SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 2002 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: 0-29754
TARGET LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3309110
- --------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
112 East 25th Street, Baltimore, Maryland 21218
- ----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 338-0127
Securities registered pursuant to Section
12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
None None
-------------- -----------------------------------------
Securities registered pursuant to Section
12(g) of the Act:
Title of Class
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 25, 2002 was $551,626.
The number of shares of common stock outstanding as of September 25, 2002 was
12,179,002
DOCUMENTS INCORPORATED BY REFERENCE
To the extent specified, Part III of this Form 10-K incorporates information by
reference to the Registrant's definitive proxy statement for its 2002 Annual
Meeting of Shareholders (to be filed).
1
TARGET LOGISTICS, INC.
2002 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
----
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Executive Officers of the Registrant 6
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 8
Item 7A. Quantitative And Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 12
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 15
Signatures 17
Certifications 18
2
PART I
ITEM 1. BUSINESS
--------
Background
- ----------
Target Logistics, Inc. ("Company") provides freight forwarding
services and logistics services, through its wholly owned subsidiary, Target
Logistic Services, Inc. ("Target"). The Company has a network of offices in 34
cities throughout the United States. The Company was incorporated in Delaware in
January 1996 as the successor to operations commenced in 1970.
Description of Business
- -----------------------
The Company's freight forwarding services involve arranging for the
total transport of customers' freight from the shipper's location to the
designated recipients, including the preparation of shipping documents and the
providing of handling, packing and containerization services. The Company
concentrates on cargo shipments weighing more than 50 pounds and generally
requiring second-day delivery. The Company also assembles bulk cargo and
arranges for insurance. The Company has a network of offices in 34 cities
throughout the United States, including exclusive agency relationships in 21
cities. The Company has international freight forwarding operations consisting
of strategic relationships in over 20 countries including share ownership in its
exclusive agents in China and Philippines. The Company has developed several
niches including fashion services, consumer direct logistics of oversized
freight, the distribution of materials for the entertainment industry, and an
expertise in material supply logistics to manufacturing concerns.
Operations
- ----------
Movement of Freight. The Company does not own any airplanes or
significant trucking equipment and relies on independent contractors for the
movement of its cargo. The Company utilizes its expertise to provide forwarding
services that are tailored to meet customer requirements. It arranges for
transportation of customers' shipments via commercial airlines, air cargo
carriers, steamship lines, and, if delivery schedules permit, the Company makes
use of lower cost inter-city truck transportation services. The Company selects
the carrier for particular shipments on the basis of cost, delivery time and
available cargo capacity. Through the Company's advanced data processing system,
it can provide, at no additional cost to the customer, value-added services such
as electronic data interchange, computer based shipping and tracking systems and
customized computer generated reports. Additionally, the Company provides cargo
assembly and warehousing services.
The rates charged by the Company to its customers are based on
destination, shipment weight and required delivery time. The Company offers
graduated discounts for shipments with later scheduled delivery times and rates
generally decrease in inverse proportion to the increasing weight of shipments.
Due to the high volume of freight controlled by the Company, it is able to
obtain favorable contract rates from carriers and is often able to book freight
space at times when available space is limited. When possible, the Company
consolidates different customers' shipments to reduce its cost of
transportation.
Information Systems. An important component of the Company's business
strategy is to provide accurate and timely information to its management and
customers. Accordingly, the Company has invested, and will continue to invest,
substantial management and financial resources in developing these information
systems.
The Company leases two HP 9000 mainframe computers and has a
proprietary freight forwarding software system which the Company has named
"TRACS". TRACS is an integrated freight forwarding and financial management data
processing system. It provides the Company with the information needed to manage
its sourcing and distribution activities through either printed or electronic
medium. Specifically, the TRACS system permits the Company to track the flow of
a particular shipment from the point of origin through the transportation
process to the point of delivery. The Company intends to continuously upgrade
TRACS to enhance its ability to maintain a competitive advantage.
International Operations. The Company's international operations
consist of air and ocean freight movements imported to and exported from the
3
Company's Target subsidiary's network of offices in the United States. During
the fiscal year ended June 30, 2002, the Company's international freight
forwarding accounted for 25.5% of the Company's operating revenue.
Customers and Marketing
- -----------------------
The Company's principal customers include large manufacturers and
distributors of computers and other electronic and high-technology equipment,
computer software and wearing apparel. As of June 30, 2002, the Company had
approximately 5,000 accounts.
The Company markets its services through an organization of
approximately 20 full-time salespersons and 30 independent sales agents
supported by the sales efforts of senior management, and the operations staff in
the Company's offices. The Company strongly promotes team selling, wherein the
salesperson is able to utilize expertise from other departments in the Company
to provide value-added services to gain a specific account. The Company staffs
each office with operational employees to provide support for the sales team,
develop frequent contact with the customer's traffic department, and maintain
customer service. The Company believes that it is important to maintain frequent
contact with its customers to assure satisfaction and to immediately react to
resolve any problem as quickly as possible.
The Company has and continues to develop expertise in several niches:
fashion, consumer direct logistics, and entertainment and media. The Company's
fashion services division targets chain retail and department store customers
and provides specific expertise in handling fashion-related shipments. The
fashion services division specializes in the movement of wearing apparel from
manufacturing vendors to their department store customers located throughout the
United States. The Company's Consumer Direct Logistics (CDL) operation
specializes in oversize and/or heavy weight shipments primarily from
manufacturers and catalogue sales distribution centers moving direct to the
residential consumer. The Company has recently expanded its service geared
toward the entertainment industry. The Entertainment Media Logistics (EML)
service has now expanded beyond film and entertainment logistics with
specialized services aimed at broadcast companies.
Many of the Company's customers utilize more than one transportation
provider. In soliciting new accounts, the Company uses a strategy of becoming an
approved carrier in order to demonstrate the quality and cost-effectiveness of
its services. Using this approach, the Company has advanced its relationships
with several of its major customers, from serving as a back-up freight services
provider to primary freight forwarder.
