UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2006 or
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period
from_______________to____________
Commission File Number: 0-26954
CD&L, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3350958
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 WESLEY STREET 07606
SOUTH HACKENSACK, NEW JERSEY (Zip Code)
(Address of principal executive offices)
(201) 487-7740
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. (as defined in Rule
12b-2 of the Securities Exchange Act of 1934)
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
The number of shares of common stock of the Registrant, par value $.001
per share, outstanding as of August 16, 2006 was 18,397,572.
1
CD&L, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006
INDEX
PAGE
----
PART I - Financial Information
ITEM 1 - Financial Statements
CD&L, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of June 30, 2006 (unaudited)
and December 31, 2005 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2006 and 2005 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2006 and 2005 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 24
ITEM 4 - Controls and Procedures 24
PART II - Other Information
ITEM 1A - Risk Factors 25
ITEM 4 - Submission of Matters to a Vote of Security Holders 25
ITEM 6 - Exhibits 26
SIGNATURE 27
CERTIFICATIONS 28
2
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
June 30, December 31,
2006 2005
----------- ------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 543 $ 837
Accounts receivable, net 28,745 26,376
Prepaid expenses and other current assets 3,495 4,048
-------- --------
Total current assets 32,783 31,261
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 3,575 3,438
GOODWILL, net 11,531 11,531
OTHER INTANGIBLE ASSETS AND DEFERRED FINANCING COSTS, net
1,083 1,185
OTHER ASSETS 741 932
-------- --------
Total assets $ 49,713 $ 48,347
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 9,371 $ 8,921
Current maturities of long-term debt 542 552
Accounts payable, accrued liabilities and bank overdrafts
17,089 15,423
-------- --------
Total current liabilities 27,002 24,896
LONG-TERM DEBT, net of current maturities 5,015 5,292
OTHER LONG-TERM LIABILITIES 1,771 1,775
-------- --------
Total liabilities 33,788 31,963
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; 393,701 shares issued at June 30, 2006
and December 31, 2005 4,000 4,000
Common stock, $.001 par value; 30,000,000 shares
authorized; 10,046,846 and 10,041,846 shares issued at June
30, 2006 and December 31, 2005, respectively 10 10
Additional paid-in capital 15,745 15,592
Treasury stock, 29,367 shares of common stock at cost (162) (162)
Accumulated deficit (3,668) (3,056)
-------- --------
Total stockholders' equity 15,925 16,384
-------- --------
Total liabilities and stockholders' equity $ 49,713 $ 48,347
======== ========
See accompanying notes to condensed consolidated financial statements.
3
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
-------------------------- --------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Revenue $ 61,911 $ 54,207 $ 122,350 $ 106,562
Cost of revenue 50,220 43,367 99,453 85,414
--------- --------- --------- ---------
Gross profit 11,691 10,840 22,897 21,148
--------- --------- --------- ---------
Costs and Expenses:
Selling, general and
administrative expenses 12,541 9,088 22,733 17,968
Depreciation and amortization 333 277 651 550
Other (income) expense, net - (9) (16) (9)
Interest expense 401 366 757 756
--------- --------- --------- ---------
Total Costs and expenses 13,275 9,722 24,125 19,265
--------- --------- --------- ---------
(Loss) income before provision for
income taxes (1,584) 1,118 (1,228) 1,883
(Benefit) provision for income taxes (783) 492 (616) 829
--------- --------- --------- ---------
Net (loss) income ($801) $ 626 ($612) $ 1,054
========= ========= ========= =========
Net (loss) income per share:
Basic ($.08) $ .07 ($.06) $ .11
========= ========= ========= =========
Diluted ($.08) $ .04 ($.06) $ .06
========= ========= ========= =========
Basic weighted average common
shares outstanding 10,017 9,356 10,016 9,356
========= ========= ========= =========
Diluted weighted average common
shares outstanding 10,017 20,248 10,016 20,251
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
CD&L, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended
June 30,
------------------------
2006 2005
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($612) $ 1,054
Adjustments to reconcile net (loss) income to net cash provided by
operating activities -
Gain on disposal of equipment and leasehold improvements (4) (5)
Depreciation and amortization, including amortization of deferred
financing costs 687 606
Stock-based compensation expense 151 -
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net (2,369) (827)
Prepaid expenses and other current assets 553 1,357
Other assets 191 (434)
(Decrease) increase in -
Accounts payable, accrued liabilities and bank overdrafts 1,666 1,317
Other long-term liabilities (4) 115
------- -------
Net cash provided by operating activities 259 3,183
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment and leasehold improvements 23 22
Additions to equipment and leasehold improvements (647) (443)
------- -------
Net cash used in investing activities (624) (421)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 450 (1,315)
Repayments of long-term debt (287) (238)
Proceeds from issuance of common stock 2 -
Deferred financing costs (94) -
------- -------
Net cash provided by (used in) financing activities 71 (1,553)
------- -------
Net (decrease) increase in cash and cash equivalents (294) 1,209
CASH AND CASH EQUIVALENTS, beginning of period 837 617
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 543 $ 1,826
======= =======
See accompanying notes to condensed consolidated financial statements.
5
CD&L, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The condensed consolidated balance sheet
at December 31, 2005 has been derived from the audited financial
statements at that date. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three
and six months ended June 30, 2006 are not necessarily indicative of
the results that may be expected for any other interim period or for
the year ending December 31, 2006. For further information, refer to
the consolidated financial statements and footnotes thereto included in
the CD&L, Inc. (the "Company" or "CD&L") Form 10-K/A for the year ended
December 31, 2005.
(2) STOCK-BASED COMPENSATION
As of June 30, 2006, the Company maintains certain stock-based
compensation plans that are described in Note 12 to the Consolidated
Financial Statements included in the Company's 2005 Annual Report on
Form 10-K/A. Under these plans, the Company may grant stock options to
employees and directors of the Company. The Company may grant up to a
maximum of 4,000,000 options under the Employee Stock Compensation
Program (the "ESCP") and up to a maximum of 500,000 options under the
2002 Stock Option Plan for Independent Directors (the "Director Plan").
At June 30, 2006, options available for grant under the ESCP and the
Director Plan total 2,000,000 and 251,000, respectively.
Prior to January 1, 2006, as permitted under SFAS No. 123, "Accounting
for Stock-Based Compensation," ("SFAS 123"), compensation cost for
employee and director stock options was recognized using the intrinsic
value method described in APB No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Effective January 1, 2006, the Company adopted
the fair-value recognition provisions of SFAS No. 123(R), "Share-Based
Payment," ("SFAS 123R") and Securities and Exchange Commission Staff
Accounting Bulletin No. 107. Under SFAS 123R, the fair value of
employee and non-employee options granted is amortized over the related
service period. SFAS 123R was adopted using the modified prospective
transition method; therefore, prior periods have not been restated.
