Item 1. Business Description
Overview
We are one of the leading national full-service providers of customized, same-day, time-critical, delivery services to a wide range of commercial, industrial and retail customers. Our services are provided throughout the United States, but concentrated on the East Coast.
In conjunction with our initial public offering in November 1995 we acquired 11 time-critical ground and air delivery businesses that operated in 52 cities across the United States. As of December 31, 2002, we had acquired 15 additional time-critical ground and air delivery businesses and sold the ground courier operations in the Mid-West, one of the contract logistics operations and the Company's air courier division.
We offer the following delivery services:
o rush delivery service, typically consisting of delivering time-sensitive packages, such as critical parts, emergency medical devices and legal and financial documents from point-to-point on an as-needed basis;
o routed services, providing, on a recurring and often daily basis, deliveries from pharmaceutical suppliers to pharmacies, from manufacturers to retailers, and the inter-branch distribution of financial documents in a commingled system;
o facilities management, including providing and supervising mailroom personnel, mail and package sorting, internal delivery and outside local messenger services; and
o dedicated contract logistics, providing a comprehensive solution to major corporations that want the control, flexibility and image of an in-house fleet with all the economic benefits of outsourcing.
At December 31, 2002 and March 31, 2003, the Company did not comply with the Minimum Earnings, Fixed Charge Coverage Ratio and Cash Flow Leverage Ratio covenants, as defined, at one or both dates. On April 23, 2003, the Company obtained waivers from its lenders for the covenant violations and renegotiated certain covenants and modified certain terms of its revolving credit facility and senior subordinated notes. (See Note 9 of Notes to Consolidated Financial Statements for additional information on the Company's debt).
Our Industry
The same-day delivery industry is serviced by a fragmented system of thousands of companies that include only a small number of large regional or national operators. The industry has been impacted by the following:
o Outsourcing and Vendor Consolidation. Commercial and industrial businesses, which choose same-day delivery services, sometimes prefer concentrating on their core business by outsourcing non-core activities. These businesses seek single-source solutions for their regional and national same-day delivery needs rather than utilizing a number of smaller, local delivery companies. At the same time, some larger national and international companies are looking toward decentralized distribution systems.
o Heightened Customer Expectations. Increasing customer demand for specialized services such as customized billing, enhanced tracking, storage, inventory management and just-in-time delivery capabilities favor companies with greater resources to devote to providing those services. The use of facsimile technology and the Internet have increased the speed at which the processing of information and transactions occur such that the requirements for immediate delivery of a wide range of critical items has become commonplace.
Our Services
We provide our customers with a full range of customized, same-day, time-critical, delivery service options.
Rush. In providing rush delivery services, or services on demand, our messengers and drivers respond to customer requests for the immediate pick-up and delivery of time-sensitive packages. We generally offer one-, two- and four-hour service, on a 7-days-a-week, 24-hours-a-day basis. Our typical customers for rush service include commercial and industrial companies, health care providers and service providers such as accountants, lawyers, advertising and travel agencies and public relations firms.
Scheduled. Our scheduled delivery services are provided on a recurring and often daily basis. We typically pick up or receive large shipments of products, which are then sorted, routed and delivered. These deliveries are made in accordance with a customer's specific schedule that generally provides for deliveries to be made at particular times. Typical routes may include deliveries from pharmaceutical suppliers to pharmacies, from manufacturers to retailers, the inter-branch distribution of financial documents, payroll data and other time-critical documents for banks, financial institutions and insurance companies. We also provide these services to large retailers for home delivery, including large cosmetic companies, door-to-door retailers, catalog retailers, home health care distributors and other direct sales companies.
Facilities Management. We provide complete mailroom management services, by offering customized solutions that include absorbing the entire mailroom function. This includes mail meter management, messenger delivery services, main entrance personnel and management personnel.
Dedicated Contract Logistics. We offer efficient and cost-effective dedicated delivery solutions, such as fleet replacement solutions, dedicated delivery systems and transportation systems management services. These services provide major health care providers, office product companies, retailers and financial institutions with the control, flexibility and image of an in-house fleet and with all of the economic benefits of outsourcing.
Our Internal Operations
We operate from 57 leased facilities and 33 customer owned facilities in 21 states. The size of each facility varies, but typically includes dedicated dispatch and order entry functions as well as delivery personnel. We accomplish coordination and deployment of our delivery personnel either through communications systems linked to our computers, through pagers, mobile data units, or by radio or telephone. A dispatcher coordinates shipments for delivery within a specific time frame. We route a shipment according to its type and weight, the geographic distance between its origin and destination and the time allotted for its delivery. In the case of scheduled deliveries, we design routes to minimize the unit costs of the deliveries and to enhance route density. We continue to deploy new hardware and software systems designed to enhance the capture, routing, tracking and reporting of deliveries throughout our network. To further improve customer service, we offer customers the opportunity to access this information via the Internet.
Sales and Marketing
We believe that a direct sales force most effectively reaches customers for same-day, time-critical delivery services and, accordingly, we do not currently engage in mass media advertising. We market directly to individual customers by designing and offering customized service packages after determining their specific delivery and distribution requirements. We are implementing a coordinated major account strategy by building on established relationships with regional and national customers.
Many of the services we provide, such as facilities management, dedicated contract logistics and routed delivery services are determined on the basis of competitive bids. However, we believe that quality and service capabilities are also important competitive factors. We derive a substantial portion of our revenues from customers with whom we have entered into contracts.
Competition
The market for our delivery services is highly competitive. We believe that the principal competitive factors in the markets in which we compete are reliability, quality, breadth of service offerings, technology and price. We compete on all of those factors. Most of our competitors in the time-critical, same-day, delivery market are privately held companies that operate in only one location or within a limited service area. Our services are available 24-hours-a-day, 7-days-a-week.
Acquisitions and Sales of Businesses
We were formed as a Delaware corporation in June 1994. As of December 31, 2002, we had acquired 26 same-day time-critical delivery businesses, including the 11 companies that we acquired simultaneously with the commencement of our operations in November 1995. We paid approximately $67,800,000 ($29,600,000 in cash and 2,935,702 shares of our common stock) to acquire the 11 founding companies. In addition to the acquisition of those companies, we acquired certain additional assets from two companies in transactions that we accounted for as purchases. Those acquired assets were not material.
In 1996, we acquired five additional businesses that had approximately $15,600,000 in aggregate annual revenues. We paid approximately $3,300,000 to acquire those companies using a combination of cash, seller-financed debt and shares of our common stock. Subsequently, the aggregate purchase price paid for those companies was reduced by approximately $616,000 because the actual revenues of some of the acquired companies did not reach the revenues projected by the sellers. We accounted for each of the 1996 acquisitions as purchases.
In 1997, we did not make any acquisitions and instead focused on internal growth. Consistent with our change of strategic focus, in January 1997 we sold our contract logistics subsidiary back to its founder in exchange for 137,239 shares of our common stock. In connection with that sale, we recorded a gain of approximately $816,000 before the effect of Federal and state income taxes.
In December 1997, we sold our direct mail business for $850,000 in cash and notes. In connection with that sale, we recorded a gain of approximately $23,000 net of Federal and state income taxes of approximately $15,000. Subsequently, in 1999 the company to which we sold our direct mail business went out of business and defaulted on their note and the Company wrote off the remaining balance of the note of $661,868.
In 1998, we acquired four same-day, time-critical delivery businesses that had aggregate annual revenues of approximately $25,100,000. We paid approximately $14,500,000 for the businesses consisting of a combination of cash, shares of our common stock and seller-financed debt. We accounted for each of the 1998 acquisitions as purchases.
In 1999, we acquired four same-day, time-critical delivery businesses that had aggregate annual revenues of approximately $24,800,000. We paid approximately $12,700,000 for the businesses consisting of a combination of cash, shares of our common stock and seller-financed debt. The acquisitions were accounted for as purchase transactions. Under the terms of the purchase agreements, additional payments of approximately $600,000 were made in 2000 and 2001 upon the accomplishment of certain financial objectives.
On December 1, 2000, we made a strategic decision to dispose of our air delivery business. On March 30, 2001, we consummated a transaction providing for the sale of certain assets and liabilities of Sureway Air Traffic Corporation, Inc. ("Sureway"), our air delivery business. The selling price for the net assets was approximately $14,150,000 and was comprised of $11,650,000 in cash, a subordinated promissory note (the "Note Receivable") for $2,500,000 and contingent cash payments based upon the ultimate development of certain liabilities retained by us. The financial position, operating results and the provision for loss on the disposition of the Company's air delivery business have been segregated from continuing operations and classified as discontinued operations in the accompanying consolidated financial statements.
The Company reported net losses of $0, $465,000 and $1,419,000 from discontinued operations for the years ended December 31, 2002, 2001 and 2000, respectively (including provisions for losses on the disposition of the assets of the Company's air delivery business, (net of benefit for income taxes of $0, $240,000 and $125,000) of $0, $465,000 and $2,807,000, respectively).
In February 1999, the Company became obligated for seller-financed acquisition debt of $1,650,000 related to the acquisition of Gold Wings (See Note 4 of Notes to Consolidated Financial Statements). As of February 28, 2003, the note had a remaining principal balance of approximately $1,000,000 (the "CDL/Gold Note"). On February 28, 2003, the Company completed a series of related transactions with GMV Express, Inc. ("GMV"), Richard Gold (a principal of GMV) ("Gold") and his affiliates, and Global Delivery Systems LLC ("Global") and its subsidiary, Sureway Worldwide LLC ("Sureway Worldwide"). The net effect of the transactions with Global, Sureway Worldwide, GMV and Gold is that the Company assigned the Note Receivable to GMV in exchange for a release on the CDL/Gold Note payable, so that the Company is now relieved of its $1,000,000 liability for the CDL/Gold Note and the Company has no further rights to the Note Receivable. In addition, the Company received payments from Sureway Worldwide and Global of approximately $117,000 ($72,000 in settlement of disputed claims and $45,000 for other amounts due) and provided Gold with a release covering claims of breach of certain non-competition agreements. As a result of this transaction, the Company recorded a gain of approximately $1,000,000 in the first quarter of 2003.
On June 14, 2001, the Company consummated a transaction providing for the sale of all the outstanding stock of National Express, Inc., the Company's ground courier operations in the Mid-West. The selling price was approximately $2,530,000 and was comprised of $880,000 in cash and a subordinated promissory note (the "Promissory Note") for $1,650,000.
As of March 14, 2003, the Promissory Note was amended to defer the interest and principal payments due on December 14, 2002 and March 14, 2003. A new quarterly payment schedule will commence on June 14, 2003 with interest only payments at a new interest rate at 9.0% per annum. Upon the earlier of June 14, 2004 or the maker of the Promissory Note meeting certain financial benchmarks, principal payments shall resume and the interest rate will prospectively revert back to 7.0% per annum. The final balloon payment of approximately $1,100,000 plus any remaining principal or unpaid interest remains due on June 14, 2006.
Regulation
Our delivery operations are subject to various state and local regulations and, in many instances, we require permits and licenses from state authorities. To a limited degree, state and local authorities have the power to regulate the delivery of certain types of shipments and operations within certain geographic areas. Interstate and intrastate motor carrier operations are also subject to safety requirements prescribed by the U.S. Department of Transportation ("DOT") and by state departments of transportation. If we fail to comply with applicable regulations, we could face substantial fines or possible revocation of one or more of our operating permits.
Safety
We seek to ensure that all of our employee drivers meet safety standards established by us and our insurance carriers as well as the U.S. DOT. In addition, where required by the DOT, state or local authorities, we require that our independent contractors meet certain specified safety standards. We review prospective drivers in an effort to ensure that they meet applicable requirements.
Employees and Independent Contractors
As of December 31, 2002, we employed approximately 1,425 people, 782 as drivers or messengers, 470 in operations, 133 in clerical and administrative positions, 14 in sales, 19 in information technology and 7 in executive management. We are not a party to any collective bargaining agreements. We also had agreements with approximately 2,230 independent contractors as of December 31, 2002. We have not experienced any work stoppages and believe that our relationship with our employees and independent contractors is good.
Risk Factors
You should carefully consider the following factors as well as the other information in this report before deciding to invest in shares of our common stock.
We have limited capital resources.
The Company has an accumulated deficit of ($8,829,000) as of December 31, 2002. In addition, at December 31, 2002 and March 31, 2003, the Company did not comply with the Minimum Earnings, Fixed Charge Coverage Ratio and Cash Flow Leverage Ratio covenants, as defined, at one or both dates. On April 23, 2003, the Company obtained waivers from its lenders for the covenant violations and renegotiated certain covenants and modified certain terms of its revolving credit facility and senior subordinated notes. (See Note 9 of Notes to Consolidated Financial Statements for additional information on the Company's debt). There can be no assurances that the Company's lenders will agree to waive any future covenant violations, if any, continue to renegotiate and modify the terms of their loans, or further extend the maturity date, should it become necessary to do so. Further, there can be no assurances that the Company will be able to meet its revenue, cost or income projections, upon which the debt covenants are based.
As of December 31, 2002, we had total cash on hand and borrowing ability of $3,890,000 under our revolving credit facility, after adjusting for the restrictions for outstanding letters of credit and minimum availability requirements. We believe that cash flows from operations and the Company's borrowing capacity after the debt modifications referred to below, are sufficient to support the Company's operations and general business and capital requirements for at least the next twelve months. Such conclusions are predicated upon sufficient cash flow from operations and the continued availability of a revolving credit facility. The risks associated with cash flow from operations are mitigated by the Company's low gross profit margin. Unless catastrophic, decreases in revenue should be accompanied by corresponding decreases in costs, resulting in minimal impact to liquidity.