Competition
- -----------
Although there are no weight restrictions on the Company's shipments,
the Company focuses primarily on cargo shipments weighing more than 50 pounds
and requiring second-day delivery. As a result, the Company does not directly
compete for most of its business with overnight couriers and integrated shippers
of principally small parcels, such as United Parcel Service of America, Inc.,
Federal Express Corporation, DHL Worldwide Express, Inc., Airborne Freight
Corporation and the United States Postal Service. However, some integrated
carriers, such as Emery Air Freight Corporation and Pittston BAX Group, Inc.,
primarily solicit the shipment of heavy cargo in competition with forwarders.
Additionally, there is a developing trend among integrated shippers of primarily
small parcels to solicit the shipment of heavy cargo.
There is intense competition within the freight forwarding industry.
While the industry is highly fragmented, the Company most often competes with a
relatively small number of forwarders who have nationwide networks and the
capability to provide a full range of services similar to those offered by the
Company. These include EGL, Inc., Pilot Air Freight, Inc., and USF Worldwide,
Inc. There is also competition from passenger and cargo air carriers and
trucking companies. On the international side of the business, the Company
competes with forwarders that have a predominantly international focus, such as
Exel plc, Danzas Group and Kuehne Nagal International. All of these companies,
as well as many other competitors, have substantially greater facilities,
resources and financial capabilities than those of the Company. The Company also
faces competition from regional and local air freight forwarders, cargo sales
agents and brokers, surface freight forwarders and carriers and associations of
shippers organized for the purpose of consolidating their members' shipments to
obtain lower freight rates from carriers.
4
Employees
- ---------
The Company and its subsidiaries had approximately 192 full-time
employees as of June 30, 2002. None of the Company's employees are currently
covered by a collective bargaining agreement. The Company has experienced no
work stoppages and considers its relations with its employees to be good.
Regulation
- ----------
The Company's freight forwarding business as an indirect air cargo
carrier is subject to regulation by the United States Department of
Transportation under the Federal Aviation Act. However, air freight forwarders
(including the Company) are exempted from most of such Act's requirements by the
Economic Aviation Regulations promulgated thereunder, but must adhere to certain
rules, such as security requirements. The Company's foreign air freight
forwarding operations are subject to regulation by the regulatory authorities of
the respective foreign jurisdictions. The air freight forwarding industry is
subject to regulatory and legislative changes which can affect the economics of
the industry by requiring changes in operating practices or influencing the
demand for, and the costs of providing, services to customers.
ITEM 2. PROPERTIES
----------
As of June 30, 2002, the Company leased terminal facilities consisting
of office and warehouse space in 13 cities located in the United States, and
also utilized 21 offices operated by exclusive agents. The Company's facilities
range in size from approximately 1,000 square feet to approximately 100,000
square feet and consist of offices and warehouses with loading bays. All of such
properties are leased from third parties. The Company's headquarters are located
in Baltimore, Maryland, and Target's headquarters are located in Los Angeles,
California, and consists of approximately 100,000 square feet of floor space
leased pursuant to the terms of a lease which expires in July 2005. Management
believes that its current facilities are more than sufficient for its planned
growth.
The Company has an additional 12 terminal facilities in the following locations:
Atlanta, Georgia Houston, Texas
Charlotte, North Carolina Memphis, Tennessee
Chicago, Illinois Miami, Florida
Dallas, Texas Newark, New Jersey
El Paso, Texas New York, New York
Greensboro, North Carolina Seattle, Washington
ITEM 3. LEGAL PROCEEDINGS
-----------------
On October 12, 2000, Pilot Air Freight Corp. ("Pilot"), a major
competitor of Target, sued Target in the United States District Court for the
Eastern District of Pennsylvania, Case No. 00-CV-5190, with respect to the
termination by a former Pilot freight forwarder of its relationship with Pilot
and entering into an exclusive forwarder relationship with Target. Pilot
alleged, among other things, intentional interference with contract, tortious
interference with business relations, violation of section 43(a) of the Lanham
Act, violation of Pennsylvania state statutes concerning stored electronic
communications, and misappropriation of trade secrets. Pilot sought an amount
"in excess of $100,000" in damages, punitive damages, and an injunction against
Target requiring it to cease competing in the Hartford, Connecticut market for
six months. During subsequent discovery proceedings, Pilot claimed that its
damages exceed $3 million. Target has denied all of Pilot's claims and believes
they are without merit. Target will continue to vigorously defend Pilot's
claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following is a listing of the executive officers of the Company as
of June 30, 2002. There are no family relationships between any Directors and
Officers of the Company.
NAME AGE POSITION
- ---- --- --------
Stuart Hettleman............... 52 President and Chief Executive
Officer
Philip J. Dubato............... 46 Vice President, Chief Financial
Officer and Secretary
Christopher Coppersmith........ 52 President and Chief Executive Officer,
Target Logistic Services, Inc.
STUART HETTLEMAN has been President, Chief Executive Officer and a director of
the Company since February 7, 1996, and a director and Chairman of Target since
May 8, 1997.
PHILIP J. DUBATO has been Vice President, Chief Financial Officer and Secretary
of the Company since February 3, 1997 and a director of the Company since
September 18, 1998. From 1984 through 1996, Mr. Dubato was employed by LEP
Profit International, Inc., a domestic and international freight forwarder,
where he held successive positions as Controller, Chief Financial Officer and
Executive Vice President.
CHRISTOPHER COPPERSMITH has been President and Chief Executive Officer of Target
Logistic Services, Inc. (acquired by the Company in May 1997) since November
1996, and a director of the Company since May 1997. From 1974 through October
1996, Mr. Coppersmith was Executive Vice President and Chief Operating Officer
of Target Airfreight, Inc.
6
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's common stock, $.01 par value (the "Common Stock")
trades, and the Company's Redeemable Common Stock Purchase Warrants (the
"Warrants") traded, on the Over-The-Counter (OTC) market under the symbols TARG
and TARGW, respectively. The warrants expired on June 28, 2001.
The following table shows the high and low sales prices of the Common
Stock and Warrants for each of the quarters during the fiscal years indicated,
as available through the OTC market. The quotations represent prices between
dealers and do not reflect the retailer markups, markdowns or commissions, and
may not represent actual transactions. There have been no dividends declared.
