA in Finance from Fairleigh Dickinson University. Mr. Cosentino is a
member of the New Jersey State Society of CPAs and the Financial Executive
Institute (FEI).
11
ITEM 2. PROPERTIES
As of December 31, 2004, we operated from 66 leased facilities (not
including 27 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 our current leased facilities.
STATE NUMBER OF LEASED FACILITIES
----- ---------------------------
New York......................... 16
California....................... 11
Florida.......................... 10
New Jersey....................... 5
North Carolina................... 4
Maine............................ 3
Louisiana........................ 2
Ohio............................. 2
Pennsylvania.................... 2
Oklahoma......................... 1
Tennessee........................ 1
Indiana.......................... 1
Massachusetts.................... 1
South Carolina................... 1
Washington....................... 1
Connecticut...................... 1
Georgia.......................... 2
Texas............................ 1
Vermont.......................... 1
--------------------------
Total 66
Our corporate headquarters is located at 80 Wesley Street, South
Hackensack, New Jersey. We believe that our properties are generally well
maintained, in good condition and adequate for our present needs. Furthermore,
we believe that suitable additional or replacement space will be available when
required.
As of December 31, 2004, we owned or leased approximately 113 vehicles
of various types, which are operated by drivers employed by us. We also utilize
independent contractors who provide their own vehicles and are required to carry
at least the minimum amount of insurance required by law.
Our aggregate rental expense, primarily for facilities, was
approximately $7,369,000, for the year ended December 31, 2004. See Note 11 to
our Consolidated Financial Statements.
12
ITEM 3. LEGAL PROCEEDINGS
From time to time, we become a party to litigation arising in the
normal course of our business, most of which involves claims for uninsured
personal injury and property damage incurred in connection with our same-day
delivery operations. In connection therewith, we had recorded reserves of
$774,000 and $885,000 as of December 31, 2004 and 2003, 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 is not aware of any actions, including the actions described
above, that would have a material adverse effect on our consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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 2003
and 2004.
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
2004 LOW HIGH
---- --- ----
First Quarter $0.78 $1.61
Second Quarter $0.93 $2.15
Third Quarter $1.15 $2.17
Fourth Quarter $1.31 $1.96
On March 16, 2005, the last reported sale price of the Common Stock was
$2.00 per share. As of March 16, 2005, there were approximately 241 stockholders
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 Convertible Notes issued in the April 2004 restructuring of its Senior
Notes. See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER EQUITY
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY WARRANTS AND RIGHTS
- -------------------------------------------------------------------------------------------------------------------------
(A) (B) (C)
- -------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS
3,565,147 $1.93 6,875,380
- -------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS - - -
- -------------------------------------------------------------------------------------------------------------------------
TOTAL 3,565,147 $1.93 6,875,380
- -------------------------------------------------------------------------------------------------------------------------
14
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of December
31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 is
derived from the Company's audited consolidated financial statements, which are
included elsewhere herein. The selected consolidated financial data set forth
below as of December 31, 2002 is derived from the Company's consolidated
financial statements audited by Deloitte & Touche LLP and as of and for the
years ended December 31, 2001 and 2000 is derived from the Company's
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,
-----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------- ------------- -------------- ---------------
Revenue $197,724 $166,083 $157,232 $160,544 $170,079
Gross profit 37,454 32,735 30,080 32,704 34,463
Selling, general and
administrative expenses 31,105 28,136 25,492 26,881 33,978
Goodwill impairment - - - 3,349 -
Depreciation and amortization 1,051 756 1,173 2,476 3,355
Other expense (income), net 601 (1,496) 206 4,685 2,438
Interest expense 1,859 2,534 2,734 2,897 3,060
Income (loss) from
continuing operations 1,583 1,683 285 (5,804) (6,229)
Discontinued operations:
Income from discontinued
operations, net of income
taxes - - - - 1,388
Provision for loss on
disposal of assets, net of
income taxes - - - (465) (2,807)
Net income (loss) $1,583 $1,683 $285 ($6,269) ($7,648)
Basic income (loss) per
share:
-Continuing operations $.20 $.22 $.04 ($.76) ($.84)
-Discontinued operations - - - (.06) (.19)
------------ ------------- ------------- -------------- ---------------
-Net income (loss) $.20 $.22 $.04 ($.82) ($1.03)
============ ============= ============= ============== ===============
Diluted income (loss) per share:
-Continuing operations $.11 $.21 $.03 ($.76) ($.84)
-Discontinued operations - - - (.06) (.19)
------------ ------------- ------------- -------------- ---------------
-Net income (loss) $.11 $.21 $.03 ($.82) ($1.03)
============ ============= ============= ============== ===============
Basic weighted average shares
outstanding 7,737 7,659 7,659 7,659 7,430
Diluted weighted average
shares outstanding 14,513 8,174 8,167 7,659 7,430
BALANCE SHEET DATA:
CD&L, Inc. and Subsidiaries (1)
-----------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ -------------- ------------- ------------- ---------------
Working (deficit) capital $8,063 $1,807 $2,869 $4,923 ($3,430)
Equipment and leasehold
improvements, net 1,627 1,446 1,233 1,961 2,841
Goodwill and other intangible
assets, net 13,268 11,968 12,192 12,252 20,666
Total assets 42,742 40,352 33,821 35,481 57,785
Total debt 15,108 20,137 17,483 20,595 34,686
Stockholders' equity $12,604 $5,583 $3,900 $3,615 $9,884
(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.
