UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 For the quarterly
period ended September 30, 1998 or
Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from_______________to____________
Commission File Number: 0-26954
CONSOLIDATED DELIVERY & LOGISTICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3350958
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
380 Allwood Road
Clifton, New Jersey 07012
(Address of principal executive offices) (Zip Code)
(973) 471-1005
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No___
The number of shares of common stock of the Registrant, par value $.001 per
share, outstanding as of November 3, 1998 was 6,637,517.
<PAGE>
CONSOLIDATED DELIVERY & LOGISTICS, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Page
Part I - Financial Information (unaudited)
Item 1 - Financial Statements
Consolidated Delivery & Logistics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997 3
Condensed Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II - Other Information
Item 1 - Legal Proceedings 14
Item 6 - Exhibits and Reports on Form 8-K 15
Signature 16
<PAGE>
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share information)
<TABLE>
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September 30, December 31,
1998 1997
------------------- -------------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $823 $1,812
Accounts receivable, net 22,478 21,275
Prepaid expenses and other current assets 3,301 2,992
------------------- -------------------
Total current assets 26,602 26,079
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 6,795 5,667
OTHER ASSETS 13,002 4,403
NONCURRENT ASSETS OF DISCONTINUED
OPERATIONS - 10
------------------- -------------------
Total assets $46,399 $36,159
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $9,822 $7,360
Current maturities of long-term debt 1,747 3,280
Accounts payable and accrued liabilities 16,790 12,868
Net liabilities of discontinued operations 100 52
------------------- -------------------
Total current liabilities 28,459 23,560
LONG-TERM DEBT 6,616 2,240
OTHER LONG-TERM LIABILITIES 1,559 1,745
------------------- -------------------
Total liabilities 36,634 27,545
------------------- -------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.001 par value; 30,000,000 shares
authorized; 6,637,517 and 6,666,884 shares issued
and outstanding at September 30, 1998 and
December 31, 1997, respectively 7 7
Additional paid-in capital 9,026 9,026
Treasury stock, 29,367 shares at cost at
September 30, 1998 (162) -
Retained earnings (accumulated deficit) 894 (419)
------------------- -------------------
Total stockholders' equity 9,765 8,614
------------------- -------------------
Total Liabilities and stockholders' equity $46,399 $36,159
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- --------------- -------------- ----------------
Revenue $48,229 $44,259 $135,507 $126,368
Cost of revenue 37,187 33,810 104,812 96,758
---------------- --------------- -------------- ----------------
Gross profit 11,042 10,449 30,695 29,610
Selling, general, and
administrative expenses 9,770 9,435 27,951 28,409
---------------- --------------- -------------- ----------------
Operating income 1,272 1,014 2,744 1,201
Other (income) expense:
Gain on sale of subsidiary, net - - - (816)
Other (income) expense, net (44) 5 (215) (209)
Interest expense 341 318 839 836
---------------- --------------- -------------- ----------------
Income from continuing operations
before income taxes 975 691 2,120 1,390
Provision for income taxes 372 277 807 556
---------------- --------------- -------------- ----------------
Income from continuing operations 603 414 1,313 834
Loss from discontinued
operations, net of tax benefit - (361) - (452)
---------------- --------------- -------------- ----------------
Net income $603 $53 $1,313 $382
================ =============== ============== ================
Basic income (loss) per share:
Continuing operations $.09 $.06 $.20 $.13
Discontinued operations - (.05) - (.07)
---------------- --------------- -------------- ----------------
Net income per share $.09 $.01 $.20 $.06
================ =============== ============== ================
Diluted income (loss) per share:
Continuing operations $.09 $.06 $.19 $.13
Discontinued operations - (.05) - (.07)
---------------- --------------- -------------- ----------------
Net income per share $.09 $.01 $.19 $.06
================ =============== ============== ================
Basic weighted average common
shares outstanding 6,638 6,659 6,652 6,674
================ =============== ============== ================
Diluted weighted average common
shares outstanding 6,809 6,659 6,820 6,674
================ =============== ============== ================
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
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For the Nine Months
Ended September 30,
-----------------------------
1998 1997
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,313 $382
Adjustments to reconcile net income to net cash provided by
operating activities -
Gain on disposal of equipment and leasehold improvements (11) (14)
