Item 1. Business
Consolidated Delivery & Logistics, Inc. was founded in June 1994 to create a national, full service, time critical ground and air delivery and logistics company. In November 1995, in conjunction with the Company's initial public offering (the "IPO" , "Offering") the Company acquired eleven time critical ground and air delivery businesses in fifty-two cities across the United States. Subsequent to the IPO and through December 31, 1998, the Company acquired eleven additional time critical ground and air delivery businesses in fourteen cities. See "--Recent Acquisitions."
The Company is a leading provider of customized time critical delivery services to a wide range of commercial, industrial and retail customers. The Company's ground delivery operations are concentrated on the East Coast and in the Midwest with a strategic presence on the West Coast. The Company's air delivery services are provided throughout the United States and to major cities around the world.
The Company's ground delivery services are generally divided between rush delivery, dedicated contract logistics, routed services and facilities management. Rush delivery service typically consists of delivering time-sensitive packages, such as critical machine parts or emergency medical devices, point-to-point on an as needed basis. Routed service provides, on a recurring and often daily basis, deliveries from pharmaceutical suppliers to pharmacies, from manufacturers to retailers, and the interbranch distribution of financial documents in a commingled system. Dedicated contract logistics service provides 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.
The Company's air delivery services are generally divided into customized heavy freight, next-flight-out and international shipments. Customized heavy freight service typically involves the movement of heavyweight and oversize shipments from businesses such as printers and computer distributors who require extra handling, late cut-off times or time-definite delivery windows. Next flight out service provides such businesses as advertising agencies and entertainment companies the ability to ship their product on the next available flight to be delivered directly to their customer. International service provides companies the ability to have additional attention, shorter transit time or time-definite delivery windows anywhere in the world.
Industry Overview
The ground and air delivery industry in the United States is composed largely of companies providing same-day, next-day and two-day services. The Company primarily services the same-day, time critical delivery market. In contrast, the next-day and two-day delivery markets are dominated by large national entities, such as United Parcel Service, Inc. ("UPS") and FedEx Corp. ("FedEx").
The Company believes that the same-day delivery industry, which is currently serviced by a fragmented system of approximately 10,000 companies that include only a small number of large regional or national operators, is undergoing substantial growth and consolidation. The Company believes that several factors, including the following, are driving the growth and consolidation of the industry:
Outsourcing and Vendor Consolidation. Commercial and industrial concerns, which are major consumers of same-day delivery services, have continued to follow the trend of concentrating on their core business by outsourcing non-core activities. Businesses also are increasingly seeking 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, larger national and international companies are looking toward decentralized distribution systems. The Company believes that significant opportunities exist for larger regional or national carriers that are able to provide a full range of services to such businesses.
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 such services. The use of facsimile and the internet have increased the processing of information and transactions such that the requirements for immediate delivery of a wide range of critical items has become commonplace. This practice increases demand for same-day, time critical delivery services
New Market Opportunities. The significant growth in Internet, catalog, at-home shopping and in-home medical care present substantial expansion opportunities for companies capable of economically providing more customized and reliable services.
Services
The Company provides a full range of customized, time-critical ground and air delivery service options.
Ground Delivery
Rush. In providing rush or service on demand, CDL messengers and drivers respond to customer requests for immediate pick up and delivery of time-sensitive packages. The Company generally offers one-, two- and four-hour service, seven days a week, twenty-four hours a day. Typical customers include commercial and industrial companies, hospitals and service providers such as accountants, lawyers, advertising and travel agencies and public relations firms.
Scheduled. The Company's scheduled delivery services are provided on a recurring and often daily basis. The Company typically picks up or receives 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 interbranch distribution of financial documents, payroll data and other time-critical documents for banks, financial institutions and insurance companies. The Company also provides these services to large retailers for home delivery, including large cosmetic companies, door-to-door retailers, catalog marketers, home health care distributors and other direct sales companies.
Facilities Management. The Company provides mailroom management services, including the provision and supervision of mailroom personnel, mail and package sorting, internal delivery and outside local messenger services. Typical customers include commercial enterprises and professional firms.
Dedicated Contract Logistics. CDL offers efficient and cost effective dedicated delivery solutions, including, but not limited to, fleet replacement solutions, dedicated delivery systems and transportation systems management services. These services provide major pharmaceutical wholesalers, office product companies and financial institutions with the control, flexibility and image of an "in-house fleet" with all of the economic benefits of outsourcing.
Air Services
The Company provides next-flight-out (rush) and scheduled air courier and airfreight services to its customers, both domestically and internationally. The services provided include arranging for (i) the transportation of a shipment from the customer's location to the airport, (ii) air transportation, and (iii) the delivery of the shipment to its ultimate destination. In order to meet the
needs of its customers, the Company has established relationships with many major airlines and large airfreight companies from which the Company purchases cargo space on an as-needed basis.
Operations
Overview
The Company's Ground and Air Divisions are currently managed and evaluated separately. The divisions have operations centers staffed by dispatchers, as well as order entry and other operations personnel. The Ground and Air Divisions operate from fifty eight leased facilities in twenty two states across the country.
Ground Delivery
Coordination and deployment of delivery personnel is accomplished either through communications systems linked to the Company's computers, through pagers, by radio or telephone. A dispatcher coordinates shipments for delivery within a specific time frame. Shipments are routed according to the type and weight of the shipment, the geographic distance between the origin and destination and the time allotted for the delivery. In the case of scheduled deliveries, routes are designed to minimize the unit costs of the deliveries and to enhance route density. The Company is currently installing new hardware and software systems designed to enhance and centralize the reporting and tracking of shipments through the ground system as well as to simplify the process of designing and scheduling delivery routes. See Year 2000 Compliance in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Air Services
The Company's air courier and airfreight service begins with a customer placing an order, which is then dispatched for pickup. A tracking number is assigned to the shipment and entered into the Company's computer system. The shipment is then routed based on delivery specifications, destination and timing considerations. At the final destination, a "proof of delivery" is obtained to conclude and confirm the delivery, at which time the customer is invoiced.
Sales and Marketing
The Company believes that a direct sales force most effectively reaches its customers for same-day, time critical delivery services and, accordingly, the Company does not currently engage in mass media advertising. The Company markets directly to individual customers by designing and offering customized service packages after determining a customer's specific delivery and distribution requirements. The Company is implementing a coordinated "major account" strategy by building on established relationships with regional and national customers. The Company also employs certain direct response marketing techniques.
Many of the services provided by the Company, such as facilities management, dedicated contract logistics and routed delivery services, are determined on the basis of competitive bids. However, the Company believes that quality and service capabilities are also important competitive factors. In certain instances, the Company has obtained business by offering a superior level of service, even though it was not the low bidder for a particular contract. The Company derives a substantial portion of its revenues from customers with whom it has entered into contracts. Virtually all scheduled dedicated vehicle and facilities management services are provided pursuant to contracts. Most of these contracts may be terminated by the customer on relatively short notice without penalty.
Competition
The market for the Company's delivery service is highly competitive. The Company believes that the principal competitive factors in the markets in which it competes are reliability, quality, breadth of service and price. CDL competes on all such factors. Most of the Company's competitors in the time-critical ground and air delivery market are privately held companies that operate in only one location or in a limited service area. However, there is a growing trend toward consolidation in the industry.
In addition to the time-critical delivery services provided by CDL, customers also utilize next-day and second-day services. The market for next-day and second-day services is dominated by nationwide network providers, which have built large, capital-intensive distribution channels that allow them to process a high volume of materials. These companies typically have fixed deadlines for next-day or second-day delivery services. In contrast, the Company specializes in on-demand, next-flight-out deliveries or services which, by their nature, are not governed by rigid time schedules. If a customer is unable to meet a network provider's established deadline, the Company can pick up the shipment, put it on the next available flight and deliver it, in some cases, before the network provider's scheduled delivery time. The Company's services are available twenty-four hours a day, seven days a week.
The Company obtains space on scheduled airline flights to provide its air services and accordingly does not have to acquire or maintain an expensive fleet of airplanes. As a result, the Company can provide a more flexible, specialized service to its customers without incurring the high fixed overhead that the larger network providers must incur.
Acquisitions and Divestitures
In November 1995 the Company commenced operations simultaneously with the acquisition of eleven companies providing same-day delivery and logistics services. The aggregate consideration paid by the Company was approximately $29.6 million in cash and 2,935,702 shares of Common Stock, par value $.001 per share (the "Common Stock"), for an aggregate value of approximately $67.8
million. In addition to the acquisition of the eleven companies, CDL acquired certain additional assets from two companies in transactions accounted for as purchases. The assets acquired in those transactions were not material to CDL.
In 1996, the Company acquired five additional businesses aggregating approximately $15.6 million in annual revenues. The aggregate purchase price paid by the Company for these businesses was approximately $3.3 million, consisting of a combination of cash, seller-financed debt and shares of Common Stock. The purchase price was subsequently reduced by approximately $616,000 due to actual revenue not reaching projected revenue as stipulated in the purchase agreements. Each of the transactions has been accounted for as a purchase.
In 1997, the Company did not make any acquisitions and instead focused on internal growth. Consistent with the change in strategic focus, in January 1997, the Company sold its contract logistics subsidiary to David Mathia, its founder and president, in exchange for 137,239 shares of the Company's common stock. In connection with the sale, the Company recorded a gain of approximately $816,000 before the effect of Federal and state income taxes. During December 1997, the Company sold its direct mail business for $850,000 in cash and notes. In connection with the sale, the Company recorded a gain of approximately $23,000 net of Federal and state income taxes of approximately $15,000. Accordingly, the direct mail business (which reflected income of $171,000 in 1996 and a loss of $1.2 million in 1997) has been reclassified as discontinued operations in the accompanying consolidated financial statements.
