| CD&L INC Item 1A Risk Factors |
| 8 ITEM 1A RISK FACTORS You should carefully consider the following factors as well as the other information in this report before deciding to invest in shares of our Common Stock |
| WE MAY NOT BE ABLE TO FINANCE FUTURE NEEDS OR ADAPT OUR BUSINESS PLAN TO CHANGES BECAUSE OF RESTRICTIONS PLACED ON US BY OUR FINANCIAL CONDITION, OUR CREDIT FACILITY, OUR OTHER SENIOR DEBT AND THE INSTRUMENTS GOVERNING OUR OTHER DEBT We had an accumulated deficit of (dlra3cmam056cmam000) as of December 31, 2005 |
| On numerous occasions, we have had to amend and obtain waivers of the terms of our credit facilities and senior debt as a result of covenant violations or for other reasons |
| On April 14, 2004, we restructured our senior subordinated debt and related covenants |
| The restructuring included an agreement among us, our lenders, certain members of CD&L management and others which improved our short-term liquidity and reduced our interest expense |
| The restructuring eased the financial covenants to our senior secured lenders to which we are subject and in October 2005 we further reduced the principal balance due on our senior subordinated debt to dlra4cmam000cmam000 |
| However, if we were to fail to meet covenants to our secured lender in the future, there can be no assurances that our lenders would agree to waive any future covenant violations, renegotiate and modify the terms of our loans or further extend the maturity date should it become necessary to do so |
| Further, there can be no assurances that we will be able to meet our revenue, cost or income projections, upon which the debt covenants to our secured lender are based |
| PRICE COMPETITION COULD REDUCE THE DEMAND FOR OUR SERVICE The market for same-day delivery and logistics services has been and is expected to remain highly competitive |
| Competition is often intense, particularly for basic delivery services |
| High fragmentation and low barriers to entry characterize the industry |
| Other companies in the industry compete with us not only for provision of services but also for qualified drivers |
| Some of these companies have longer operating histories and greater financial and other resources than us |
| Additionally, companies that do not currently operate delivery and logistics businesses may enter the industry in the future |
| Price competition can cause margin erosion and prevent us from increasing our prices to our customers commensurate with cost increases |
| WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS Our contracts with our customers typically are terminable upon 30 days notice |
| We often have significant start-up costs when we begin servicing a new customer in a new location |
| Termination of these contracts could have a material adverse effect on our business, financial condition and results of operations |
| WE RELY ON A FEW LARGE CUSTOMERS For the years ended December 31, 2005 and 2004, our four largest customers accounted for 28dtta1prca and 31dtta0prca of our revenues, respectively, and our top ten customers accounted for 46dtta9prca and 48dtta1prca of our revenues, respectively |
| The loss of any of these customers could have a material adverse effect on our results of operations |
| From time to time, some of these employee drivers are involved in automobile accidents |
| We currently carry liability insurance of dlra1cmam000cmam000 for each employee driver, subject to applicable deductibles, and carry umbrella coverage up to dlra5cmam000cmam000 |
| However, claims against us may exceed the amounts of available insurance coverage |
| In accordance with our policy, all independent contractor drivers are required to maintain liability coverage as well as workers &apos compensation or occupational accident insurance |
| If we were to experience a material increase in the frequency or severity of accidents, liability claims or workers &apos compensation claims or unfavorable resolutions of claims, our operating results could be materially affected |
| For independent contractor drivers, we carry umbrella coverage of dlra5cmam000cmam000 |
| 8 AS A SAME-DAY DELIVERY COMPANY, OUR ABILITY TO SERVICE OUR CLIENTS EFFECTIVELY OFTEN DEPENDS UPON FACTORS BEYOND OUR CONTROL Our revenues and earnings are especially sensitive to events that are beyond our control that affect the same-day delivery services industry, including: o extreme weather conditions; o economic factors affecting our significant customers; o mergers and consolidations of existing customers; o ability to purchase insurance coverage at reasonable prices; o US business activity; and o the levels of unemployment |
| WE DEPEND ON THE AVAILABILITY OF QUALIFIED DELIVERY PERSONNEL We depend on our ability to attract and retain, as employees or independent contractors, qualified delivery personnel who possess the skills and experience necessary to meet the needs of our operations |
| We compete in many markets in which unemployment is generally relatively low and the competition for owner-operators and other employees is intense |
| We must continually evaluate and upgrade our pool of available owner-operators to keep pace with demands for delivery services |