Gain on sale of subsidiary - (816)
Depreciation and amortization 2,146 1,550
Changes in operating assets and liabilities
(Increase) decrease in -
Accounts receivable, net 287 (1,961)
Prepaid expenses and other current assets (407) (587)
Other assets (188) (249)
Increase (decrease) in -
Accounts payable and accrued liabilities 2,979 3,429
Other long-term liabilities (189) 93
------------- ------------
Net cash provided by operating activities 5,930 1,827
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (4,786) -
Proceeds from sale of equipment and leasehold improvements 16 30
Additions to equipment and leasehold improvements (1,882) (808)
------------- ------------
Net cash used in investing activities (6,652) (778)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net 2,462 (307)
Proceeds from long-term debt 150 -
Repayments of long-term debt (2,937) (916)
Deferred financing costs - (125)
------------- ------------
Net cash used in financing activities (325) (1,348)
------------- ------------
CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 58 (188)
------------- ------------
Net decrease in cash and cash equivalents (989) (487)
CASH AND CASH EQUIVALENTS, beginning of period 1,812 1,757
------------- ------------
CASH AND CASH EQUIVALENTS, end of period $823 $1,270
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
CONSOLIDATED DELIVERY & LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
condensed consolidated balance sheet at December 31, 1997, has been
derived from the audited financial statements at that date. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results that
may be expected for any other interim period or for the year ending
December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto which are included in the
Company's Form 10-K for the year ended December 31, 1997.
(2) 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 market
value of the underlying assets of $4.38 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. The
Note is convertible in its entirety at the option of the Company when
the average closing sales price of the Company's common stock equals or
exceeds $7 per share over a ninety day period. In addition, the
purchase agreement also provides for a contingent earn out of up to
$1.5 million which is payable to Metro based on the achievement of
certain financial goals by the newly formed division during the two
year period following the closing. Final determination of the purchase
price will be made by October 2001.
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 market 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 at a conversion price of $6 per share. The KBD
Note is convertible in part or in its entirety at the option of the
Company when the average closing sales price of the Company's common
stock 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 is 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 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 place. The
purchase price for the assets and certain non-competition 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.
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 the date of acquisition.
The following summarized unaudited pro forma financial information
assumes that the Metro and KBD acquisitions were consummated on January
1, respectively of 1998 and 1997. This information is not necessarily
indicative of the results the Company would have obtained had these
events actually occurred or of the Company's actual or future results.
<TABLE>
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Three Months Ended Nine Months Ended
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
Pro Forma Pro Forma Pro Forma Pro Forma
Combined Combined Combined Combined
---------------- ------------------ ------------------ -----------------
Revenue $48,847 $47,153 $142,823 $135,049
Income from
operations 1,248 461 3,192 974
Net income $571 $100 $1,334 $522
Net income per
share - basic $.09 $.02 $.20 $.08
Net income per
share - dilued $.08 $.02 $.20 $.08
</TABLE>
(3) SHORT-TERM BORROWINGS:
Under the terms of its July 14, 1997 Revolving Credit Facility with
First Union Commercial Corporation (the "Bank"), the Company was not in
compliance with its tangible net worth and fixed charge coverage ratio,
two of its loan covenants as of and for the three month period ended
September 30, 1998. The Bank has issued a waiver to the Company with
respect to such non-compliance for the three month period ended
September 30, 1998. The Company is currently in negotiations concerning
appropriate changes in such loan covenant and other substantive
provisions of its revolving credit facility.
(4) SUBORDINATED DEBENTURES:
On April 1, 1998 the Company converted $740,000 of the $2 million of 8%
Subordinated Convertible Debentures (the " 8% Debentures") to 10%
Subordinated Convertible Debentures (the "10% Debentures") and issued
$150,000 of additional 10% Debentures. 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 of the above transaction, the 10% Debentures,
totaling $890,000, have been classified as long-term debt. The
remaining 8% Debentures, totaling $1.3 million were repaid in August
1998.