COMMON STOCK WARRANTS
Fiscal Year Ended June 30, 2002
First Quarter High $0.39 High -
Low $0.14 Low -
Second Quarter High $0.32 High -
Low $0.11 Low -
Third Quarter High $0.34 High -
Low $0.12 Low -
Fourth Quarter High $0.45 High -
Low $0.14 Low -
Fiscal Year Ended June 30, 2001
First Quarter High $0.53 High $0.00
Low $0.36 Low $0.00
Second Quarter High $0.45 High $0.00
Low $0.23 Low $0.00
Third Quarter High $0.47 High $0.00
Low $0.25 Low $0.00
Fourth Quarter High $0.36 High $0.00
Low $0.25 Low $0.00
On September 25, 2002 there were 703 shareholders of record of the
Company's Common Stock. The closing price of the Common Stock on that date was
$0.13 per share.
7
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
TARGET LOGISTICS, INC.
(in thousands, except per share data)
Year Ended June 30,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
Statement of Operations Data:
Operating revenue $ 97,784 $ 51,720 $ 84,088 $ 90,143 $ 93,484
Cost of transportation 73,599 34,790 56,949 60,912 63,174
---------- ---------- ---------- --------- ----------
Gross profit 24,185 16,930 27,139 29,231 30,310
Selling, general & administrative
expenses 21,880 20,471 27,194 30,655 29,969
Depreciation and Amortization 1,132 833 989 897 1,017
---------- ---------- ---------- --------- ----------
Operating income (loss) $ 1,173 $ (4,374) $ (1,044) $ (2,321) $ (676)
Gain on sale of subsidiary - 24,832 - - -
Net income (loss) $ 7,404 $ 14,016 $ (1,197) $ (1,772) $ (935)
Net income (loss) per common share $ 0.90 $ 1.63 $ (0.14) $ (0.18) $ (0.10)
Balance Sheet Data:
Total assets $ 38,547 $ 34,932 $ 36,669 $ 36,484 $ 37,388
Working capital (deficit) ( 2,340) 5,567 4,535 336 57
Current liabilities 26,085 15,251 18,474 20,440 22,293
Long-term indebtedness 4,138 24 92 34 34
Shareholders' equity $ 8,324 $ 19,657 $ 18,102 $ 16,010 $ 15,061
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
This Annual Report on Form 10-K contains certain forward-looking
statements reflecting the Company's current expectations with respect to its
operations, performance, financial condition, and other developments. Such
statements are necessarily estimates reflecting the Company's best judgment
based upon current information and involve a number of risks and uncertainties.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from expectations are: (i) the Company's
historic losses and ability to achieve operating profitability, (ii) the
Company's ability to increase operating revenue, improve gross profit margins
and reduce selling, general and administrative costs, (iii) competitive
practices in the industries in which the Company competes, (iv) the Company's
dependence on current management, (v) the impact of current and future laws and
governmental regulations affecting the transportation industry in general and
the Company's operations in particular, (vi) general economic conditions, and
(vii) other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements. There
can be no assurance that these and other factors will not affect the accuracy of
such forward-looking statements. Forward-looking statements are preceded by an
asterisk (*).
Overview
- --------
The Company generated operating revenues of $93.5 million, $90.1
million, and $84.1 million, and had a net loss of $0.9 million, $1.8 million,
and $1.2 million for the fiscal years ended June 30, 2002, 2001, and 2000,
respectively.
The Company had earnings or (losses) before interest, taxes,
depreciation and amortization (EBITDA) of approximately $340,000, ($1,424,000),
and ($54,000), for the fiscal years ended June 30, 2002, 2001, and 2000
respectively. EBITDA, like operating income, does not include the effects of
interest and taxes, and excludes the "non-cash" effects of depreciation and
amortization on current assets. Companies have some discretion as to which
elements of depreciation and amortization are excluded in the EBITDA
8
calculation. The Company excludes all depreciation charges related to property,
plant and equipment, and all amortization charges, including amortization of
goodwill, leasehold improvements and other intangible assets. While management
considers EBITDA useful in analyzing the Company's results, it is not intended
to replace any presentation included in the Company's consolidated financial
statements.
* For the fiscal year ended June 30, 2002, the revenue of the
Company's Target subsidiary increased by 3.7% when compared to the fiscal year
ended June 30, 2001. Target's gross profit margin (i.e., gross operating revenue
less cost of transportation expressed as a percentage of gross operating
revenue) was 32.4% for the 2002 and 2001 periods. Management continues to
believe that the Company must focus on increasing revenues and must increase
gross profit margin to restore the Company to profitability. Management intends
to continue to work on growing revenue by increasing sales generated by Target's
employed sales personnel, sales generated by exclusive forwarders, and by
strategic acquisitions. Management also intends to continue to work on improving
Target's gross profit margins by reducing transportation costs.
Results of Operations
- ---------------------
Years ended June 30, 2002 and 2001
Operating Revenue. Operating revenue increased to $93.5 million for
the year ended June 30, 2002 from $90.1 million for the year ended June 30,
2001, a 3.7% increase, due to increased domestic freight volume. Domestic
revenue increased by 6.7% to $69,652,711 for the year ended June 30, 2002 from
$65,255,740 for the year ended June 30, 2001, while international revenue
decreased by 4.2% to $23,831,028 for the year ended June 30, 2002 from
$24,887,462 for the year ended June 30, 2001, primarily as a result of decreases
in air export freight volume.
Cost of Transportation. Cost of transportation was 67.6% of operating
revenue for each of the years ended June 30, 2002 and 2001.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit was 32.4% of operating revenue for the years ended June
30, 2002 and 2001.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses decreased to 33.1% of operating revenue for the year
ended June 30, 2002, from 35.0% of operating revenue for the year ended June 30,
2001. Within the Company's Target subsidiary, selling, general and
administration expenses (excluding exclusive forwarder commission expense) were
16.7% of operating revenue for each of the years ended June 30, 2002 and 2001.
Exclusive forwarder commission expense was 14.6% and 16.4% of operating revenue
for the year June 30, 2002 and 2001, respectively, an 11.0% decrease, resulting
from decreases in forwarder agent freight volume.