Compensation expense recognized in the three and six months ended June
30, 2006 includes compensation cost for all share-based payments
granted to employees and directors prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123. Compensation cost
for any share-based payments granted subsequent to January 1, 2006 is
based on the grant date fair value estimated in accordance with the
provisions of SFAS 123R.
Stock options are granted with exercise prices not less than the fair
market value of the Company's common stock at the time of grant and
with an exercise term not to exceed 10 years. Generally, stock options
granted under the ESCP become exercisable in three installments over a
period of two years. Stock options granted under the Director Plan
generally become exercisable after one year. Option awards usually
provide for accelerated vesting upon retirement, death or disability.
The Company granted 0 and 400,000 options during the three months ended
June 30, 2006 and 2005, respectively, and 0 and 500,000 options during
the six months ended June 30, 2006 and 2005, respectively.
As a result of adopting SFAS 123R, our loss before taxes for the six
months ended June 30, 2006 is $151,000 higher and our net loss is
$80,000 higher than if we had continued to account for stock-based
compensation under APB 25. Compensation expense is recognized in the
selling, general and administrative expenses line items of the
accompanying condensed consolidated statements of operations on a
ratable basis over the vesting periods. These awards have been
classified as equity instruments, and as such, a corresponding increase
of $151,000 has been reflected in additional paid-in capital in the
accompanying condensed consolidated balance sheet as of June 30, 2006.
There were no capitalized stock-based compensation costs at June 30,
2006 and 2005. As of June 30, 2006, there was $95,000 of total
unrecognized compensation cost related to non-vested stock options to
be recognized over a weighted-average period of 1.32 years.
6
The intrinsic values of options exercised during the six months ended
June 30, 2006 and 2005 were not significant. The total cash received
from the exercise of stock options was $2,000 and $0 for the six months
ended June 30, 2006 and 2005, respectively, and is classified as
financing cash flows in the accompanying condensed consolidated
statements of cash flows. New shares of the Company's common stock are
issued upon exercise of the options. Prior to the adoption of SFAS
123R, any tax benefits of deductions resulting from the exercise of
stock options would have been presented as operating cash flows in the
statements of cash flows. SFAS 123R requires that cash flows from tax
benefits attributable to tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) be classified
as financing cash flows. The Company did not have any significant
excess tax benefits for the six months ended June 30, 2006.
Since employee options are granted with exercise prices that are not
less than market value, the Company did not record any stock-based
employee compensation in the three and six months ended June 30, 2005.
The fair value for employee and non-employee options granted used in
determining pro forma net income below was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for the three and six months ended June 30, 2005. There
were no stock options granted during the three or six months ended June
30, 2006.
For the Three Months Ended For the Six Months Ended
June 30, 2005 June 30, 2005
---------------------------- ------------------------
Risk-free interest rate 3.8% 3.5%
Volatility factor 38% 47%
Expected life 7 years 7 years
Dividend yield None None
The risk-free interest rate is based on reference to United States
Treasury securities with terms matching the expected term of the
subject options. The expected life of the 2005 option grants related to
the above referenced periods was based on historical exercises and
terminations. Due to the insignificant number of stock option exercises
during the past several years, the Company has estimated the expected
life of options granted to be the midpoint between the average vesting
term and the contractual term. The expected volatility was based on an
analysis of the volatility of the Company's stock price using
alternative historical periods of time and alternative statistical
measures of volatility (exponential weighted moving average and the
GARCH measure of volatility). The expected dividend yield is zero.
7
Changes in outstanding options in the six months ended June 30, 2006
are as follows:
Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Exercise Term (years) Intrinsic
Options Price Value (1)
------------- ------------ -------------- --------------
Options outstanding at
December 31, 2005 4,249,000 $1.97
Granted - -
Exercised (5,000) $0.47
Canceled - -
----------
Options outstanding at June 30, 2006 4,244,000 $1.97 6.31 $2,071,000
==========
Options exercisable at June 30, 2006 4,019,342 $1.97 6.15 $2,002,000
=========
Options available for grant at
June 30, 2006 2,251,000
=========
(1) The aggregate intrinsic value has been calculated based on the
difference between the exercise price of in-the-money options versus
the Company's closing stock price as of June 30, 2006.
The table below presents the pro forma effect on net income and basic
and diluted net income per share if the Company had applied a fair
value recognition method instead of the intrinsic value method to
options granted under the Company's stock option plans for the three
and six months ended June 30, 2005. For purposes of this pro forma
disclosure, the value of the options is estimated using the
Black-Scholes option-pricing model and amortized to expense over the
options' vesting periods.
8
The pro forma information regarding net income and net income per share
is as follows (in thousands, except per share data):
For the Three Months Ended For the Six Months Ended
June 30, 2005 June 30, 2005
------------------------------ -----------------------------
Net income, as reported $626 $1,054
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects
(146) (265)
------------------------------ -----------------------------
Pro forma net income $480 $789
============================== =============================
Net income per share:
Basic, as reported $.07 $.11
Diluted, as reported $.04 $.06
Basic, pro forma $.05 $.08
Diluted, pro forma $.03 $.05
(3) SHORT-TERM BORROWINGS:
Short-term borrowings totaled $9,371,000 and $8,921,000 as of June 30,
2006 and December 31, 2005, respectively. At December 31, 2005,
short-term borrowings consisted of a line of credit balance of
$8,080,000 and $841,000 of outstanding borrowings related to the
insurance financing arrangements entered into in 2005. There were no
balances related to the insurance financing arrangements at June 30,
2006.
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 which was due to expire
on June 27, 2005 but was extended through January 31, 2006, provided
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 was based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15,000,000 and was collateralized
by substantially all of the assets, including certain cash balances,
accounts receivable, equipment, leasehold improvements and general
intangibles of the Company and its subsidiaries.
As of January 31, 2006, CD&L and Bank of America, N.A. (successor by
merger to Fleet Capital Corporation) entered into a new agreement (the
"Bank of America Facility") which replaced the prior Fleet Facility.
The Bank of America Facility, which expires on September 30, 2008,
continues to provide CD&L with standby letters of credit, prime rate
based loans at the bank's prime rate, as defined (8.25% at June 30,
2006), and LIBOR based loans at the bank's LIBOR rate, as defined, plus
200 basis points. Credit availability is based on eligible amounts of
accounts receivable, as defined, up to a maximum amount of $20,000,000
and is collateralized by substantially all of the assets, including
certain cash balances, accounts receivable, equipment, leasehold
improvements and general intangibles of the Company and its
subsidiaries. The maximum borrowings outstanding under the Bank of
America Facility during the six months ended June 30, 2006 were
$10,872,000. As of June 30, 2006, the Company had total cash on hand
and borrowing availability of $5,670,000 under the Bank of America
Facility, after adjusting for restrictions related to outstanding
standby letters of credit of $4,582,000 and minimum availability
requirements.