In 1998 the Company acquired four additional same-day, time critical delivery businesses with aggregate annual revenues of approximately $25.1 million. The aggregate purchase price paid for these businesses was $14.5 million consisting of a combination of cash, shares of Common Stock, and seller-financed debt. Each of the transactions has been accounted for as a purchase. - See Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations.
In February 1999 CDL acquired an air delivery company with annual revenues of approximately $14.9 million. The acquisition was accounted for as a purchase. The price paid for this business was approximately $5.9 million consisting of a combination of cash, shares of Common Stock and seller financed debt. Under the terms of the agreement there is the potential for up to $520,000 to be paid upon the accomplishment of certain financial and operational objectives.
Regulation
The Company's delivery operations are subject to various state and local regulations and, in many instances, require permits and licenses from state authorities. To a limited degree, state and local authorities have the power to regulate the delivery of certain types of shipments and operations within certain geographic areas. Interstate and intrastate motor carrier operations are also subject to safety requirements prescribed by the United States Department of Transportation (the "DOT") and by State Departments of Transportation. The Company's failure to comply with the applicable regulations could result in substantial fines or possible revocation of one or more of the Company's operating permits.
Safety
The Company seeks to ensure that all employee drivers meet safety standards established by the Company and its insurance carriers as well as the DOT. In addition, where required by the DOT or state or local authorities, the Company requires independent owner/operators utilized by the Company to meet certain specified safety standards. The Company reviews prospective drivers in an effort to ensure that they meet applicable requirements.
Employees and Independent Contractors
At December 31, 1998, the Company employed approximately 3,500 people, 2,400 as drivers or messengers, 600 in operations, 300 in clerical and administrative positions, 60 in sales and 140 in management. The Company is not a party to any collective bargaining agreements, although the Company is subject to union organizing activity from time to time. The Company also had contracts with approximately 1,400 independent contractor drivers as of December 31, 1998. The Company has not experienced any work stoppages and believes that its relationship with its employees and independent contractor drivers is good. See "Risk Factors - Independent Contractors and Employee Owner/Operators."
Risk Factors
In reading this report, you should consider the following risks carefully. The risks described below are not the only ones that we face. Additional risks about which we do not yet know or that we currently think are immaterial may also impair our business operations. Our business, operating results or financial condition could be materially adversely affected by any of the following risks. The trading price of our common stock could decline due to any of these risks. You should also refer to the other information set forth in this Report. This Report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases you can identify forward-looking statements by terminology such as "may," "will," "expect," "believe," "intend," "anticipate," "estimate," or similar words. These statements are only predictions and are based on our current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Actual results and events may vary materially from those discussed in the forward looking statements. We discuss risks and uncertainties that might cause such a difference below and elsewhere in this Report.
Limited Combined Operating History
We conducted no operations and generated no revenue prior to our IPO in November, 1995. At that time, we acquired eleven companies in the same-day delivery and logistics business. Since then, we have acquired several additional businesses. Prior to their acquisition by us, the companies that we have acquired were operated as independent entities. The process of integrating the operations of these businesses into our business may involve unforeseen difficulties and may require a significant amount of our financial and other resources, including management time. We cannot assure you that we will be able to integrate the operations of these businesses successfully into our operations. In addition, to manage the combined enterprise on a profitable basis we must conform all acquired companies into certain necessary common systems and procedures, including computer and accounting systems. We cannot be certain that we will successfully institute these common systems and procedures for all acquired companies. Our inability to integrate or successfully manage the companies we have acquired or acquire in the future could have a material adverse effect on our business, financial condition and results of operations.
Ability to Manage Growth
We expect to expend significant time and effort in expanding our business and acquiring other businesses. This growth may place a significant strain on our resources. We cannot be certain that our systems, procedures and controls will be adequate to support our operations as they expand. Any future growth also will impose significant additional responsibilities on members of our senior management, including the need to identify, recruit and integrate new senior level managers and executives. We cannot be certain that we can identify and retain such additional managers and executives. As a result, we cannot assure you that we will be able to expand our business or manage any future growth effectively and profitably.
Risks Related to Our Acquisition Strategy
In 1997 we made no acquisitions. One of our strategies for 1998, however, was to increase our revenues and profitability and expand our markets through the acquisition of selected companies in the same-day ground and air delivery business. The Company added 4 such businesses in 1998 and intends to continue its acquisition activity into 1999. Consistent with that plan, CDL acquired an air delivery company in February 1999. We may not, however, be able to identify, acquire or manage profitable additional businesses or integrate successfully any acquired businesses without substantial costs, delays or other operational or financial problems. Acquisitions involve a number of special risks, including:
o Possible adverse effects on our operating results and the timing of those results; o Diversion of management's attention; o Dependence on retaining, hiring and training of key personnel; o Risks associated with unanticipated problems or legal liabilities; and o The realization of intangible assets.
Some or all of these additional risks could have a material adverse affect on our business, financial condition and results of operations, especially in the fiscal quarters immediately following the acquisition. If we are unable to acquire additional same-day delivery companies or integrate those businesses successfully, our ability to expand our operations and increase our revenues and profitability could be reduced significantly.
Risks Related to Acquisition Financing
We cannot readily predict the timing, size and success of our acquisition efforts or the capital we will need for these efforts. We currently intend to finance future acquisitions by using a combination of our common stock, notes and cash. If the common stock does not maintain a sufficient market value, or if the owners of the businesses we wish to acquire are unwilling to accept common stock as part of the purchase price, we may be required to use more of our cash resources, if available, to maintain our acquisition program.
Using cash for acquisitions limits our financial flexibility and makes us more likely to seek additional capital through borrowing money or selling stock. The Company completed a $15 million private placement of senior subordinated notes and warrants in January 1999 to be used primarily to finance acquisitions.The Company may not be able to obtain the additional cash we will need for our future acquisition program on acceptable terms, or at all. This could have a material adverse effect on our business, financial condition and results of operations. In addition, our Revolving Credit Facility currently restricts our ability to make acquisitions.
Risks Associated With the Same-Day Delivery Industry; General Economic Conditions
Our revenues and earnings are especially sensitive to events that affect the delivery services industry, including:
o Extreme weather conditions; o Equipment failures o Economic factors affecting our significant customers; o Increases in fuel prices; and o Shortages of or disputes with labor.
Any of these factors could make it more difficult for us to service our clients effectively.
Demand for our services may also be negatively impacted by down turns in the level of general economic activity and employment
Dependence on Technology
Our business is dependent upon several different information and telecommunications technologies. We have entered into a contract with Computer Associates, Inc. in March, 1999 to develop new software to facilitate order processing and tracking. If we are not able to process transactions accurately and quickly, we may lose our customers and our reputation may be diminished. We intend to integrate these separate operating systems of our subsidiaries into an integrated company-wide system. We may encounter unexpected delays and costs in integrating and converting these systems. We may be unable to complete our software development plan in a timely or economic manner. In addition, the developed software may fail to perform the order processing and tracking services contemplated by our information technology strategy or customer demand for the intended software applications may decrease or be insufficient to support the technology related capital investment we make. This could have a material adverse effect on our business, financial condition or results of operations.
Independent Contractors and Employee Owners/Operators
Federal and state authorities have from time to time asserted that independent contractors in the transportation industry, including those used by the Company, are employees rather than independent contractors. We believe that the independent contractors we use are not employees under existing interpretations of Federal and state laws. Federal and state authorities could challenge this position and laws, including tax laws, and interpretations of various laws, may change. If the Company were required to pay for and administer added benefits to independent contractors, our operating costs could substantially increase. In addition, certain of our employees own and operate their own vehicles. The Company is presently undergoing an employment tax examination by the Internal Revenue Service (the "IRS"). The examination covers certain payments made during the 1995, 1996 and 1997 tax years to employee owner operators for all or a portion of the costs of operating their vehicles in the course of their employment. The Company believes that these arrangements do not represent additional compensation to those employees. However, there can be no assurance that the IRS will not seek to recharacterize some or all of such payments as additional compensation. If such amounts were recharacterized, the Company could have to pay additional employment-related taxes on such amounts.
Claims Exposure
We use approximately 3,800 independent contractor and employee drivers in our business. These drivers are involved in accidents from time to time. We currently carry liability insurance of $1,000,000 for each accident (subject to applicable deductibles). We also carry umbrella coverage up to $25 million and require our independent contractors to maintain liability insurance of at least the minimum amounts required by state and Federal law. We cannot guarantee that claims against us will not exceed the amount of coverage. If there were a material increase in the frequency or severity of accidents, liability claims or workers compensation claims against us, or unfavorable resolutions of those claims, our operating results could be materially adversely affected. Significant increases in insurance costs could reduce our profitability.
Shares Eligible For Future Sales
Sale of a large number of shares of our common stock in the market could cause the market price of the common stock to drop. As of March 12, 1999, 7,043,702 shares of common stock were issued and outstanding. In addition, 2,042,833 shares of common stock were issuable upon the exercise or conversion of stock options, convertible notes or debentures and the Company's employee stock purchase plan, 1,442,439 of which have been registered for resale by the holders and are freely tradable upon issuance and 600,394 of which are subject to registration rights pursuant to which the holders can cause the Company to register those shares for resale. Sale in the market of substantial amounts of common stock, or the perception that sales might occur, could adversely affect the market price of the common stock. If all of these shares were issued they would represent 29% of the Company's issued and outstanding shares. Any sales of these shares may make it more difficult for us to sell equity securities in the future when and at a price that we deem appropriate.