15
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:
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes (the "Senior Notes") and warrants with
three financial institutions. The Senior Notes originally bore interest at 12.0%
per annum and are subordinate to all senior debt including the Company's Fleet
Facility. For a description of the Fleet Facility, see "Liquidity and Capital
Resources". Under the terms of the Senior Notes, as amended, the Company was
required to maintain certain financial ratios and comply with other financial
conditions contained in the Senior Notes agreement.
At March 31, 2004, the Company owed $11,000,000 on the Senior Notes. On
April 14, 2004, an agreement was reached among the Company, the Original
Noteholders and the Investors as to the financial restructuring of the Senior
Notes. The Original Noteholders agreed to convert a portion of the existing debt
due from CD&L into equity and to modify the terms of the Senior Notes if the
Investors purchased a portion of the notes and accepted similar modifications.
The nature of the restructuring is as follows:
(a) The Original Noteholders exchanged Senior Notes in the
aggregate principal amount of $4,000,000 for shares of the
Series A Convertible Redeemable Preferred Stock of the
Company, par value $.001 per share ("Preferred Stock"), with a
liquidation preference of $4,000,000. The Preferred Stock is
convertible into 3,937,008 shares of Common Stock, does not
pay dividends (unless dividends are declared and paid on the
Common Stock) and is redeemable by the Company for the
liquidation value. The conversion price is $1.016 per share
which was equal to the average closing price for the Company's
common stock for the 5 days prior to the closing. Holders of
the Preferred Stock have the right to elect two directors.
(b) The Original Noteholders and the Company amended the terms of
the $7,000,000 balance of the Senior Notes, and then exchanged
the amended notes for the new notes, which consist of two
series of convertible notes, the Series A Convertible
Subordinated Notes (the "Series A Convertible Notes") in the
principal amount of $3,000,000 and the Series B Convertible
Subordinated Notes ("Series B Convertible Notes") in the
principal amount of $4,000,000 (collectively, the "Convertible
Notes"). The loan agreement that governed the Senior Notes was
amended and restated to reflect the terms of the substituted
Series A Convertible Notes and the Series B Convertible Notes,
including the elimination of most financial covenants. The
principal amount of the Convertible Notes is due in a balloon
payment at the maturity date of April 14, 2011. The
Convertible Notes bear interest at a rate of 9% for the first
two years of the term, 10.5% for the next two years and 12%
for the final three years of the term and will be paid
quarterly. The terms of the two series of Convertible Notes
are identical except for the conversion price ($1.016 for the
Series A
16
Convertible Notes, the average closing price for the Company's
common stock for the 5 days prior to the closing and $2.032
for the Series B Convertible Notes).
(c) The Investors purchased the Series A Convertible Notes from
the Original Noteholders for a price of $3,000,000.
(d) The Company issued an additional $1,000,000 of Series A
Convertible Notes to the Investors for an additional payment
of $1,000,000, the proceeds of which were used to reduce
short-term debt.
(e) The Investors, the Original Noteholders and the Company
entered into a Registration Rights Agreement pursuant to which
the shares of the Company's common stock issuable upon
conversion of the Preferred Stock and the Convertible Notes
may be registered for resale with the Securities and Exchange
Commission ("SEC").