Price competition could reduce the demand for our service.
The market for our services has been extremely competitive and is expected to be so for the foreseeable future. Price competition is often intense, particularly in the market for basic delivery services where barriers to entry are low.
Claims above our insurance limits, or significant increases in our insurance premiums, may reduce our profitability.
We utilize the services of approximately 260 employee drivers. From time to time some of those drivers are involved in automobile accidents. We currently carry liability insurance of $1,000,000 for each driver accident, subject to applicable deductibles (generally $350,000 per occurrence) and carry umbrella coverage up to $10,000,000 in the aggregate. However, claims against us may exceed the amounts of available insurance coverage. We also contract with approximately 2,230 independent contractor drivers. In accordance with Company policy, all independent contractor drivers are required to maintain liability coverage as well as workers' compensation or occupational accident insurance. If we were to experience a material increase in the frequency or severity of accidents, liability claims or workers' compensation claims, or unfavorable resolutions of claims, our operating results could be materially affected.
As a same-day delivery company, our ability to service our clients effectively is often dependent upon factors beyond our control.
Our revenues and earnings are especially sensitive to events that are beyond our control that affect the same-day delivery services industry, including:
o extreme weather conditions;
o economic factors affecting our significant customers;
o mergers and consolidations of existing customers;
o U.S. business activity; and
o the levels of unemployment.
Our reputation will be harmed, and we could lose customers, if the information and telecommunications technologies on which we rely fail to adequately perform.
Our business depends upon a number of different information and telecommunication technologies as well as the ability to develop and implement new technology enabling us to manage and process a high volume of transactions accurately and timely. Any impairment of our ability to process transactions in this way could result in the loss of customers and diminish our reputation.
Governmental regulation of the transportation industry, particularly with respect to our independent contractors, may substantially increase our operating expenses.
From time to time, federal and state authorities have sought to assert that independent contractors in the transportation industry, including those utilized by us, are employees rather than independent contractors. We believe that the independent contractors that we utilize are not employees under existing interpretations of federal and state laws. However, federal and state authorities have and may continue to challenge this position. Further, laws and regulations, including tax laws, and the interpretations of those laws and regulations, may change. If, as a result of changes in laws, regulations, interpretations or enforcement by federal or state authorities, we become required to pay for and administer added benefits to independent contractors, our operating costs could substantially increase.
Shareholders will experience dilution when we issue the additional shares of common stock that we are permitted or required to issue under convertible notes, options and warrants.
We are permitted, and in some cases obligated, to issue shares of common stock in addition to the common stock that is currently outstanding. If and when we issue these shares, the percentage of the common stock currently issued and outstanding will be diluted. The following is a summary of additional shares of common stock that we have currently reserved for issuance as of December 31, 2002:
o 506,250 shares are issuable upon the exercise of outstanding warrants at an exercise price of $.001 per share.
o 4,000,000 shares are issuable upon the exercise of options or other benefits under our employee stock option plan, consisting of:
o outstanding options to purchase 1,806,153 shares at a weighted average exercise price of $3.09 per share, of which options covering 1,770,987 shares were exercisable as of December 31, 2002; and
o 2,193,847 shares available for future awards after December 31, 2002.
o 200,000 shares are issuable upon the exercise of options or other benefits under our independent director stock option plan, consisting of:
o outstanding options to purchase 127,500 shares at a weighted average exercise price of $1.85 per share, of which options covering 127,500 shares were exercisable as of December 31, 2002; and
o 72,500 shares available for future awards after December 31, 2002.
o 458,083 shares are issuable upon the exercise of outstanding convertible notes at a weighted average exercise price of $6.47 per share.
Our success is dependent on the continued service of our key management personnel.
Our future success depends, in part, on the continued service of our key management personnel. If certain employees were unable or unwilling to continue in their present positions, our business, financial condition, operating results and future prospects could be materially adversely affected.
If we fail to maintain our governmental permits and licenses, we may be subject to substantial fines and possible revocation of our authority to operate our business in certain jurisdictions.
Our delivery operations are subject to various state, local and federal regulations that in many instances require permits and licenses. If we fail to maintain required permits or licenses, or to comply with applicable regulations, we could be subject to substantial fines or our authority to operate our business in certain jurisdictions could be revoked.
Our certificate of incorporation, by-laws, shareholder rights plan and Delaware law contain provisions that could discourage a takeover that current shareholders may consider favorable.
Provisions of our certificate of incorporation, by-laws and our shareholder rights plan, as well as Delaware law, may discourage, delay or prevent a merger or acquisition that you may consider favorable. These provisions of our certificate of incorporation and by-laws:
o establish a classified board of directors in which only a portion of the total number of directors will be elected at each annual meeting;
o authorize the Board of Directors to issue preferred stock;
o prohibit cumulative voting in the election of directors;
o limit the persons who may call special meetings of stockholders;
o prohibit stockholder action by written consent; and
o establish advance notice requirements for nominations for the election of the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
In addition, we have adopted a Stockholder Protection Rights Plan in order to protect against offers to acquire us that our Board of Directors believes to be inadequate or not otherwise in our best interests. There are, however, certain possible disadvantages to having the Plan in place, which might adversely impact us. The existence of the Plan may limit our flexibility in dealing with potential acquirers in certain circumstances and may deter potential acquirers from approaching us.
Executive Management
Albert W. Van Ness, Jr., 60, has served as the Chairman of the Board, Chief Executive Officer and Director of CD&L since January 1997. He was formerly the President and Chief Operating Officer of Club Quarters, LLC, a privately held hotel management company and remains a member partner. In the early nineties, Mr. Van Ness served as Director of Managing People & Productivity, a senior management consulting firm. During most of the eighties, Mr. Van Ness held various executive positions with Cunard Line Limited, a passenger ship and luxury hotel company, including Executive Vice President and Chief Operating Officer of the Cunard Leisure Division and Managing Director and President of the Hotels and Resorts Division. Earlier in his career Mr. Van Ness served as the President of Seatrain Intermodal Services, Inc., a cargo shipping company. Mr. Van Ness held various management positions at the start of his professional life with Ford Motor Company, Citibank and Hertz. Mr. Van Ness majored in Sociology and Economics and received a B.A. and M.A. degree and completed his coursework towards his doctorate in Economics. He attended Duke University, Northern State University, South Dakota State University and Syracuse University.
William T. Brannan, 55, has served as President, Chief Operating Officer and Director of CD&L since November 1994. From January 1991 until October 1994, Mr. Brannan served as President, Americas Region - US Operations, for TNT Express Worldwide, a major European-based overnight express delivery company. Mr. Brannan has more than 25 years of experience in the transportation and logistics industry.
Michael Brooks, 49, has served as Director of the Company since December 1995 and as Group Operations President since December 2000. Mr. Brooks previously had been the President of Silver Star Express, Inc., a subsidiary of the Company, since November 1995. Prior to the merger of Silver Star Express, Inc. into the Company, Mr. Brooks was President of Silver Star Express, Inc. since 1988. Mr. Brooks has more than 25 years of experience in the same-day delivery and distribution industries. In addition, Mr. Brooks is currently a Member of the Express Carriers Association and various other transportation associations.
Russell J. Reardon, 53, has served as Vice President - Chief Financial Officer since November 1999. Mr. Reardon previously had been Vice President - Treasurer of CD&L since January 1999. Prior thereto, from September 1998 until January 1999 Mr. Reardon was Chief Financial Officer and Secretary of Able Energy, Inc. a regional energy retailer. From April 1996 until June 1998, Mr. Reardon was Chief Financial Officer and Secretary of Logimetrics, Inc. a manufacturer of broad-band wireless communication devices. He earned an accounting degree and an MBA in Finance from Fairleigh Dickinson University.
Mark T. Carlesimo, 49, has served as Vice President - General Counsel and Secretary of CD&L since September 1997. From July 1983 until September 1997, Mr. Carlesimo served as Vice President of Legal Affairs of Cunard Line Limited. Earlier in his career, Mr. Carlesimo served as Staff Counsel to Seatrain Lines, Inc., a cargo shipping company and was engaged in the private practice of law. Mr. Carlesimo received a B.A. in Economics from Fordham University in 1975 and received his law degree from Fordham University School of Law in 1979. Mr. Carlesimo is a Member of the Bar of the states of New York and New Jersey.
Anthony Guzzo, 30, was appointed Vice President - Controller in March 2003. Prior to his appointment, Mr. Guzzo served as the Company's Treasurer since January 2001. Mr. Guzzo previously had been the Company's Director of Financial Reporting since June 2000 and before that was a manager in the Consumer Products and Services Division of Arthur Andersen LLP.
Item 2.
Item 2. Properties
As of December 31, 2002, the Company operated from 57 leased facilities (not including 33 customer-owned facilities). These facilities are principally used for operations, general and administrative functions and training. In addition, several facilities also contain storage and warehouse space. The table below summarizes the location of the Company's current leased facilities.
State Number of Leased Facilities - ----- --------------------------- New York.......................................... 17 Florida........................................... 7 New Jersey........................................ 5 California........................................ 4 North Carolina.................................... 3 Louisiana......................................... 3 Maine............................................. 2 Ohio.............................................. 2 Oklahoma.......................................... 2 Indiana........................................... 1 Massachusetts..................................... 1 Pennsylvania...................................... 1 South Carolina.................................... 1 Tennessee......................................... 1 Washington........................................ 1 Arkansas.......................................... 1 Connecticut....................................... 1 Georgia........................................... 1 Maryland.......................................... 1 Texas............................................. 1 Vermont........................................... 1 -------- Total 57
The Company's corporate headquarters is located at 80 Wesley Street, South Hackensack, New Jersey. The Company believes that its properties are generally well maintained, in good condition and adequate for its present needs. Furthermore, the Company believes that suitable additional or replacement space will be available when required.
As of December 31, 2002, the Company owned or leased approximately 400 vehicles of various types, which are operated by drivers employed by the Company. The Company also hires independent contractors who provide their own vehicles and are required to carry at least the minimum amount of insurance required by law.
The Company's aggregate rental expense, primarily for facilities, was approximately $6,747,000, for the year ended December 31, 2002. See Note 12 to the Company's Consolidated Financial Statements.
Item 3.
Item 3. Legal Proceedings
In February 1996, Liberty Mutual Insurance Company ("Liberty Mutual") filed an action against Securities Courier Corporation ("Securities"), a subsidiary of the Company, Mr. Vincent Brana, an employee of the Company, and certain other parties in the United States District Court for the Southern District of New York. Under the terms of its acquisition of Securities, the Company had certain rights to indemnification from Mr. Brana. In connection with the indemnification, Mr. Brana has entered into a settlement agreement and executed a promissory note (the "Brana Note") in such amount as may be due for any defense costs or award arising out of this suit. Mr. Brana has agreed to repay the Company on December 1, 2003, together with interest calculated at a rate per annum equal to the rate charged the Company by its senior lender. Mr. Brana delivered 357,301 shares of CD&L common stock to the Company as collateral for the Brana Note. On September 8, 2000 the parties entered into a settlement agreement in which Securities and Mr. Brana agreed to pay Liberty Mutual $1,300,000. An initial payment of $650,000 was made by Securities on October 16, 2000, $325,000 plus interest at a rate of 10.5% per annum was paid in monthly installments ending July 1, 2001 and the balance of $325,000 plus interest at a rate of 12.0% per annum was paid in monthly installments ending July 1, 2002.
At December 31, 2002 and 2001, the Company had a receivable due from Mr. Brana totaling $2,800,000. As of December 31, 2002, considering the market value of the collateral and Mr. Brana's failure to update and provide satisfactory evidence to support his ability to pay the Brana Note, the Company has recorded a $2,800,000 reserve against the receivable.
In an effort to resolve all outstanding disputes between Mr. Brana and the Company, a settlement agreement is currently being negotiated. If an agreement is reached, the Company would return to Mr. Brana the 357,301 shares of CD&L common stock held by the Company as collateral for the $2,800,000 note, and provide certain releases for claims that the Company may have against him. Mr. Brana's employment with the Company was terminated on September 1, 2002 and he has served as a paid consultant since that time.
The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for uninsured personal injury and property damage incurred in connection with its same-day delivery operations. In connection therewith, the Company has recorded reserves of $325,000 and $575,000 as of December 31, 2002 and 2001, respectively.
Also from time to time, federal and state authorities have sought to assert that independent contractors in the transportation industry, including those utilized by us, are employees rather than independent contractors. We believe that the independent contractors that we utilize are not employees under existing interpretations of federal and state laws. However, federal and state authorities have and may continue to challenge this position. Further, laws and regulations, including tax laws, and the interpretations of those laws and regulations, may change.
Management believes that none of these actions, including the actions described above, will have a material adverse effect on the consolidated financial position or results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been trading on the American Stock Exchange under the symbol "CDV" since February 23, 1999. Prior to that date, the Company's Common Stock was included for quotation on the Nasdaq National Market under the symbol "CDLI." The following table sets forth the high and low closing sales prices for the Common Stock for 2001 and 2002.
2001 Low High ---- --- ---- First Quarter $0.37 $1.25 Second Quarter $0.33 $0.62 Third Quarter $0.40 $0.62 Fourth Quarter $0.30 $0.49
2002 Low High ---- --- ---- First Quarter $0.38 $0.61 Second Quarter $0.44 $0.70 Third Quarter $0.40 $0.58 Fourth Quarter $0.46 $0.62
On April 17, 2003, the last reported sale price of the Common Stock was $0.41 per share. As of March 17, 2003, there were approximately 284 shareholders of record of Common Stock.