Under the terms of the Bank of America Facility, the Company is
required to maintain certain financial ratios and comply with other
financial conditions. The Bank of America 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. At June 30, 2006, the Company
was in violation of certain of the financial covenants due to the
reported net loss for the second quarter. On August 11, 2006, the
Company obtained a waiver from its lender for the covenant violation.
Bank of America has consented to the merger with Velocity and the
revolving loan balance will be paid in full and closed on the merger
date.
9
Costs incurred relative to the establishment of the Bank of America
Facility amounted to approximately $94,000. This has been accounted for
as deferred financing costs and is being amortized over the term of the
new financing agreement. As of June 30, 2006, the unamortized portion
of the deferred financing costs amounted to approximately $77,000.
(4) LONG-TERM DEBT:
On January 29, 1999, the Company completed a $15,000,000 private
placement of the senior subordinated notes (the "Senior Notes") and
warrants with three financial institutions. The Senior Notes originally
bore interest at 12.0% per annum and are subordinate to all senior debt
including the Company's Bank of America Facility. Under the terms of
the Senior Notes, as amended, the Company was required to maintain
certain financial ratios and comply with other financial conditions
contained in the Senior Notes agreement.
At March 31, 2004, the Company owed $11,000,000 of principal on the
Senior Notes. On April 14, 2004, an agreement was reached among the
Company, BNP Paribas ("Paribas"), Exeter Venture Lenders, L.P. ("Exeter
Venture") and Exeter Capital Partners IV, L.P. ("Exeter Capital") and
together with Exeter Venture and Paribas (the "Original Note holders")
and certain members of CD&L management and others ("Investors") as to
the financial restructuring of the Senior Notes. The Original Note
holders agreed to convert a portion of the existing debt due from CD&L
into equity and to modify the terms of the Senior Notes if the
Investors purchased a portion of the notes and accepted similar
modifications. The nature of the restructuring was as follows:
(a) The Original Note holders exchanged Senior Notes in the
aggregate principal amount of $4,000,000 for shares of
the Series A Convertible Redeemable Preferred Stock of
the Company, par value $.001 per share ("Preferred
Stock"), with a liquidation preference of $4,000,000.
The Preferred Stock is convertible into 3,937,010 shares
of Common Stock, does not pay dividends (unless
dividends are declared and paid on the Common Stock) and
is redeemable by the Company for the liquidation value.
The conversion price is $1.016 per share which was equal
to the average closing price for the Company's common
stock for the 5 days prior to the closing. Holders of
the Preferred Stock have the right to elect two
directors.
(b) The Original Note holders and the Company amended the
terms of the remaining $7,000,000 principal balance of
the Senior Notes, and then exchanged the amended notes
for the new notes, which consist of two series of
convertible notes, the Series A Convertible Subordinated
Notes (the "Series A Convertible Notes") in the
principal amount of $3,000,000 and the Series B
Convertible Subordinated Notes ("Series B Convertible
Notes") in the principal amount of $4,000,000
(collectively, the "Convertible Notes"). The loan
agreement that governed the Senior Notes was amended and
restated to reflect the terms of the Convertible Notes,
including the elimination of most financial covenants.
The principal amount of the Convertible Notes is due in
a balloon payment at the maturity date of April 14,
2011. The Convertible Notes bear interest at a rate of
9% for the first two years of the term, 10.5% for the
next two years and 12% for the final three years of the
term and will be paid quarterly. As the interest on the
Convertible Notes increases over the term of the notes,
the Company records the associated interest expense on a
straight-line basis using a blended rate of 10.71%,
giving rise to accrued interest over the early term of
the Convertible Notes. The terms of the two series of
Convertible Notes are identical except for the
conversion price ($1.016 for the Series A Convertible
Notes, the average closing price for the Company's
common stock for the 5 days prior to the closing and
$2.032 for the Series B Convertible Notes). The Series B
Convertible Notes were extinguished on October 31, 2005
and the Series A Convertible Notes were extinguished on
July 11, 2006, as described below.
10
(c) The Investors purchased the Series A Convertible Notes
from the Original Note holders for a price of
$3,000,000.
(d) The Company issued an additional $1,000,000 of Series A
Convertible Notes to the Investors for an additional
payment of $1,000,000, the proceeds of which were used
to reduce short-term debt.
(e) The Investors, the Original Note holders and the Company
entered into a Registration Rights Agreement pursuant to
which the shares of the Company's common stock issuable
upon conversion of the Preferred Stock (3,937,010
shares) and the Convertible Notes (3,937,008 shares for
Series A and 1,968,504 shares for Series B) would be
registered for resale with the Securities and Exchange
Commission ("SEC"). Subsequently, on August 2, 2005, the
Company filed the required registration statement and
the registration statement was declared effective on
August 11, 2005.
The Company cannot be compelled to redeem the Preferred Stock
for cash at any time.
Costs incurred relative to the aforementioned transactions
amounted to approximately $592,000. Of this amount, $420,000
has been accounted for as deferred financing costs and is
being amortized over the term of the new financing agreements.
The remaining $172,000 has been accounted for as a reduction
in paid-in capital. These amounts have been allocated based on
the proportion of debt to equity raised in the aforementioned
transactions. These amounts were subsequently adjusted due to
the extinguishment of the Series B Convertible Notes. As of
June 30, 2006, remaining costs related to this transaction
amounted to approximately $337,000. Of this amount, $225,000
continued to be amortized as a deferred financing cost and
$112,000 remained as a reduction of additional paid-in capital
as of June 30, 2006. These amounts will be adjusted in
connection with the extinguishment of the Series A Convertible
Notes on July 11, 2006.
On October 31, 2005, the Company retired the Series B
Convertible Notes that were issued to Paribas, Exeter Capital
and Exeter Venture. The principal amount of the Series B
Convertible Notes totaled $4,000,000 as of the retirement
date. The portion of the Series B Convertible Notes held by
Paribas was satisfied by a cash payment of $2,666,667
principal and $40,000 of accrued interest through October 31,
2005. Exeter Venture and Exeter Capital (collectively
"Exeter") held the remaining $1,333,333 of the Series B
Convertible Notes. Exeter exercised their right of conversion
of their notes and, as such, the Company issued to Exeter a
total of 656,168 shares of the Company's Common Stock. In
addition, a cash payment of $20,000 was made to Exeter
relating to accrued interest through October 31, 2005.
On July 11, 2006, the Series A Convertible Notes were
converted into 3,937,008 shares of the Company's common stock
and the debt was retired. In addition, the 393,701 shares of
Preferred Stock were converted into 3,937,010 shares of the
Company's common stock. See Note 7 - Subsequent Events for
further discussion.
The warrants originally issued on January 29, 1999 remain
outstanding at June 30, 2006 at an exercise price of $.001 per
share (convertible into 506,250 shares of common stock). The
warrants were due to expire in January 2009. On July 3, 2006,
Velocity Express Corporation ("Velocity") entered into a
warrant purchase agreement with the Original Note holders. On
July 11, 2006, the warrants were exercised on a cashless basis
for an aggregate exercise price of $506.25 so that Velocity
received 506,075 shares of the Company's common stock. See
Note 7 - Subsequent Events for further discussion.