The Company cannot be compelled to redeem the Preferred Stock for
cash at any time. As the interest on the Convertible Notes increases over the
term of the Convertible Notes, the Company records the associated interest
expense on a straight-line basis, giving rise to accrued interest over the early
term of the Convertible Notes.
As a result of the debt restructuring described above, the Company
has taken a charge of $628,000 recorded in other expense in the second quarter
of 2004, representing the unamortized balance of the original issue discount and
deferred financing costs related to the original private placement of the Senior
Notes.
Costs incurred relative to the aforementioned transactions amounted to
approximately $592,000. Of this amount, $420,000 has been accounted for as
deferred financing costs and is being amortized over the term of the new
financing agreements. The remaining $172,000 has been accounted for as a
reduction in paid-in capital. These amounts have been allocated based on the
proportion of debt to equity raised in the aforementioned transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to accounts
receivable, intangible assets, insurance reserves, income taxes and
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
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 an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make payments when due
or within a reasonable period of time thereafter. The Company estimates
allowances for doubtful accounts 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, 2004, the Company has
estimated that an allowance for doubtful accounts of $1,330,000 is needed to
cover the current receivable base. As a result of this estimate, the Company
recorded $867,000 of expense in 2004 related to the allowance for doubtful
accounts. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make required
payments, additional allowances may be required.
17
REVENUE RECOGNITION
Revenue is recognized when pervasive evidence of an arrangement exists,
the price to the customer is fixed or determinable and collection 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 2003 relates solely to additional sales volume.
GOODWILL
The value of the Company's goodwill is significant relative to total
assets and stockholders' equity. The Company reviews goodwill for impairment on,
at least, an annual basis using several fair-value based tests, which include,
among others, a discounted cash flow and terminal value computation as well as
comparing the Company's market capitalization to the book value of the Company.
The discounted cash flow and terminal value computation is based on management's
estimates of future operations. During 2004, 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 2004 statement of operations related to
goodwill. Changes in business conditions or interest rates could materially
impact management's estimates of future operations and consequently the
Company's evaluation of fair value, and this could result in an impairment of
goodwill. Such impairment, if any, could have a significant impact on the
Company's reported results from future 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 the Company's inability to increase prices to its customers at
the same rate as that of the associated cost increases.
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. The deductible for employee health medical costs is $150,000 per loss.
Effective July 1, 2003, automobile liability coverage is maintained for covered
vehicles through a fully-insured indemnity program with no deductible. 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. As of
December 31, 2004, the Company has accrued approximately $2,229,000 for
estimated losses incurred but not reported. The Company has also accrued
$195,000 for incurred but unpaid employee health medical costs as of December
31, 2004.
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.
18
RESULTS OF OPERATIONS 2004 COMPARED WITH 2003
The following discussion compares the Company's results of operations for the
year ended December 31, 2004 and the year ended December 31, 2003.
INCOME AND EXPENSE AS A PERCENTAGE OF REVENUE
For the Years Ended
December 31,
-----------------------------
2004 2003
------------ ------------
Revenue 100.0% 100.0%
Gross profit 18.9% 19.7%
Selling, general and
administrative expenses 15.7% 16.9%
Depreciation and amortization 0.5% 0.5%
Other expense (income), net 0.3% (0.9%)
Interest expense 0.9% 1.5%
Net income 0.8% 1.0%
REVENUE
Revenue for the year ended December 31, 2004 increased by $31,641,000, or 19.1%,
to $197,724,000 from $166,083,000 for the year ended December 31, 2003. The
increase was due to new customers as well as a higher volume of business from
existing customers. The revenue growth reflected the launch of the Company's
nationwide business development program and its ability to expand into new
markets with its existing customer base, partially offset by the business
interruptions during the year related to hurricanes in the southeast and the
presidential conventions in New York City and Boston.