(5) LITIGATION:
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 initial public offering (the "Offering").
The gravamen of the complaint was 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 sought 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. A preliminary order approving the terms of the
settlement was issued by the Court 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. Class members
who wish to be excluded from the class must request exclusion by
December 4, 1998. A final settlement hearing formally approving the
settlement is scheduled for December 18, 1998. The last date for filing
Proof of Claims by any class member is February 20, 1999. The full
amount of the settlement is covered by the Company's applicable
insurance. Accordingly the settlement will not have a material adverse
affect on the Company's financial condition or results of operations.
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 will have a material adverse effect on the financial
position or results of operations of the Company and its subsidiaries.
(6) EARNINGS PER SHARE:
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), in the quarter
ended December 31, 1997. SFAS 128 establishes standards for the method
of computation, presentation and disclosure for earnings per share
("EPS") and requires the presentation of basic and diluted EPS.
Previously reported EPS amounts were not affected by the adoption of
this new standard. The conversion of the debentures into common stock
(see Note 4) were antidilutive for 1998 and 1997. The effect of the
conversion of unexercised stock options were antidilutive for 1997.
A reconciliation of weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution follows
(in thousands) -
<TABLE>
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Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
1998 1997 1998 1997
--------------- ------------- ------------- ------------
Basic weighted average
common shares oustanding 6,638 6,659 6,652 6,674
Effect of dilutive securities:
Stock options 171 - 168 -
--------------- ------------- ------------- ------------
Diluted weighted average
common shares outstanding 6,809 6,659 6,820 6,674
=============== ============= ============= ============
</TABLE>
(7) NEW ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131
introduces a new model for segment reporting, called the "management
approach." The management approach is based on the way that management
organizes segments within a company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure - any manner
in which management disaggregates a company. The management approach
replaces the notion of industry and geographic segments in current
accounting standards. SFAS 131 is effective for fiscal years beginning
after December 15, 1997 and early adoption is encouraged. However, SFAS
131 need not be applied to interim statements in the initial year of
application. SFAS 131 requires restatement of all prior period
information reported. The Company intends to adopt this standard when
required and is in the process of determining the effect of SFAS 131 on
the Company's consolidated financial statements.
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 is in the process
of determining the effect of this statement on the Company's
consolidated financial position and results of operations.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company and the related Notes thereto
appearing elsewhere herein.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Certain information contained in this Form 10-Q
includes information that is forward looking, such as the Company's expectations
for future performance, its growth and acquisition strategies, its anticipated
liquidity and capital needs, the prospects for settlement of litigation, the
ability to lower costs through increased route density, the effects of Year 2000
compliance and its future prospects. The matters referred to in such forward
looking statements could be affected by the risks and uncertainties related to
the Company's business. Actual results may vary from these forward-looking
statements due to many factors including but not limited to: lack of
satisfactory acquisition candidates and/or an inability to conclude acquisitions
on satisfactory terms; acquisition limitations under the terms of the existing
credit facility; inability to obtain acquisition financing on satisfactory
terms, the effect of economic and market conditions, the ability of the Company
to execute its strategic plan, the impact of competition and the Company's
reported results varying materially from management's current expectations.
Investors are further cautioned that the Company's financial results can vary
from quarter to quarter, and the financial results reported for the first nine
months may not necessarily be indicative of future results. For more information
about the Company, please review the Company's most recent Form 10-K filed with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenue increased for the nine months ended September 30, 1998 by $9.1 million
or 7.2%, to $135.5 million compared to revenue of $126.4 million for same period
in 1997. The Company's ground delivery divisions accounted for the revenue
increase as a result of newly added customers, continued strong internal growth
of the Company's core businesses and partially due to revenue from acquisitions.
The revenue contribution from acquisitions of $2.8 million offset one time
incremental revenue generated in August, 1997 as a result of a strike at United
Parcel Service. The air division's revenue for nine months did not increase over
revenue generated for the same time period in 1997. Revenue increases generated
as a result of newly added customers were offset due to a concerted effort by
air division management to identify and eliminate low margin product lines.