Reliance on Key Personnel
Our future success will depend in part upon the continued service of our senior management and on the senior management of companies that we acquire in the future. If any of these people decide not to continue in their employment with us, or if we are unable to attract and retain other skilled employees, our business could be adversely affected.
Competition
We believe that the markets for the same-day ground and air delivery services we provide are highly competitive. Price competition is often intense, especially in the market for basic delivery services. We compete with a large number of other air delivery and ground courier service entities. While we believe that we compete effectively with these other entities, we cannot guarantee that we will be able to maintain our competitive position in our principal markets.
Permits and Licensing
Our delivery operations are subject to various state, local and Federal regulations that in many instances require permits and licenses. Our failure to maintain required permits or licenses or to comply with these laws and regulations could subject us to substantial fines or could lead to the revocation of our authority to conduct certain of our operations.
No Future Dividends
We do not anticipate paying cash dividends on our shares of common stock in the foreseeable future. We intend to retain any future earnings for use in our business. Our Revolving Credit Facility limits our ability to pay dividends on our common stock.
Effect of Certain Charter Provisions
Certain provisions of our Certificate of Incorporation and By-Laws, as currently in effect, as well as Delaware law, could discourage potential acquisition proposals, delay or prevent a change in control of the Company or limit the price that certain investors may be willing to pay in the future for our common stock. Our Certificate of Incorporation permits our Board of
Directors to issue shares of preferred stock without further stockholder action. The existence of this preferred stock could discourage a third party from attempting to obtain control of the Company and may also cause the market price of the common stock to drop. We have no current plans to issue shares of preferred stock. In addition, Section 203 of the Delaware General Corporation law restricts certain persons from engaging in business combinations with us. Our current By-Laws provide for a staggered board of directors, which means that only one-third of the board will be elected at each annual meeting of stockholders
Item 2.
Item 2. Properties -
As of December 31, 1998, the Company operated from fifty-eight leased facilities (excluding six authorized sales agent locations). 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 facilities (excluding the sales agent locations):
State Number of Facilities - - ----- -------------------- New York.......................................... 16 Florida........................................... 8 New Jersey........................................ 6 North Carolina.................................... 4 Massachusetts..................................... 3 California........................................ 2 Illinois.......................................... 2 Louisiana......................................... 2 Ohio.............................................. 2 Alabama........................................... 1 Arizona........................................... 1 Connecticut....................................... 1 Georgia........................................... 1 Indiana........................................... 1 Maine............................................. 1 Maryland.......................................... 1 Missouri.......................................... 1 New Hampshire..................................... 1 South Carolina.................................... 1 Tennessee......................................... 1 Virginia.......................................... 1 Washington........................................ 1
The Company's corporate headquarters are located in Clifton, 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, 1998, the Company owned or leased approximately 75 cars and 550 trucks of various types, which are primarily operated by drivers employed by the Company. In addition, certain of the Company's employee drivers own or lease their own vehicles. The Company also hires independent contractors who typically provide their own vehicles and are required to carry at least the minimum amount of insurance required by state law.
The Company's aggregate rental expense for the year ended December 31, 1998 was approximately $12.7 million. See Note 13 to the Company's Consolidated Financial Statements.
Item 3.
Item 3. Legal Proceedings
On March 19, 1997, a purported class action complaint, captioned Gapszewicz v. Consolidated Delivery & Logistics, Inc., et al. (97 Civ. 1939), was filed in the United States District Court for the Southern District of New York (the "Court") against the Company, certain of the Company's present and former executive officers, and the co-managing underwriters of the Company's IPO. The gravamen of the complaint is that the Company's registration statement for the Offering contained misstatements and omissions of material fact in violation of the Federal securities laws and that the Company's Financial statements included in the registration statement were false and misleading and did not fairly reflect the Company's true financial condition. The complaint seeks the certification of a class consisting of purchasers of the Company's Common Stock from November 21, 1995 through February 27, 1997, rescission of the Offering, attorneys' fees and other damages. In April 1997, five other complaints containing allegations identical to the Gapszewicz complaint were filed in the same Federal court against the Company. On May 27, 1997, these six complaints were consolidated into a single action entitled "In re Consolidated Delivery & Logistics, Inc. Securities Litigation." On July 16, 1997, the Company and the underwriter defendants filed a motion to dismiss the complaint. In response, the plaintiffs filed an amended complaint on October 20, 1997. A motion to dismiss the amended complaint was filed by the Company and the underwriter defendants on December 15, 1997. The motion was denied on May 11, 1998. On October 7, 1998 a Stipulation and Agreement of Settlement (the "Settlement Agreement") was entered into by the parties providing for a Settlement Fund of $1.5 million. The Court issued a preliminary order approving the terms of the settlement on October 19, 1998. Mailing of Notice and Proof of Claims to class members under the terms of the Settlement Agreement was completed by October 23, 1998. The Court issued an Order and Final Judgement formally approving the settlement on February 11, 1999. The Plaintiff's time to appeal the Order and Judgement expired on March 15, 1999 and this matter is now concluded. The full amount of the settlement is covered by the Company's applicable insurance; accordingly the settlement will not have a material adverse effect on the Company's financial position or results of operations.
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 and certain other parties in the United States District Court for the Southern District of New York alleging, among other things, that Securities had fraudulently obtained automobile liability insurance from Liberty Mutual in the late 1980s and early 1990s at below market rates. This suit, which claims common law fraud, fraudulent inducement, unjust enrichment and violations of the civil provisions of the Federal RICO statute, among other things, seeks an unspecified amount of compensatory and punitive damages from the defendants, as well as attorneys' fees and other expenses. 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 in the amount of up to $500,000 or such greater amount as may be due together with interest calculated at a rate equivalent to the rate charged the Company by its senior lender and due on December 1, 2000. The Promissory Note is further secured by 100,000 shares of CDL Common Stock. Discovery is currently pending and as a result the Company is unable to make a determination as to the merits of the claim. The Company does not believe that an adverse determination in this matter would result in a material adverse effect on the consolidated financial position or results of operations of the Company.
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 personal injury and property damage incurred in connection with its same-day ground and air delivery operations. 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
Through February 19, 1999 the Company's Common Stock was included for quotation on the Nasdaq National Market under the symbol "CDLI." Effective February 23, 1999 the Company's Common Stock began trading on the American Stock Exchange under the symbol "CDV". The following table sets forth the high and low sales prices for the Common Stock for 1997 and 1998:
1997 Low High First Quarter $1.88 $5.00 Second Quarter $1.63 $4.00 Third Quarter $2.13 $3.63 Fourth Quarter $2.19 $4.00
1998 Low High First Quarter $2.63 $5.00 Second Quarter $4.25 $5.50 Third Quarter $3.00 $5.50 Fourth Quarter $2.75 $3.75
On March 12, 1999, the last reported sale price of the Common Stock was $3.50 per share. As of March 12, 1999, there were approximately 140 shareholders of record of Common Stock and, based on security position listings, the Company believes there were approximately 1,600 beneficial holders of the Common Stock.
On December 8, 1998, the Company issued 206,185 shares of stock in connection with the acquisition of certain assets of Manteca Enterprises, Inc. and related companies. The issuance was exempt from registration under Section 4(2) of the Securities Act.
On February 16, 1999, the Company issued 200,000 shares of common stock in connection with the acquisition of certain assets of the Gold Wings Trust and related companies. The issuance was exempt from registration under Section 4(2) of the Securities Act.
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 1. Business - Risk Factors - No Future Dividends and 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
SELECTED FINANCIAL DATA (In thousands, except per share amounts)
Consolidated Delivery & Logistics, Inc. was founded in June 1994. In November 1995, simultaneously with the closing of the Company'sOffering, separate wholly owned subsidiaries of CDL merged (the "Merger") with each of the eleven acquired businesses (the "Founding Companies"). Consideration for the acquisition of these businesses consisted of a combination of cash and common stock of CDL. The assets and liabilities of the acquired businesses at September 30, 1995, were recorded by CDL at their historical amounts.
The statement of operations data shown below for the year ended December 31, 1994 and for the nine month period ended September 30, 1995 and the balance sheet data as of December 31, 1994 are that of the Combined Founding Companies prior to the Merger (the "Combined Founding Companies") on a historical basis. During the periods presented, the Combined Founding Companies were not under common control or management and some were not taxable entities. Therefore the data presented may not be comparable to or indicative of post-Merger results.
The selected financial data with respect to the Company's consolidated statement of operations for the years ended December 31, 1996, 1997 and 1998 and with respect to the Company's consolidated balance sheet as of December 31, 1997 and 1998 have been derived from the Company's consolidated financial statements that appear elsewhere herein. The financial data provided below should be read in conjunction with these accompanying consolidated financial statements and notes thereto as well as "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, inability to conclude acquisitions on satisfactory terms, the effect of economic and market conditions, the impact of competition and the Company's actual results varying 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. During 1997 the Company made no acquisitions and instead concentrated on improving operating efficiencies. During 1998, the Company refocused its acquisition efforts and acquired four same-day ground delivery businesses. See "Business-Recent Acquisitions." Each of these acquisitions has been accounted for using the purchase method of accounting. On December 31, 1997, the Company sold certain assets of its direct mail business. Accordingly, the financial position, results of operations and cash flows of the Company's direct mail business have been reclassified as discontinued operations in the accompanying consolidated financial statements. The Company's results in 1997 were also impacted by the sale of its contract logistics subsidiary which accounted for $4.6 million in revenue for 1996 and $400,000 to the date of its sale in January 1997. The Company's historical results of operations reflect the results of the acquired businesses and the reclassification referred to above; therefore, the historical operating results of the Company for the periods presented are not necessarily comparable.