COST OF REVENUE
Cost of revenue consisted primarily of independent contractor delivery costs,
other direct pick-up and delivery costs and the costs of dispatching rush demand
messengers. These costs increased by $26,922,000, or 20.2%, from $133,348,000
for 2003 to $160,270,000 in 2004. Stated as a percentage of revenue, these costs
increased to 81.1% for 2004 compared to 80.3% for 2003. The increase in cost of
revenue stated as a percentage of revenue was due primarily to increased cost of
utilizing independent contractors (direct delivery costs increased by 3.3% as a
percentage of revenue). This increase in cost of sales as a percentage of
revenue was partially offset by:
o A $350,000 reversal of the direct labor vacation accrual due
to a change in the vacation policy effective December 31,
2004.
o A decrease in Company delivery vehicle expenses of $235,000.
o A reduction in cargo claims of $148,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("SG&A")
SG&A included costs to support the Company's sales effort and the expense of
maintaining facilities, information systems, financial, legal and other
administrative functions. SG&A increased by $2,969,000, or 10.6%, from
$28,136,000 in 2003 to $31,105,000 in 2004. As a percentage of revenue, SG&A
decreased to 15.7% in 2004 compared to 16.9% of revenue in 2003. The overall
increase in SG&A was due primarily to the following factors:
o A $2,146,000 increase in compensation expense which included
the addition of approximately 20 new employees in our
administrative, sales and information technology departments
and higher incentive compensation as compared to 2003.
19
o A $459,000 increase in premises rent.
o A $437,000 increase in the provision for doubtful accounts,
primarily due to increased sales volume in 2004.
o Other increases in SG&A primarily related to computer costs,
utilities, travel expenses and office supplies.
The above factors were partially offset by the following:
o A $541,000 decrease in professional fees, primarily due to a
reduction in legal fees.
o A $535,000 reversal of the SG&A vacation accrual due to a
change in the vacation policy effective December 31, 2004.
o A $317,000 reduction in medical claims.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $295,000, or 39.0%, from $756,000 for
2003 to $1,051,000 for 2004. Factors driving such increase included the
amortization of the First Choice customer list and the depreciation of the
Company's new People Soft financial system.
OTHER EXPENSE (INCOME), NET
Other expense (income), net, had a net change of $2,097,000, to $601,000 of
expense in 2004 from $1,496,000 of income in 2003. The 2004 other expense was
mainly due to the write-off of deferred financing costs and original issue
discount related to the original Senior Notes which were restructured on April
14, 2004. The Company recorded a gain included in other expense (income), 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 was 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 3 to the
Company's audited consolidated financial statement contained herein.
INTEREST EXPENSE
Interest expense decreased by $675,000 from $2,534,000 in 2003 to $1,859,000 in
2004. This decrease was primarily due to the restructuring of the Senior Notes.
See Liquidity and Capital Resources - Long-term Debt included elsewhere herein.
PROVISION FOR INCOME TAXES
The provision for income taxes was 44% of pre-tax income in 2004 compared to 40%
of pre-tax income in 2003. The increase in the provision for 2004 was primarily
due to an increase in state income taxes.
RESULTS OF OPERATIONS 2003 COMPARED WITH 2002
The following discussion compares the Company's results of operations for 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%
20
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 contributed to such revenue
increase, partially offset by certain price reductions granted to extend
customer contracts. The revenue growth reflected 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 consisted primarily of independent contractor delivery costs,
other direct pick-up and delivery costs and the costs of dispatching rush demand
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 was due primarily to increased cost of
independent contractors. While the cost of this labor was 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 was partially attributable to the change in auto
liability coverage to a fully-insured indemnity program in July 2003 and
significantly fewer Company-owned vehicles in service. This net reduction in
cost of sales as a percentage of revenue was partially offset by additional
cargo claims of approximately $800,000.
SG&A
SG&A included costs to support the Company's sales effort and the expense of
maintaining facilities, information systems, financial, legal and other
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 was 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 were primarily attributable to an
increase in property and corporate umbrella insurance costs,
office maintenance and expenses, data communications, computer
costs and other indirect expenses.
o The above factors were 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 included 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. In February 1999, the Company
became obligated for seller-financed acquisition debt of $1,650,000 related to
the acquisition of Gold Wings. As of February 28, 2003, the note had
21
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 is that the Company assigned the
Note Receivable to GMV in exchange for a release on the CDL/Gold Note payable,
so that the Company is now relieved of its $1,034,000 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
within Other (Income) Expense, net.
Also included in other income for 2003 was 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 3
to the Company's audited consolidated financial statements included elsewhere in
this Annual Report. The expense in 2002 related to a $300,000 increase in the
allowance for the stockholder 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased by $6,256,000 from $1,807,000
as of December 31, 2003 to $8,063,000 as of December 31, 2004. The increase was
primarily the result of an increase in the net accounts receivable balance of
$2,762,000 due to revenue growth and the impact of the April 14, 2004 debt
restructuring which resulted in a $2,098,000 decrease in the current portion of
long-term debt. Other factors include a $2,283,000 reduction in accrued
expenses, partially offset by a $1,551,000 increase in accounts payable and a
decrease in cash and cash equivalents of $1,080,000 at December 31, 2004.