Dividends
The Company has not declared or paid any dividends on its Common Stock. The Company currently intends to retain earnings to support its growth strategy and does not anticipate paying dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, results of operations, current and anticipated cash needs and plans for expansion. The Company's ability to pay cash dividends on the Common Stock is also limited by the terms of its revolving credit facility. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.
Item 6.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below as of and for the year ended December 31, 2002 is derived from our consolidated financial statements audited by Deloitte & Touche LLP, independent auditors, which are included elsewhere herein. The selected consolidated financial data set forth below for the years ended December 31, 2000 and 2001 and as of December 31, 2001, which are included herein, and for the years ended December 31, 1998 and 1999 and as of December 31, 1998, 1999, and 2000, which are not included herein, are derived from our consolidated financial statements audited by Arthur Andersen LLP, independent public accountants who have ceased operations. The selected consolidated financial data set forth below should be read in conjunction with the consolidated financial statements and related notes thereto and with Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements.
The Company is provided a "safe harbor" for forward-looking statements contained in this report by the Private Securities Litigation Reform Act of 1995. The Company may discuss forward-looking information in this Report such as its expectations for future performance, growth and acquisition strategies, liquidity and capital needs and its future prospects. Actual results may not necessarily develop as the Company anticipates due to many factors including, but not limited to the timing of certain transactions, unexpected expenses encountered, the effect of economic and market conditions, the impact of competition and the factors listed in Item 1. Business Description - Risk Factors. Because of these and other reasons, the Company's actual results may vary materially from management's current expectations.
Overview
The consolidated financial statements of the Company including all related notes, which appear elsewhere in this report, should be read in conjunction with this discussion of the Company's results of operations and its liquidity and capital resources.
Discontinued Operations
On December 1, 2000, we made a strategic decision to dispose of our air delivery business and accordingly have restated the accompanying balance sheets, statements of operations and statements of cash flows to reflect such as discontinued operations. On March 30, 2001, we consummated a transaction providing for the sale of certain assets and liabilities of Sureway Air Traffic Corporation, Inc. ("Sureway"), our air delivery business. The selling price for the net assets was approximately $14,150,000 and was comprised of $11,650,000 in cash, a subordinated promissory note (the "Note Receivable") for $2,500,000 and contingent cash payments based upon the ultimate development of certain liabilities retained by us. The Note Receivable originally bore interest at the rate of 10.0% per annum, with interest only payable in monthly installments. The entire balance of principal, plus all accrued interest, was due and payable on March 30, 2006. As of December 31, 2001 collection of the Note Receivable, interest accrued thereon and certain other related receivables was in doubt. Accordingly, the Company recorded a pre-tax charge of $2,500,000 (included in Other expense, net) in the fourth quarter of 2001 to write-off the Note Receivable. Additionally, the Company recorded a pre-tax charge of $705,000 (included in Discontinued Operations) in the fourth quarter of 2001 to write-off certain other direct expenses incurred on behalf of Sureway subsequent to March 30, 2001 for which collection was in doubt and to true-up certain accruals that were estimated in 2000 relative to the disposition of Sureway.
The Company reported net losses of $0, $465,000 and $1,419,000 from discontinued operations for the years ended December 31, 2002, 2001 and 2000, respectively (including provisions for losses on the disposition of the assets of the Company's air delivery business, (net of benefit for income taxes of $0, $240,000 and $125,000) of $0, $465,000 and $2,807,000, respectively).
In February 1999, the Company became obligated for seller-financed acquisition debt of $1,650,000 related to the acquisition of Gold Wings (See Note 4 of Notes to Consolidated Financial Statements). As of February 28, 2003, the note had a remaining principal balance of approximately $1,000,000 (the "CDL/Gold Note"). On February 28, 2003, the Company completed a series of related transactions with GMV Express, Inc. ("GMV"), Richard Gold (a principal of GMV) ("Gold") and his affiliates, and Global Delivery Systems LLC ("Global") and its subsidiary, Sureway Worldwide LLC ("Sureway Worldwide"). The net effect of the transactions with Global, Sureway Worldwide, GMV and Gold is that the Company assigned the Note Receivable to GMV in exchange for a release on the CDL/Gold Note payable, so that the Company is now relieved of its $1,000,000 liability for the CDL/Gold Note and the Company has no further rights to the Note Receivable. In addition, the Company received payments from Sureway Worldwide and Global of approximately $117,000 ($72,000 in settlement of disputed claims and $45,000 for other amounts due) and provided Gold with a release covering claims of breach of certain non-competition agreements. As a result of this transaction, the Company recorded a gain of approximately $1,000,000 in the first quarter of 2003.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to accounts and notes receivable, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies reflect more significant judgments and estimates used in the preparation of its consolidated financial statements.
Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts and notes receivable for estimated losses resulting from the inability of its customers and debtors to make payments when due or within a reasonable period of time thereafter. The Company estimates allowances for doubtful accounts and notes receivable by evaluating past due aging trends, analyzing customer payment histories and assessing market conditions relating to its customers operations and financial condition. Such allowances are developed principally for specific customers. If the financial condition of the Company's customers and debtors were to deteriorate, resulting in an impairment of their ability to make required payments, additional allowances may be required.
Revenue Recognition Revenue is recognized when pervasive evidence of an arrangement exists, the price to the customer is fixed or determinable and collectibility is reasonably assured. The Company interprets the timing of revenue recognition to be when services are rendered to customers, and expenses are recognized as incurred. This policy applies to all of the Company's same-day, time-critical delivery service options, including Rush, Scheduled, Facilities Management and Dedicated Contract Logistics. Certain customers pay in advance, giving rise to deferred revenue.
Goodwill The value of the Company's goodwill is significant relative to total assets and stockholders' equity. The Company reviews goodwill for impairment on at least an annual basis using several fair-value based tests, which include, among others, a discounted cash flow and terminal value computation. The discounted cash flow and terminal value computation is based on management's estimates of future operations. Changes in business conditions could materially impact management's estimates of future operations and this could result in an impairment of goodwill. Such impairment, if any, could have a significant impact on the Company's operations and financial condition. Examples of changes in business conditions include, but are not limited to, bankruptcy or loss of a significant customer, a significant adverse change in regulatory factors, a loss of key personnel, increased levels of competition from companies with greater financial resources than the Company and margin erosion caused by our inability to increase prices to our customers at the same rate that our costs increase.
Insurance Reserves The Company maintains certain insurance risk through insurance policies with a $350,000 deductible for workers' compensation and automobile liability ($250,000 prior to July 1, 2002) and a $150,000 deductible for employee health medical costs ($125,000 prior to March 1, 2002). The Company reserves the estimated amounts of uninsured claims and deductibles related to such insurance retentions for claims that have occurred in the normal course of business. These reserves are established by management based upon the recommendations of third-party administrators who perform a specific review of open claims, which include fully developed estimates of both reported claims and incurred but not reported claims, as of the balance sheet date. Actual claim settlements may differ materially from these estimated reserve amounts.
Income Taxes The Company files income tax returns in every jurisdiction in which it has reason to believe it is subject to tax. Historically, the Company has been subject to examination by various taxing jurisdictions. To date, none of these examinations has resulted in any material additional tax. Nonetheless, any tax jurisdiction may contend that a filing position claimed by the Company regarding one or more of its transactions is contrary to that jurisdiction's laws or regulations.
Results of Operations 2002 Compared with 2001
The following discussion compares the year ended December 31, 2002 and the year ended December 31, 2001, for continuing operations.
Income and Expense as a Percentage of Revenue
For the Years Ended December 31, ----------------------------- 2002 2001 ------------ ------------
Revenue 100.0% 100.0%
Gross profit 19.1% 20.4%
Selling, general and administrative expenses 16.2% 16.7% Goodwill Impairment 0.0% 2.1% Depreciation and amortization 0.7% 1.5% Other expense, net 0.1% 2.9% Interest expense 1.7% 1.8%
Income (loss) from continuing operations 0.2% (3.6)%
Revenue for the year ended December 31, 2002 decreased $3,312,000, or 2.1%, to $157,232,000 from $160,544,000 for the year ended December 31, 2001. The decrease included approximately $4,500,000 in lost revenue due to the sale of the Company's Mid-West operations on June 14, 2001. All other revenue increased by $1,188,000, or 0.7%.
Cost of revenue consists primarily of payments to employee drivers and independent contractors, agents, other direct pick-up and delivery costs and the costs of dispatching drivers and messengers. These costs decreased $688,000, or 0.5%, from $127,840,000 for 2001 to $127,152,000 in 2002. Stated as a percentage of revenue, these costs increased to 80.9% for 2002 compared to 79.6% for 2001. Excluding the $3,592,000 reduction due to the sale of the Company's Mid-West operations, cost of revenue increased $2,904,000 or 2.3%. This reflects increased direct messenger and driver costs of $6,352,000 and higher workers' compensation and vehicle insurance of $442,000. These cost increases were partially offset by the favorable impact on vehicle lease and operating costs of $3,433,000 due to a reduction in Company owned vehicles and decreased uninsured product-related claims and other costs of $457,000.
As a result of the above, gross profit decreased by $2,624,000, from $32,704,000 in 2001 to $30,080,000 in 2002. As a percentage of revenue, gross profit decreased to 19.1% in 2002 compared to 20.4% in 2001.
Selling, general and administrative expense ("SG&A") includes costs incurred at the terminal level related to taking orders and administrative costs related to such functions. Also included are costs to support the Company's marketing and sales effort and the expense of maintaining information systems, human resources, financial, legal and other corporate administrative functions. SG&A decreased by $1,389,000, or 5.2%, from $26,881,000 in 2001 to $25,492,000 in 2002. As a percentage of revenue SG&A decreased to 16.2% in 2002 compared to 16.7% of revenue in 2001. Excluding the $690,000 decrease due to the sale of the Company's Mid-West operations, SG&A decreased $699,000 or 2.7%. SG&A expense was favorably impacted by reduced staffing costs of $637,000, lower facility and communication costs of $451,000, lower bad debt expense of $286,000 and $183,000 in grants received related to the events of September 11, 2001. These were partially offset by increased general insurance expenses of $464,000 and net increases of $394,000 of other expense.
There was no goodwill impairment for 2002 compared to $3,349,000 for 2001. The charge taken in 2001 was the result of a comprehensive review of the Company's intangible assets under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 121"). In 2001, as a result of recording significant losses on the dispositions of Sureway and the Mid-West operations and as a result of inadequate cash flows from certain acquired businesses due to the loss of customers, the Company determined that the carrying amount of certain assets might not be fully recoverable. The measurement of impairment losses recognized in 2001 is based on the difference between the fair values, which were calculated based upon the present value of projected future cash flows, and the carrying amounts of the assets.
Depreciation and amortization decreased by $1,303,000, or 52.6%, from $2,476,000 for 2001 to $1,173,000 for 2002. The decrease was primarily attributable to the adoption of SFAS 142, as discussed below. In addition, other factors driving such reduction was the full depreciation of certain vehicles held under a capital lease that ended during 2001 and reduced capital expenditures in 2000, 2001 and 2002. On June 30, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") was issued. SFAS 142 eliminates goodwill amortization over its estimated useful life. However, goodwill is subject to at least an annual assessment for impairment by applying a fair-value based test. Additionally, acquired intangible assets must be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. Intangible assets with definitive lives are amortized over their useful lives. The statement requires that by June 30, 2002, a company must establish its fair value benchmarks in order to test for impairment. The Company adopted SFAS 142 effective January 1, 2002. For purposes of performing the fair-value based test of goodwill, the Company has determined that it has one reporting unit. This reporting unit is consistent with its single operating segment, which management determined is appropriate under the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). During 2002, a transitional goodwill impairment test was performed and the Company determined that there was no impairment of goodwill. Further, as required by SFAS 142, an annual impairment test was completed at the end of fiscal 2002 and the Company determined that there was no impairment. Fair value was determined by two methods:
1. Present value of future estimated cash flows, including a determination of a terminal value.
2. Market capitalization utilizing quoted market prices of the Company's common stock.
The adoption of SFAS 142 did not result in an impairment of goodwill. However, changes in business conditions could result in an impairment in the future. Such impairment, if any, could have a significant impact on the Company's operations and financial condition. Examples of changes in business conditions include, but are not limited to, bankruptcy or loss of a significant customer, a significant adverse change in regulatory factors, a loss of key personnel, increased levels of competition from companies with greater financial resources than the Company and margin erosion caused by our inability to increase prices to our customers at the same rate that our costs increase. Adoption of SFAS 142 increased pretax earnings by approximately $738,000 for the year ended December 31, 2002 due to the cessation of goodwill amortization.