Net Loss. The Company realized a net loss of ($934,527) for the year
ended June 30, 2002, compared to a net loss of ($1,771,583) for the year ended
June 30, 2001. The 2001 results include a $777,895 benefit for income taxes.
Years ended June 30, 2001 and 2000
Operating Revenue. Operating revenue increased to $90.1 million for
the year ended June 30, 2001 from $84.1 million for the year ended June 30,
2000, a 7.2% increase, due to increased domestic freight volume. Domestic
revenue increased by 16.3% to $65,255,740 for the year ended June 30, 2001 from
$56,093,399 for the year ended June 30, 2000, while international revenue
decreased by 11.1% to $24,887,462 for the year ended June 30, 2001 from
$27,994,796 for the year ended June 30, 2000, primarily the result of decreases
in air export and import freight volume.
Cost of Transportation. Cost of transportation decreased slightly to
67.6% of operating revenue for the year ended June 30, 2001 from 67.7% of
operating revenue for the year ended June 30, 2000.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit for the year ended June 30, 2001 increased slightly to
32.4% of operating revenue from 32.3% of operating revenue for the year ended
June 30, 2000.
9
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased to 35.0% of operating revenue for the year
ended June 30, 2001, from 33.5% of operating revenue for the year ended June 30,
2000. Within the Company's Target subsidiary, selling, general and
administration expenses (excluding exclusive forwarder commission expense) were
16.7% of operating revenue for the year ended June 30, 2001 and 16.3% for the
year ended June 20, 2000, a 2.5% increase. This increase was primarily due to
increased operating labor costs to handle the increased freight volume and
increased selling labor cost resulting from increases in the number of sales
personnel employed by Target. Exclusive forwarder commission expense was 16.4%
and 15.2% of operating revenue for the year June 30, 2001 and 2000,
respectively, a 7.9% increase, resulting from increases in forwarder agent
freight volume.
Net Loss. The Company realized a net loss of ($1,771,583) for the year
ended June 30, 2001, compared to a net loss of ($1,196,605) for the year ended
June 30, 2000. The 2001 results include a $777,895 benefit for income taxes.
Liquidity and Capital Resources
- -------------------------------
General. During the year ended June 30, 2002, net cash used in
operating activities was $315,838. Cash used in investing activities was
$839,950, which consisted of $311,287 of capital expenditures and $528,663
relating to the purchase by the Company's Target subsidiary of the assets of SDS
Logistics and Air America Freight Service, Inc. Cash provided by financing
activities was $1,910.
Currently, approximately $1.4 million of the Company's outstanding
accounts payable represent unsecured trade payables of closed subsidiaries
which, at this time, the Company continues to carry on its books.
Capital expenditures. Capital expenditures for the fiscal year ended
June 30, 2002 were $311,287.
GMAC Facility. The Company's Target subsidiary maintains a $10 million
revolving credit facility ("GMAC Facility") with GMAC Commercial Credit LLC
("GMAC"), guaranteed by the Company. The interest rate of the GMAC Facility is
prime plus 1%, however, at any time prior to September 20, 2002, the interest
rate could not be less than 6.0% and after September 20, 2002 cannot be less
than 5.0%. Under the terms of the GMAC Facility, Target can borrow the lesser of
$10 million or 85% of eligible accounts receivable. The borrowings under the
GMAC Facility are secured by a first lien on all of the Company's and its
subsidiaries' assets. As of June 30, 2002, there were outstanding borrowings of
$5,993,475 under the GMAC Facility (which represented 83% of the amount
available thereunder) out of a total amount available for borrowing under the
GMAC Facility of approximately $7,211,000. The GMAC Facility expires on January
14, 2005. The Company entered into the GMAC Facility on January 16, 1997, and
subsequently extended the facility for an additional three-year term and most
recently for an additional two-year term.
* Working Capital Requirements. Cash needs of the Company are
currently met by the Company's accounts receivable financing facility and cash
on hand. As of June 30, 2002, the Company had $1,217,761 available under its $10
million accounts receivable financing facility and approximately $4,333,015 in
cash from operations and cash on hand. The Company believes that its current
financial resources will be sufficient to finance its operations and obligations
(current and long-term liabilities) for the long and short terms. However, the
Company's actual working capital needs for the long and short terms will depend
upon numerous factors, including the Company's operating results, the cost of
increasing the Company's sales and marketing activities, and, competition, none
of which can be predicted with certainty.
Inflation
- ---------
The Company does not believe that the relatively moderate rates of
inflation in the United States in recent years have had a significant effect on
its operations.
Critical Accounting Policies
- ----------------------------
The Company's accounting policies are more fully described in Note 3
of the Notes to the Consolidated Financial Statements, starting on page F-8. As
discussed there, the preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions about future events that affect the amounts reported
in the financial statements and accompanying notes. Since future events and
their effects cannot be determined with absolute certainty, the determination of
estimates requires the exercise of judgment. Actual results could differ from
10
those estimates, and such difference may be material to the financial
statements. The most significant accounting estimates inherent in the
preparation of the Company's financial statements include estimates as to the
appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, primarily allowance for doubtful accounts,
accruals for transportation and other direct costs, accruals for cargo
insurance, and the classification of net operating loss and tax credit
carryforwards between current and long-term assets. Management bases its
estimates on historical experience and on various assumptions which are believed
to be reasonable under the circumstances. The Company reevaluates these
significant factors as facts and circumstances change. Historically, actual
results have not differed significantly from the Company's estimates.
New Accounting Pronouncements
- -----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations." SFAS No. 141 supersedes Accounting
Principles Board ("APB") No. 16 and requires that any business combinations
initiated after June 30, 2001, be accounted for as a purchase, therefore,
eliminating the pooling-of-interest method defined in APB No. 16. The statement
was effective for any business combination initiated after June 30, 2001, and
must have been applied to all business combinations accounted for by the
purchase method for which the date of acquisition was July 1, 2001, or later.