Cost of revenue increased by $8.0 million or 8.3% from $96.8 million for the
first nine months of 1997 to $104.8 million for the nine months ended September
30, 1998. The increase in costs stated as a percentage of revenue represents an
increase from 76.6% for the first nine months of 1997 to 77.3% for the first
nine months of 1998 or 0.7%. The cost of revenue increase has been isolated to
the Southeast and Midwest/West ground operations where the majority of such
ground business is dedicated and/or route - scheduled deliveries. This product
line has experienced a lack of driver availability causing payroll cost to
increase resulting from the current low level of unemployment; coupled with some
initial start-up costs for new business being absorbed by the operations at
these regions. Concurrently, the Northeast ground operation demonstrated a
reduction in costs as a result of an improved delivery route matrix and higher
distribution volume. The air division has also seen lower costs as they continue
to analyze profitability for each of their major accounts.
Selling, general and administrative expense (SG&A) continues to decrease when
comparing period to period levels. SG&A decreased $458,000 or 1.6% for the nine
months ended September 30, 1998 compared to the same period in the prior year.
The nine months ended September 30, 1998 shows a reduction of approximately
$800,000 in SG&A, offset somewhat by increased depreciation expense of
approximately $300,000 as a result of an investment in technology. SG&A for the
first nine months of 1998 was 20.6% stated as a percentage of revenue compared
to 22.5% for the first nine months of 1997, a decrease of 1.9%.
As a result of the matters discussed above, operating income increased by $1.5
million or 125% from $1.2 million for the nine months ended September 30, 1997
to $2.7 million for the nine months ended September 30, 1998. Operating income
for the first nine months of 1998 was 2.0% stated as a percentage of revenue
versus 1.0% for the same period in 1997.
Income from continuing operations before income taxes increased by $730,000, or
52.1%, from $1.4 million for the first nine months of 1997 to $2.1 million for
the first nine months of 1998.
Three Months ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Revenue for the third quarter of 1998 increased by $4.0 million or 9.0% from
$44.2 million for the third quarter of 1997 to $48.2 million for the same period
in 1998. The increased revenue resulted primarily from a $4.7 million increase
in the Company's ground operations offset slightly by a reduction of
approximately $0.7 million in the Company's air division. Increased revenue from
acquisitions of approximately $2.8 generated in the third quarter of 1998 were
offset by an incremental revenue increase during the third quarter of 1997 due
to the positive impact of the short-lived United Parcel Service strike.
The cost of revenue differential for the third quarter 1998 stated as a percent
of revenue compared to the third quarter 1997 increased slightly from 76.4% to
77.1% due to the lack of driver availability and initial start-up costs for new
business added to the Southeast and Northeast regions of the Company.
Selling general and administrative expenses stated as a percentage of revenue
declined by 1.0% from 21.3% for the third quarter of 1997 to 20.3% for the third
quarter of 1998. SG&A increased $335,000 or 3.6% during the third quarter of
1998 as compared to the same period in 1997. The primary contribution to the
dollar increase in SG&A is depreciation expense as a result of increased capital
expenditures in technology, with the remaining increase in dollars attributable
to newly added salespersons.
As a result of the matters discussed above, operating income for the third
quarter of 1998 improved to $1.3 million compared to $1.0 million for the same
period in 1997.
Income from continuing operations was 45.7% higher for the three months ended
September 30, 1998 compared to the same period in 1997, increasing from $414,000
or 0.9% of revenues for the third quarter 1997 to $603,000 or 1.3% of revenues
for the third quarter 1998.
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 recharaterized, the Company could
have to pay additional employment-related taxes on such amounts.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by $4.4 million to a deficit of $1.9 million at
September 30, 1998 from $2.5 million at December 31, 1997. The decrease
represents the use of the Company's line of credit to to consummate the
previously discussed acquisitions. Cash and cash equivalents decreased by $1.0
million from $1.8 million at December 31, 1997 to $800,000 at September 30,
1998. The Company utilized cash of $1.0 million and cash generated by its
operations of $5.9 million to purchase three businesses for $4.8 million, to
purchase equipment and leasehold improvements totaling $1.9 million, and to
reduce its net borrowings by $325,000.