Other expense decreased by $4,479,000, to $206,000 in 2002 from $4,685,000 in 2001. The 2002 expense includes a $300,000 increase in the allowance for the shareholder note receivable. The 2001 expense is primarily due to two transactions. As of December 31, 2001, the Company wrote-off the Note Receivable received on March 30, 2001 amounting to $2,500,000 in the transaction to dispose of certain assets and liabilities of Sureway, as collection of the Note Receivable, interest accrued thereon and certain other related receivables was in doubt. The Company also recorded a $2,283,000 loss on the sale of all of the outstanding stock in National Express, Inc. (the Company's ground courier operation in the Mid-West) on June 14, 2001. The selling price of the stock was approximately $2,530,000 and was comprised of $880,000 in cash and a subordinated promissory note (the "Promissory Note") for $1,650,000. The Promissory Note originally bore interest at the rate of 7.0% per annum. The Promissory Note, as amended on March 14, 2003, allows for the deferral of the interest and principal payments due on December 14, 2002 and March 14, 2003. A new quarterly payment schedule will commence on June 14, 2003 with interest only payments at a new interest rate at 9.0% per annum. Upon the earlier of June 14, 2004 or the maker of the Promissory Note meeting certain financial benchmarks, principal payments shall resume and the interest rate will prospectively revert back to 7.0% per annum. The final balloon payment of approximately $1,100,000 plus any remaining principal or unpaid interest remains due on June 14, 2006.
Interest expense decreased by $163,000 from $2,897,000 in 2001 to $2,734,000 in 2002. The decrease is primarily attributable to decreased debt. Total debt was $3,112,000 lower at December 31, 2002 compared to December 31, 2001. Principal payments of $1,750,000 and $1,040,000 on the senior subordinated notes and seller-financed debt, respectively, comprised the majority of the debt reduction.
Provision for income taxes increased by $1,970,000 from a benefit for income taxes of $1,780,000 in 2001 to a provision for income taxes of $190,000 in 2002. The increase was caused by the increase in pre-tax income in 2002 compared to a loss in 2001.
Results of Operations 2001 Compared with 2000
The following discussion compares the year ended December 31, 2001 and the year ended December 31, 2000, for continuing operations.
Income and Expense as a Percentage of Revenue
For the Years Ended December 31, ----------------------------- 2001 2000 ------------ ------------
Revenue 100.0% 100.0%
Gross profit 20.4% 20.3%
Selling, general and administrative expenses 16.7% 20.0% Goodwill Impairment 2.1% 0.0% Depreciation and amortization 1.5% 2.0% Other expense, net 2.9% 1.4% Interest expense 1.8% 1.8%
Loss from continuing operations (3.6)% (3.7)%
Revenue for the year ended December 31, 2001 decreased $9,535,000, or 5.6%, to $160,544,000 from $170,079,000 for the year ended December 31, 2000. The decrease included approximately $6,300,000 in lost revenue due to the sale of the Company's Mid-West operations on June 14, 2001. The balance of the decrease in revenue is due to the Company's ongoing efforts to increase its profit margins and eliminate less profitable business. As a result of a portfolio review, contracts with certain customers that had unacceptable profit margins were given notice of rate increases. If the rate increases were not accepted, the contracts were terminated. This revenue loss was partially offset by the effect of fuel surcharges and price increases implemented throughout 2000 that remained in effect for 2001.
Cost of revenue consists primarily of payments to employee drivers and independent contractors, agents, other direct pick-up and delivery costs and the costs of dispatching drivers and messengers. These costs decreased $7,776,000, or 5.7%, from $135,616,000 for 2000 to $127,840,000 in 2001. Stated as a percentage of revenue, these costs were flat, amounting to 79.6% for 2001 and 79.7% for 2000. Excluding the $5,296,000 reduction in cost of revenue due to the sale of the Company's Mid-West operations, cost of revenue decreased $2,480,000 or 2.0%. This reflects a reduction in vehicle lease and operating costs of $3,253,000 and lower auto and workers' compensation expense of $1,085,000, partially offset by higher labor costs of $887,000 and other net cost increases of $971,000.
As a result of the above, gross profit decreased by $1,759,000, from $34,463,000 in 2000 to $32,704,000 in 2001. As a percentage of revenue gross profit was consistent, and amounted to 20.4% in 2001 and 20.3% in 2000.
SG&A includes costs incurred at the terminal level related to taking orders and administrative costs related to such functions. Also included are costs to support the Company's marketing and sales effort and the expense of maintaining information systems, human resources, financial, legal and other corporate administrative functions. SG&A decreased by $7,097,000, or 20.9%, from $33,978,000 in 2000 to $26,881,000 in 2001. As a percentage of revenue SG&A decreased to 16.7% in 2001 compared to 20.0% of revenue in 2000. Excluding the $1,279,000 decrease due to the sale of the Company's Mid-West operations, SG&A decreased $5,818,000 or 18.2%. SG&A expense was favorably impacted by reduced staffing costs of $1,939,000, lower bad debt expense of $1,022,000, lower professional fees of $636,000, lower legal expense of $454,000, reduced rent expense of $372,000 and all other net expense reductions of $1,395,000. The decrease in such costs is due primarily to both the Company's ongoing efforts to reduce and better control such costs and certain non-recurring items recorded during 2000, primarily the bad debt expense related to the bankruptcy of a significant customer.
Goodwill impairment for 2001 was $3,349,000 compared to $0 for 2000. The charge taken in 2001 was the result of a comprehensive review of the Company's intangible assets under the provisions of SFAS 121. In 2001, as a result of recording significant losses on the dispositions of Sureway and the Mid-West operations and as a result of inadequate cash flows from certain acquired businesses due to the loss of customers, the Company determined that the carrying amount of certain assets might not be fully recoverable. The measurement of impairment losses recognized in 2001 is based on the difference between the fair values, which were calculated based upon the present value of projected future cash flows, and the carrying amounts of the assets.
Depreciation and amortization decreased by $879,000, or 26.2%, from $3,355,000 for 2000 to $2,476,000 for 2001. The decrease was primarily attributable to the full depreciation of certain vehicles held under a capital lease that ended during 2000 and reduced capital expenditures in 2000 and 2001.
Other expense increased by $2,247,000, to $4,685,000 in 2001 from $2,438,000 in 2000. The 2001 expense is primarily due to two transactions. As of December 31, 2001, the Company wrote-off the Note Receivable received on March 30, 2001 amounting to $2,500,000 in the transaction to dispose of certain assets and liabilities of Sureway, as collection of the Note Receivable, interest accrued thereon and certain other related receivables was in doubt. The Company also recorded a $2,283,000 loss on the sale of all of the outstanding stock in National Express, Inc., the Company's ground courier operation in the Mid-West, on June 14, 2001. The selling price of the stock was approximately $2,530,000 and was comprised of $880,000 in cash and a subordinated promissory note (the "Promissory Note") for $1,650,000. The Promissory Note originally bore interest at the rate of 7.0% per annum. The Promissory Note, as amended on March 14, 2003, allows for the deferral of the interest and principal payments due on December 14, 2002 and March 14, 2003. A new quarterly payment schedule will commence on June 14, 2003 with interest only payments at a new interest rate at 9.0% per annum. Upon the earlier of June 14, 2004 or the maker of the Promissory Note meeting certain financial benchmarks, principal payments shall resume and the interest rate will prospectively revert back to 7.0% per annum. The final balloon payment of approximately $1,100,000 plus any remaining principal or unpaid interest remains due on June 14, 2006. The 2000 expense is primarily as a result of recording a reserve related to a note receivable from a stockholder related to the Company's funding of litigation defense and settlement expenses in connection with the action filed by Liberty Mutual Insurance Company against Securities Courier Corporation ("Securities"), a subsidiary of the Company, and Mr. Vincent Brana, an employee of the Company. Under the terms of its acquisition of Securities, the Company has certain rights to indemnification from Mr. Brana. In connection with the indemnification, Mr. Brana has entered into a settlement agreement and executed a promissory note (the "Brana Note") due and payable on December 1, 2003. Mr. Brana delivered 357,301 shares of CD&L common stock to the Company as collateral for the Brana Note. Considering the market value of the collateral and Mr. Brana's failure to update and provide satisfactory evidence to support his ability to pay the Brana Note, the Company recorded a $2,500,000 reserve against the note receivable.
Interest expense decreased by $163,000 from $3,060,000 in 2000 to $2,897,000 in 2001. The decrease is primarily attributable to decreased borrowings on the Company's revolving line of credit as a result of the sales of Sureway and the Mid-West operations, partially offset by an increase in the interest rates paid on the seller-financed debt from acquisitions.
Benefit for income taxes decreased by $359,000 from a benefit for income taxes of $2,139,000 in 2000 to a benefit for income taxes of $1,780,000 in 2001. The decrease was caused by the decrease in pre-tax loss in 2001 and the recording of a $2,283,000 capital loss with no related tax benefit recognized on the sale of the stock of National Express, Inc., the Company's Mid-West operations, on June 14, 2001, partially offset by the recording in 2000 of a $1,000,000 valuation allowance against the deferred tax assets recorded by the Company.
Liquidity and Capital Resources
The following tables summarize our contractual and commercial obligations as of December 31, 2002:
The Company's working capital decreased by $2,054,000 from $4,923,000 as of December 31, 2001 to $2,869,000 as of December 31, 2002. The decrease is primarily a result of increased current maturities of long-term debt of $1,080,000, increased accrued expenses of $2,175,000 and reduced prepaid expenses of $1,378,000 partially offset by a $1,146,000 reduction in accounts payable and bank overdrafts.
Cash and cash equivalents increased by $287,000 during 2002. Cash of $3,865,000 was provided from operating activities, $308,000 was used in investing activities and $3,270,000 was used in financing activities, principally to pay down debt.
Capital expenditures amounted to $522,000, $333,000 and $859,000 for the years ended December 31, 2002, 2001 and 2000, respectively. These expenditures relate primarily to enhanced and expanded information systems capability, upgraded Company facilities in the ordinary course of business and upgrading of the Company's automotive fleet in 2000. Capital expenditures of approximately $800,000 are anticipated for the year ending December 31, 2003.
Short-term borrowings -
At December 31, 2002 and 2001, the Company had a line of credit agreement for $15,000,000. The Company's short-term borrowings on its line of credit are as follows for the years ended December 31 (in thousands) -
2002 2001 ---- ---- Maximum amount outstanding during the year $1,800 $11,500 End of year balance - - Average balance outstanding during the year 300 2,700 Weighted average borrowing cost during the year 11.0% 11.0% Standby letters of credit, end of year balance 7,000 7,081
As of June 27, 2002 the Company and Summit Business Capital Corporation, doing business as Fleet Capital - Business Finance Division, entered into an agreement establishing a revolving credit facility (the "Fleet Facility") of $15,000,000. The Fleet Facility replaced a revolving credit facility with First Union Commercial Corporation established in July 1997. The Fleet Facility expires on June 27, 2005 and provides the Company with standby letters of credit, prime rate based loans at the bank's prime rate, as defined, plus 25 basis points and LIBOR based loans at the bank's LIBOR, as defined, plus 225 basis points. Credit availability is based on eligible amounts of accounts receivable, as defined, up to a maximum amount of $15,000,000 and is secured by substantially all of the assets, including certain cash balances, accounts receivable, equipment, leasehold improvements and general intangibles of the Company and its subsidiaries. As of December 31, 2002, the Company had borrowing availability of $2,438,000 under the Fleet Facility, after adjusting for restrictions related to outstanding standby letters of credit of $7,000,000 and minimum availability requirements.
Under the terms of the Fleet Facility, the Company is required to maintain certain financial ratios and comply with other financial conditions. The Fleet Facility also prohibits the Company from incurring certain additional indebtedness, limits certain investments, advances or loans and restricts substantial asset sales, capital expenditures and cash dividends. See "waivers and amendments" below:
Long-Term Debt -
On January 29, 1999, the Company completed a $15,000,000 private placement of senior subordinated notes and warrants (the "Senior Notes") with three financial institutions. The Senior Notes originally bore interest at 12.0% per annum and are subordinate to all senior debt including the Company's Fleet Facility. Under the terms of the Senior Notes, as amended, the Company is required to maintain certain financial ratios and comply with other financial conditions contained in the Senior Notes agreement. See "waivers and amendments" below:
The Senior Notes mature on January 29, 2006 and may be prepaid by the Company under certain circumstances. The warrants expire on January 19, 2009 and are exercisable at any time prior to expiration at a price of $.001 per equivalent share of common stock for an aggregate of 506,250 shares of the Company's stock, subject to additional adjustments. The Company has recorded the fair value of the warrants of $1,265,000 as a credit to additional paid-in-capital and a debt discount on the Senior Notes. The Company used the proceeds to finance acquisitions and to reduce outstanding short-term borrowings. As of August 17, 2000, November 21, 2000, March 30, 2001, May 30, 2001, August 20, 2001, November 19, 2001, April 12, 2002, June 28, 2002 and April 23, 2003, the Company and the note holders modified the Senior Subordinated Loan Agreement (the "Senior Note Agreement") entered into on January 29, 1999. The Senior Note Agreement, as amended, provides for scheduled repayments of $250,000 at the end of each calendar quarter beginning in the first quarter of 2003 and ending in the fourth quarter of 2005. Such payments increase to $312,500 if the Company meets certain availability benchmarks under the Fleet Facility, as defined. The interest rate on the $3,000,000 of the notes scheduled to be repaid would be reduced to 10% on a prospective basis if the Company makes a voluntary principal repayment of $750,000 at any time prior to maturity.
Waivers and Amendments -
At December 31, 2002 and March 31, 2003, the Company did not comply with the Minimum Earnings, Fixed Charge Coverage Ratio and Cash Flow Leverage Ratio covenants, as defined, at one or both dates. On April 23, 2003, the Company obtained waivers from its lenders for the covenant violations and renegotiated certain covenants and modified certain terms of its revolving credit facility and senior subordinated notes. (See Note 9 of Notes to Consolidated Financial Statements for additional information on the Company's debt).