Results of Operations 1998 Compared with 1997
Revenue for the year ended December 31,1998 increased $14.2 million, or 8.3%, to $185.7 million from $171.5 million for the year ended December 31, 1997 including $7.3 million contributed by the businesses acquired in 1998 as well as increased sales from the Company's existing operations.
Ground delivery revenue increased $15.2 million, or 13.2%, consisting of the $7.3 million from acquired businesses previously mentioned with the balance of the increase resulting from the addition of new contract distribution routes as well as the expansion of existing routes. Air delivery revenue decreased by $1.0 million, or 1.8%, due to the elimination during 1998 of certain unprofitable business.
Cost of revenue consists of, among other things, payments to employee drivers and independent contractors, agents, airlines, other direct pick up and delivery costs and the costs of dispatching drivers and messengers. These costs increased $12.3 million, or 9.5%, from $129.8 million for 1997 to $142.1 million in 1998. Stated as a percentage of revenue, these costs increased to 76.5% for 1998 from 75.7% for 1997, or 0.8% year over year. This increase reflects the generally lower gross profit associated with contract distribution services. As a result of the revenue increase discussed above, gross profit increased by $2.0 million or ,4.8%, from $41.7 million in 1997 to $43.7 million in 1998.
Selling general and administration expenses ("SG&A") include 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 administrative functions. SG&A decreased by $1.0 million, or 2.7%, from $36.7 million in 1997 to $35.7 million in 1998. SG&A decreased by $2.2 million before consideration of the additional $1.2 million of SG&A due to the companies acquired in 1998, reflecting the Company's continuing consolidation efforts. Primarily due to the Company's investment in computer systems and support, depreciation and amortization increased by $800,000, or 34.8%, from $2.3 million for 1997 to $3.1 million for 1998.
As a result of the above, operating income increased $2.1 million, or 77.8%, from $2.7 million for the year ended December 31, 1997 to $4.8 million for the year ended December 31, 1998. Stated as a percentage of revenue, operating income increased from 1.6% for 1997 to 2.6% for 1998.
Income from continuing operations included a gain of $816,000 resulting from the sale of the Company's contract logistics subsidiary in January 1997 with no similar gain for 1998. Interest expense increased by $100,000, or 9.1%, from $1.1 million in 1997 to $1.2 million in 1998. The net increase results from borrowings necessary to acquire four businesses in 1998.
Net income increased by $1.8 million from $459,000 in 1997 to $2.3 million in 1998. A loss from discontinued operations of $1.2 million reduced net income in 1997. If the effects of the discontinued operations were not considered, income from continuing operations would have increased $600,000, or 35.3%, from $1.7 million in 1997 to $2.3 million for the year ended December 31, 1998.
Results of Operations 1997 Compared with 1996
Revenue increased $8.4 million, or 5.2%, from $163.1 million in 1996 to $171.5 million for the year ended December 31, 1997.
Air courier revenue increased $4.6 million, or 8.8%, and ground delivery revenue increased $3.9 million, or 3.5%, for the year 1997 over the year 1996. Air courier revenue benefited from the expansion and internal growth of existing accounts as well as the full-year contribution of acquisitions made by the Company during 1996. Ground delivery revenue increased by $3.9 million from the addition of time service and facilities management revenue as a result of previously disclosed acquisitions and the addition of several new contract distribution routes in the pharmaceutical, electronic repair and office products industries. The increases in ground delivery revenue discussed above were offset by a decrease of $1.7 million in the Company's banking division due to continued industry consolidation. Two of the Company's largest banking customers merged, decreasing their branch network and the number of stops required.
Cost of revenue includes, among other things, payment to employee drivers, owner operators and independent contractors as well as agents, airfreight carriers, commercial airlines, and pick-up and delivery cost. These costs increased by $7.7 million, or 6.3%, from $122.1 million for the year 1996 to $129.8 million for the year ended December 31, 1997. The increase in cost of revenue is due to several factors that include significant start-up costs in connection with new contracts added in the pharmaceutical and office products distribution industries as well as an increase in costs necessary to support a growing revenue base in ground delivery. The Company was impacted early in 1997 by airline fuel surcharges as well as a change in the general business mix that reduced certain consolidation opportunities in selected airfreight shipments in the Company's major markets.
As a result of the above, gross profit increased by $644,000, or 1.6%, from $41.0 million for 1996 to $41.7 million for the year ended December 31, 1997. If the gross profit of the Company's contract logistics subsidiary were not considered, gross profit would have increased by $1.4 million, or 3.5%, from $40.2 million for 1996 to $41.6 million for 1997.
SG&A include salaries, sales commissions and travel to support the Company's marketing and sales effort. Also included are the expenses of maintaining the Company's information systems, human resources, financial, legal, procurement and other administrative functions. SG&A decreased by $4.2 million, or 10.3%, from $40.9 million in 1996 to $36.7 million in 1997. The sale of the Company's contract logistics subsidiary accounted for $1.4 million of the decrease. In the fourth quarter of 1996, the Company recorded a special charge of $1.4 million that included contract and salary settlements, abandonment of operating leases and other costs associated with management headcount reduction and other consolidation issues. The 1996 restructuring charge included in SG&A resulted in a net reduction of SG&A costs of approximately $700,000 in 1997. The balance of the reduction is principally the result of reduced salaries at the operating regions due to internal consolidation. Depreciation and amortization expense increased $700,00, or 43.8%, from $1.6 million in 1996 to $2.3 million in 1997 primarily due to the replacement of a number of vehicles and the Company's investment in computer system and related equipment.
As a result of the above, operating income increased for the year ended December 31, 1997 by $4.2 million from a loss of $1.5 million in 1996 to an operating profit of $2.7 million in 1997. When excluding the results of the Company's contract logistics subsidiary that was sold in early 1997, operating income would have increased $3.5 million. The gain recognized by the Company on the aforementioned sale of its contract logistics subsidiary in January 1997 amounted to $816,000 before applicable taxes.
Interest expense increased by $339,000 from $805,000 in 1996 to $1.1 million for the year ended December 31, 1997. The increase is primarily due to an overall increase in the level of borrowing by the Company during 1997 compared to 1996. To a lesser extent, the Company was also subject to interest rate increases during the first quarter of 1997 with its previous lenders prior to the establishment of its current Revolving Credit Facility (See Note 9 to the accompanying consolidated financial statements).
Liquidity and Capital Resources
Working capital decreased by $6.7 million from $2.5 million at December 31, 1997 to a deficit of $4.2 million at December 31, 1998. The decrease is due primarily to the use of the Company's line of credit to finance the businesses acquired during 1998. This results in a working capital decrease because the Company is using short-term borrowing (its line of credit) to finance the additions of non-current assets (primarily intangibles).
Cash and cash equivalents decreased $1.5 million to $295,000 at December 31, 1998 from $1.8 million at December 31, 1997. Cash in the amount of $5.0 million was provided by operations and $2.9 million from financing activities which was used primarily to acquire four businesses for $7.2 million and for the purchase of property and equipment (net of proceeds on disposition) in the amount of $2.1 million.
Capital expenditures amounted to $2.2 million, $1.2 million and $1.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. These expenditures primarily upgraded and expanded computer system capability and to expand and maintain Company facilities in the ordinary course of business. In addition, CDL incurred a capital lease obligation of $2.5 million during 1997 in connection with an agreement to lease 175 vehicles.
Under the terms of its agreement with its lenders, CDL is prohibited from the payment of dividends without obtaining prior consent.
The Company completed a $15 million private placement of senior subordinated notes and warrants on January 29, 1999. Proceeds will be used primarily to finance acquisitions and to reduce outstanding short-term borrowings. The notes mature in 2006 and bear interest at the rate of 12% per annum. The notes were issued with detachable warrants subject to a Warrant Agreement dated January 29, 1999.
Management believes that cash flows from operations, together with its borrowing capacity (see Note 9 of the accompanying consolidated financial statement) and the senior subordinated notes described above are sufficient to support the Company's operations and general business and capital liquidity requirements for the foreseeable future.
Recently Issued Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The statement is intended to eliminate the diversity in practice in accounting for internal-use software costs and improve financial reporting. The statement is effective for fiscal years beginning after December 15, 1998. The Company has determined that the effect of this statement on the Company's consolidated financial position and results of operations is immaterial.
Year 2000 Compliance
The Company is currently in the process of evaluating its information technology infrastructure for the Year 2000 compliance. The Company does not expect that the cost to modify its information technology infrastructure to be Year 2000 compliant will be material to its financial position or results of operations. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company to be in compliance. The Company is in the process of obtaining information concerning the Year 2000 compliance status of its suppliers and customers. In the event that any of the Company's significant suppliers or customers does not successfully and timely achieve Year 2000 compliance, the Company's business or operations could be adversely affected.
The Company continues to implement its Year 2000 compliance program. The following table provides a summary of the Company's progress in each of the phases, estimated percentage complete and the anticipated completion date of each phase:
The Company estimates that the cost of compliance will not exceed the initial amount budgeted of $250,000.
Where practical the Company will develop contingency plans during the coming months in an effort to ensure minimal disruption to our clients. A pilot project in this regard is currently in development with a major client.