The adoption of this statement did not have a material impact to the Company's
financial position or results of operations, since the Company has not
participated in such activities covered under this pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. This statement is
effective for fiscal years beginning after December 15, 2001. The Company
adopted this statement on July 1, 2002. Under the non-amortization approach,
goodwill and certain intangibles will not be amortized into results of
operations, but instead will be reviewed for impairment, written down and
charged to results of operations only in periods in which the recorded value of
goodwill and certain intangibles is more than its fair value. The Company is
having an independent valuation analysis completed and does not anticipate any
material transitional impairment; however, future impairment reviews may result
in periodic write-downs ranging from zero to $11,239,917. The Company amortized
approximately $596,000 of goodwill for each of the fiscal years ended June 30,
2002, 2001 and 2000, respectively.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable and is measured by a comparison
of the carrying amount of an asset to undiscounted future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future undiscounted cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds the
fair value of the asset. SFAS No. 144 requires companies to separately report
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sales, abandonment or in a distribution to
owners) or is classified as held for sale. Assets to be disclosed are reported
at the lower of the carrying amount or fair value less costs to sell. The
Company adopted SFAS No. 144 on July 1, 2002. The Company anticipates that
adoption of SFAS No. 144 will not have a material impact to the Company's
financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
11
Corrections". This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's principal financial instrument is long-term debt under
the GMAC Facility which provides for interest at the prime rate plus 1% with a
minimum interest rate of 6.0% prior to September 20, 2002, and a minimum
interest rate of 5.0% after September 20, 2002. The Company is affected by
market risk exposure primarily through the effect of changes in interest rates
on amounts payable by the Company under the GMAC Facility. A significant rise in
the prime rate could materially adversely affect the Company's business,
financial condition and results of operations. At June 30, 2002, an aggregate
principal amount of $5,993,475 was outstanding under the GMAC Facility bearing
interest at an annual rate of 6.0%. If principal amounts outstanding under the
Company's credit facility remained at this year-end level for an entire year and
the prime rate increased or decreased, respectively, by 0.5%, the Company would
pay or save, respectively, an additional $29,967 in interest in that year. The
Company does not utilize derivative financial instruments to hedge against
changes in interest rates or for any other purpose.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data required by this Item
8 are included in the Company's Consolidated Financial Statements and set forth
in the pages indicated in Item 14(a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURES
------------------------------------
On April 22, 2002, the Company filed a Current Report on Form 8-K.
Item 4 of Form 8-K, "Changes in Registrant's Certifying Accountant" was reported
as follows:
On April 18, 2002, Target Logistics, Inc. (the "Company") determined,
for itself and on behalf of its subsidiaries, to dismiss its independent
auditors, Arthur Andersen LLP ("Arthur Andersen"), and to engage the services of
Stonefield Josephson, Inc. ("Stonefield Josephson") as its new independent
auditors. The change in auditors became effective immediately. This
determination followed the Company's decision to seek proposals from independent
accountants to audit the financial statements of the Company, and was approved
by the Company's Board of Directors upon the recommendation of its Audit
Committee. Stonefield Josephson was engaged to review the financial statements
of the Company beginning with the fiscal quarter ended March 31, 2002.
During the two most recent fiscal years of the Company ended June 30,
2001, and the subsequent interim period through April 18, 2002, there were no
disagreements between the Company and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to Arthur Andersen's
satisfaction, would have caused Arthur Andersen to make reference to the subject
matter of the disagreement in connection with its reports.
12
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the two most recent fiscal years of the Company
ended June 30, 2001 or within the interim period through April 18, 2002.
The audit reports of Arthur Andersen on the consolidated financial
statements of the Company as of and for the fiscal years ended June 30, 2000 and
2001 did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles. A
letter from Arthur Andersen was attached as Exhibit 16.1 to the Form 8-K filing.
During the two most recent fiscal years of the Company ended June 30,
2001, and the subsequent interim period through April 18, 2002, neither the
Company nor any of its subsidiaries consulted with Stonefield Josephson
regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii)
of Regulation S-K.
13
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information with respect to the identity and business experience
of the directors of the Company and their remuneration in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A and issued in
conjunction with the 2002 Annual Meeting of Shareholders, is incorporated herein
by reference. The information with respect to the identity and business
experience of executive officers of the Company is set forth in Part I of this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this item is incorporated by reference
from the Company's definitive Proxy Statement to be issued in conjunction with
the 2002 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
------------------------------------------
The information required by this item is incorporated by reference
from the Company's definitive Proxy Statement to be issued in conjunction with
the 2002 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is incorporated by reference
from the Company's definitive Proxy Statement to be issued in conjunction with
the 2002 Annual Meeting of Shareholders.
14
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
-----------------------------------------------------------------
(a) 1. Financial Statements
--------------------
Page
----
Report of Independent Public Accountants F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of June 30, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended
June 30, 2002, 2001, and 2000 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 2002, 2001, and 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2002, 2001, and 2000 F-6
Notes to Consolidated Financial Statements F-8
(a) 2. Financial Statement Schedules
-----------------------------
Schedule II - Schedule of Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable, are not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
-----------------------------------------------------------
Exhibit No.
- -----------
3.1 Certificate of Incorporation of Registrant, as amended (incorporated
by reference to Exhibit 3.1 to the Registrant's Current Report on Form
8-K dated November 30, 1998, File No. 0-29754)
3.2 By-Laws of Registrant, as amended (incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended December 31, 1998, File No. 0-29754)
4.1 Warrant Agent Agreement (incorporated by reference to Exhibit 4.3 to
the Registrant's Registration Statement on Form S-1, Registration No.
333-03613)
4.2 Form of Amendment No. 1 to Warrant Agent Agreement dated June 13, 1997
(incorporated by reference to Exhibit 4.7 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-30351)
4.3 Certificate of Designations with respect to the Registrant's Class A
Preferred Stock (contained in Exhibit 3.1)
4.4 Certificate of Designations with respect to the Registrant's Class B
Preferred Stock (contained in Exhibit 3.1)
4.5 Certificate of Designations with respect to the Registrant's Class C
Preferred Stock (contained in Exhibit 3.1)
4.6 Certificate of Designations with respect to the Registrant's Class D
Preferred Stock (contained in Exhibit 3.1)
4.7 Certificate of Designations with respect to the Registrant's Class E
Preferred Stock (contained in Exhibit 3.1)
10.1 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
December 31, 1997, File No. 0-29754)
10.2 Restated and Amended Accounts Receivable Management and Security
Agreement, dated as of July 13, 1998 by and between GMAC Commercial
Credit LLC, as Lender, and Target Logistic Services, Inc., as
Borrower, and guaranteed by the Registrant ("GMAC Facility Agreement")
(incorporated by reference to Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended June 30, 1999, File No.