Long-term debt consists of the following (in thousands) -
(a) In March 2001, the Company renegotiated the repayment terms of certain seller-financed debt. Upon maturity, the individual notes were converted into four year term loans with principal and interest payments due monthly. The thirty-sixth payment was to be a balloon payment of the remaining principal and interest due. In April 2002, the Company renegotiated the repayment terms of certain seller-financed debt. Effective with the July 2002 payments, the individual notes convert into five year term loans with principal and interest payments due monthly. The interest rate on seller-financed debt, as amended in 2002, is generally a floating interest rate with a floor of 7% and a ceiling of 9%. The one note not renegotiated in 2002 has a balance of $1,159,000 at December 31, 2002 and bears interest at a rate of 11.0%.
The aggregate annual principal maturities of debt (excluding capital lease obligations) as of December 31, 2002 are as follows (in thousands) -
2003 $3,148 2004 2,432 2005 1,761 2006 9,258 2007 581 ------- Total $17,180 =======
The Company leases certain transportation and warehouse equipment under capital lease agreements that expire at various dates. At December 31, 2002, minimum annual payments under capital leases, including interest, are as follows (in thousands) -
2003 $312 2004 5 2005 2 2006 2 2007 1 ---- Total minimum payments 322 Less - Amounts representing interest (19) ---- Net minimum payments 303 Less - Current portion of obligations under capital leases (294) ---- Long-term portion of obligations under capital leases $ 9 ====
The Company has an accumulated deficit of ($8,829,000) as of December 31, 2002. There can be no assurances that the Company's lenders will agree to waive any future covenant violations, if any, continue to renegotiate and modify the terms of their loans, or further extend the maturity date, should it become necessary to do so. Further, there can be no assurances that the Company will be able to meet its revenue, cost or income projections, upon which the debt covenants are based.
Management believes that cash flows from operations and its borrowing capacity, after the debt modifications referred to above, are sufficient to support the Company's operations and general business and capital requirements for at least the next twelve months. Such conclusions are predicated upon sufficient cash flow from operations and the continued availability of a revolving credit facility. The risks associated with cash flow from operations are mitigated by the Company's low gross profit margin. Unless catastrophic, decreases in revenue should be accompanied by corresponding decreases in costs, resulting in minimal impact to liquidity. The risks associated with the revolving credit facility are as discussed above.
Accounting Standards to be Adopted in 2003
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") was issued. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material impact on the financial position or results of operations of the Company.
In November 2002, Interpretation No. 45 of the Financial Accounting Standards Board ("FASB"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") was issued. FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. Generally, FIN 45 applies to certain types of financial guarantees that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying agreement that is related to an asset, liability, or an equity security of the guaranteed party; performance guarantees involving contracts which require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement; indemnification agreements that contingently require the guarantor to make payments to an indemnified party based on changes in an underlying agreement that is related to an asset, liability, or an equity security of the indemnified party; or indirect guarantees of the indebtedness of others. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements under FIN 45 are effective for financial statements ending after December 15, 2002 and are applicable to all guarantees issued by the guarantor subject to FIN 45's scope, including guarantees issued prior to FIN 45. The Company has evaluated the accounting provisions of the interpretations and there was no material impact on its financial condition, results of operations or cash flows for the period ended December 31, 2002.
In January 2003, Interpretation No. 46 of the FASB, "Consolidation of Variable Interest Entities" ("FIN 46") was issued. The Company does not believe that it has any relationships with variable interest entities that will be subject to the requirements of FIN 46.
Inflation
While inflation has not had a material impact on the Company's results of operations for the last three years, recent fluctuations in fuel prices can and do affect the Company's operating costs.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the effect of changing interest rates. At December 31, 2002, the Company's debt consisted of approximately $13,462,000 (excluding unamortized discount of $557,000) of fixed rate debt with a weighted average interest rate of 13.01% and $4,578,000 of variable rate debt with a weighted average interest rate of 7.0%. The variable rate debt consists of seven seller-financed notes with an interest rate of prime plus 200 basis points with a minimum rate of 7% and maximum rate of 9%. Based on the average amounts outstanding under the variable rate debt for 2002, a 100 basis point change in interest rates would have resulted in an increase in interest expense of approximately $50,000 in 2002. Maximum borrowings of revolving line of credit debt at any quarter-end were $559,000.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CD&L, Inc.:
We have audited the accompanying consolidated balance sheet of CD&L, Inc. and subsidiaries (the "Company") as of December 31, 2002 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 2002, listed in the Index at Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. The Company's consolidated financial statements and financial statement schedules as of December 31, 2001, and for each of the two years in the period then ended, before the restatement discussed in Note 18 and the inclusion of the transitional disclosures discussed in Note 2 with respect to Statement of Financial Accounting Standards ("SFAS") No.148, Accounting for Stock Based Compensation-Transitional Disclosure and Amendments of SFAS No. 123 and in Note 7 with respect to SFAS No. 142, Goodwill and other Intangible Assets to the consolidated financial statements were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and stated that such 2001 and 2000 financial statement schedules, when considered in relation to the 2001 and 2000 basic consolidated financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein, in their report dated February 26, 2002 (except with respect to the matters discussed in Note 9, as to which the date is April 15, 2002).
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedule for the year ended December 31, 2002, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 7 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform SFAS No. 142.
As discussed above, the consolidated financial statements of the Company as of December 31, 2001 and for each of the two years in the period ended December 31, 2001, were audited by other auditors who have ceased operations. As described in Note 18, these consolidated financial statements have been restated to change the classification of the write-off of a $2,500,000 note from discontinued operations to continuing operations. We audited the adjustment that was applied to the restated amounts reflected in the 2001 financial statements. Our procedures included (1) agreeing the previously reported line items and disclosure amounts included in the 2001 consolidated financial statements to a Company analysis obtained from management (2) comparing restated amounts in the analysis to supporting documentation and (3) testing the mathematical accuracy of the analysis. In our opinion, such adjustment has been properly applied.
In addition, as described in Notes 2 and 7, the consolidated financial statements of the Company as of December 31, 2001 and for each of the two years in the period ended December 31, 2001 have been revised to include the transitional disclosures required by SFAS No. 148 and SFAS No. 142, respectively. Our audit procedures with respect to the transitional disclosures included in Notes 2 and 7 with respect to 2001 and 2000 included (1) comparing the amount of stock-based compensation expense to the Company's underlying analysis obtained from management, (2) comparing the previously reported net loss to the previously issued financial statements and the adjustments to reported net loss representing stock based compensation and amortization expense related to goodwill (including any related tax effects) recognized in those periods, to the Company's underlying analysis obtained from management, and (3) testing the mathematical accuracy of the reconciliation of adjusted net loss to reported net loss and the related loss-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Notes 2 and 7 are appropriate.
However, we were not engaged to audit, review or apply any procedures to the 2001 or 2000 consolidated financial statements of the Company other than with respect to the restatement adjustment and transitional disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 consolidated financial statements taken as a whole.
DELOITTE & TOUCHE LLP
New York, New York April 3, 2003 (except with respect to the matters discussed in Note 9, as to which the date is April 23, 2003)
This audit report of Arthur Andersen LLP, our former independent public accountants, is a copy of the original report dated February 26, 2002 rendered by Arthur Andersen LLP on our consolidated financial statements included in our Form 10-K filed on April 16, 2002, and has not been reissued by Arthur Andersen LLP since that date. Arthur Andersen reported on the 2001 consolidated financial statements prior the restatement discussed in Note 18 and the transitional disclosures discussed in Notes 2 and 7. We are including this copy of the Arthur Andersen LLP audit report pursuant to Rule 2-02(e) of Regulation S-X under the Securities Act of 1933.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CD&L, Inc.:
We have audited the accompanying consolidated balance sheets of CD&L, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CD&L, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statement schedules is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey February 26, 2002 (except with respect to the matters discussed in Note 9, as to which the date is April 15, 2002)
CD&L, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
CD&L, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
CD&L, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (in thousands, except share data)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
CD&L, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
CD&L, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS:
CD&L, Inc. (the "Company" or "CD&L") was founded in June 1994. In November 1995, simultaneous with the closing of the Company's initial public offering (the "Offering") separate wholly owned subsidiaries of the Company merged (the "Merger") with each of eleven acquired businesses. Consideration for the acquisition of these businesses consisted of a combination of cash and common stock of the Company, par value $0.001 per share. The assets and liabilities of the acquired businesses at September 30, 1995 were recorded by the Company at their historical amounts.
The Company provides an extensive network of same-day delivery services to a wide range of commercial, industrial and retail customers. The Company's operations are currently concentrated on the East Coast, with a strategic presence on the West Coast.
The Company has an accumulated deficit of ($8,829,000) as of December 31, 2002. There can be no assurances that the Company's lenders will agree to waive any future covenant violations, if any, continue to renegotiate and modify the terms of their loans, or further extend the maturity date, should it become necessary to do so. Further, there can be no assurances that the Company will be able to meet its revenue, cost or income projections, upon which the debt covenants are based.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates in Preparation of the Financial Statements -
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -
CD&L considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Equipment and Leasehold Improvements -
Equipment and leasehold improvements are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and assets subject to capital leases are amortized over the shorter of the terms of the leases or the estimated useful lives of the assets.
Vehicle Maintenance and Repair-
Vehicle maintenance and repair expense are expensed as incurred. Vehicle maintenance and repair expense was $528,000, $677,000 and $1,059,000 for the years ended 2002, 2001 and 2000, respectively. This expense is included as a component of Cost of Revenue on the Statement of Operations. Due to the nature of the Company's operations, the bulk of its vehicles are vans, pick-ups and passenger cars. As such, the Company does not incur significant overhaul expenses that require capitalization.
Goodwill -
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This Statement requires that goodwill no longer be amortized over its estimated useful life but tested for impairment on an annual basis. During 2002, a transitional goodwill impairment test was performed and the Company determined that there was no impairment of goodwill. Further, as required by SFAS 142, an annual impairment test was completed at the end of fiscal 2002 and the Company determined that there was no impairment.
The value of the Company's goodwill is significant relative to total assets and stockholders' equity. The Company reviews goodwill for impairment on at least an annual basis using several fair-value based tests, which include, among others, a discounted cash flow and terminal value computation. The discounted cash flow and terminal value computation is based on management's estimates of future operations. Changes in business conditions could materially impact management's estimates of future operations and this could result in an impairment of goodwill. Such impairment, if any, could have a significant impact on the Company's operations and financial condition.
Intangible Assets -
Intangible assets consist of non-compete agreements which are being amortized over a 3-5 year period.
Deferred Financing Costs -
The costs incurred to obtain financing, including all related fees, are included in intangible assets and deferred financing costs in the accompanying consolidated balance sheets and are amortized over the life of the related financing, from 3 - 7 years. Such costs are amortized over the term of the related debt agreements using the straight line method, which approximates that of the effective interest method.
Insurance -
The Company maintains certain insurance risk through insurance policies with a $350,000 deductible for workers' compensation and automobile liability ($250,000 prior to July 1, 2002) and a $150,000 deductible for employee health medical costs ($125,000 prior to March 1, 2002). The Company reserves the estimated amounts of uninsured claims and deductibles related to such insurance retentions for claims that have occurred in the normal course of business. These reserves are established by management based upon the recommendations of third-party administrators who perform a specific review of open claims, which include fully developed estimates of both reported claims and incurred but not reported claims, as of the balance sheet date. Actual claim settlements may differ materially from these estimated reserve amounts. The Company's estimated cumulative losses for workers' compensation and automobile liability claims for the period January 1, 1999 through December 31, 2002 amounted to $14,336,000, of which $11,949,000 has been funded to the Company's insurance carrier. The net liability of $2,387,000 is included in accrued expenses in the accompanying financial statements. Additionally, the Company has accrued $237,000 for incurred but unpaid employee health medical costs as of December 31, 2002.
A portion of the premium payments made by CD&L to its shared captive insurance company (the "Captive") includes allocated amounts to fund the losses that are in a risk-sharing layer of the Captive. If losses for a member of the Captive exhaust the funds that the member is required to pay to the Captive for a given policy year, the excess losses are shared between all other members of the Captive on a proportional basis based on member premiums. As of the end of the last full policy year, June 30, 2002, and from inception of CD&L's participation on January 1, 1999, the cumulative risk-sharing layer allocation to CD&L was approximately $265,000.
The Company also requires its independent contractors to maintain auto insurance coverage as well as workers' compensation or occupational accident insurance.
Significant Customers -
For the years ended December 31, 2002, 2001 and 2000, two customers accounted for 14.7%, 11.8% and 8.2%, respectively, of revenue. These customers accounted for 11.1% and 10.1% of gross accounts receivable as of December 31, 2002 and 2001, respectively.
Revenue Recognition -
Revenue is recognized when pervasive evidence of an arrangement exists, the price to the customer is fixed or determinable and collectibility is reasonably assured. The Company interprets the timing of revenue recognition to be when services are rendered to customers, and expenses are recognized as incurred. This policy applies to all of the Company's same-day, time-critical delivery service options, including Rush, Scheduled, Facilities Management and Dedicated Contract Logistics. Certain customers pay in advance, giving rise to deferred revenue.
Income Taxes -
CD&L accounts for income taxes utilizing the asset and liability approach. Deferred income taxes are provided for differences in the recognition of assets and liabilities for tax and financial reporting purposes. Temporary differences result primarily from accelerated depreciation and amortization for tax purposes and various accruals and reserves being deductible for tax purposes in future periods.
Long-Lived Assets -
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which became effective for the Company in 2002, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement extends the reporting requirements to include reporting separately as discontinued operations, components of an entity that have either been disposed of or classified as held-for-sale. The adoption of SFAS No. 144 did not have a material impact on the financial position or results of operations of the Company.