11
Long-term debt consisted of the following (in thousands) -
JUNE 30, DECEMBER 31,
2006 2005
------------- -------------
Series A Convertible Notes $4,000 $4,000
Capital lease obligation due October 2007 with interest
at 5.45% and collateralized by the related property. 3 7
Seller-financed debt on acquisitions, payable in monthly
installments through May 2009, convertible into
134,193 and 155,197 shares of common stock at June
30, 2006 and December 31, 2005, respectively, at a
weighted average exercise price of $6.15 per share.
Interest is payable at rates ranging between 7.0%
and 9.0%. 1,554 1,837
------------- -------------
5,557 5,844
Less - Current maturities (542) (552)
------------- -------------
$5,015 $5,292
============= =============
(5) LITIGATION:
The Company is, from time to time, a party to litigation arising in the
normal course of its business, including claims for uninsured personal
injury and property damage incurred in connection with its same-day
delivery operations.
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.
In connection with the above matters, the Company has recorded reserves
of $2,133,000 and $555,000 as of June 30, 2006 and December 31, 2005.
The increases in reserves were due largely to a tentative settlement of
an employment tax assessment in the State of California, increases in
certain reserves as a result of continued settlement negotiations for
existing claims and the establishment of new reserves for recently
instituted litigation.
Management believes that none of these actions, including the actions
described above, will have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
(6) NET (LOSS) INCOME PER SHARE:
Basic net (loss) income per share represents net (loss) income divided
by the weighted average shares outstanding. Diluted net income per
share represents net income divided by the weighted average shares
outstanding adjusted for the incremental dilution of potentially
dilutive common shares.
12
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows
(in thousands)-
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ -----------
Basic weighted average
common shares outstanding 10,017 9,356 10,016 9,356
Effect of dilutive securities:
Stock options and warrants - 1,049 - 1,052
Preferred Stock - 3,937 - 3,937
Convertible Notes - 5,906 - 5,906
------------ --------- --------- --------
Diluted weighted average common shares
outstanding 10,017 20,248 10,016 20,251
============ ========= ========= ========
A reconciliation of net (loss) income as reported to net (loss) income
as adjusted for the effect of dilutive securities follows (in
thousands)-
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2006 2005 2006 2005
------------ ---------- ------------ -----------
Net (loss) income, as reported ($801) $626 ($612) $1,054
Effect of dilutive securities:
Interest on Convertible Notes - 129 - 257
------------ ------- --------- ---------
Net (loss) income, as adjusted for the effect
of dilutive securities ($801) $755 ($612) $1,311
============ ======= ========= =========
The following potentially dilutive common shares were excluded from the
computation of diluted net (loss) income per share because the exercise
or conversion price was greater than the average market price of common
shares (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2006 2005 2006 2005
-------------- ------------ ------------ ------------
Stock options and warrants 1,266 1,135 1,409 1,135
Seller financed convertible notes 134 175 139 180
Convertible preferred stock 3,937 - 3,937 -
Subordinated convertible debentures 3,937 - 3,937 -
13
(7) SUBSEQUENT EVENTS:
Entry into a Definitive Merger Agreement
On July 3, 2006, CD&L and Velocity signed a definitive merger agreement
for Velocity to acquire CD&L in a two-step, all cash transaction for
$3.00 per share of common stock.
The merger agreement provides that, upon the terms and subject to the
conditions contained in it, a wholly-owned subsidiary of Velocity
("Sub") will be merged with CD&L, the separate corporate existence of
Sub will cease, CD&L will be the surviving corporation and continue to
be governed by the laws of the State of Delaware, and the corporate
existence of CD&L with all its rights, privileges, immunities, powers,
and franchises shall continue unaffected by the merger. Sub is also a
party to the merger agreement.
At the effective time of the merger, each share of CD&L's common stock
issued and outstanding immediately before the merger, other than
dissenting shares, will be canceled and converted into the right to
receive $3.00 in cash, without interest. The $3.00 amount is subject to
proportionate adjustment so as to maintain an aggregate merger
consideration of approximately $33 million in the event that the total
number of shares of common stock outstanding, or issuable (net of any
exercise or conversion price) upon exercise or conversion of CD&L stock
options outstanding, at the effective time of the merger is more or
less than 11,039,238 shares. No adjustment of the per-share purchase
price need be made as a result of any change in the number of shares
unless such adjustment would exceed $0.01. After the merger is
effective, each holder of a certificate representing shares of our
common stock, other than dissenting shares, will no longer have any
rights with respect to those shares, except for the right to receive
the cash merger consideration. Each share of CD&L's common stock held
by CD&L, Velocity or its subsidiaries at the time of the merger will be
canceled without any payment.
The Company has called for a special meeting on August 17, 2006 to seek
shareholder approval of the merger agreement. If the merger agreement
is approved at the special meeting and there is no litigation with
respect thereto, it is anticipated that the merger will be completed
immediately after the special meeting. Velocity, through its ownership
of common stock acquired under the securities purchase agreements
described below and through its rights under the voting agreement
described below, has or controls the vote of a majority of the shares
of the Company's common stock, and has indicated that it will vote to
approve the merger agreement.
Series A Preferred Stock, Common Stock and Warrant Purchase Agreements
On July 3, 2006, Velocity entered into a Series A Preferred Stock and
Warrant Purchase Agreement with BNP Paribas ("Paribas") and two Series
A Preferred Stock, Common Stock and Warrant Purchase Agreements with
Exeter Capital Partners IV, L.P. ("Exeter IV"), one of which related to
securities purchased on June 30, 2006, by Exeter IV from the United
States Small Business Administration as receiver for Exeter Venture
Lenders, L.P. ("Exeter I") and one relating to our securities held by
Exeter IV prior to that date (collectively, the "preferred purchase
agreements"). Under the preferred purchase agreements, Velocity
purchased the 393,701 shares of the Company's Preferred Stock and the
506,250 warrants from Paribas and Exeter IV and the 656,168 shares of
the Company's common stock held by Exeter IV.
Shortly after consummations of such purchases, Velocity provided notice
of conversion of the Preferred Stock, effective as of July 11, 2006,
into an aggregate of 3,937,010 shares of the Company's common stock,
and exercised the 506,250 warrants on a cashless basis for an aggregate
exercise price of $506.25, so that it received 506,075 shares. As a
result, under the preferred purchase agreements, Velocity acquired, in
the aggregate, 5,099,253 shares of the Company's common stock.