0-29754)
10.3 Letter amendment to GMAC Facility Agreement, dated January 25, 2001
(incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended December 31, 2000,
File No. 0-29754)
10.4 Amendment to GMAC Facility Agreement, dated September 20, 2002
15
10.5 Employment Agreement dated June 24, 1996 between Amertranz Worldwide
Holding Corp. and Stuart Hettleman (incorporated by reference to
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended June 30, 1996, File No. 0-29754)
10.6 Addendum to Employment Agreement effective June 24, 1999 between
Target Logistics, Inc. and Stuart Hettleman (incorporated by reference
to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended June 30, 2000, File No. 0-29754)
10.7 Addendum to Employment Agreement dated June 30, 2002 between Target
Logistics, Inc. and Stuart Hettleman
10.8 (P) Lease Agreement for Los Angeles Facility (incorporated by
reference to Exhibit 10.17 to the Registrant's Annual Report on Form
10-K for the Year Ended June 30, 1997, File No. 0-29754)
10.9 Amendment to Lease Agreement for Los Angeles Facility
21 Subsidiaries of Registrant (incorporated by reference to Exhibit 21 to
the Registrant's Annual Report on Form 10-K for the Year Ended June
30, 1997, File No. 0-29754)
23 Consent of Stonefield Josephson, Inc.
99 Certification Required Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
-------------------
On April 22, 2002, the Registrant filed a Current Report on Form 8-K reporting
its change of auditors from Arthur Andersen LLP to Stonefield Josephson, Inc.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
TARGET LOGISTICS, INC.
Date: September 27, 2002 By: /s/ Stuart Hettleman
---------------------------------
Stuart Hettleman
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Stuart Hettleman President, Chief Executive September 27, 2002
- ---------------------------- Officer and Director
Stuart Hettleman
/s/ Michael Barsa Director September 27, 2002
- ----------------------------
Michael Barsa
/s/ Brian K. Coventry Director September 27, 2002
- ----------------------------
Brian K. Coventry
/s/ Christopher Coppersmith Director September 27, 2002
- ----------------------------
Christopher Coppersmith
/s/ Philip J. Dubato Vice President, Chief September 27, 2002
- ---------------------------- Financial Officer,
Philip J. Dubato Principal Accounting Officer
and Director
17
CERTIFICATIONS
I, Stuart Hettleman, certify that:
1. I have reviewed this Annual Report on Form 10-K of Target
Logistics, Inc.;
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report; and 3. Based on my knowledge, the financial statements, and other
financial information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Annual Report.
Date: September 27, 2002 /s/ Stuart Hettleman
------------------------------------
Stuart Hettleman
Chief Executive Officer
I, Philip J. Dubato, certify that:
1. I have reviewed this Annual Report on Form 10-K of Target
Logistics, Inc.;
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Annual Report.
Date: September 27, 2002 /s/ Philip J. Dubato
------------------------------------
Philip J. Dubato
Chief Financial Officer
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Target Logistics, Inc.
Baltimore, Maryland
We have audited the consolidated balance sheet of Target Logistics, Inc. (a
Delaware corporation) and subsidiaries, as of June 30, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 consolidated financial position of Target
Logistics, Inc. and subsidiaries, as of June 30, 2002, and the results of their
consolidated operations and their consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated 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
consolidated financial statements taken as a whole.
STONEFIELD JOSEPHSON, INC.
Santa Monica, California
August 9, 2002
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Target Logistics, Inc.:
We have audited the accompanying consolidated balance sheets of Target
Logistics, Inc. (a Delaware corporation), and subsidiaries as of June 30, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for the three years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Target Logistics,
Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for the years ended June 30, 2001, 2000 and
1999, in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated 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
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
August 10, 2001
EXPLANATORY NOTE REGARDING REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
On April 18, 2002, the Company decided to no longer engage Arthur Andersen
LLP ("Andersen") as its independent public accountants and engaged Stonefield
Josephson, Inc. to serve as its independent public accountants for the year
ending June 30, 2002. More information regarding the Company's change in
independent public accountants is contained in a Current Report on Form 8-K
filed with the Securities and Exchange Commission on April 22, 2002.
We could not obtain permission of Andersen to the inclusion in this Annual
Report on Form 10-K of their Report of Independent Public Accountants, above.
Accordingly, the above Report of Independent Public Accountants is merely
reproduced from the Company's Annual Report on Form 10-K for the year ended June
30, 2001 (although the consolidated balance sheet as of June 30, 2000, and the
consolidated statements of operations, shareholders' equity and cash flows for
the year ended June 30, 1999 referred to in that report are not included herein)
and does not include the manual signature of Andersen.
Because Andersen has not consented to the inclusion of its report in this Annual
Report, it may be more difficult to seek remedies against Andersen and the
ability to seek relief against Andersen may be impaired.