Inflation
Inflation has not had a material impact on the Company's results of operations for the past three years.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
CDL's major "market risk" exposure is the effect of changing interest rates. CDL manages its interest exposures by using a combination of fixed and variable rate debt. At December 31, 1998, the Company's debt consisted of approximately $9.6 million of fixed rate debt with a weighted average interest rate of 7.6% and $13.6 million of variable rate debt with a weighted average interest rate of 7.5% The amount of variable rate debt fluctuates during the year based on CDL's cash requirements. Maximum borrowings of variable rate debt at any quarter end were $13.6 million. If interest rates on such variable rate debt were to increase by 75 basis points (one-tenth of the rate at December 31, 1998), the impact, net of income taxes, to the Company's results of operations and cash flows would be a decrease of approximately $100,000.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Page
Report of Independent Public Accountants...................................21
Consolidated Balance Sheets as of December 31, 1998 and 1997...............22
Consolidated Statements of Operations For The Years Ended December 31, 1998, 1997 and 1996..................................23
Consolidated Statements of Changes in Stockholders' Equity For The Years Ended December 31, 1998, 1997 and 1996..............24
Consolidated Statements of Cash Flows For The Years Ended December 31, 1998, 1997 and 1996.............................25
Notes to Consolidated Financial Statements.................................26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Consolidated Delivery & Logistics, Inc.:
We have audited the accompanying consolidated balance sheets of Consolidated Delivery & Logistics, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. 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 Consolidated Delivery & Logistics, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
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 24, 1999
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS:
Consolidated Delivery & Logistics, Inc. was founded in June 1994. In November 1995, simultaneously with the closing of the it's initial public offering (the "Offering") separate wholly owned subsidiaries of Consolidated Delivery & Logistics, Inc. merged (the "Merger") with each of the eleven acquired businesses. Consideration for the acquisition of these businesses consisted of a combination of cash and common stock of Consolidated Delivery & Logistics, Inc., par value $0.001 per share. The assets and liabilities of the acquired businesses at September 30, 1995 were recorded at their historical amounts.
Consolidated Delivery & Logistics, Inc. and Subsidiaries (the "Company" or "CDL") provides an extensive network of same-day ground and air delivery services to a wide range of commercial, industrial and retail customers. CDL ground delivery operations currently are concentrated on the East Coast, with a strategic presence in the Midwest and on the West Coast. CDL air delivery services are provided throughout the United States and to major cities around the world.
(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 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 -
CDL considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Included in cash and cash equivalents is cash restricted for a national marketing and advertising program for CDL's sales agency agreements (see Note 13).
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 lives of the assets.
Deferred Financing Costs -
The costs incurred for obtaining financing, including all related legal and accounting fees are included in other assets in the accompanying consolidated balance sheets and are amortized over the life of the related financing from two to four years.
Intangible Assets -
Intangible assets consist of goodwill, customer lists, and non-compete agreements. Goodwill represents the excess of the purchase price over the fair value of assets of businesses acquired and is amortized on a straight-line basis over twenty-five years to forty years. Customer lists and non-compete agreements are amortized over the estimated period to be benefited, generally from three to five years.
Revenue Recognition -
Revenue is recognized when the shipment is completed, or when services are rendered to customers, and expenses are recognized as incurred. Certain customers pay in advance, giving rise to deferred revenue.
Income Taxes -
CDL accounts for income taxes utilizing the 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, various accruals and reserves being deductible for tax purposes in future periods and certain acquired businesses reporting on the cash basis for income tax purposes prior to the Merger.
Long-Lived Assets -
CDL reviews its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The measurement of impairment losses to be recognized is based on the difference between the fair values and the carrying amounts of the assets. Impairment would be recognized in operating results if a diminution in value occurred. The Company does not believe that any such changes have occurred.
Fair Value of Financial Instruments -
Due to the short maturities of CDL's cash, receivables and payables, the carrying value of these financial instruments approximates their fair values. The fair value of CDL's debt is estimated based on the current rates offered to CDL for debt with similar remaining maturities. CDL believes that the carrying value of its debt estimates the fair value of such debt instruments.
Stock Based Compensation -
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") requires that an entity account for employee stock compensation under a fair value based method. However, SFAS 123 also allows an entity to continue to measure compensation cost for employee stock-based compensation plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," ("Opinion 25"). CDL has elected to continue to account for employee stock-based compensation under Opinion 25 and provide the required pro forma disclosures as if the fair value based method of accounting under SFAS 123 had been applied (see Note 14).
Income (Loss) Per Share -
CDL follows Statement of Financial Accounting Standards No. 128, "Earnings Per Share" to calculate its earnings per share ("EPS"). 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 weighted average shares outstanding adjusted for the incremental dilution of common stock equivalents.
A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution follows:
The following common stock equivalents were excluded from the computation of diluted EPS because the exercise or conversion price was greater than the average market price of common shares:
Recent Accounting Pronouncements-
In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The statement is intended to eliminate the diversity in practice in accounting for internal-use software costs and improve financial reporting. The statement is effective for fiscal years beginning after December 15, 1998. The Company has determined that the effect of this statement on the Company's consolidated financial position and results of operations is immaterial.
Reclassifications -
Certain reclassifications have been made to the prior years' consolidated financial statements in order to conform to the 1998 presentation.
(3) BUSINESS COMBINATIONS:
In July 1998, the Company acquired all of the assets and certain liabilities of Metro Courier Network, Inc. ("Metro"), a provider of ground delivery services in Massachusetts, Maine and New Hampshire. The purchase price was approximately $4.4 million, consisting of $2.6 million in cash and a $1.8 million convertible note (the "Note") plus certain contingent payments. The excess purchase price over fair value of the underlying assets of $4.4 million was allocated to goodwill and other intangible assets. The Note bears interest at the rate of 7% per annum, with interest payable quarterly, is due July 2001 and is subordinate to all indebtedness due or that may become due to the Company's senior lender, First Union Commercial Corporation or its affiliates. The Note is convertible in its entirety at the option of the holder at any time through July 1, 2001 into fully paid shares of the Company's common stock at a conversion price of $7 per share over a ninety-day period. In addition, the purchase agreement also provided for a contingent earn-out of up to $1.5 million which has been amended by an agreement dated January 7, 1999, which cancelled this contingent obligation. The agreement required a purchase price adjustment of $180,000 which will result in an adjustment to increase the excess of purchase price over fair value of the net assets for this amount.
In August 1998, the Company acquired all of the outstanding shares of the capital stock of KBD Services, Inc. ("KBD"), a provider of ground delivery services in North and South Carolina. The purchase price was approximately $4.1 million consisting of $2.1 million in cash, a $1.5 million 7% subordinated convertible note (the "KBD Note") and a $500,000, 7% contingent subordinated convertible note (the "Contingent Note"). The excess purchase price over fair value of the underlying assets of $3.5 million was allocated to goodwill. The KBD Note is due August 5, 2003 with interest payable quarterly commencing October 1, 1998 and is convertible in its entirety at the option of the holder at any time through July 1, 2003 into fully paid shares of the Company's common stock if the market price equals or exceeds $6 per share over a thirty day period. The Contingent Note is subject to reduction or discharge if KBD's earnings before interest and taxes are less than $700,000 for the year ending July 31, 1999 and is due with interest on the finally determined principal on November 1, 1999. The holder or the Company may convert the Contingent Note in its entirety into fully paid shares of the Company's common stock at a conversion price of $6 per share after September 16, 1999 and through October 20, 1999. The KBD Note and the Contingent Note are subordinate to all indebtedness due or that may become due to the Company's senior lender, First Union Commercial Corporation or its affiliates.
In September 1998, the Company acquired certain assets and assumed certain liabilities of Eveready Express Corp. ("Eveready"), a provider of ground delivery services in the New York City market. The purchase price for the assets and certain non-compete agreements was $975,000, with $415,000 in cash and a $560,000 subordinated contingent note (the "Eveready Contingent Note"). The entire purchase price was allocated to goodwill and other intangible assets. The Eveready Contingent Note bears interest at the rate of 6% per annum, with
semi-annual principal payments of $50,000 plus accrued interest commencing March 1999 and the remaining balance of principal and interest due September 2000. The final determination of the purchase price and the Eveready Contingent Note will be based upon the percentage of collected revenues earned by Eveready during the one-year period following the closing. The Eveready Contingent Note is subordinate to all indebtedness due or that may become due to the Company's senior lender, First Union Commercial Corporation or its affiliates.
In December 1998, the Company acquired all of the outstanding shares of the capital stock of First Choice Courier and Distribution Systems, Inc., Regional Express II, Inc., Regional Express III, Inc., and Manteca Enterprises, Inc. (collectively "First Choice Companies"). The purchase price was approximately $5.0 million consisting of $2.9 million in cash including direct acquisition costs, 206,185 shares of the Company's common stock (at $3.438 per share) and $1.4 million in 7% subordinated convertible notes (the "Notes). The excess purchase price over fair value of the underlying assets of $5.0 million was allocated to goodwill. The Notes are due December 8, 2001 with interest payable quarterly commencing February 28, 1999. At the option of either the holder or CDL, under certain circumstances 50% of the principal amount of the Notes are convertible into fully paid shares of CDL common stock at a conversion price of $7 per share. The notes are subordinate to all existing or future senior debt of CDL. In addition, a contingent earn-out in the aggregate amount of up to $800,000 is payable based on the achievement of certain financial goals during the three-year period following the closing.
Any payments of the earnouts discussed above will increase the goodwill recorded for the acquisition of the applicable company. The amortization of any additional goodwill and the conversion of any of the convertible notes and contingent convertible notes payable into common stock will negatively affect the Company's future earnings per share.
The above transactions have been accounted for under the purchase method of accounting. Accordingly, the allocation of the cost of the acquired assets and liabilities has been made on the basis of the estimated fair value. The consolidated financial statements include the operating results of each business from their respective dates of acquisition.
The following summarized unaudited pro forma financial information (in thousands, except per share data) assumes that the Metro, KBD and First Choice acquisitions were consummated on January 1, 1998 and 1997. This information is not necessarily indicative of the results the Company would have obtained had these events actually occurred on such dates or of the Company's actual or future results.