Cash and cash equivalents decreased by $1,080,000 during 2004. Cash
of $221,000 was provided by operating activities, primarily due to lower prepaid
insurance through the insurance financing arrangement at December 31, 2004. Cash
of $915,000 was used in investing activities, the majority of which relates to
the purchase of additional hardware, scanners and customizations to the
Company's new PeopleSoft financial system. Cash of $386,000 was used in
financing activities primarily for $2,996,000 of debt repayments and
restructuring costs, partially offset by $1,000,000 of proceeds from the April
14, 2004 debt restructuring and $1,610,000 of proceeds from the rights offering.
Capital expenditures amounted to $935,000, $968,000 and $522,000 for
the years ended December 31, 2004, 2003 and 2002, respectively. These
expenditures related primarily to enhanced and expanded information systems
capability and upgraded Company facilities in the ordinary course of business.
Increased expenditures in 2003 and 2004 related to the purchase, implementation
and customization of the PeopleSoft financial system. Capital expenditures of
approximately $1,000,000 are anticipated for the year ending December 31, 2005.
Short-term borrowings -
At December 31, 2004, short-term borrowings totaled $4,809,000
consisting of a line of credit balance of $4,190,000 and $619,000 of outstanding
borrowings related to the insurance financing arrangements discussed below. 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 entered into in 2003.
As of June 27, 2002, CD&L and Summit Business Capital Corporation,
doing business as Fleet Capital - Business Finance Division ("Summit"), entered
into an agreement establishing a revolving credit facility (the "Fleet
Facility") of $15,000,000. The Fleet Facility 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
22
(5.50% at December 31, 2004) and LIBOR based loans at the bank's LIBOR, as
defined, plus 225 basis points (4.56% at December 31, 2004). The Company expects
that it will negotiate an extension or replacement of the Fleet Facility on
terms at least as favorable as the current terms, before the June 2005
expiration date. Credit availability is based on eligible amounts of accounts
receivable, as defined, up to a maximum amount of $15,000,000 and is
collateralized by substantially all of the assets, including certain cash
balances, accounts receivable, equipment, leasehold improvements and general
intangibles of the Company and its subsidiaries. As of December 31, 2004,
outstanding borrowings were $4,190,000 and the maximum borrowings outstanding
under the Fleet Facility during the year were $7,909,000. As of December 31,
2004, the Company had total cash on hand and borrowing availability of
$5,466,000 under the Fleet Facility, after adjusting for restrictions related to
outstanding standby letters of credit of $5,748,000 and minimum availability
requirements.
Under the terms of the Fleet Facility, the Company is required to
maintain certain financial ratios and comply with other financial conditions.
The Fleet Facility also prohibits the Company from incurring certain
additional indebtedness, limits certain investments, advances or loans and
restricts substantial asset sales, capital expenditures and cash dividends.
The Company was in compliance with its debt covenants, as amended, as of
December 31, 2004.
Insurance Financing Agreements -
In connection with the renewal of certain of the Company's insurance
policies, CD&L entered into an agreement to finance annual insurance premiums. A
total of $1,382,000 was financed through this arrangement as of December 31,
2004. Monthly payments, including interest, amount to $156,000. The interest
rate is 3.2% and the note matures in April 2005. The related annual insurance
premiums were paid to the various insurance companies at the beginning of each
policy year. The outstanding debt amount of $619,000 at December 31, 2004 (and
$1,231,000 at December 31, 2003) is included in short-term borrowings. The
corresponding prepaid insurance has been recorded in prepaid expenses and other
current assets.