F-2
TARGET LOGISTICS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2002 June 30, 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $4,333,015 $5,486,893
Accounts receivable, net of allowance for doubtful accounts of
$995,245 and $1,391,157, respectively 17,012,677 14,855,373
Deferred income taxes 694,333 245,960
Prepaid expenses and other current assets 310,543 188,135
------- -------
Total current assets 22,350,568 20,776,361
PROPERTY AND EQUIPMENT, NET 615,606 725,138
OTHER ASSETS 942,110 458,717
DEFERRED INCOME TAXES 2,239,667 2,688,040
GOODWILL, net of accumulated amortization of $3,715,106
and $3,119,239, respectively 11,239,917 11,835,784
---------- ----------
Total assets $37,387,868 $36,484,040
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $5,834,820 $5,594,124
Accrued expenses 1,783,136 2,197,726
Accrued transportation expenses 8,430,078 6,713,348
Note payable to bank 5,993,475 5,679,912
Dividends payable 110,270 115,862
Taxes payable 64,576 65,375
Lease obligation - current portion 76,982 73,909
---------- ----------
Total current liabilities 22,293,337 20,440,256
LEASE OBLIGATION -- LONG TERM 34,002 33,624
----------- -----------
Total liabilities $22,327,339 $20,473,880
----------- -----------
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $10 par value; 2,500,000 shares authorized,
320,696 shares issued and outstanding 3,206,960 3,206,960
Common Stock, $.01 par value; 30,000,000 shares authorized,
12,913,953 and 12,613,953 shares issued and outstanding,
respectively 129,139 126,139
Paid-in capital 24,202,248 23,905,248
Accumulated deficit (11,833,013) (10,583,382)
Less: Treasury stock, 734,951 shares held at cost (644,805) (644,805)
----------- -----------
Total shareholders' equity 15,060,529 16,010,160
----------- -----------
Total liabilities and shareholders' equity $37,387,868 $36,484,040
=========== ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
OPERATING REVENUES: $93,483,739 $90,143,202 $84,088,195
COST OF TRANSPORTATION: 63,173,982 60,912,272 56,948,811
----------- ----------- -----------
GROSS PROFIT: 30,309,757 29,230,930 27,139,384
----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
("SG&A"):
SG&A - Target subsidiary 15,600,538 15,025,467 13,692,166
SG&A - Target subsidiary
(Exclusive forwarder commissions) 13,620,593 14,802,994 12,803,075
SG&A - Corporate 748,411 826,886 698,635
Depreciation and amortization 1,016,687 896,610 989,205
----------- ---------- ----------
Selling, general and administrative expenses 30,986,229 31,551,957 28,183,081
----------- ---------- ----------
Operating loss (676,472) (2,321,027) (1,043,697)
OTHER EXPENSE:
Interest expense (258,055) (228,451) (44,013)
----------- ---------- -----------
Loss before income taxes (934,527) (2,549,478) (1,087,710)
(Benefit) provision for income taxes - (777,895) 108,895
----------- ----------- -----------
Net loss $ (934,527) $(1,771,583) $(1,196,605)
=========== =========== ===========
Basic and diluted loss per share attributable to $(0.10) $(0.18) $(0.14)
====== ====== ======
common shareholders
Weighted average shares outstanding 11,953,797 11,879,002 11,015,126
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Preferred Stock Common Stock Additional Treasury Stock
--------------- ------------ Paid-In -------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
Balance, June 30, 1999 427,207 $4,272,070 10,031,868 $100,318 $22,877,209 (839,855) $(654,935) $(6,937,598) $19,657,064
Cash dividends associated
with the Class A, C and D
Preferred Stock - - - - - - - (357,172) (357,172)
Common Stock issued in
connection with the conversion
of Class D Preferred Stock (106,511)(1,065,110) 2,582,085 25,821 1,039,289 - - - -
Purchase of Treasury Stock
at cost - - - - - (1,400) (1,120) - (1,120)
Treasury Stock retired,
at cost - - - - (11,250) 106,304 11,250 - -
Net loss - - - - - - - (1,196,605) (1,196,605)
-------- ---------- ---------- -------- ----------- -------- --------- ----------- -----------
Balance, June 30, 2000 320,696 $3,206,960 12,613,953 $126,139 $23,905,248 (734,951) $(644,805) $(8,491,375) $18,102,167
Cash dividends associated
with the Class A and C
Preferred Stock - - - - - - - (320,424) (320,424)
Net loss - - - - - - - (1,771,583) (1,771,583)
-------- ---------- ---------- -------- ----------- -------- --------- ------------ -----------
Balance, June 30, 2001 320,696 $3,206,960 12,613,953 $126,139 $23,905,248 (734,951) $(644,805)$ (10,583,382) $16,010,160
Cash dividends associated
with the Class A and C
Preferred Stock - - - - - - - (315,104) (315,104)
Common Stock issued pursuant
to Subscription Agreements
- - 300,000 3,000 297,000 - - - 300,000
Net loss - - - - - - - (934,527) (934,527)
-------- ---------- ---------- ------- ----------- -------- --------- ------------ -----------
Balance, June 30, 2002 320,696 $3,206,960 12,913,953 $129,139 $24,202,248 (734,951) $(644,805) $(11,833,013) $15,060,529
======== ========== ========== ======== =========== ======== ========= ============= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(934,527) $(1,771,583) $(1,196,605)
Bad debt expense 341,090 (239,611) 312,659
Depreciation and amortization 1,016,687 896,610 989,205
Deferred income tax - (777,895) 108,895
Adjustments to reconcile net loss to net cash used in operating activities-
(Increase) decrease in accounts receivable (2,498,395) 334,062 (4,609,167)
(Increase) decrease in prepaid expenses and other current assets (122,408) (155,774) 120,579
Decrease in other assets 45,270 9,898 9,767
Increase (decrease) in accounts payable and accrued expenses 1,836,445 937,752 (44,945)
---------- ----------- -----------
Net cash used for operating activities (315,838) (766,541) (4,309,612)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (311,287) (450,694) (435,787)
Asset Purchase Acquisitions (Note 5) (528,663) - -
----------- ----------- -----------
Net cash used for investing activities (839,950) (450,694) (435,787)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (315,104) (320,626) (409,788)
Purchase of treasury stock - - (1,120)
Borrowing from note payable to bank 87,585,081 83,376,995 76,853,359
Repayment of note payable to bank (87,271,518) (82,333,904) (73,566,516)
Repayment of long-term debt - - (10,500)
Proceeds (payment) of lease obligations 3,451 (73,441) 53,473
----------- ------------ -----------
Net cash provided by financing activities 1,910 649,024 2,918,908
----------- ----------- -----------
Net decrease in cash and cash equivalents (1,153,878) (568,211) (1,826,491)
CASH AND CASH EQUIVALENTS, beginning of year 5,486,893 6,055,104 7,881,595
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $4,333,015 $5,486,893 $6,055,104
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $382,320 $506,793 $361,349
Income taxes $ 800 $ 2,499 $ 19,934
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
Issuance of 300,000 shares of Common Stock pursuant to Subscription Agreements $300,000 - -
TIA, Inc. conversion of 106,511 Class D Preferred Shares - - $(1,065,110)
Issuance of Common Stock for TIA, Inc. conversion of 106,511
Class D Preferred Shares - - $ 25,821
Retirement of Treasury Stock - - $ 11,250
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 2002
1. BUSINESS
Target Logistics, Inc. ("Company") provides freight forwarding
services and logistics services, through its wholly owned subsidiary, Target
Logistic Services, Inc. ("Target"). The Company has a network of offices in 34
cities throughout the United States. The Company was incorporated in Delaware in
January 1996 as the successor to operations commenced in 1970.