14
Series A Convertible Subordinated Debenture Purchase Agreement
On July 3, 2006, Velocity entered into a Series A Convertible
Subordinated Debenture Purchase Agreement (the "debenture purchase
agreement") with the 14 individuals who held all of the Company's
Series A Convertible Notes in the aggregate principal amount of
$4,000,000, including Albert W. Van Ness, Jr., Chairman and Chief
Executive Officer of CD&L, William T. Brannan, President and a director
of CD&L, Michael Brooks, Group Operations President and a director of
CD&L, Russell Reardon, Chief Financial Officer of CD&L, Mark Carlesimo,
General Counsel of CD&L, Matthew J. Morahan, a director of CD&L, Peter
Young, a director of CD&L, five other officers of subsidiaries of the
Company, a consultant to the Company, and one other individual
(collectively, the "Series A debenture sellers"). Under the debenture
purchase agreement, Velocity purchased the Series A Convertible Notes
for an aggregate price of $12,795,276.
The Series A debenture sellers had been parties to a shareholders
agreement with CD&L and the holders of the Preferred Stock under which
they had a right of first refusal to acquire the Preferred Stock. As a
condition to Velocity's entry into the debenture purchase agreement,
the Series A debenture sellers also entered into an agreement whereby
they waived those rights of first refusal in connection with Velocity's
purchase of the Preferred Stock.
Shortly after the consummation of the debenture purchase, Velocity
converted the Series A debentures into an aggregate of 3,937,008 shares
of the Company's common stock. As a result of this conversion and the
preferred purchase agreement, as of July 11, 2006, Velocity will own
9,036,261 shares of the Company's common stock, representing 49.1% of
the outstanding shares of common stock.
Voting Agreement
As a condition to entering into the merger agreement and the debenture
purchase agreement, Velocity required that each of Albert Van Ness,
Jr., William T. Brannan, Michael Brooks, Russell J. Reardon, Matthew J.
Morahan, Vincent P. Brana (a consultant to the Company and a former
officer) and Jack McCorkell (an officer of one of our subsidiaries)
enter into a voting agreement. Under the voting agreement each such
stockholder agreed to vote in favor of the merger and the merger
agreement and against any action which would result in a breach of the
merger agreement or voting agreement. The voting agreement also
provides that such stockholders will vote against any extraordinary
corporate transaction, sale or transfer of assets, change to the Board
of Directors, change in capitalization, charter or bylaws, change to
the structure or business of CD&L, or any other action which would
potentially interfere, delay or adversely effect the merger or
transactions contemplated thereby. The prohibition does not apply to a
vote for a competing merger offer that the Board determines to be on
more favorable terms than the Velocity merger agreement, provided that
the Board recommends the stockholders do not approve the merger
transaction with Velocity. The voting agreement will terminate upon the
earlier of the termination of the merger agreement, in accordance with
its terms, or the effective date of the merger.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements typically are identified by use of
terms such as "may," "will," "should," "plan," "expect," "believe,"
"anticipate," "estimate" and similar expressions, although some
forward-looking statements are expressed differently. Forward-looking
statements represent our management's judgment regarding future events.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance
that such expectations will prove to be correct. All statements other
than statements of historical fact included in this report regarding
our financial position, business strategy, products, services, markets,
budgets, plans, or objectives for future operations are forward-looking
statements. We cannot guarantee the accuracy of the forward-looking
statements, and you should be aware that our actual results could
differ materially from those contained in the forward-looking
statements due to a number of factors, including the statements under
"Risk Factors" and "Critical Accounting Policies" detailed in our
annual report on Form 10-K for the year ended December 31, 2005, and
other reports filed with the Securities and Exchange Commission
("SEC").
Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all other documents filed by the
Company or with respect to its securities with the SEC are available
free of charge through our website at www.cdl.net. Information on our
website does not constitute a part of this report.
OVERVIEW
The Company is 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. These services are
provided throughout the United States. The Company currently operates
in a single-business segment and thus additional disclosures under
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information, are not required.
The Company offers the following delivery services:
o Rush delivery services, typically consisting of delivering
time-sensitive packages, such as critical parts, emergency
medical devices and legal and financial documents from
point-to-point on an as-needed basis;
o Distribution services, providing same-day delivery for many
pharmaceutical and office supply wholesalers, from
manufacturers to retailers and inter-branch distribution of
financial documents in a commingled system;
o Facilities management, including providing and supervising
mailroom personnel, mail and package sorting, internal
delivery and outside local messenger services; and
o Dedicated contract logistics, providing a comprehensive
solution to major corporations that want the control,
flexibility and image of an in-house fleet with the
economic benefits of outsourcing.
Revenue consists primarily of charges to the Company's customers for
delivery services. These customers are billed as the services are
rendered, mostly on a weekly basis. Recurring charges related to
facilities management or contract logistics services are typically
billed on a monthly basis. The Company's recent revenue growth has been
attributable to the expansion of its current customer base into new
geographical areas. The Company has always had a strong presence in the
Northeast and Southeast regions of the country. As a result of its
nationwide business development program, the Company has increased its
revenue volume on the West coast during the first half of 2006 by 48%
as compared to the first six months of 2005.
16
Cost of revenue consists primarily of independent contractor delivery
costs, other direct pick-up and delivery costs and the costs of
dispatching rush demand messengers. The Company has experienced an
overall increase in cost of revenue as a percent of revenue during the
first six months of 2006 compared to the first six months of 2005. This
reduction in gross margin is primarily due to operational
inefficiencies associated with the high volume of new business on the
West coast compared to last year's first six months.
Selling, general and administrative expense ("SG&A") includes the costs
to support the Company's sales effort and the expense of maintaining
facilities, information systems, financial, legal and other
administrative functions. There was a significant increase in SG&A
during the second quarter of 2006 related to legal costs associated
with the definitive merger agreement entered into with Velocity as well
as settlement costs arising out of a tentative settlement of an
employment tax audit in the State of California. Other factors include
increased rent charges and higher travel costs as a result of opening
new facilities to facilitate its recent expansion into new geographical
locations. In addition, the Company has increased its sales force and
operating personnel significantly in the West coast to manage the
recent revenue growth along with the anticipated growth of the region
going forward.
The Company continues to invest in its infrastructure and is currently
in the development stage of implementing a state-of-the-art,
web-enabled, business information management system. It will provide
the scalability, availability and security required to manage the
future growth of driver, route, tracking and reporting components of
the Company's ground distribution services.
The condensed consolidated financial statements of the Company,
including all related notes, which appear elsewhere in this report,
should be read in conjunction with this discussion of the Company's
results of operations and its liquidity and capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to
accounts receivable, intangible assets, insurance reserves, income
taxes and contingencies. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. For a discussion of the Company's critical accounting
policies, see the Company's Annual Report on Form 10-K/A for 2005.
New Accounting Standards and Pronouncements -
In May 2005, SFAS No. 154, "Accounting Changes and Error Corrections"
("SFAS 154") was issued. SFAS 154 replaces APB Opinion No. 20,
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements", and changes the requirements for the
accounting for and reporting of a change in accounting principle. This
statement is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Company has
not had any accounting changes or corrections of errors during 2006.