The following tables summarize our contractual and commercial obligations as of
December 31, 2004:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------
2009-
CONTRACTUAL OBLIGATIONS 2005 2006 2007 2008 THEREAFTER TOTAL
(IN THOUSANDS) ---- ---- ---- ---- ---------- -----
Long-term debt $485 $520 $528 $533 $8,228 $10,294
Capital leases $2 $2 $1 $- $- $5
-------------------------------------------------------------------------------
Total long-term debt $487 $522 $529 $533 $8,228 $10,299
Operating leases (Primarily for $3,928 $3,179 $1,907 $956 $638 $10,608
facilities)
23
Other Contractual Obligations:
The Company has entered into employment agreements with its key executives which
under certain change in control circumstances could result in total cash
payments of as much as approximately $4 million. See Item 11.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS
(IN THOUSANDS) 2009-
2005 2006 2007 2008 THEREAFTER TOTAL
---- ---- ---- ---- ---------- -----
Working Capital Facility $15,000 $- $- $- $- $15,000
(Including Standby Letters of Credit)
Standby Letter of Credit $5,748 (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.
LONG-TERM DEBT:
On January 29, 1999, the Company completed a $15,000,000 private
placement of senior subordinated notes (the "Senior Notes") and warrants with
three financial institutions. The Senior Notes originally bore interest at 12.0%
per annum and were subordinate to all senior debt including the Company's Fleet
Facility. For description of the Fleet Facility, see "Liquidity and Capital
Resources". Under the terms of the Senior Notes, as amended, the Company was
required to maintain certain financial ratios and comply with other financial
conditions contained in the Senior Notes agreement.
At March 31, 2004, the Company owed principal of $11,000,000 on the
Senior Notes. On April 14, 2004, an agreement was reached among the Company, the
Original Noteholders and the Investors as to the financial restructuring of the
Senior Notes. The Original Noteholders agreed to convert a portion of the
existing debt due from CD&L into equity and to modify the terms of the Senior
Notes if the Investors purchased a portion of the note and accepted similar
modifications. The nature of the restructuring is as follows:
(a) The Original Noteholders exchanged Senior Notes in the
aggregate principal amount of $4,000,000 for shares of the
Preferred Stock, with a liquidation preference of $4,000,000.
The Preferred Stock is convertible into 3,937,008 shares of
Common Stock, does not pay dividends (unless dividends are
declared and paid on the Common Stock) and is redeemable by
the Company for the liquidation value. The conversion price is
$1.016 per share which was equal to the average closing price
for the Company's common stock for the 5 days prior to the
closing. Holders of the Preferred Stock have the right to
elect two directors.
(b) The Original Noteholders and the Company amended the terms of
the $7,000,000 balance of the Senior Notes, and then exchanged
the amended notes for the new notes, which consist of two
series of convertible notes, the Series A Convertible Notes in
the principal amount of $3,000,000 and the Series B
Convertible Notes in the principal amount of $4,000,000. The
loan agreement that governed the Senior Notes was amended and
restated to reflect the terms of the substituted Series A
Convertible Notes and the Series B Convertible Notes,
including the elimination of most financial covenants. The
principal amount of the Convertible Notes is due in a balloon
payment at the maturity date of April 14, 2011. The
Convertible Notes bear interest at a rate of 9% for the first
two years of the term, 10.5% for the next two years and 12%
for the final three years of the term and will be paid
quarterly. The terms of the two series of Convertible Notes
are identical except for the conversion price ($1.016 for the
Series A Convertible Notes, the average closing price for the
Company's common stock for the 5 days prior to the closing and
$2.032 for the Series B Convertible Notes).
24
(c) The Investors purchased the Series A Convertible Notes from
the Original Noteholders for a price of $3,000,000.
(d) The Company issued an additional $1,000,000 of Series A
Convertible Notes to the Investors for an additional payment
of $1,000,000, the proceeds of which were used to reduce
short-term debt.
(e) The Investors, the Original Noteholders and the Company
entered into a Registration Rights Agreement pursuant to which
the shares of the Company's common stock issuable upon
conversion of the Preferred Stock and the Convertible Notes
may be registered for resale with the SEC.
The Company cannot be compelled to redeem the Preferred Stock for cash at any
time. As the interest on the Convertible Notes increases over the term of the
Convertible Notes, the Company records the associated interest expense on a
straight-line basis, giving rise to accrued interest over the early term of the
Convertible Notes.
As a result of the debt restructuring described above, the Company has
taken a charge of $628,000 recorded in other expense in the second quarter of
2004, representing the unamortized balance of the original issue discount and
deferred financing costs related to the original private placement of the Senior
Notes.
Costs incurred relative to the aforementioned transactions amounted to
approximately $592,000. Of this amount, $420,000 has been accounted for as
deferred financing costs and is being amortized over the term of the new
financing agreements. The remaining $172,000 has been accounted for as a
reduction in paid-in capital. These amounts have been allocated based on the
proportion of debt to equity raised in the aforementioned transactions.