As of April 1, 1998 the Company converted $740,000 of its $2.0 million 8%
Subordinated Convertible Debentures to 10% Subordinated Convertible Debentures,
and issued an additional $150,000 of the 10% Subordinated Convertible
Debentures. In August 1998, the Company redeemed $1.3 million of its 8%
Subordinated Convertible Debentures. These transactions did not affect
availability under the terms of the Company's credit facility. At September 30,
1998 the Company had $4.3 million available under its credit facility.
The Company has engaged an exclusive placement agent for the proposed sale of
$20 million of senior subordinated notes to provide additional financing to fund
the Company's anticipated acquisitions for which negotiations are being
currently conducted.
In addition, the Company is also conducting current negotiations to modify its
existing credit facility to increase the maximum available from $15 million to
$22.5 million and to provide for an equipment acquisition loan facility of up to
$2.5 million.
Management believes that cash flow from its operations, together with its
existing and anticipated borrowing capacity, as discussed above, are sufficient
to support the Company's operations and general business and liquidity
requirements for the foreseeable future, including anticipated acquisitions.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 introduces a new model for segment
reporting, called the "management approach." The management approach is based on
the way that management organizes segments within a company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure - any manner in
which management disaggregates a company. The management approach replaces the
notion of industry and geographic segments in current accounting standards. SFAS
131 is effective for fiscal years beginning after December 15, 1997 and early
adoption is encouraged. However, SFAS 131 need not be applied to interim
statements in the initial year of application. SFAS 131 requires restatement of
all prior period information reported. The Company intends to adopt this
standard when required and is in the process of determining the effect of SFAS
131 on the Company's consolidated financial statements.
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 is in the process of determining the effect of this statement on the
Company's consolidated financial position and results of operations.
Year 2000 Compliance
The Company is aware of the issues related to the approach of the Year 2000 and
continues to address the impact of these issues on it business to ensure that
its critical systems will function appropriately for the turn of the century.
These issues affect computer systems that have date-sensitive programs that may
not properly recognize the Year 2000, as well as machines and equipment that
contain imbedded technology, such as security systems, telephone switches,
telephones and postal meters.
The Company's Year 2000 efforts are being carried out by the Company's Year 2000
team, under the leadership of the Director of Information Technology. The Year
2000 team has formalized a project plan to focus on four areas: (i) internal
business and financial information systems including computer hardware,
application software, operating systems and data telecommunications; (ii)
imbedded technology; (iii) third party interfaces with customers, vendors, banks
and others, where information is exchanged electronically; and (iv) third party
compliance where the third party provides critical services to the Company, such
as telecommunication carriers, mobile network providers, insurance companies and
financial institutions. The first phase in the Company's plan is data gathering
to determine whether systems are Year 2000 compliant and to ascertain the costs
of bringing the systems and interfaces into compliance. This phase is underway
and is scheduled for completion by the end of 1998 for all of the aforementioned
areas except third party compliance, which is anticipated to be an ongoing
project as third party progress is monitored against such parties Year 2000
compliance plans. The remaining phases of the Company's plan include assessment
of associated risks of non-compliance, prioritization of upgrades and
replacements, implementation of the development program and development of a
contingency plan.
Based on a preliminary estimate, the Company does not expect that the cost to
modify its information technology infrastructure to be Year 2000 compliant to
exceed $250,000. The estimate of the cost to upgrade or replace systems is
subject to the completion of phase one as described above.
The Company is in the process of obtaining information concerning the Year 2000
compliance status of its suppliers and customers. In the event that the
Company's airline, utility or telecommunication vendors do not successfully and
timely achieve Year 2000 compliance, the Company's operations could be adversely
affected by the absence of a means to communicate with its customers, vendors,
drivers and others. Since the Company has not yet fully obtained Year 2000
information from its suppliers and customers, the Company is not in a position
to be able to develop a contingency plan or fully detail the elements of a
worst-case scenario.