17
In December 2004, SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123(R)") was issued. SFAS 123(R) revises SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes
APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS
123, as originally issued in 1995, established as preferable a fair
value-based method of accounting for share-based payment transactions
with employees and directors. However, SFAS 123 as amended permitted
entities the option of continuing to apply the intrinsic value method
under APB 25 that the Company had been using, as long as the notes to
the financial statements disclosed what net income would have been had
the preferable fair value-based method been used. SFAS 123(R) requires
that the compensation cost relating to all share-based payment
transactions, including employee and director stock options, be
recognized in the historical financial statements. That cost is
measured based on the fair value of the equity or liability instrument
issued and amortized over the related service period. The Company has
adopted the guidance in SFAS 123(R) effective January 1, 2006. As such,
the accompanying condensed consolidated statements of operations for
the three and six months ended June 30, 2006 includes $151,000 of
compensation expense in SG&A related to the fair value of options
granted under the Company's stock-based employee and director
compensation plans which is being amortized over the service period in
the financial statements, as required by SFAS 123(R). These awards have
been classified as equity instruments, and as such, a corresponding
increase of $151,000 has been reflected in additional paid-in capital
in the accompanying balance sheet as of June 30, 2006.
18
RESULTS OF OPERATIONS
INCOME AND EXPENSE AS A PERCENTAGE OF REVENUE
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2006 2005 2006 2005
---------------- -------------- ------------- --------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross profit 18.9% 20.0% 18.7% 19.9%
Selling, general and
administrative expenses 20.3% 16.7% 18.6% 16.9%
Depreciation and amortization 0.5% 0.5% 0.5% 0.5%
Other (income) expense, net 0.0% 0.0% 0.0% 0.0%
Interest expense 0.7% 0.7% 0.6% 0.7%
(Loss) income before provision for
income taxes (2.6%) 2.1% (1.0%) 1.8%
(Benefit) provision for income taxes (1.3%) 0.9% (0.5%) 0.8%
Net (loss) income (1.3%) 1.2% (0.5%) 1.0%
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 2005
Revenue for the six months ended June 30, 2006 increased by
$15,788,000, or 14.8%, to $122,350,000 from $106,562,000 for the six
months ended June 30, 2005. This increase in revenue includes
$12,600,000 from existing customers and $6,000,000 from new customers.
These increases were partially offset by lost business of $2,800,000.
Cost of revenue increased by $14,039,000, or 16.4%, to $99,453,000 for
the six months ended June 30, 2006 from $85,414,000 for the six months
ended June 30, 2005. Cost of revenue for the six months ended June 30,
2006 represented 81.3% of revenues as compared to 80.1% for the same
period in 2005. If the gross profit margin had remained the same as
last year's 19.9%, the $22,897,000 gross profit for the six months
ended June 30, 2006 would have been approximately $1,450,000 higher.
The reduced margin was due primarily to new business start-up costs and
competitive rate pressures. Our pricing to new and existing customers
has not kept pace with our increased driver costs. The significant
increase in fuel costs has required us to pay more to attract and
retain contract drivers.
SG&A increased by $4,765,000, or 26.5%, to $22,733,000 for the six
months ended June 30, 2006 from $17,968,000 for the same period in
2005. Stated as a percentage of revenue, SG&A was 18.6% for the six
months ended June 30, 2006 as compared to 16.9% for the same period in
2005. The increase in SG&A was due primarily to the following:
Increase from 2005
-------------------------
Legal fees/reserves $1,970,000 400.9%
Consulting services 349,000 80.9%
Premises rent 455,000 16.1%
Compensation, other than stock-based 421,000 5.0%
Provision for bad debts 715,000 398.7%
Travel and entertainment 249,000 29.0%
Stock-based compensation 151,000 (1)
(1) The Company implemented SFAS 123(R) during the first quarter of
2006. As such, there was no comparable expense recorded in 2005.
19
The increase in legal fees related to costs incurred in connection with
the definitive merger agreement entered into with Velocity Express
Corporation. In addition, a $980,000 accrual has been established
during the second quarter 2006 related to a tentative settlement of an
employment tax audit in the State of California.
Of the $349,000 increase in consulting services, $250,000 relates to
fees incurred in connection with the merger agreement with Velocity.
The remaining increase in consulting fees relates to modifications made
to the PeopleSoft financial reporting system during 2006. The provision
for bad debts for the six months ended June 30, 2006 was $536,000. Of
this amount, $300,000 related to the write-off of the Global Delivery
Systems note receivable obtained in connection with the settlement
agreement in September 2005. During the six months ended June 30, 2005,
there was a reduction in the provision for doubtful accounts based on
the historical effectiveness of our receivables management. The
increases in compensation (other than stock-based), premises rent and
travel and entertainment all relate primarily to additional facilities
opened on the West coast and Southeast region as a result of the
expansion into new geographic locations.
Depreciation and amortization was $651,000 as of June 30, 2006 as
compared to $550,000 for the same period in 2005. This increase relates
to the depreciation of fixed assets purchased in the latter part of
2005 and the first half of 2006.
Interest expense remained consistent at $757,000 for the six months
ended June 30, 2006 as compared to $756,000 for the same period in
2005.
As a result of the factors discussed above, income before provision for
income taxes decreased by $3,111,000 to a loss of $1,228,000 for the
six months ended June 30, 2006 from income of $1,883,000 for the six
months ended June 30, 2005.
Provision for income taxes decreased by $1,445,000 to a benefit of
$616,000 for the six months ended June 30, 2006 as compared to a
provision of $829,000 for the same period in 2005. This was due to the
decrease in income before provision for income taxes discussed above.
The effective tax rate for the six months ended June 30, 2006 was 50%;
without the $39,000 of deferred tax benefit related to the SFAS 123(R)
stock-based compensation cost, the rate would have been 47% as compared
to 44% as of June 30, 2005.
Net income decreased by $1,666,000 to a loss of $612,000 for the six
months ended June 30, 2006 as compared to income of $1,054,000 for the
same period in 2005. This was due to the factors discussed above.
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2005
Revenue for the three months ended June 30, 2006 increased by
$7,704,000, or 14.2%, to $61,911,000 from $54,207,000 for the three
months ended June 30, 2005. This increase in revenue includes
$6,400,000 from existing customers and $3,100,000 from new customers.
These increases were partially offset by lost business of $1,400,000.
Cost of revenue increased by $6,853,000, or 15.8%, to $50,220,000 for
the three months ended June 30, 2006 from $43,367,000 for the three
months ended June 30, 2005. Cost of revenue for the three months ended
June 30, 2006 represented 81.1% of revenue as compared to 80.0% for the
same period in 2005. If the gross profit margin had remained the same
as last year's 20.0%, the $11,691,000 gross profit for the three months
ended June 30, 2006 would have been approximately $691,000 higher. The
reduced margin was due primarily to new business start-up costs and
competitive rate pressures. Our pricing to new and existing customers
has not kept pace with our increased driver costs. The significant
increase in fuel costs has required us to pay more to attract and
retain contract drivers.