During 1996, the Company acquired certain businesses in transactions accounted for as purchases. The total consideration paid in these transactions is contingent upon future activity and is estimated to aggregate $3.3 million, which consists of $2.2 million in cash, 75,312 shares of Common Stock at $8 per share and 90,909 shares of Common Stock at $5.50 per share. The Company also assumed approximately $185,000 of debt due to the former owners of one of the acquired businesses and their relatives. Of this amount $3.1 million has been assigned to the excess of purchase price over net assets of businesses acquired (goodwill) and other intangible assets. The purchase price was subsequently reduced by approximately $259,000 and $357,000 during 1998 and 1997, respectively, due to actual revenue not reaching projected revenue as stipulated in the purchase agreements. Accordingly, goodwill and seller-financed debt were reduced by this amount to reflect the reduction in the purchase price. Final determinations of the individual acquisition costs will be made by April 2000. The results of the acquired businesses have been reflected in the accompanying consolidated statements of operations since their respective acquisition dates. The results of operations of the acquired businesses prior to their acquisitions are not material to the Company's consolidated statements of operations.
(4) DISCONTINUED OPERATIONS:
On December 31, 1997, the Company entered into an agreement providing for the sale of certain assets of its fulfillment and direct mail business. The purchase price for the assets was $850,000 and is comprised of $125,000 in cash with the remainder in the form of a promissory note (the "Note Receivable"). The Note Receivable bears interest at the rate of 6% per annum, with interest only in monthly installments during 1998. Commencing February 1, 1999 the Note Receivable will be paid in equal monthly installments of $14,016 including principal and interest through January 1, 2004. The Note Receivable is included in prepaid expenses and other current assets ($117,000 at December 31, 1998) and in security deposits and other assets ($608,000 and $725,000 at December 31, 1998 and 1997, respectively, in the accompanying consolidated balance sheets. The Note Receivable is collateralized by a security interest in the purchaser's accounts receivable, equipment and general intangibles. The security interest is subordinate to the interest of the purchaser's majority shareholder.
Accordingly, the financial position, operating results and the gain on the disposition of the Company's direct mail business have been
segregated from continuing operations and reclassified as a discontinued operation in the accompanying consolidated financial statements.
Results from the discontinued fulfillment and direct mail business were as follows (in thousands) -
The net liabilities of discontinued operations are comprised of the following (in thousands) -
(5) PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following (in thousands) -
(6) EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following (in thousands) -
Leased equipment under capitalized leases (included above) consists of the following (in thousands) -
The Company incurred capital lease obligations of $114,000 in 1998 for office equipment and $2.5 million during 1997 in connection with an agreement to lease 175 delivery vehicles.
(7) INTANGIBLE ASSETS:
Intangible assets (see Note 3) consist of the following (in thousands) -
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following (in thousands) -
(9) SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
Short-term borrowings -
At December 31, 1998 and 1997, the Company had line of credit agreements for $22.5 million and $15 million, respectively. The Company's outstanding borrowings on such lines of credit were approximately $13.6 million at December 31, 1998 and $7.4 million at December 31, 1997.
In November 1998, CDL and First Union Commercial Corporation ("First Union") modified an agreement entered into in July 1997, establishing a revolving credit facility (the "First Union Agreement"). The First Union Agreement provides for an increase in the original credit facility from $15 million to $22.5 million, provides CDL with an equipment acquisition term loan facility of up to $2.5 million and modifies other terms and conditions. Credit availability is based on eligible amounts of accounts receivable, as defined, up to a maximum amount of $22.5 million and is secured by substantially all of the assets, including certain cash balances, accounts receivable, equipment and leasehold improvements and general intangibles of the Company and its subsidiaries. The First Union Agreement provides for both fixed and variable rate loans. Interest rates on fixed rate borrowings are based on LIBOR (which was 5.07% at December 31, 1998), plus 1.5% to 2%. Variable rate borrowings are based on First Union's prime lending rate (which was 7.75% at December 31, 1998), minus .25% to plus .25%. Based on eligible accounts receivable at December 31, 1998, $2.5 million of the credit facility and $2.5 million of the equipment acquisition term loan facility were available for future borrowings.
Under the terms of the First Union Agreement, the Company is required to maintain certain financial ratios and comply with other financial conditions. The First Union Agreement 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 December 31, 1998, the Company was in compliance with all loan covenants. Borrowings under the line of credit facility averaged approximately $7.8 million with an average interest rate of 9.1% for the year ended December 31, 1998. Maximum borrowings were $13.6 million for the same period.
Long-Term Debt -
Long-term debt consists of the following (in thousands) -
(a) In September 1995, the Company issued $2 million in the aggregate principal amount of its 8% Subordinated Convertible Debentures (the "8% Debentures"). On April 1, 1998 the Company converted $740,000 of the $2 million of the 8% Debentures to 10% Subordinated Convertible Debentures (the "10% Debentures") and issued $150,000 of additional 10% Debentures. The remaining 8% Debentures, totaling $1,260,000 were repaid in August 1998. The 10% Debentures are convertible into common stock of the Company at a conversion price of $5.50 per share, accrue interest at 10% per annum which is payable quarterly, mature on August 21, 2000 and extend the initial repayment date by one year from August 1998 to August 1999. The 10% Debentures are redeemable by the Company, in whole or in part, without premium or penalty at any time on or after August 18, 1999, at their face amount plus accrued and unpaid interest, if any, to the date of redemption. The 10% Debentures are redeemable at the option of the holder, in whole but not in part, without premium or penalty, at any time after August 21, 1999. As a result, the 10% Debentures, totaling $890,000, have been classified as current maturities of long-term debt.
The aggregate annual principal maturities of debt (excluding capital lease obligations) as of December 31, 1998 are as follows (in thousands) -
1999 $2,158 2000 883 2001 3,242 2002 18 2003 1,461 ----------------- Total $7,762 =================
The Company leases certain transportation and office equipment under capital lease agreements that expire at various dates. At December 31, 1998, minimum annual payments under capital leases, including interest, are as follows (in thousands) -
1999 $1,141 2000 773 2001 18 --------------- Total minimum payments 1,932 Less - Amounts representing interest (130) --------------- Net minimum payments 1,802 Less - Current portion of obligations under capital leases (1,023) --------------- Long-term portion of obligations under capital leases $779 ===============
(10) EMPLOYEE BENEFIT PLANS:
The Company adopted a 401(k) retirement plan during 1996 and merged all of the existing subsidiary plans into the newly adopted plan. Substantially all employees are eligible to participate in the plan and are permitted to contribute between 1% and 20% of their annual salary. 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, 1998, 1997 and 1996.
(11) INCOME TAXES:
Federal and state income tax provision (benefit) for the years ended December 31, 1998, 1997 and 1996 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, 1998, 1997 and 1996, result from the following (in thousands) -
The acquired businesses filed "short-period" Federal tax returns through November 30, 1995. In connection with such filings the Company provided $400,000 during 1995 to cover any potential exposures related to the filings, which was subsequently reduced by $311,000 in 1996.
The components of deferred income tax assets and liabilities are as follows (in thousands) -
December 31, ------------------------- 1998 1997 ----------- ----------- Deferred income tax assets - Allowance for doubtful accounts $753 $633 Reserves and other, net 903 712 ============ ============ Total deferred income tax assets $1,656 $1,345 ============ ============
Deferred income tax liabilities - Trade receivables discount $(507) $ - Accumulated depreciation and amortization (391) (320) Cash to accrual differences (288) (176) Other (731) (692) ------------- ----------- Total deferred income tax liabilities ($1,917) ($1,188) ============= ============ Net deferred tax (liability) asset $(261) $157 ============= ============
(12) REPORTABLE SEGMENTS:
Effective December 31, 1998, CDL implemented Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("SFAS 131"). SFAS 131 requires a company to disclose reportable segments based on the way management organizes its segments for making operating decisions and assessing performance. CDL has two reportable segments: Air and Ground. Separate management of each segment is required because each business unit is subject to different cost and delivery parameters. Segment information for 1998, 1997 and 1996 is as follows (in thousands).
The CDL Air Division derives its revenue from the provision of customized heavy freight, next flight out and international shipments whereby package movement is by air generally on scheduled airline flights. CDL ground delivery services are provided to customers by a CDL driver in a vehicle either on a rush basis or on a regularly scheduled route basis. Air revenue is generally measured by package while ground delivery revenue is generally measured by the number of stops involved.
Intersegment revenue results from the provision of ground service for the pick-up or delivery of packages for delivery to airports or from airports to customers. The Air Division also provides delivery by air of time-critical material for ultimate distribution by ground-based drivers.
Management evaluates the performance of each segment based on its overall contribution to the Company's net income after factoring in the allocation of interest as well as an intersegment charge for Corporate general and administrative expenses.
(13) COMMITMENTS AND CONTINGENCIES:
Operating Leases -
The Company leases its office and warehouse facilities under noncancellable operating leases, which expire at various times through January 2007. The
approximate minimum rental commitments of the Company, under existing agreements as of December 31, 1998, are as follows (in thousands) -
1999 $4,274 2000 3,323 2001 2,427 2002 1,357 2003 955 Thereafter 1,488
Rent expense related to operating leases amounted to approximately $12.7 million, $13.1 million and $13.7 million for the years ended December 31, 1998, 1997 and 1996, 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 and certain other parties in the United States District Court for the Southern District of New York alleging, among other things, that Securities Courier had fraudulently obtained automobile liability insurance from Liberty Mutual in the late 1980s and early 1990s at below market rates. This suit, which claims common law fraud, fraudulent inducement, unjust enrichment and violations of the civil provisions of the Federal RICO statute, among other things, seeks an unspecified amount of compensatory and punitive damages from the defendants, as well as attorneys' fees and other expenses. 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 in the amount of up to $500,000 or such greater amount as may be due together with interest calculated at a rate equivalent to the rate charged the Company by its senior lender and due on December 1, 2000. The Promissory Note is further secured by 100,000 shares of CDL common stock. Discovery is currently pending and as a result the Company is unable to make a determination as to the merits of the claim. The Company does not believe that an adverse determination in this matter would result in a material adverse effect on the consolidated financial position or results of operations of the Company.