| There can be no assurance that qualified delivery personnel will continue to be available in sufficient numbers and on terms acceptable to us |
| The inability to attract and retain qualified delivery personnel could have a material adverse impact on our business, financial condition and results of operations |
| RISING FUEL COSTS CAN ADVERSELY AFFECT OUR BUSINESS The owner-operators that we use are responsible for all vehicle expenses, including maintenance, insurance, fuel and all other operating costs |
| We try to include fuel cost adjustments in customer billings that are paid to owner-operators to offset the impact of fuel price increases |
| If future fuel cost adjustments are insufficient to offset owner-operators &apos costs, we may be unable to attract a sufficient number of owner-operators, which may negatively impact our business, financial condition and results of operations |
| OUR ATTEMPTS AT GEOGRAPHIC EXPANSION MAY NOT BE SUCCESSFUL We are attempting to expand geographically on the West Coast and into the Midwest |
| Each new facility we open involves increased rent charges, higher travel costs and additional operating personnel |
| If we do not generate sufficient revenues at these new locations to cover the additional SG&A and other costs, their operation will have a negative impact on our financial condition and results of operations |
| OUR REPUTATION WILL BE HARMED, AND WE COULD LOSE CUSTOMERS, IF THE INFORMATION AND TELECOMMUNICATIONS TECHNOLOGIES ON WHICH WE RELY FAIL TO ADEQUATELY PERFORM Our business depends upon a number of different information and telecommunication technologies as well as the ability to develop and implement new technology enabling us to manage and process a high volume of transactions accurately and timely |
| Any impairment of our ability to process transactions in this way could result in the loss of customers and diminish our reputation |
| GOVERNMENTAL REGULATION OF THE TRANSPORTATION INDUSTRY, PARTICULARLY WITH RESPECT TO OUR INDEPENDENT CONTRACTORS, MAY SUBSTANTIALLY INCREASE OUR OPERATING EXPENSES A significant number of our drivers are currently independent contractors, meaning that they are not our employees |
| From time to time, federal and state taxing authorities have sought to assert that independent contractor drivers in the same-day transportation and transportation industries are employees |
| We do not pay or withhold federal or state employment taxes with respect to drivers who are independent contractors |
| Although we believe that the independent contractors we use are not employees under existing interpretations of federal and state laws, federal and state authorities may challenge this position or change other relevant laws or regulations, including tax laws and laws relating to employment and workers &apos compensation |
| If the Internal Revenue Service or a state taxing authority were to successfully assert that our independent contractors are in fact our employees, we would be required to pay withholding taxes, extend additional employee benefits to these persons and could be required to pay penalties or be subject to other liabilities as a result of incorrectly classifying employees |
| If drivers are deemed to be employees rather than independent contractors, we could be required to contribute to workers &apos compensation as well |
| Any of the foregoing possibilities could increase our operating costs and have a material adverse effect on our business, financial condition and results of operations |
| 9 STOCKHOLDERS WILL EXPERIENCE DILUTION WHEN WE ISSUE THE ADDITIONAL SHARES OF COMMON STOCK THAT WE ARE PERMITTED OR REQUIRED TO ISSUE UNDER CONVERTIBLE NOTES, OPTIONS AND WARRANTS We are permitted, and in some cases obligated, to issue shares of common stock in addition to the common stock that is currently outstanding |
| If and when we issue these shares, the percentage of the common stock currently issued and outstanding will be diluted |
| The following is a summary of additional shares of common stock that we have currently reserved for issuance as of December 31, 2005: o 506cmam250 shares are issuable upon the exercise of outstanding warrants at an exercise price of $ |
| o 4cmam000cmam000 shares are issuable upon the exercise of options or other benefits under our employee stock option plan, consisting of: o outstanding options to purchase 4cmam000cmam000 shares at a weighted average exercise price of dlra1dtta99 per share, of which options covering 2cmam758cmam348 shares were exercisable as of December 31, 2005; and o 2cmam000cmam000 shares available for future awards after December 31, 2005, subject to ratification at the June 2006 annual stockholder meeting |
| o 500cmam000 shares are issuable upon the exercise of options or other benefits under our independent director stock option plan, consisting of: o outstanding options to purchase 249cmam000 shares at a weighted average exercise price of dlra1dtta59 per share, of which options covering 201cmam000 shares were exercisable as of December 31, 2005; and o 251cmam000 shares available for future awards after December 31, 2005 |