The preceding discussion contains numerous forward-looking statements and should
be read in conjunction with the "Disclosure Regarding Forward-Looking
Statements" appearing at the beginning of "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Expectations about future
Year 2000 related costs and the progress of the Company's Year 2000 plan are
subject to various uncertainties that could cause the actual results to differ
materially from the Company's expectations, including the Company identifying
hardware, software and devices that are not Year 2000 compatible, the nature and
amount of related labor and consulting costs and the success of the Company's
significant vendors and customers in addressing their Year 2000 issues.
Inflation
Inflation has not had a material impact on the Company's results of operations.
<PAGE>
Part II - OTHER INFORMATION
Item 1 - 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 initial public
offering (the "Offering"). The gravamen of the complaint was 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 sought 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. A preliminary order approving the terms of the
settlement was issued by the Court on October 19, 1998. Mailing of Notice and
Proofs of Claims to class members under the terms of the Settlement Agreement
was completed by October 23, 1998. Class members who wish to be excluded from
the class must request exclusion by December 4, 1998. A final settlement hearing
formally approving the settlement is scheduled for December 18, 1998. The last
date for filing Proof of Claims by any class member is February 20, 1999. The
full amount of the settlement will be covered by the Company's applicable
insurance. Accordingly the settlement will not have a material adverse affect on
the Company's financial condition or results of operations.
In February 1996, Liberty Mutual Insurance Company ("Liberty Mutual") filed an
action against Securities Courier Corporation, 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 Courier, the Company has certain rights to
indemnification from Mr. Brana. 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. A discovery cutoff date has been set by
the court for December 4, 1998.
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 will have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.2 Amended and Restated By-laws of Consolidated Delivery
& Logistics, Inc. (filed as Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998 and incorporated
herein by reference).
10.1 Amendment to Employment Agreement, dated as of
January 5, 1998, with Albert W. Van Ness, Jr.
27.1 Financial Data Schedule (for electronic submission
only)
(b) Report on Form 8-K filed on July 16, 1998 concerning the
Company's acquisition of all of the assets and certain
liabilities of Metro Courier Network, Inc.
Report on Form 8-K filed on August 18, 1998 concerning the
Company's acquisition of all of the capital stock of KBD
Services, Inc.
Report on Form 8-K filed on August 19, 1998 concerning the
Company's private placement for the proposed sale of $20 million
of senior subordinated notes.
Report on Form 8-K/A filed on September 15, 1998 concerning the
Company's acquisition of all of the assets and certain
liabilities of Metro Courier Network, Inc.
Report on Form 8-K filed on September 28, 1998 concerning the
Company's acquisition of certain assets and certain liabilities
of Eveready Express, Corp.
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.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 16, 1998 CONSOLIDATED DELIVERY & LOGISTICS, INC.
By: /s/ Albert W. Van Ness, Jr.
Albert W. Van Ness, Jr.
Chairman of the Board, Chief Executive
Officer and Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
<PAGE>
EXHIBIT INDEX
10.1 Amendment to Employment Agreement, dated as of January 5, 1998, with
Albert W. Van Ness, Jr.
27.1 Financial Data Schedule (for electronic submission only)
<PAGE>
Exhibit 10.1
AMENDMENT TO EMPLOYMENT AGREEMENT
Dated: January 5, 1998
This Amendment dated January 5, 1998 amends the Employment Agreement
dated February 5, 1997 as amended by an Amendment dated December 23, 1997 (the
"Agreement") by and between Consolidated Delivery and Logistics, Inc., (the
"Company") and Albert W. Van Ness, Jr. (the "Employee").
WHEREAS, the Employee has served as Chairman and Chief Executive
Officer of the Company from February 5, 1997 to date; and
WHEREAS, the Board of Directors of the Company desire to retain the
services of the Employee for an additional one year term commencing January 5,
1998 ("First Renewal Term")
WHEREAS, the Compensation Committee ("Committee") of the Board of
Directors of Consolidated Delivery and Logistics, Inc. have met at certain duly
convened meetings and have approved the extension of the Agreement for an
additional one year term ("First Renewal Term"); and
WHEREAS, the Employee desires to continue to serve as Chairman and
Chief Executive Officer for such First Renewal Term.