25
Long-term debt consisted of the following (in thousands) -
DECEMBER 31,
---------------------------------------
2004 2003
------------------- ------------------
Senior Subordinated Notes, net of unamortized discount of $0 and $377,
respectively. $- $10,623
Series A Convertible Subordinated Notes 4,000 -
Series B Convertible Subordinated Notes 4,000 -
Capital lease obligations due through July 2007 with interest at rates ranging
from 8.0% to 11.5% and collateralized by the related property. 5 76
Seller-financed debt for acquisitions, payable in monthly installments through
May 2009. Interest is payable at rates ranging between 7.0% and 9.0%. 2,294 3,671
------------------- ------------------
10,299 14,370
Less - Current maturities (487) (2,585)
------------------- ------------------
$9,812 $11,785
=================== ==================
The aggregate annual principal maturities of debt (excluding capital
lease obligations) as of December 31, 2004 are as follows (in thousands) -
2005 485
2006 520
2007 528
2008 533
2009 and thereafter 8,228
-------------------
Total $10,294
===================
The Company leases certain transportation and warehouse equipment
under capital lease agreements that expire at various dates. At December 31,
2004, minimum annual payments under capital leases, including interest, are as
follows (in thousands) -
2005 $2
2006 2
2007 1
2008 -
2009 -
------------------
Total minimum payments 5
Less - Amounts representing interest -
------------------
Net minimum payments 5
Less - Current portion of obligations under capital leases (2)
------------------
Long-term portion of obligations under capital leases $3
==================
The Company had an accumulated deficit of ($5,563,000) as of
December 31, 2004. On numerous occasions, The Company has had to amend and
obtain waivers of the terms of its credit facilities and senior debt as a result
of covenant violations or projected covenant violations or for other reasons. On
April 14, 2004, the Company restructured its senior debt. The restructuring
included an agreement among the Company, its lenders, members of CD&L management
and others which improved the Company's short-term liquidity and reduced
interest expense. The restructuring eased the financial covenants to which we
are subject. However, if we were to fail to meet such covenants in the future,
there can be no assurances that the Company's lenders will agree to waive any
future covenant violations, renegotiate and modify the terms of their loans, or
further extend the maturity date, should it become necessary to do so. Further,
there can be no assurances that the Company will be able to meet its revenue,
cost or income projections, upon which the debt covenants are based.
26
Management believes that cash flows from operations and its borrowing
capacity are sufficient to support the Company's operations and general business
and capital requirements for at least the next twelve months. Such conclusions
are predicated upon sufficient cash flows from operations and the continued
availability of a revolving credit facility. The risks associated with cash
flows from operations are mitigated by the Company's low gross profit margin.
Unless extraordinary, decreases in revenue should be accompanied by
corresponding decreases in costs, resulting in minimal impact to liquidity. The
risks associated with the revolving credit facility are as discussed above.
NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
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). During 2004, the provisions of SFAS 150 were followed in
determining the equity classification of preferred shares issued in relation to
the April 14, 2004 debt restructuring.
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 post-retirement 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 did not have a material impact on the
financial position or results of operations of the Company.
In December 2004, SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123(R)") was issued. SFAS 123(R) replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("Opinion 25"). Statement 123, as
originally issued in 1995, established as preferable a fair-value based method
of accounting for share-based payment transactions with employees. However, that
Statement permitted entities the option of continuing to apply the guidance in
Opinion 25, as long as the footnotes to the financial statements disclosed what
net income would have been had the preferable fair-value based method been used.
SFAS 123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in the financial statements. That cost will be
measured based on the fair value of the equity or liability instrument issued.
Public entities (other than those filings as small business issuers) will be
required to apply SFAS 123(R) as of the first annual reporting period that
begins after June 15, 2005. As the Company currently applies the guidance in
Opinion 25, this SFAS 123(R) will be adopted in the first quarter of 2006 and
will result in additional compensation expense in the Consolidated Statement of
Operations.
In December 2004, SFAS No. 153, "Exchanges of Nonmonetary Assets"
("SFAS 153") was issued. SFAS 153 amends APB Opinion No. 29, "Accounting for
Nonmonetary Transactions" to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. As of
December 31, 2004, the Company is not involved in any exchanges of nonmonetary
assets.