Fair Value of Financial Instruments -
Due to the short maturities of the Company's cash, receivables and payables, the carrying value of these financial instruments approximates their fair values. The fair value of the Company's debt is estimated based on the current rates offered to the Company for debt with similar remaining maturities. The Company believes that the carrying value of its debt estimates the fair value of such debt instruments.
Stock Based Compensation -
In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") was issued and became effective in 2002. This Statement amends SFAS No. 123 "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based compensation. The Company has elected to continue to recognize stock-based compensation using the intrinsic value method and has incorporated the additional disclosure requirements of SFAS 148.
The Company adopted the provisions of SFAS 123 and has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Pro forma information regarding net income (loss) and earnings (loss) per share is required, and has been determined as if the Company had accounted for its stock options under the fair value method. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions for 2002, 2001 and 2000.
2002 2001 2000 ------------ ------------ ------------ Weighted average fair value $0.44 $0.53 $1.83 Risk-free interest rate 4.30% 4.80% 6.50% Volatility factor 101% 141% 140% Expected life 7 years 7 years 7 years Dividend yield None None None ------------ ------------ ------------
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income (loss) and income (loss) per share were as follows (in thousands, except per share data):
Except for the impact of the non-cash compensation expense of $74,000, $124,000 and $1,127,000 (net of tax) in 2002, 2001 and 2000, respectively, related to these stock options, there were no other items which impacted the pro-forma amounts disclosed above.
Income (Loss) Per Share -
Basic earnings per share represents net income (loss) divided by the weighted average shares outstanding. Diluted earnings per share represents net income (loss) divided by the weighted average shares outstanding adjusted for the incremental dilution of potentially dilutive common shares. Because of the Company's net loss for the years ended December 31, 2001 and 2000, the inclusion of shares represented by 1,842 and 1,840 Stock Options and 505,351 and 505,955 Warrants respectively, for which the exercise or conversion price was less than the average market price of common shares, would be anti-dilutive and therefore they are not included in the loss per share calculations for the years ended December 31, 2001 and 2000.
A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution follows:
2002 2001 2000 --------- --------- ---------
Basic weighted average common shares outstanding 7,658,660 7,658,660 7,430,175 Effect of dilutive securities: Stock options and warrants 508,751 - - --------- --------- --------- Diluted weighted average common shares outstanding 8,167,411 7,658,660 7,430,175 ========= ========= =========
The following potentially dilutive common shares were excluded from the computation of diluted Earnings Per Share because the exercise or conversion price was greater than the average market price of common shares -
2002 2001 2000 --------- --------- --------- Stock options 1,889,434 1,917,202 1,982,534 Subordinated convertible debentures - 9,863 109,098 Seller-financed convertible notes 458,083 524,961 593,333
Accounting Standards to be adopted in 2003 -
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") was issued. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material impact on the financial position or results of operations of the Company.
In November 2002, Interpretation No. 45 of the Financial Accounting Standards Board ("FASB"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") was issued. FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. Generally, FIN 45 applies to certain types of financial guarantees that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying agreement that is related to an asset, liability, or an equity security of the guaranteed party; performance guarantees involving contracts which require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement; indemnification agreements that contingently require the guarantor to make payments to an indemnified party based on changes in an underlying agreement that is related to an asset, liability, or an equity security of the indemnified party; or indirect guarantees of the indebtedness of others. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements under FIN 45 are effective for financial statements ending after December 15, 2002 and are applicable to all guarantees issued by the guarantor subject to FIN 45's scope, including guarantees issued prior to FIN 45. The Company has evaluated the accounting provisions of the interpretations and there was no material impact on its financial condition, results of operations or cash flows for the period ended December 31, 2002.
In January 2003, Interpretation No. 46 of the FASB, "Consolidation of Variable Interest Entities" ("FIN 46") was issued. The Company does not believe that it has any relationships with variable interest entities that will be subject to the requirements of FIN 46.
(3) DISCONTINUED OPERATIONS:
On December 1, 2000, the Company made a strategic decision to dispose of its air delivery business. Subsequently, on March 30, 2001, the Company consummated a transaction providing for the sale of certain assets and liabilities of Sureway Air Traffic Corporation, Inc. ("Sureway"), its 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 the Company. The Note Receivable originally bore interest at the rate of 10.0% per annum, with interest only payable in monthly installments. The entire balance of principal, plus all accrued interest, was due and payable on March 30, 2006.
The Company reported net losses of $0, $465,000 and $1,419,000 from discontinued operations for the years ended December 31, 2002, 2001 and 2000, respectively (including provisions for losses on the disposition of the assets of the Company's air delivery business, (net of benefit for income taxes of $0, $240,000 and $125,000) of $0, $465,000 and $2,807,000, respectively).
Accordingly, the operating results and the provision for loss on the disposition of the Company's air delivery business have been segregated from continuing operations and classified as discontinued operations in the accompanying consolidated statements of operations.
As of December 31, 2001 collection of the Note Receivable, interest accrued thereon and certain other related receivables was in doubt. Accordingly, the Company recorded a pre-tax charge of $2,500,000 (included in Other Expense, net) in the fourth quarter of 2001 to write-off the Note Receivable. Additionally, the Company recorded a pre-tax charge of $705,000 (included in Discontinued Operations) in the fourth quarter of 2001 to write-off certain other direct expenses incurred on behalf of Sureway subsequent to March 30, 2001 for which collection was in doubt and to true-up certain accruals that were estimated in 2000 relative to the disposition of Sureway.
In February 1999, the Company became obligated for seller-financed acquisition debt of $1,650,000 related to the acquisition of Gold Wings (See Note 4). As of February 28, 2003, the note had a remaining principal balance of approximately $1,000,000 (the "CDL/Gold Note"). On February 28, 2003, the Company completed a series of related transactions with GMV Express, Inc. ("GMV"), Richard Gold (a principal of GMV) ("Gold") and his affiliates, and Global Delivery Systems LLC ("Global") and its subsidiary, Sureway Worldwide LLC ("Sureway Worldwide"). The net effect of the transactions with Global, Sureway Worldwide, GMV and Gold is that the Company assigned the Note Receivable to GMV in exchange for a release on the CDL/Gold Note payable, so that the Company is now relieved of its $1,000,000 liability for the CDL/Gold Note and the Company has no further rights to the Note Receivable. In addition, the Company received payments from Sureway Worldwide and Global of approximately $117,000 ($72,000 in settlement of disputed claims and $45,000 for other amounts due) and provided Gold with a release covering claims of breach of certain non-competition agreements. As a result of this transaction, the Company recorded a gain of approximately $1,000,000 in the first quarter of 2003.
Operations from the discontinued air delivery business were as follows (in thousands) -
The income from discontinued operations includes allocated interest of $0, $0 and $642,000 for the years ended December 31, 2002, 2001, and 2000, respectively. Such interest was allocated based upon the proportion of net assets employed in the discontinued operations to the total net assets of the Company.
As a result of the sale of its air delivery business, the Company now operates in only one reportable business segment.
(4) BUSINESS COMBINATIONS AND DIVESTITURES:
On February 16, 1999, the Company and its subsidiary, Sureway, entered into and consummated an asset and stock purchase agreement with Victory Messenger Service, Inc., Richard Gold, Darobin Freight Forwarding Co., Inc., ("Darobin") and The Trust Created Under Paragraph Third of the Last Will and Testament of Charles Gold (the "Trust"), (collectively "Gold Wings"), whereby Sureway purchased all of the outstanding shares of the capital stock of Darobin and certain of the assets and liabilities of the other sellers. The purchase price was comprised of approximately $3,000,000 in cash, including estimated direct acquisition costs, $1,650,000 in a 7% subordinated note (the "CDL/Gold Note") and 200,000 shares of CD&L common stock at $3.875 per share. The CDL/Gold Note was due April 16, 2001, with interest payable quarterly commencing April 1, 1999. In 2001 the CDL/Gold Note was renegotiated to include monthly principal and interest payments through April 2004 at an increased interest rate of 9%. The CDL/Gold Note is subordinate to all existing or future senior debt of CD&L. In addition, a contingent earn out in the aggregate amount of up to $520,000 was payable based on the achievement of certain financial goals during the two year period following the closing. The earn out was payable 55% in cash and 45% in CD&L common stock. The net assets acquired in this transaction were sold as part of the disposition of Sureway. The obligations under the CDL/Gold Note and earn out, however, remain with CD&L following the sale of the air delivery business. During 2000, approximately $250,000 of the earn out was paid in cash and the remaining obligation under the earn out was reduced by approximately $100,000. In 2001, approximately $150,000 was paid to Gold Wings in full settlement of the earn out. In 2002 the CDL/Gold Note was renegotiated to include monthly principal and interest payments through June 2007 and the interest rate was changed to a floating rate with a floor of 7% and a ceiling of 9%. See Note 3.
On April 30, 1999, CD&L entered into and consummated an asset purchase agreement with its subsidiary, Silver Star Express, Inc. ("Silver Star") and Metro Parcel Service, Inc., Nathan Spaulding and Kelly M. Spaulding, (collectively, "Metro Parcel"), whereby Silver Star purchased certain of the assets and liabilities of Metro Parcel. The purchase price was comprised of approximately $710,000 in cash, $202,734 in a 7% subordinated note (the "Metro Parcel Note") and 40,000 shares of CD&L's common stock at $3.25 per share. The Metro Parcel Note was due April 30, 2001 with interest payable quarterly commencing August 1, 1999. The Metro Parcel Note is subordinate to all existing or future senior debt of CD&L. In 2001 the Metro Parcel Note was renegotiated to include monthly principal and interest payments through April 2004 at an increased interest rate of 9%. In 2002 the Metro Parcel Note was renegotiated to include monthly principal and interest payments through June 2007 and the interest rate was changed to a floating rate with a floor of 7% and a ceiling of 9%.
On April 30, 1999, CD&L entered into and consummated an asset purchase agreement with its subsidiary, Clayton/National Courier Systems, Inc. ("Clayton/National") and Westwind Express, Inc., Logistics Delivery Systems, Inc., Fastrak Delivery Systems, Inc., Sierra Delivery Services, Inc., and Steven S. Keihner (collectively, "Westwind"), whereby Clayton/National purchased certain of the assets and liabilities of Westwind. The purchase price was comprised of approximately $2,650,000 in cash, $1,680,000 in various 7% subordinated notes (the "Westwind Notes") and 149,533 shares of CD&L's common stock at $3.21 per share. The Westwind Notes are comprised of two-year notes due April 30, 2001 with a total principal amount of $1,200,000 and three-year notes due April 30, 2002 with a total principal amount of $480,000. Interest on the Westwind Notes was payable quarterly commencing July 31, 1999. The Westwind Notes are subordinate to all existing or future senior debt of CD&L. In addition, a contingent earn out in the aggregate amount of up to $700,000 was payable based on the achievement of certain financial goals during the two year period following the closing. The earn out was payable 60% in cash and 40% in one year promissory notes bearing interest at a rate of 7% per annum having similar terms as the Westwind Notes referred to above. During 2000, the earn out was settled for $100,000 payable in twelve monthly cash installments commencing November 1, 2000. In 2001 the Westwind Notes due April 30, 2001 were consolidated and renegotiated to include monthly principal and interest payments through April 2004 at an increased interest rate of 9%. In 2002 the Westwind Notes due April 30, 2002 were consolidated and renegotiated to include monthly principal and interest payments through April 2007 and the interest rate was changed to a floating rate with a floor of 7% and a ceiling of 9%. In addition, the Westwind Notes amended in 2001 were renegotiated and amended to include monthly principal and interest payments through June 2007 and the interest rate was changed to a floating rate with a floor of 7% and a ceiling of 9%.
On May 10, 1999, CD&L entered into and consummated an asset purchase agreement (the "Skycab Purchase Agreement") with its subsidiary, Sureway and Skycab, Inc. and Martin Shulman (collectively, "Skycab"), whereby Sureway purchased certain assets of Skycab. The purchase price was comprised of approximately $78,100 in cash and a contingent earn out payable for sixteen quarters following the closing date. The net assets acquired in this transaction were sold as part of the disposition of Sureway, who also assumed the liability for the remaining contingent earn out payments.
CD&L financed each of the above acquisitions using proceeds from its revolving credit facility. All of the above transactions have been accounted for under the purchase method of accounting. Accordingly, the allocations of the cost of the acquired assets and liabilities have been made on the basis of their estimated fair value. The aggregate amount of goodwill recorded for the Gold Wings and Skycab acquisitions was originally $5,200,000 and was being amortized over 25 years up to the date of disposition. The goodwill recorded for the Metro Parcel acquisition was approximately $1,100,000 and was being amortized over 25 years. The goodwill for the Westwind acquisition was approximately $5,200,000 and was being amortized over 40 years. Under the provisions of SFAS 142 the Company ceased amortization of goodwill in 2002 and began annually testing such goodwill for impairment (Note 7). The consolidated financial statements include the operating results of Gold Wings, Metro Parcel, Westwind, and Skycab from their respective acquisition dates until the sale date as applicable.