NOW, THEREFORE in consideration of the mutual promises herein to be
kept and other good and valuable considerations the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Capitalized terms used herein but not defined herein shall
have the meaning ascribed in the Agreement.
2. The following shall be added as a new sub-paragraph (d) to
Section 3 of the Agreement:
"(d) For all services rendered by the Employee during the First Renewal
Term of the Agreement, the Employee shall be compensated as follows:
(i) The Company shall pay the Employee a salary at the rate of $125,000
per annum payable on a bi-weekly basis.
(ii) Employee shall receive as additional compensation stock option
grants for a total of 100,000 shares which shall vest in full as of
January 5, 1998. These shares shall have a strike (exercise) price
equal to $2.625 per share. The options described in this subsection
shall expire on 5:00 PM on January 4, 2008. The Company shall provide
Employee concurrent with the signing of this Agreement the following
documents covering these grants:
(a) One Incentive Stock Option Agreement covering 38,095 shares; and
(b) One non-qualified Stock Option Agreement covering 61,905 shares.
(iii) As additional contingent compensation the Employee shall receive
one stock option grant covering up to 60,000 shares which shall vest in
full as of January 5, 1998 with a strike (exercise) price equal to
$2.625 per share and having an expiration date of 5:00 PM January 4,
2008. The actual number of options to be granted shall be based on
achievement of performance criteria for 1998 to be agreed to by the
Company and the Employee.
(iv) As additional contingent compensation, if the share price of the
Company stock increases at any time by $2.00 or more over the January
5, 1998 share price of $2.625 (NASDAQ end of day) a non-qualified stock
option for 35,000 shares shall automatically be granted to the
Employee. These shares shall have a strike (exercise) price equal to
$2.625 per share. These options shall vest in full as of January 5,
1998 and shall expire at 5:00 PM on January 4, 2008.
(v) As additional contingent compensation the Employee shall receive an
additional stock option grant covering 25,000 shares which shall vest
in full as of January 5, 1998 upon achievement of any of six of the
company's nine corporate goals set out in the Company's "1998 Strategic
Plan." These shares shall have a strike (exercise) price equal to
$2.625 per share. These options shall vest in full as of January 5,
1998 and shall expire at 5:00 PM on January 4, 2008.
3. The following shall be added as a new Section 15 to the Agreement:
"Section 15. Change of Control.
In the event of a consolidation, merger or transfer of all or
substantially all of the assets of the Company to another
person or entity whereby immediately after such transaction,
50% or more of the voting securities of the Company have been
transferred, the Company shall immediately prior to such
transfer pay the Employee an amount in cash equal to the
Employee's salary for the remainder of the First Renewal Term
of this Agreement. In addition any and all conditions set
forth in Section 3 (d) (iii) (b), (iv) and (v) of the
Agreement with respect to contingent compensation shall be
deemed to have been satisfied and all contingent stock options
shall be granted to the Employee immediately prior to such
transfer.
4. The last two sentences of Section 5 (b) of the Agreement are hereby deleted
and replaced with the following: "For a period of four months commencing on the
effective date of the termination of his employment, Employee agrees that he
will not hire any executive of the Company or its subsidiaries or solicit or
induce any such executive to leave the employment of the Company."
5. The parties agree that this Amendment maybe executed by
each party signing a facsimile copy hereof and shall become effective upon the
Company 's receipt of one fully executed facsimile copy. Each fully executed
facsimile copy held by the parties shall be deemed a valid and enforceable
original copy of this Amendment.
6. All terms and conditions of the Agreement not expressly
amended hereby shall remain in full force and effect.
IN WITNESS WHEREOF, the Company and the Employee each have caused this
Amendment to be executed by its duly authorized officers and shall be deemed to
be effective upon signature below by both parties.
CONSOLIDATED DELIVERY THE EMPLOYEE:
AND LOGISTICS, INC.
By: /s/ William T. Brannan /s/ Albert W. Van Ness, Jr.
William T. Brannan, President Albert W. Van Ness, Jr.
Date: January 5, 1998
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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