20
SG&A increased by $3,453,000, or 38.0%, to $12,541,000 for the three
months ended June 30, 2006 from $9,088,000 for the same period in 2005.
Stated as a percentage of revenue, SG&A was 20.3% for the three months
ended June 30, 2006 as compared to 16.7% for the same period in 2005.
The increase in SG&A was due primarily to the following:
Increase from 2005
------------------------
Legal fees/reserves $1,693,000 496.5%
Consulting services 321,000 134.4%
Premises rent 297,000 21.4%
Compensation, other than stock-based 143,000 3.3%
Provision for bad debts 737,000 460.2%
Travel and entertainment 102,000 20.7%
Stock-based compensation 56,000 (1)
(1) The Company implemented SFAS 123(R) during the first quarter of
2006. As such, there was no comparable expense recorded in
2005.
The increase in legal fees related to costs incurred in connection with
the definitive merger agreement entered into with Velocity Express
Corporation. In addition, a $980,000 accrual has been established
during the second quarter 2006 related to a tentative settlement of an
employment tax audit in the State of California.
Of the $321,000 increase in consulting services, $250,000 relates to
fees incurred in connection with the merger agreement with Velocity.
The remaining increase in consulting fees relates to modifications made
to the PeopleSoft financial reporting system during 2006. The provision
for bad debts for the second quarter of 2006 was $577,000. Of this
amount, $300,000 related to the write-off of Global Delivery Systems
note receivable obtained in connection with the settlement agreement in
September 2005. During the second quarter of 2005, there was a
reduction in the provision for doubtful accounts based on the
historical effectiveness of our receivables management. The increases
in compensation (other than stock-based), premises rent and travel and
entertainment all relate primarily to additional facilities opened on
the West coast and Southeast region as a result of the expansion into
new geographic locations.
Depreciation and amortization increased by $56,000, or 20.2%, to
$333,000 for the three months ended June 30, 2006 from $277,000 for the
same period last year. This increase relates to the depreciation of
fixed assets purchased in the latter part of 2005 and the first half of
2006.
Interest expense increased by $35,000 to $401,000 for the three months
ended June 30, 2006 as compared to $366,000 for the same period last
year primarily as a result of increased borrowings on the line of
credit as compared with last year coupled with the increased prime rate
during 2006.
As a result of the factors discussed above, income before provision for
income taxes decreased by $2,702,000 to a loss of $1,584,000 for the
three months ended June 30, 2006, as compared to income of $1,118,000
for the same period in 2005.
Provision for income taxes decreased by $1,275,000 to a benefit of
$783,000 for the three months ended June 30, 2006, as compared to a
provision of $492,000 for the same period in 2005. This was due to the
decrease in income before provision for income taxes discussed above.
The effective tax rate for the three months ended June 30, 2006 was
50%; without the $39,000 of deferred tax credit related to the SFAS
123(R) stock-based compensation cost, the rate would have been 47% as
compared to 44% as of June 30, 2005.
Net income decreased by $1,427,000 to a net loss of $801,000 for the
three months ended June 30, 2006 as compared to net income of $626,000
for the same period in 2005. This was due to the factors discussed
above.
21
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company was indebted to Paribas and Exeter in
the sum of $11.0 million pursuant to a subordinated note bearing
interest at 12% per annum (see Senior Notes in Note 4). On April 14,
2004, an agreement was reached between Paribas, Exeter and the
Investors as to the financial restructuring of the Senior Notes.
Paribas agreed to convert a portion of its existing debt due from CD&L
into equity and to modify the terms of its subordinated note if the
investors purchased a portion of the note and accepted similar
modifications. The loan agreement that governed the Senior Notes was
amended and restated to reflect the terms of the substituted Series A
Convertible Notes and the Series B Convertible Notes, including the
elimination of most financial covenants. The principal amount of the
Convertible Notes was due in a balloon payment at the maturity date of
April 14, 2011. The Convertible Notes bore interest at a rate of 9% for
the first two years of the term, 10.5% for the next two years and 12%
for the final three years of the term. The Series B Convertible Notes
were extinguished on October 31, 2005 and the Series A Convertible
Notes were extinguished on July 11, 2006, as described below. At June
30, 2006 and 2005, long-term debt included $4,000,000 of Series A
Convertible Notes. At June 30, 2005, long-term debt also included
$4,000,000 of Series B Convertible Notes.
On October 31, 2005, the Company retired the Series B Convertible Notes
that were issued to Paribas, Exeter Capital and Exeter Venture. The
principal amount of the Series B Convertible Notes totaled $4,000,000
as of the retirement date. The portion of the Series B Convertible
Notes held by Paribas was satisfied by a cash payment of $2,666,667
principal and $40,000 of accrued interest through October 31, 2005.
Exeter Venture and Exeter Capital (collectively "Exeter") held the
remaining $1,333,333 of the Series B Convertible Notes. Exeter
exercised their right of conversion of their notes and, as such, the
Company issued to Exeter a total of 656,168 shares of the Company's
common stock. In addition, a cash payment of $20,000 was made to Exeter
relating to accrued interest through October 31, 2005.
On July 11, 2006, the Series A Convertible Notes were converted into
3,937,008 shares of the Company's common stock and the debt was
retired. In addition, the 393,701 shares of Preferred Stock were
converted into 3,937,010 shares of the Company's common stock.
The Company's working capital decreased by $584,000 from $6,365,000 as
of December 31, 2005 to $5,781,000 as of June 30, 2006. Cash and cash
equivalents decreased by $294,000 to $543,000 as of June 30, 2006. Cash
of $259,000 was provided by operations primarily due to a $553,000
reduction in prepaid expenses relating to the insurance financing
arrangements. Cash of $624,000 was used in net investing activities for
capital expenditures discussed below and cash of $71,000 was provided
by net financing activities from additional short-term net borrowings.
Capital expenditures amounted to $647,000 and $443,000 for the six
months ended June 30, 2006 and 2005, respectively. Increased capital
expenditures in the first half of 2006 related to the purchase of
scanners and improving the functionality of our internal network.
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 which was due to expire
on June 27, 2005 but was extended through January 31, 2006, provided
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 was based on eligible amounts of accounts receivable, as
defined, up to a maximum amount of $15,000,000 and was collateralized
by substantially all of the assets, including certain cash balances,
accounts receivable, equipment, leasehold improvements and general
intangibles of the Company and its subsidiaries.
As of January 31, 2006, CD&L and Bank of America, N.A. (successor by
merger to Fleet Capital Corporation) entered into a new agreement (the
"Bank of America Facility") which replaced the prior Fleet Facility.