The Company and its subsidiaries are from time to time, parties to litigation arising in the normal course of their business, most of which involves claims for personal injury and property damage incurred in connection with their operations. Management believes that none of these actions, including the above action, will have a material adverse effect on the financial position or results of operations of the Company and its subsidiaries.
Sales Agency Agreements -
The Company has entered into sales agency agreements with independent contractors with varying terms to perform courier services on behalf of the Company. The independent contractors provide marketing and sales services and
the Company provides the resources to perform courier services. In connection with these transactions the Company retains from the independent contractors a fee for services rendered of approximately 10% of revenues. The profit on these sales net of the Company's fees for its services is remitted back to the independent contractors as payment for marketing and sales services rendered. Sales agency charges totaled $4.2 million, $4.7 million and $3.8 million in 1998, 1997 and 1996, respectively.
Earn-Outs -
Certain of the companies acquired by CDL are eligible to earn additional amounts, consisting of a combination of cash and notes payable, as adjustments to the purchase prices paid for those companies. At December 31, 1998, the Company recorded an accrual for the estimated earn-outs for KBD ($500,000 contingent note payable), Everready ($560,000 contingent note payable), and the First Choice Companies ($687,000 payable in cash and included in other liabilities in the accompanying financial statements).
(14) 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. The Employee Stock Compensation Program is 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 Program 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.
1995 Stock Option Plan 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. 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 1998 and February 1999, the committee approved further amendments to the Plan. These amendments, subject to shareholder approval at the annual meeting, 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, 1995 395,000 $13.00
Granted 219,706 (1) $8.86 Exercised - - Canceled (52,138) $13.00 --------
Outstanding at December 31, 1996 562,568 $11.36
Granted 444,928 $3.85 Exercised - - Canceled (99,373) $10.15 ----------
Outstanding at December 31, 1997 908,123 $7.80
Granted 302,203 $2.85 Exercised - - Canceled (56,011) $11.81 -----------
Outstanding at December 31, 1998 1,154,315 $6.34 ============
Options exercisable at: December 31, 1996 131,037 $11.94 ============ ======== December 31, 1997 576,592 $7.33 ============ ========= December 31, 1998 915,378 $6.35 ============ =========
(1) Includes 100,179 grants approved by the Compensation Committee of the Board of Directors in January 1996 that were priced effective as of the date of the Mergers (November 27, 1995).
At December 31, 1998, options available for grant under the Employee Stock Compensation Plan and the Director Plan total 780,685 and 65,000, respectively.
The following summarizes information about option groups outstanding and exercisable at December 31, 1998:
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 1998, 1997 and 1996 -
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):
(15) EMPLOYEE STOCK PURCHASE PLAN
Effective April 1, 1998, CDL adopted an Employee Stock Purchase Plan (the "Employee Purchase Plan"). The Employee Purchase Plan permits eligible employees to purchase CDL common stock at 85% of the closing market price on the last day prior to the commencement of the purchase period. The Employee Purchase Plan provides for the purchase of up to 500,000 shares of common stock. No shares were issued under the Employee Purchase Plan in 1998.
(16) RELATED PARTY TRANSACTIONS:
Leasing Transactions -
Certain subsidiaries of the Company paid approximately $530,000, $905,000 and $851,000 for the years ended December 31, 1998, 1997 and 1996, 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.
Receivable from Shareholder -
In connection with his indemnification to CDL under the terms of CDL's acquisition of Securities Courier Corporation ("Securities"), Mr. Vincent Brana has entered into a settlement agreement and executed a promissory 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, which Mr. Brana has indemnified CDL (see Note 13). At December 31, 1998 the Company had a receivable due from Mr. Brana totalling $599,000, which is included in other assets in the accompanying consolidated financial statements. Mr. Brana has agreed to repay the Company on December 1, 2000, together with interest calculated at a rate per annum equal to the rate charged the Company by its senior lender. The Company holds 100,000 shares of common stock as security for the Note.
Administrative Fees and Other -
The Company incurred sales commissions and consulting fees of $1.9 million in 1998, $1.3 million in 1997 and $1.1 million in 1996 to companies affiliated through common ownership with directors or stockholders of the Company or to former employees of the Company or its subsidiaries. As of December 31, 1998 and 1997, accrued expenses and other current liabilities included approximately $168,000 and $274,000, respectively, of accrued sales commissions due to related parties. See Note 18 for restructuring charges that pertain to related parties.
In connection with the Merger discussed in Note 1, stockholders of the acquired businesses entered into five-year covenants-not-to-compete agreements with the Company. Additionally, certain of the stockholders received employment contracts.
(17) SALE OF SUBSIDIARY:
On January 31, 1997 the Company sold the stock of Distribution Solutions International, Inc. (DSI), a subsidiary that provided contract logistics services, to its former owner and president in exchange for 137,239 shares of the Company's common stock, valued at approximately $4.38 per share (the closing
price of the Company's common stock on the sale date.) In connection with the sale, the Company recorded a gain of approximately $816,000 before applicable Federal and state income taxes. Revenue included in the accompanying consolidated financial statements from the operation was approximately $400,000 and $4.6 million for the month of January 1997 and the year ended December 31, 1996 respectively. Operating losses were approximately $20,000 and $650,000 for the month of January 1997 and the year ended December 31, 1996, respectively.
(18) RESTRUCTURING CHARGE:
During the fourth quarter of 1996, the Company recognized the impact of several non-recurring charges totaling $1.4 million . The restructuring charge included salary and contract settlements, abandonment of operating leases and other costs associated with management headcount reduction and other consolidation issues. At December 31, 1998, $275,000 was included in accrued expenses and $69,000 was included in other liabilities and are payable to a former director and stockholder of the Company or its subsidiaries. At December 31, 1997, $339,000 was included in accrued expenses and $344,000 was included in other liabilities, of which $275,000 and $344,000, respectively, were payable to a former director and stockholder of the Company or its subsidiaries.
(19) SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes for the years ended December 31, 1998, 1997 and 1996 was as follows (in thousands) -
Supplemental schedule of noncash financing activities for the years ended December 31, 1998, 1997 and 1996 was as follows (in thousands) -
(20) SUBSEQUENT EVENTS:
Stock Options
On January 4, 1999 CDL granted 200,000 stock options under its Employee Stock Compensation Plan.
Senior Subordinated Notes and Warrants
On January 29, 1999, the Company completed a $15 million private placement of senior subordinated notes and warrants with three financial institutions. The notes bear interest at 12% per annum and are subordinate to all senior debt including the Company's credit facility with First Union Commercial Corporation. Under the terms of the notes, the Company is required to maintain certain financial ratios and comply with other financial conditions. The notes mature on January 29, 2006 and may be prepaid by the Company under certain circumstances. The warrants expire 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 plans to use the proceeds to finance acquisitions as they arise and for general working capital purposes.
Acquisition
On February 16, 1999, CDL entered into and consummated an asset and stock purchase agreement (the "Purchase Agreement") with its subsidiary, Sureway Air Traffic Corporation ("Sureway") and 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 $3.0 million in cash including estimated direct acquisition costs, $1,650,000 in a 7% subordinated note (the "Note") and 200,000 shares of CDL common stock. The Note is due April 16, 2001 with interest payable quarterly commencing April 1, 1999. The Note is subordinate to all existing or future senior debt of CDL. In addition, a contingent earn out in the aggregate amount of up to $520,000 is payable based on the achievement of certain financial goals during the two year period following the closing. The earn out is payable 55% in cash and 45% in CDL common stock. CDL financed the acquisition using proceeds from its revolving credit facility with First Union Commercial Corporation.
The following summarized unaudited pro forma financial information (in thousands except per share data) assumes that the Gold Wings acquisition was consummated, the senior subordinated notes and warrants were issued and the acquisitions
discussed in Note 3 occurred on January 1, 1998. This information is not necessarily indicative of the results CDL would have obtained had these events actually occurred or of CDL's actual or future results.
For the Year Ended December 31, 1998 ------------------------- (Unaudited) Revenue $216,435 Income from continuing operations 4,592 Net income $1,988
Basic net income per share $.26 Diluted net income per share $.26
Exchange Listing -
As of February 23, 1999, shares of the Company's common stock began trading on the American Stock Exchange under the symbol CDV. The Company's stock formerly traded on the Nasdaq National Market under the symbol CDLI.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
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 1999 Annual Meeting of Stockholders, except for certain information relating to the Company's executive officers which is provided below.
Executive Officers
The following table sets forth certain information as of March 12, 1999 concerning each of the Company's executive officers:
Name Age Position
Albert W. Van Ness, Jr. 56 Chairman of the Board, Chief Executive Officer, Acting Chief Financial Officer and Director William T. Brannan 50 President, Chief Operating Officer and Director Joseph J. Leonhard 47 Vice President - Controller Mark Carlesimo 45 General Counsel Russell J. Reardon 48 Vice President - Treasurer Andrew B. Kronick 35 Vice President - Sales and Marketing Robin Dennis 46 Vice President - Information Technology Michael Brooks 44 Southeast Region Manager Randy Catlin 52 Air Division Manager Robert Wyatt 40 Northeast Region Manager
Albert W. Van Ness, Jr. has served as the Chairman of the Board, Chief Executive Officer and Director of CDL since February 1997 and Acting Chief Financial Officer since May, 1998. He remains a Managing Partner of Club Quarters, LLC, a hotel development and management company, since October 1992. From June 1990 until October 1992, Mr. Van Ness served as Director of Managing People Productivity, a consulting firm. Prior thereto, from 1982 until June
1990, Mr. Van Ness held various executive offices 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. Prior thereto, Mr. Van Ness served as the President of Seatrain Intermodal Services, Inc., a cargo shipping company.