27
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, 2004, the Company's debt consisted of approximately $10,918,000 of
fixed rate debt with a weighted average interest rate of 8.25% and $4,190,000 of
variable rate debt with a weighted average interest rate of 4.59%. The variable
rate debt consists of borrowings of revolving line of credit debt at the bank's
prime rate plus 25 basis points (5.50% at December 31, 2004). If interest rates
on variable rate debt were to increase by 46 basis points (one-tenth of the
weighted average interest rate at December 31, 2004), the net impact to the
Company's results of operations and cash flows for the year ended December 31,
2004 would be a decrease of income before provision for income taxes and cash
flows from operating activities of approximately $19,000. Maximum borrowings of
revolving line of credit debt during the year ended December 31, 2004 were
$7,909,000.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Registered Public Accounting Firm........................................................ 30
Consolidated Balance Sheets as of December 31, 2004 and 2003.................................................... 32
Consolidated Statements of Operations For The Years Ended December 31, 2004, 2003 and
2002........................................................................................................ 33
Consolidated Statements of Changes in Stockholders' Equity For The Years Ended December 31,
2004, 2003 and 2002......................................................................................... 34
Consolidated Statements of Cash Flows For The Years Ended December 31, 2004, 2003 and
2002........................................................................................................ 35
Notes to Consolidated Financial Statements...................................................................... 36
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CD&L, Inc.:
We have audited the accompanying consolidated balance sheet of CD&L, Inc. and
Subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. Our audit also included the financial statement schedule for the year
ended December 31, 2004 listed in the Index at Item 15. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of CD&L, Inc. and Subsidiaries as of
December 31, 2004, and their results of operations and cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, such financial statement schedule
for the year ended December 31, 2004, 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.
/s/ J.H.Cohn LLP
Roseland, New Jersey
April 14, 2005
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders 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 the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 2003 and 2002. 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, 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 the results of their operations and their cash flows for
the years ended December 31, 2003 and 2002, 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.
DELOITTE & TOUCHE LLP
New York, New York
March 26, 2004 (except with respect to the matters discussed in Notes 8 and 14,
as to which the date is April 14, 2004)
31
CD&L, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31,
-------------------------------------
2004 2003
----------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $617 $1,697
Accounts receivable, less allowance for doubtful accounts of $1,330
and $872 in 2004 and 2003, respectively (Note 8) 21,548 18,786
Deferred income taxes (Notes 2 and 10) 1,248 1,542
Prepaid expenses and other current assets (Note 4) 3,606 2,526
------------------ ------------------
Total current assets 27,019 24,551
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net (Notes 2 and 5) 1,627 1,446
GOODWILL, net (Notes 2, 3 and 6) 11,531 11,531
OTHER INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net (Notes 2, 3 and 6) 1,737 437
NOTE RECEIVABLE AND SECURITY DEPOSITS (Note 3) 828 2,235
DEFERRED INCOME TAXES (Notes 2 and 10) - 152
------------------ ------------------
Total assets $42,742 $40,352
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 8) $4,809 $5,767
Current maturities of long-term debt (Notes 2 and 8) 487 2,585
Accounts payable 4,200 2,649
Accrued expenses and other current liabilities (Note 7) 9,460 11,743
----------------- ------------------
Total current liabilities 18,956 22,744
LONG-TERM DEBT, net of current maturities (Notes 2 and 8) 9,812 11,785
DEFERRED INCOME TAXES (Notes 2 and 10) 1,100 -
OTHER LONG-TERM LIABILITIES 270 240
----------------- ------------------
Total liabilities 30,138 34,769
----------------- ------------------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
STOCKHOLDERS' EQUITY (Notes 12, 13 and 14):
Preferred stock, $.001 par value; 2,000,000 shares authorized; 393,701
shares issued and outstanding at December 31, 2004 4,000 -
Common stock, $.001 par value; 30,000,000 shares authorized,
9,385,678 and 7,688,027 shares issued in 2004 and 2003, respectively 9 8
Additional paid-in capital 14,320 12,883
Treasury stock, 29,367 shares at cost (162) (162)
Accumulated deficit (5,563) (7,146)
----------------- ------------------
Total stockholders' equity 12,604 5,583
----------------- ------------------
Total liabilities and stockholders' equity $42,742 $40,352
================= ==================
The accompanying notes to consolidated financial statements are an integra