On June 14, 2001, the Company consummated a transaction providing for the sale of all the outstanding stock of National Express, Inc., the Company's ground courier operation in the Mid-West. The selling price was approximately $2,530,000 and was comprised of $880,000 in cash and a subordinated promissory note (the "Promissory Note") for $1,650,000. The Promissory Note originally bore interest at the rate of 7.0% per annum. The Promissory Note, as amended on March 14, 2003, allows for the deferral of the interest and principal payments due on December 14, 2002 and March 14, 2003. A new quarterly payment schedule will commence on June 14, 2003 with interest only payments at a new interest rate at 9.0% per annum. Upon the earlier of June 14, 2004 or the maker of the Promissory Note meeting certain financial benchmarks, principal payments shall resume and the interest rate will prospectively revert back to 7.0% per annum. The final balloon payment of approximately $1,100,000 plus any remaining principal or unpaid interest remains due on June 14, 2006. The Promissory Note is included in Security Deposits and Other Assets in the accompanying balance sheets. As a result of the transaction, the Company recorded a $2,283,000 capital loss on the sale with no related net tax benefit, which is included in Other Expense, net in the accompanying statements of operations for the year ended December 31, 2001. Revenues for the Mid-West operations amounted to $0, $4,500,000 and $10,800,000 for the years ending December 31, 2002, 2001 and 2000, respectively.
(5) PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following (in thousands) -
December 31, ------------------------------ 2002 2001 ------ ------ Other receivables $ 210 $ 205 Prepaid insurance 170 207 Prepaid income taxes 89 1,297 Other 115 253 ------ ------ $ 584 $1,962 ====== ======
(6) EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following (in thousands) -
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was approximately $1,148,000, $1,532,000 and $2,242,000, respectively.
Leased equipment under capitalized leases (included above) consists of the following (in thousands) -
December 31, ----------------------- 2002 2001 ------- ------- Equipment $ 674 $ 3,565 Less - accumulated depreciation (399) (2,989) ------- ------- $ 275 $ 576 ======= =======
The Company incurred capital lease obligations of $8,000 and $693,000 in 2002 and 2001 for warehouse equipment and vehicles, respectively.
(7) GOODWILL, INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS:
Goodwill consists of the following (in thousands) -
Intangible assets and deferred financing costs consist of the following (in thousands) -
December 31, ---------------------- Useful Lives 2002 2001 ------------ ----- ----- Non-compete agreements 3 - 5 years 250 250 Deferred financing costs and other 3 - 7 years 1,396 1,283 ----- ----- 1,646 1,533 Less - accumulated amortization (985) (812) ----- ----- $661 $721 ===== =====
Intangible asset amortization expense for the years ended December 31, 2002, 2001 and 2000 was approximately $210,000, $210,000 and $179,000, respectively.
Estimated intangible amortization expense for the years ended December 31 (in thousands)-
2003 $224 2004 224 2005 199 2006 14
As a result of adopting SFAS 142 on January 1, 2002, the Company discontinued amortization of goodwill. A reconciliation of previously reported income (loss) from continuing operations and earnings (loss) per share from continuing operations to the amounts adjusted for the exclusion of goodwill amortization, net of the related income tax effect is as follows (in thousands, except per share amounts):
During 2001 the Company recorded a goodwill impairment charge of $3,349,000. The charge was the result of a comprehensive review of the Company's intangible assets and such charge was calculated in accordance with the provisions of SFAS 121. The measurement of impairment losses recognized in 2001 is based on the difference between the estimated fair value and the carrying amounts of such assets.
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following (in thousands) -
December 31, ----------------------- 2002 2001 ------ ------ Payroll and related expenses $2,552 $2,725 Third party delivery costs 2,105 2,904 Insurance 2,434 210 Professional fees 291 206 Interest 78 36 Rent - 148 Uninsured personal injury and property damage claims claims (Note 12) 325 575 Other 1,740 546 ------ ------ $9,525 $7,350 ====== ======
(9) SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
Short-term borrowings -
At December 31, 2002 and 2001, the Company had a line of credit agreement for $15,000,000. The Company's short-term borrowings on its line of credit are as follows for the years ended December 31 (in thousands) -
2002 2001 ---- ----
Maximum amount outstanding during the year $1,800 $11,500 End of year balance - - Average balance outstanding during the year 300 2,700 Weighted average borrowing cost during the year 11.0% 11.0% Standby letters of credit, end of year balance 7,000 7,081
As of June 27, 2002 CD&L and Summit Business Capital Corporation, doing business as Fleet Capital - Business Finance Division, entered into an agreement establishing a revolving credit facility (the "Fleet Facility") of $15,000,000. The Fleet Facility replaced a revolving credit facility with First Union Commercial Corporation established in July 1997. The Fleet Facility expires on June 27, 2005 and provides CD&L with standby letters of credit, prime rate based loans at the bank's prime rate, as defined, plus 25 basis points and LIBOR based loans at the bank's LIBOR, as defined, plus 225 basis points. Credit availability is based on eligible amounts of accounts receivable, as defined, up to a maximum amount of $15,000,000 and is secured by substantially all of the assets, including certain cash balances, accounts receivable, equipment, leasehold improvements and general intangibles of the Company and its subsidiaries. As of December 31, 2002, the Company had borrowing availability of $2,438,000 under the Fleet Facility, after adjusting for restrictions related to outstanding standby letters of credit of $7,000,000 and minimum availability requirements.
Under the terms of the Fleet Facility, the Company is required to maintain certain financial ratios and comply with other financial conditions. The Fleet Facility also prohibits the Company from incurring certain additional indebtedness, limits certain investments, advances or loans and restricts substantial asset sales, capital expenditures and cash dividends. See "Waivers and Amendments" below.
Long-Term Debt -
On January 29, 1999, the Company completed a $15,000,000 private placement of senior subordinated notes and warrants (the "Senior Notes") with three financial institutions. The Senior Notes originally bore interest at 12.0% per annum and are subordinate to all senior debt including the Company's Fleet Facility. Under the terms of the Senior Notes, as amended, the Company is required to maintain certain financial ratios and comply with other financial conditions contained in the Senior Notes agreement. See "waivers and amendments" below.
The Senior Notes mature on January 29, 2006 and may be prepaid by the Company under certain circumstances. The warrants expire on January 19, 2009 and are exercisable at any time prior to expiration at a price of $.001 per equivalent share of common stock for an aggregate of 506,250 shares of the Company's stock, subject to additional adjustments. The Company has recorded the fair value of the warrants of $1,265,000 as a credit to additional paid-in-capital and a debt discount on the Senior Notes. The Company used the proceeds to finance acquisitions and to reduce outstanding short-term borrowings. As of August 17, 2000, November 21, 2000, March 30, 2001, May 30, 2001, August 20, 2001, November 19, 2001, April 12, 2002, June 28, 2002 and April 23, 2003, the Company and the note holders modified the Senior Subordinated Loan Agreement (the "Senior Note Agreement") entered into on January 29, 1999. The Senior Note Agreement, as amended, provides for scheduled repayments of $250,000 at the end of each calendar quarter beginning in the first quarter of 2003 and ending in the fourth quarter of 2005. Such payments increase to $312,500 if the Company meets certain availability benchmarks under the Fleet Facility, as defined. The interest rate on the $3,000,000 of the notes scheduled to be repaid would be reduced to 10% on a prospective basis if the Company makes a voluntary principal repayment of $750,000 at any time prior to maturity.
Waivers and Amendments -
At December 31, 2002 and March 31, 2003, the Company did not comply with the Minimum Earnings, Fixed Charge Coverage Ratio and Cash Flow Leverage Ratio covenants, as defined, at one or both dates. On April 23, 2003, the Company obtained waivers from its lenders for the covenant violations and renegotiated certain covenants and modified certain terms of its revolving credit facility and senior subordinated notes.
Long-term debt consists of the following (in thousands) -
(a) In March 2001, the Company renegotiated the repayment terms of certain seller-financed debt. Upon maturity, the individual notes were converted into three year term loans based upon a four year amortization schedule with principal and interest payments due monthly. The thirty-sixth payment was to be a balloon payment of the remaining principal and interest due. In April 2002, the Company renegotiated the repayment terms of certain seller-financed debt. Effective with the July 2002 payments, the individual notes convert into five year term loans with principal and interest payments due monthly. The interest rate on seller-financed debt, as amended in 2002, is generally a floating interest rate with a floor of 7% and a ceiling of 9%. The one note not renegotiated in 2002 has a balance of $1,159,000 at December 31, 2002 and bears interest at a rate of 11.0%.
The aggregate annual principal maturities of debt (excluding capital lease obligations) as of December 31, 2002 are as follows (in thousands) -
2003 $ 3,148 2004 2,432 2005 1,761 2006 9,258 2007 581 ------- Total $17,180 =======
The Company leases certain transportation and warehouse equipment under capital lease agreements that expire at various dates. At December 31, 2002, minimum annual payments under capital leases, including interest, are as follows (in thousands) -
2003 $312 2004 5 2005 2 2006 2 2007 1 ---- Total minimum payments 322 Less - Amounts representing interest (19) ---- Net minimum payments 303 Less - Current portion of obligations under capital leases (294) ---- Long-term portion of obligations under capital leases $ 9 ====
(10) EMPLOYEE BENEFIT PLANS:
The Company adopted a 401(k) retirement plan during 1996. Substantially all employees are eligible to participate in the plan and are permitted to contribute an unlimited percentage of their annual salary, subject to Internal Revenue Service discrimination testing limitations. The Company has the right to make discretionary contributions that will be allocated to each eligible participant. The Company did not make discretionary contributions for the years ended December 31, 2002, 2001 and 2000.
(11) INCOME TAXES:
Federal and state income tax provision (benefit) for continuing operations for the years ended December 31, 2002, 2001 and 2000 are as follows (in thousands) -
2002 2001 2000 ---- ---- ---- Federal- Current $ 673 ($1,061) ($988) Deferred (513) (535) (962) State 30 (184) (189) ---- ------- ------- $190 ($1,780) ($2,139) ==== ======= =======
The Company had estimated Federal Net Operating Losses ("NOLs") available to offset future taxable income of approximately $0 and $550,000 as of December 31, 2002 and 2001, respectively.
The components of deferred income tax assets and liabilities are as follows (in thousands) -
The differences in Federal income taxes provided and the amounts determined by applying the Federal statutory tax rate (34%) to income (loss) from continuing operations before income taxes for the years ended December 31, 2002, 2001 and 2000, result from the following (in thousands) -
In 2001, as a result of the loss on the sale of National Express, Inc. (See Note 4), the Company has a capital loss carryforward of approximately $2,300,000 which expires in 2006. Such loss is available to offset future capital gains, if any. Management has concluded that it is more likely than not that such loss will not be utilized prior to its expiration. Accordingly, a full valuation allowance has been provided for this item.
(12) COMMITMENTS AND CONTINGENCIES:
Operating Leases -
The Company leases its office and warehouse facilities under non-cancelable operating leases, which expire at various dates through September 2007. The approximate minimum rental commitments of the Company, under existing agreements as of December 31, 2002, are as follows (in thousands) -
2003 $2,896 2004 1,706 2005 1,131 2006 779 2007 152
Rent expense, primarily for facilities, amounted to approximately $6,747,000, $8,409,000 and $10,769,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Litigation -
In February 1996, Liberty Mutual Insurance Company ("Liberty Mutual") filed an action against Securities Courier Corporation ("Securities"), a subsidiary of the Company, Mr. Vincent Brana, an employee of the Company, and certain other parties in the United States District Court for the Southern District of New York. Under the terms of its acquisition of Securities, the Company had certain rights to indemnification from Mr. Brana. In connection with the indemnification, Mr. Brana has entered into a settlement agreement and executed a promissory note (the "Brana Note") in such amount as may be due for any defense costs or award arising out of this suit. Mr. Brana has agreed to repay the Company on December 1, 2003, together with interest calculated at a rate per annum equal to the rate charged the Company by its senior lender. Mr. Brana delivered 357,301 shares of CD&L common stock to the Company as collateral for the Brana Note. On September 8, 2000 the parties entered into a settlement agreement in which Securities and Mr. Brana agreed to pay Liberty Mutual $1,300,000. An initial payment of $650,000 was made by Securities on October 16, 2000, $325,000 plus interest at a rate of 10.5% per annum was paid in monthly installments ending July 1, 2001 and the balance of $325,000 plus interest at a rate of 12.0% per annum was paid in monthly installments ending July 1, 2002.
At December 31, 2002 and 2001, the Company had a receivable due from Mr. Brana totaling $2,800,000. As of December 31, 2002, considering the market value of the collateral and Mr. Brana's failure to update and provide satisfactory evidence to support his ability to pay the Brana Note, the Company has recorded a $2,800,000 reserve against the receivable.
In an effort to resolve all outstanding disputes between Mr. Brana and the Company, a settlement agreement is currently being negotiated. If an agreement is reached, the Company would return to Mr. Brana the 357,301 shares of CD&L common stock held by the Company as collateral for the $2,800,000 note, and provide certain releases for claims that the Company may have against him. Mr. Brana's employment with the Company was terminated on September 1, 2002 and he has served as a paid consultant since that time.
The Company is, from time to time, a party to litigation arising in the normal course of its business, including claims for uninsured personal injury and property damage incurred in connection with its same-day delivery operations. In connection therewith, the Company has recorded reserves of $325,000 and $575,000 as of December 31, 2002 and 2001, respectively.
Also from time to time, federal and state authorities have sought to assert that independent contractors in the transportation industry, including those utilized by CD&L, are employees rather than independent contractors. The Company believes that the independent contractors that it utilizes are not employees under existing interpretations of federal and state laws. However, federal and state authorities have and may continue to challenge this position. Further, laws and regulations, including tax laws, and the interpretations of those laws and regulations, may change.