The Bank of America Facility, which expires on September 30, 2008,
continues to provide CD&L with standby letters of credit, prime rate
based loans at the bank's prime rate, as defined (8.25% at June 30,
2006), and LIBOR based loans at the bank's LIBOR rate, as defined, plus
200 basis points. Credit availability is based on eligible amounts of
accounts receivable, as defined, up to a maximum amount of $20,000,000
and is collateralized by substantially all of the assets, including
certain cash balances, accounts receivable, equipment, leasehold
improvements and general intangibles of the Company and its
subsidiaries. The maximum borrowings outstanding under the Bank of
America Facility during the six months ended June 30, 2006 were
$10,872,000. As of June 30, 2006, the Company had total cash on hand
and borrowing availability of $5,670,000 under the Bank of America
Facility, after adjusting for restrictions related to outstanding
standby letters of credit of $4,582,000 and minimum availability
requirements.
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Under the terms of the Bank of America Facility, the Company is
required to maintain certain financial ratios and comply with other
financial conditions. The Bank of America 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. At June 30, 2006, the Company
was in violation of certain of the financial covenants due to the
reported net loss for the second quarter. On August 11, 2006, the
Company obtained a waiver from its lender for the covenant violation.
Bank of America has consented to the merger with Velocity and the
revolving loan balance will be paid in full and closed on the merger
date.
Costs incurred relative to the establishment of the Bank of America
Facility amounted to approximately $94,000. This has been accounted for
as deferred financing costs and is being amortized over the term of the
new financing agreement. As of June 30, 2006, the unamortized portion
of the deferred financing costs amounted to approximately $77,000.
The Company retains a risk of incurring uninsured losses. There can be
no assurances that the Company's risk management policies and
procedures will minimize future uninsured losses or that a material
increase in frequency or severity of uninsured losses will not occur
and adversely impact the Company's future consolidated financial
results.
The Company had an accumulated deficit of ($3,668,000) as of June 30,
2006. On numerous occasions, the Company has had to amend and obtain
waivers of the terms of its credit facilities and senior debt as a
result of covenant violations or for other reasons. On April 14, 2004,
the Company restructured its senior debt and related covenants. The
restructuring included an agreement among the Company, its lenders and
certain members of CD&L management and others which improved the
Company's short-term liquidity and reduced interest expense. The
restructuring eased the financial covenants to which the Company was
subject. However, if the Company were to fail to meet such covenants in
the future, there can be no assurances that the Company's lenders would
agree to waive any future covenant violations, renegotiate and modify
the terms of their loans, or further extend the maturity date, should
it become necessary to do so. Further, there can be no assurances that
the Company will be able to meet its revenue, cost or income
projections, upon which the debt covenants are based.
Management believes that cash flows from operations and its borrowing
capacity are sufficient to support the Company's operations and general
business and capital requirements through at least June 30, 2007. Such
conclusions are predicated upon sufficient cash flows from operations
and the continued availability of a revolving credit facility. The
risks associated with cash flows from operations are mitigated by the
Company's low gross profit margin. Unless extraordinary, decreases in
revenue should be accompanied by corresponding decreases in costs,
resulting in minimal impact to liquidity. The risks associated with the
revolving credit facility are as discussed above.
INFLATION
While inflation has not had a material impact on the Company's results
of operations for the periods presented herein, recent fluctuations in
fuel prices can and do affect the Company's operating costs.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the effect of changing interest rates. At
June 30, 2006, the Company's debt consisted of approximately $5,557,000
of fixed rate debt with a weighted average interest rate of 9.35% and
$9,371,000 of variable rate debt with a weighted average interest rate
of 7.72%. The variable rate debt consists of borrowings of revolving
line of credit debt at the bank's prime rate (8.25% at June 30, 2006).
If interest rates on variable rate debt were to increase by 83 basis
points (one-tenth of the weighted average interest rate at June 30,
2006), the net impact to the Company's results of operations and cash
flows for the six months ended June 30, 2006 would be a decrease of
income before provision for income taxes and cash flows from operating
activities of approximately $36,000. Maximum borrowings of revolving
line of credit debt during the six months ended June 30, 2006 were
$10,872,000.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the Company's
most recently completed fiscal quarter covered by this report, the
Company carried out an evaluation, with the participation of the
Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-15. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the Securities
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC rules and forms.
(b) Changes in internal controls over financial reporting. There have
been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter to
which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1A - Risk Factors
Aside from the risk factor noted below, there have not been any
material changes in the risk factors that were previously disclosed in
Item 1A to Part I of the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
BASED ON CURRENT DISCUSSIONS WITH THE SEC, WE MAY BE REQUIRED TO AMEND
PRIOR FILINGS.
The SEC has asked the Company to provide additional support for its
accounting for the March 1, 2004 transaction wherein the Company
repurchased certain Indiana-based assets and liabilities originally
sold to First Choice Courier in June 2001. Consideration for the
repurchase included cancellation of a promissory note receivable owed
by First Choice plus a three year contingent earn-out based on retained
revenue. The majority of the purchase price related to the value of the
First Choice customer list. An intangible asset of $1,602,000 was
recorded as of the purchase date. The asset is being amortized over
five years. The SEC is questioning if all, or part, of the purchase
price should have been accounted for as forgiveness of debt.
On July 12, 2006, the Company filed Amendment No. 1 to its Annual
Report on Form 10-K for the year ended December 31, 2005. This
amendment reflected a change in the description of the First Choice
transaction and resolved the previously disclosed SEC comment.
ITEM 4 - Submission of Matters to a Vote of Security Holders
On June 7, 2006, the Company held its annual meeting of stockholders.
The following sets forth a brief description of each matter which was
acted upon, as well as the votes cast for, against or withheld for each
such matter, and, where applicable, the number of abstentions and
broker non-votes for each matter:
1. Election of Directors.
Name of Director Votes For Withheld
------------------------- --------- --------
Albert W. Van Ness, Jr. 8,391,349 250,816
Thomas E. Durkin III 8,336,898 305,267
John A. Simourian 8,381,996 260,169
Peter Young 8,382,890 259,275
2. Approval of the Amendment to the 2000 Stock Incentive Plan.
Votes For: 1,508,538
Votes Against: 527,475
Abstentions: 13,712
Broker Non-Votes: 6,592,440
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ITEM 6 - Exhibits
(a) Exhibits
10.1 Form of Amended and Restated Employment Agreement dated April
14, 2004 with William T. Brannan (Employment Agreements of
Albert W. Van Ness, Jr., Michael Brooks, Russell J. Reardon,
and Mark T. Carlesimo are in the same form).
31.1 Certification of Albert W. Van Ness, Jr. Pursuant to Exchange
Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Russell J. Reardon Pursuant to Exchange Act
Rules 13a- 14(a) and 15d-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Albert W. Van Ness, Jr. Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Russell J. Reardon Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 16, 2006 CD&L, INC.
By: \s\ Russell J. Reardon
------------------------------
Russell J. Reardon
Vice President and
Chief Financial Officer
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