| o 155cmam197 shares are issuable upon the exercise of outstanding convertible notes issued to sellers of businesses to us at a weighted average exercise price of dlra6dtta15 per share |
| o 3cmam937cmam008 shares are issuable upon the conversion of the convertible notes issued to investors as part of our April 2004 restructuring at a weighted average exercise price of dlra1dtta016 per share |
| o 3cmam937cmam010 shares are issuable upon the conversion of the outstanding shares of our Series A Preferred Stock, par value $ |
| 001 per share ( "e Preferred Stock "e ) at a weighted average exercise price of dlra1dtta016 per share |
| OUR SUCCESS DEPENDS ON THE CONTINUED SERVICE OF OUR KEY MANAGEMENT PERSONNEL Our future success depends, in part, on the continued service of our key management personnel |
| If certain employees were unable or unwilling to continue in their present positions, our business, financial condition, operating results and future prospects could be materially adversely affected |
| IF WE FAIL TO MAINTAIN OUR GOVERNMENTAL PERMITS AND LICENSES, WE MAY BE SUBJECT TO SUBSTANTIAL FINES AND POSSIBLE REVOCATION OF OUR AUTHORITY TO OPERATE OUR BUSINESS IN CERTAIN JURISDICTIONS 10 Our delivery operations are subject to various state, local and Federal regulations that, in many instances, require permits and licenses |
| If we fail to maintain required permits or licenses, or to comply with applicable regulations, we could be subject to substantial fines or our authority to operate our business in certain jurisdictions could be revoked |
| OUR CERTIFICATE OF INCORPORATION, BYLAWS, STOCKHOLDER RIGHTS PLAN AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER THAT CURRENT STOCKHOLDERS MAY CONSIDER FAVORABLE Provisions of our certificate of incorporation, bylaws and our stockholder protection rights plan, as well as Delaware law, may discourage, delay or prevent a merger or acquisition that you may consider favorable |
| These provisions of our certificate of incorporation and bylaws: o establish a classified board of directors in which only a portion of the total number of directors will be elected at each annual meeting; o authorize the Board of Directors to issue Preferred Stock; o do not provide for cumulative voting in the election of directors; and o limit the persons who may call special meetings of stockholders |
| We have adopted a stockholder protection rights plan in order to protect against offers to acquire us that our board of directors believes inadequate or otherwise not to be in our best interests |
| There are, however, possible disadvantages to having the plan in place, which might adversely impact us |
| The existence of the plan may limit our flexibility in dealing with potential acquirers and may deter potential acquirers from approaching us |
| We are subject to section 203 of the Delaware General Corporation Law, an anti-takeover law |
| In general, section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder |
| Section 203 generally does not apply if the business combination or the transaction in which the person became an interested stockholder is approved in advance |
| Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder |
| Generally, an interested stockholder is a person who, with affiliates and associates, owns or, within three years before the determination of interested stockholder status, did own 15prca or more of a corporationapstas voting stock |
| Section 203 may delay or prevent a change in control of us without further action by the stockholders |
| WE HAVE SIGNIFICANT INTANGIBLE ASSETS The value of our goodwill is significant relative to total assets and stockholders equity |
| We review goodwill for impairment on at least an annual basis |
| While there was no impairment of goodwill in 2005, changes in business conditions or interest rates could materially impact our estimates of future operations and result in an impairment of goodwill |
| BASED ON CURRENT DISCUSSIONS WITH THE SECURITIES AND EXCHANGE COMMISSION ( "e SEC "e ), WE MAY BE REQUIRED TO AMEND PRIOR FILINGS The SEC has asked the Company to provide additional support for its accounting for the March 1, 2004 transaction wherein the Company repurchased certain Indiana-based assets and liabilities originally sold to First Choice Courier in June 2001 |
| Consideration for the repurchase included cancellation of a promissory note receivable owed by First Choice plus a three year contingent earn-out based on retained revenue |
| The majority of the purchase price related to the value of the First Choice customer list |
| An intangible asset of dlra1cmam602cmam000 was recorded as of the purchase date |
| The asset is being amortized over five years |
| The SEC is questioning if all, or part, of the purchase price should have been accounted for as forgiveness of debt |
| The Company disagrees with that position and believes its accounting for the transaction is correct |
| 11 If however, after review and discussion, the SEC does not ultimately agree with the Companyapstas accounting, the Company may be required to amend prior years filings and there may be an adjustment required in previously reported operating results |
| The Company will be communicating with the SEC subsequent to this filing to resolve this issue |