William T. Brannan has served as the President and Chief Operating Officer of CDL 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 twenty three years of experience in the transportation and logistics industry.
Joseph J. Leonhard has been the Controller of CDL since June 1995 and was appointed to the position of Vice-President in May 1996. Prior thereto, from June 1987 until June 1995, Mr. Leonhard was the Controller and Chief Financial Officer of Scientific Devices East, Inc.
Mark Carlesimo has been General Counsel of CDL since September 1997. From July 1983 until September 1997, Mr. Carlesimo served as Vice President of Legal Affairs of Cunard Line Limited.
Russell J. Reardon was appointed Vice President - Treasurer of CDL in January 1999. Prior thereto, from September 1998 until January 1999 Mr. Reardon was Chief Financial Officer, Secretary and Vice President - Finance of Able Energy, Inc. From April 1996 until February 1998 Mr. Reardon was Chief Financial Officer, Secretary and Vice President - Finance of Logimetrics, Inc.
Andrew B. Kronick was appointed Vice President - Sales and Marketing of CDL in January 1999. Prior thereto Mr. Kronick served as General Manager and Vice President-Business Development for the Company's Northeast Region. From August, 1991 until its merger into the Company, Mr. Kronick was Vice President of Click Courier Systems.
Robin Dennis was appointed Vice President - Information Technology of CDL in January 1999. Mr. Dennis was an independent consultant providing information technology advice to a wide range of companies. Prior thereto, Mr. Dennis served as Vice President - Information Technology for Cunard Line Limited from October 1988 until February 1997.
Michael Brooks has served as Director of the Company since December 1995, as Southeast Region Manager since August 1996 and as 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 twenty four years of experience in the same-day ground and distribution industries. In addition, Mr. Brooks is currently a Director of the Express Carriers Association, an associate member of the National Small Shipment Traffic Conference and an affiliate of the American Transportation Association.
Randy Catlin has served as Air Division Manager of the Company and as Chief Executive Officer of SureWay Worldwide, a subsidiary of the Company, since March 1997. From 1984 until 1997, Mr. Catlin was Vice-Chairman of SureWay Worldwide, formerly known as Sureway Air Traffic Corporation. Mr. Catlin has thirty one years of experience in the air courier industry. In addition, Mr.
Catlin is currently Chairman of the annual conference of the Air Courier Conference of America, and has served previously as President and Director of the organization.
Robert Wyatt has been the Northeast Region Manager since November 1997, Manhattan Region Manager since August 1996 and President of Olympic Courier Systems, Inc. a subsidiary of the Company since November 1995. From December 1995 until November 1997, Mr. Wyatt served as Director of the Company. Prior thereto, Mr. Wyatt was co-founder and President of certain of the companies comprising Orbit/Lightspeed Courier Systems, Inc. , a former subsidiary of the Company which has been merged into Olympic. Mr. Wyatt has fourteen years of experience in the same-day delivery industry. He currently serves on the Board of Directors of the Messenger Courier Association of the Americas. Mr. Wyatt has also served as the President of the New York State Messenger and Courier Association.
Item 11.
Item 11. Executive Compensation
The Company hereby incorporates by reference the applicable information from its definitive proxy statement for its 1999 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 1999 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 1999 Annual Meeting of Stockholders.
PART IV
Item 14.
Item 14. 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
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES: Schedule II - Consolidated Valuation and Qualifying Accounts - For the years ended December 31, 1998, 1997 and 1996..................S-1
All other schedules called for by Regulation S-X are not submitted because either 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 (c) below are filed herewith.
(b) Reports on Form 8-K
Report on Form 8-K/A filed on October 19, 1998 concerning the Company's acquisition of all of the capital stock of KBD Services, Inc.
Report on Form 8/K filed on December 11, 1998 concerning the amendment of the Company'scredit facility with First Union Commercial Corporation increasing credit availability from $15 million to $25 million.
Report on Form 8/K filed on December 22, 1998 concerning the Company's acquisition of all of the capital stock of First Choice Courier and Distribution Systems, Inc. and related companies.
Report on Form 8-K filed on February 26, 1999 concerning the Company's purchase of certain assets and stock by Sureway Air Traffic Corporation of the Gold Wings Companies (including a Trust).
Report on Form 8-K filed on February 26, 1999 concerning the Company's completion of $15 million private placement of senior subordinated notes and warrants.
(c) Exhibits
Exhibit Description Number
3.1 Second Restated Certificate of Incorporation of Consolidated Delivery & Logistics, Inc. (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
3.2 Amended and Restated By-laws of Consolidated Delivery & Logistics, Inc. (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
4.1 Form of certificate evidencing ownership of Common Stock of Consolidated Delivery & Logistics, Inc. (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
4.2 Instruments defining the rights of holders of the Company's long-term debt (not filed pursuant to Regulation S-K Item 601((b)(4)(iii); to be furnished to the Commission upon request).
10.1 Consolidated Delivery & Logistics, Inc. Employee Stock Compensation Program (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
10.2 Consolidated Delivery & Logistics, Inc. 1995 Stock Option Plan for Independent Directors (filed as Exhibit 10. 2 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
10.3 Employment Agreement, dated as of February 5, 1997, with Albert W. Van Ness, Jr.
10.4 Loan and Security Agreement, dated July 14, 1997 By and Between First Union Commercial Corporation and Consolidated Delivery & Logistics, Inc. and Subsidiaries (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 and incorporated herein by reference).
10.5 Amendment, dated April 11, 1996, to Employment Agreement, with John Mattei (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (File No. 0-26954) and incorporated herein by reference).
10.6 Employment Agreement, dated as of September 8, 1995, with William T. Brannan (filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
10.7 Employment Agreement, dated as of September 8, 1995, with Joseph G. Wojak (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
10.8 Employment Agreement, dated as of September 15, 1995, with William T. Beaury (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
10.9 Amendment to Loan and Security Agreement, dated September 30, 1997 By and Between First Union Commercial Corporation and Consolidated Delivery & Logistics, Inc. and Subsidiaries (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 and incorporated herein by reference).
10.10 Employment Agreement, dated as of September 15, 1995, with Michael Brooks (filed as Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
10.11 Asset Purchase Agreement dated December 31, 1997 by and among Consolidated Delivery & Logistics, Inc., Mimatar Corporation and Sureway Logistics Corporation (filed as Exhibit 10.1 to the Company's Report on Form 8-K filed on January 15, 1998 and incorporated herein by reference).
10.12 Promissory Note dated December 31, 1997 by and between Mimatar Corporation and Sureway Logistics Corporation (filed as Exhibit 10.2 to the Company's Report on Form 8-K filed on January 15, 1998 and incorporated herein by reference).
10.13 Consulting Agreement, dated July 27, 1997, by and between Clayton/National Courier Systems, Inc., and Labe Leibowitz.
10.14 Amendment, dated December 23, 1997, to Employment Agreement, with Al Van Ness, Jr.
10.15 Employment Agreement, dated as of September 15, 1995, with Robert Wyatt (filed as Exhibit 10.35 to the Company's Registration Statement on Form S-1 (File No. 33-97008) and incorporated herein by reference).
11.1 Statement Regarding Computation of Net Income (Loss) Per Share.
21.1 List of subsidiaries of Consolidated Delivery & Logistics, Inc.
23.1 Consent of Independent Public Accountants
25.1 Power of Attorney
27.1 Financial Data Schedule (for electronic submission only)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 29, 1999.
CONSOLIDATED DELIVERY & LOGISTICS, INC.
By: /s/ Albert W. Van Ness, Jr. Albert W. Van Ness, Jr., Chairman of the Board, Chief Executive and Acting 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 March 27, 1998.
Signature Capacity
/s/ Albert W. Van Ness, Jr. Chairman of the Board, Chief Executive Albert W. Van Ness, Jr. and Acting Chief Financial Officer (Principal Executive, Financial and Accounting Officer) and Director
/s/ William T. Brannan President, Chief Operating Officer and William T. Brannan Director
/s/ Michael Brooks Director Michael Brooks
/s/ Randall Catlin Director Randall Catlin
/s/ Jon F. Hanson Director Jon F. Hanson
/s/ Labe Leibowitz Director Labe Leibowitz
/s/ Marilu Marshall Director Marilu Marshall
/s/ Kenneth W. Tunnell Director Kenneth W. Tunnell
/s/ John S. Wehrle Director John S. Wehrle
*By: ___/s/ Albert W. Van Ness, Jr. Albert W. Van Ness, Jr., Attorney-in-Fact
(a) Represents allowance for doubtful accounts of acquired companies.
The accompanying notes to consolidated financial statements are an integral part of this schedule.
INDEX TO EXHIBITS
Exhibits Page
10.13 Consulting Agreement, dated July 27, 1997, by and between Clayton/National Courier Systems, Inc., and Labe Leibowitz. 2
10.14 Amendment, dated December 23, 1997, to Employment Agreement, with Al Van Ness, Jr. 6
11.1 Statement Regarding Computation of Net Income (Loss) Per Share 9
21.1 List of Subsidiaries of Consolidated Delivery & Logistics, Inc. 10
23.1 Consent of Independent Public Accountants 11
25.1 Power of Attorney 12
27.1 Financial Data Schedule (for electronic submission only) 13