Management believes that none of these actions, including the actions described above, will have a material adverse effect on the consolidated financial position or results of operations of the Company.
(13) Stock Option Plans:
The Company has two stock option plans under which employees and independent directors may be granted options to purchase shares of Company Common Stock at or above the fair market value at the date of grant. Options generally vest in one to four years and expire in 10 years.
Employee Stock Compensation Program -
In September 1995, the Board of Directors adopted, and the stockholders of the Company approved the Company's Employee Stock Compensation Program (the "Employee Stock Compensation Program"). The Employee Stock Compensation Program authorizes the granting of incentive stock options, non-qualified supplementary options, stock appreciation rights, performance shares and stock bonus awards to key employees of the Company, including those employees serving as officers or directors of the Company. The Company initially reserved 1,400,000 shares of Common Stock for issuance in connection with the Employee Stock Compensation Program. In June 1998 the Board of Directors adopted and the stockholders of the Company approved an additional 500,000 shares for issuance under the Employee Stock Compensation Program. In June 2000 the Board of Directors adopted and the stockholders of the Company approved the Year 2000 Employee Stock Compensation Program, which provided an additional 1,350,000 shares for issuance to key employees of the Company. In June 2001 the Board of Directors adopted and the stockholders of the Company approved an amendment to the Year 2000 Employee Stock Compensation Program, which provided an additional 375,000 shares for issuance to key employees of the Company. In October 2002 the Board of Directors adopted and the stockholders of the Company approved a second amendment to the Year 2000 Employee Stock Compensation Program, which provided an additional 375,000 shares for issuance to key employees of the Company. The Employee Stock Compensation Programs are administered by a committee of the Board of Directors (the "Administrators") made up of directors who are disinterested persons. Options and awards granted under the Employee Stock Compensation Programs will have an exercise or payment price as established by the Administrators provided that the exercise price of incentive stock options may not be less than the fair market value of the underlying shares on the date of grant. Unless otherwise specified by the Administrators, options and awards will vest in four equal installments on the first, second, third and fourth anniversaries of the date of grant.
Stock Option Plans for Independent Directors -
In September 1995, the Board of Directors adopted, and the stockholders of the Company approved, the Company's 1995 Stock Option Plan for Independent Directors (the "Director Plan"). The Director Plan authorizes the granting of non-qualified stock options to non-employee directors of the Company. The Company has reserved 100,000 shares of Common Stock for issuance in connection with the Director Plan. In October 2002 the Board of Directors adopted and the stockholders of the Company approved the 2002 Stock Option Plan for Independent Directors, which provided an additional 100,000 shares for issuance to non-employee directors of the Company. The Director Plan is administered by a committee of the Board of Directors (the "Committee"), none of whom will be eligible to participate in the Director Plan. The Director Plan provided for an initial grant of an option to purchase 1,500 shares of Common Stock upon election as a director of the Company, a second option to purchase 1,000 shares of Common Stock upon the one-year anniversary of such director's election and subsequent annual options for 500 shares of Common Stock upon the anniversary of each year of service as a director. In June 1998 the stockholders of the Company approved amendments to the Director Plan. The amendments replaced the annual stock option grants of the original plan with quarterly grants of 1,250 shares of stock options on the first trading day of each fiscal quarter commencing on October 1, 1997. In August of 1998 and February of 1999, the Committee approved further amendments to the Director Plan. These amendments replaced the time period to exercise vested options after a participating director has served as a director for a period of three consecutive years or more. The Director Plan was amended to provide that in the event any holder, who has served as a director for three or more consecutive years, shall cease to be a director for any reason, including removal with or without cause or death or disability, all options (to the extent exercisable at the termination of the director's service) shall remain exercisable by the holder or his lawful heirs, executors or administrators until the expiration of the ten year period following the date such options were granted.
Information regarding the Company's stock option plans is summarized below:
Weighted Number Average of Exercise Shares Price ------ ---------- Shares under option: Outstanding at December 31, 1999 1,460,319 $5.33
Granted 1,522,500 $1.91 Exercised - - Canceled (559,134) $2.76 ---------
Outstanding at December 31, 2000 2,423,685 $3.77
Granted 55,000 $0.56 Exercised - - Canceled (534,969) $4.79 ---------
Outstanding at December 31, 2001 1,943,716 $3.25
Granted 75,000 $ .52 Exercised - - Canceled (85,063) $6.40 ---------
Outstanding at December 31, 2002 1,933,653 $3.01 =========
Options exercisable at: December 31, 2000 1,611,928 $4.57 ========= ===== December 31, 2001 1,685,372 $3.41 ========= ===== December 31, 2002 1,898,487 $3.02 ========= =====
At December 31, 2002, options available for grant under the Employee Stock Compensation Plans and the Director Plans total 2,193,847 and 72,500, respectively.
The following summarizes information about option groups outstanding and exercisable at December 31, 2002:
(14) EMPLOYEE STOCK PURCHASE PLAN
Effective April 1, 1998, CD&L adopted an Employee Stock Purchase Plan (the "Employee Purchase Plan") which was amended in 1999. The Employee Purchase Plan permitted eligible employees to purchase CD&L common stock at 85% of the closing market price on the last day prior to the commencement or the end of the purchase period. The Employee Purchase Plan provided for the purchase of up to 500,000 shares of common stock. During 2002, 2001 and 2000, 0, 0 and 305,202 shares were issued under the Employee Purchase Plan, respectively.
(15) SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On December 27, 1999, the Board of Directors of the Company announced the declaration of a dividend of one right (a "Right") for each outstanding share of Common Stock of the Company held of record at the close of business on January 6, 2000, or issued thereafter and prior to the time at which they separate from the Common Stock and thereafter pursuant to options and convertible securities outstanding at the time they separate from the Common Stock. The Rights were issued pursuant to a Stockholder Protection Rights Agreement, dated as of December 27, 1999, between the Company and American Stock Transfer & Trust Company, as Rights Agent. Each Right entitles its registered holder to purchase from the Company, after the Separation Time, one one-hundredth of a share of Participating Preferred Stock, par value $0.01 per share, for $27.00 (the "Exercise Price"), subject to adjustment. The holders of Rights will, solely by reason of their ownership of Rights, have no rights as stockholders of the Company, including, without limitation, the right to vote or to receive dividends.
The Rights will separate from the Common Stock if any person or group (subject to certain exceptions) becomes the beneficial owner of fifteen percent or more of the Common Stock or any person or group (subject to certain exceptions) makes a tender or exchange offer that would result in that person or group beneficially owning fifteen percent or more of the Common Stock. Upon separation of the Rights from the Common Stock, each Right (other than Rights beneficially owned by the acquiring person or group, which Rights shall become void) will constitute the right to purchase from the Company that number of shares of Common Stock of the Company having a market price equal to twice the Exercise Price for an amount equal to the Exercise Price. In addition, if a person or group who has acquired beneficial ownership of fifteen percent or more of the Common Stock controls the Board of Directors of the Company and the Company engages in certain business combinations or asset sales, then the holders of the Rights (other than the acquiring person or group) will have the right to purchase common stock of the acquiring company having a market value equal to two times the Exercise Price.
In certain circumstances, the Board of Directors may elect to exchange all of the then outstanding Rights (other than Rights beneficially owned by the acquiring person or group, which Rights become void) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect certain changes in the capital stock of the Company. In addition, the Board of Directors may, prior to separation from the Common Stock, redeem all (but not less than all) the then outstanding Rights at a price of $.01 per Right. Unless redeemed, exchanged or amended on an earlier date, the Rights will expire on the tenth anniversary of the record date.
At December 31, 2002 and 2001, no Rights have been exchanged.
(16) RELATED PARTY TRANSACTIONS:
Leasing Transactions -
Certain subsidiaries of the Company paid approximately $114,000, $173,000 and $523,000 for the years ended December 31, 2002, 2001 and 2000, respectively, in rent to certain directors, stockholders or companies owned and controlled by directors or stockholders of the Company. Rent is paid for office, warehouse facilities and transportation equipment. At December 31, 2002 and 2001, $8,000 and $11,000, respectively, are owed to related parties in connection with these transactions.
Note Receivable from Stockholder -
In connection with his indemnification to the Company under the terms of the Company's acquisition of Securities, Mr. Vincent Brana, an employee of the Company, has entered into a settlement agreement and executed a promissory note (the "Brana Note") in the amount of $500,000 or such greater amount as may be due under the settlement agreement. The Company has agreed to advance certain legal fees and expenses related to certain litigation involving Securities, for which Mr. Brana has indemnified the Company. At December 31, 2002 and 2001, the Company had a receivable due from Mr. Brana totaling $2,800,000. Mr. Brana has agreed to repay the Company on December 1, 2003, together with interest calculated at a rate per annum equal to the rate charged the Company by its senior lender. Mr. Brana delivered 357,301 shares of CD&L common stock to the Company as collateral for the Brana Note. As of December 31, 2002, considering the market value of the collateral and Mr. Brana's failure to update and provide satisfactory evidence to support his ability to pay the Brana Note, the Company has recorded a $2,800,000 ($2,500,000 was recorded in 2000 and $300,000 in 2002) reserve against the receivable.
In an effort to resolve all outstanding disputes between Mr. Brana and the Company, a settlement agreement is currently being negotiated. If an agreement is reached, the Company would return to Mr. Brana the 357,301 shares of CD&L common stock held by the Company as collateral for the $2,800,000 note, and provide certain releases for claims that the Company may have against him. Mr. Brana's employment with the Company was terminated on September 1, 2002 and he has served as a paid consultant since that time.
(17) SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (net refund received) for interest and income taxes for the years ended December 31, 2002, 2001 and 2000 was as follows (in thousands) -
2002 2001 2000 ---- ---- ---- Interest $2,507 $3,171 $2,969 Income taxes ($281) ($1,132) $33
Supplemental schedule of non-cash financing activities for the years ended December 31, 2002, 2001 and 2000 was as follows (in thousands) -
2002 2001 2000 ---- ---- ---- Capital lease obligations incurred $ 8 $693 $ - Reduction of purchase price for businesses previously acquired, net - 559 600
(18) CHANGES TO DECEMBER 31, 2001 FINANCIAL STATEMENTS:
Subsequent to the issuance of the Company's 2001 financial statements, the Company determined that the write-off of the $2,500,000 note receivable from the purchasers of Sureway, which was included in discontinued operations, should be included in continuing operations. As a result, the consolidated financial statements for the year ended December 31, 2001 have been restated.
The impact of this restatement on reported operations is as follows (in thousands) -
As Originally Reported As Restated ----------------------- --------------
Loss from continuing operations ($3,964) ($5,804) Loss from discontinued operations (2,305) (465) Net loss ($6,269) ($6,269)
Basic loss per share: Continuing operations ($.52) ($.76) Discontinued operations (.30) (.06) Net loss per share ($.82) ($.82)
Diluted loss per share: Continuing operations ($.52) ($.76) Discontinued operations (.30) (.06) Net loss per share ($.82) ($.82)
(19) QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited quarterly financial data for the years ended December 31, 2002 and 2001 was as follows (in thousands, except per share amounts) -
(1) During the fourth quarter of 2002, the Company recorded an additional reserve of $300,000 in connection with a related party note receivable (Note 16). (2) During the fourth quarter of 2001, the Company wrote-off a $2,500,000 note received in the transaction to dispose of the Company's air delivery business (Note 3). (3) During the second quarter of 2001, the Company recorded a loss of $2,283,000 in connection with the sale of all of the outstanding stock of National Express Inc. (Note 4).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
For information regarding the Company's change in independent auditors from Arthur Andersen LLP to Deloitte & Touche LLP, please refer to our Current Report on Form 8-K filed with the Commission on August 9, 2002. We have had no disagreements with our independent auditors regarding accounting or financial disclosure matters.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company
The Company hereby incorporates by reference the applicable information from its definitive proxy statement for its 2003 Annual Meeting of Stockholders, except for certain information relating to the Company's executive officers, which is provided below.
Executive Officers
Information with respect to the Executive Officers of the Company is set forth under the caption "Executive Management" contained in Part I, Item 1 of this report and are incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The Company hereby incorporates by reference the applicable information from its definitive proxy statement for its 2003 Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company hereby incorporates by reference the applicable information from its definitive proxy statement for its 2003 Annual Meeting of Stockholders.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Company hereby incorporates by reference the applicable information from its definitive proxy statement for its 2003 Annual Meeting of Stockholders.
Item 14.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See Item 8. Financial Statements and Supplementary Data.
(a)(2) Financial Statement Schedules
All other schedules called for by Regulation S-X are not submitted because they are not applicable or not required or because the required information is not material or is included in the financial statements or notes thereto.
(a)(3) Exhibits
The Exhibits listed in (b) below are filed herewith.
(b) Exhibits
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this annual report on Form 10-K for the year ended December 31, 2002 to be signed on its behalf by the undersigned, thereunto duly authorized, on April 30, 2003.
CD&L, Inc.
By: /s/ Russell J. Reardon ----------------------- Russell J. Reardon Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on April 30, 2003.
CERTIFICATIONS
I, Albert W. Van Ness, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of CD&L, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 30, 2003 /s/ Albert W. Van Ness, Jr. ------------------------------------ Chairman and Chief Executive Officer
I, Russell J. Reardon, certify that:
1. I have reviewed this annual report on Form 10-K of CD&L, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 30, 2003 /s/ Russell J. Reardon ------------------------------------------ Vice President and Chief Financial Officer
(a) Represents allowance for doubtful accounts of company disposed of.