The Company's freight forwarding services involve arranging for the
total transport of customers' freight from the shipper's location to the
designated recipients, including the preparation of shipping documents and the
providing of handling, packing and containerization services. The Company
concentrates on cargo shipments weighing more than 50 pounds and generally
requiring second-day delivery. The Company also assembles bulk cargo and
arranges for insurance. The Company has a network of offices in 34 cities
throughout the United States, including exclusive agency relationships in 21
cities. The Company has international freight forwarding operations consisting
of strategic relationships in over 20 countries including share ownership in its
exclusive agents in China and Philippines. The Company has developed several
niches including fashion services, consumer direct logistics of oversized
freight, the distribution of materials for the entertainment industry, and an
expertise in material supply logistics to manufacturing concerns.
2. CHANGE IN AUDITORS
On April 18, 2002, the Company determined, for itself and on behalf of
its subsidiaries, to dismiss its independent auditors, Arthur Andersen LLP, and
to engage the services of Stonefield Josephson, Inc. ("Stonefield Josephson") as
its new independent auditors. The change in auditors became effective
immediately. This determination followed the Company's decision to seek
proposals from independent accountants to audit the financial statements of the
Company, and was approved by the Company's Board of Directors upon the
recommendation of its Audit Committee.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Company, as summarized below, are in
conformity with generally accepted accounting principles. 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 financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation
For the fiscal years ended June 30, 2002, 2001 and 2000, the
consolidated financial statements include the accounts of the Company, Target,
and other inactive subsidiaries. All significant intercompany balances and
transactions have been eliminated upon consolidation.
Use of Estimates
In the process of preparing its consolidated financial statements, the Company
estimates the appropriate carrying value of certain assets and liabilities which
are not readily apparent from other sources. Management bases its estimates on
historical experience and on various assumptions which are believed to be
reasonable under the circumstances. The primary estimates underlying the
Company's consolidated financial statements include allowance for doubtful
accounts, accruals for transportation and other direct costs, accruals for cargo
insurance, and the classification of NOL and tax credit carryforwards between
current and long-term assets.
F-8
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED JUNE 30, 2002
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed under the
straight-line method over estimated useful lives ranging from 3 to 8 years.
Assets under capital leases are depreciated over the shorter of the estimated
useful life of the asset or the lease term. The Company utilizes a half-year
convention for assets in the year of acquisition and disposal. Leasehold
improvements are amortized using the straight-line method over the shorter of
the asset life of the asset or the remaining lease term.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. Management has performed
a review of all long-lived assets and has determined that no impairment of the
respective carrying value has occurred as of June 30, 2002.
Goodwill
Goodwill represents the excess of cost over net assets acquired and is amortized
on a straight-line basis over 25 years.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles. This statement is effective for
fiscal years beginning after December 15, 2001. The Company adopted this
statement on July 1, 2002. Under the non-amortization approach, goodwill and
certain intangibles will not be amortized into results of operations, but
instead will be reviewed for impairment, written down and charged to results of
operations only in periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The Company is having an independent
valuation analysis completed and does not anticipate any material transitional
impairment; however, future impairment reviews may result in periodic
write-downs ranging from zero to $11,239,917. The Company amortized
approximately $596,000 of goodwill for each of the fiscal years ended June 30,
2002, 2001 and 2000, respectively.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in the
period that the tax change occurs.
Stock Options
The Company accounts for its employee stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Compensation
expense relating to employee stock options is recorded only if, on the date of
grant, the fair value of the underlying stock exceeds the exercise price. The
Company adopted the disclosure-only requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation", which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
options as if the fair value based method of accounting in SFAS No. 123 had been
applied to these transactions.
F-9
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
Revenue Recognition
In accordance with EITF 91-9 "Revenue and Expense Recognition for Freight
Services in Process", revenue from freight forwarding is recognized upon
completed delivery of goods, and direct expenses associated with the cost of
transportation are accrued concurrently. Ongoing provision is made for doubtful
receivables, discounts, returns and allowances.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are not held as
collateral, and which are purchased with an original maturity of three months or
less, to be cash equivalents.
Per Share Data
Basic loss per share is calculated by dividing net loss attributable to common
shareholders plus preferred stock dividends, by the weighted average number of
shares of common stock outstanding during the period. Diluted income per share
is calculated by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding, adjusted for potentially
dilutive securities. Diluted loss per share has not been presented since the
inclusion of outstanding convertible preferred stock and stock options would be
antidilutive.
The following table summarizes the equivalent number of common shares assuming
the related securities that were outstanding as of June 30, 2002, 2001 and 2000
had been converted, but not included in the calculation of diluted loss per
share as such shares are antidilutive:
June 30,
--------
2002 2001 2000
---- ---- ----
Convertible preferred stock........... 9,983,626 6,951,166 5,127,730
Stock Options......................... 576,957 576,957 456,957
Stock Warrants........................ 109,448 5,183,731
---------- --------- ----------
Antidilutive securities 10,560,583 7,637,571 10,768,418
========== ========= ==========
Options to purchase 576,957, 576,957, and 456,957 shares of common stock for the
years ended June 30, 2002, 2001 and 2000, respectively, were not included in the
computation of diluted EPS because the exercise prices of those options were
greater than the average market price of the common shares, thus they are
anti-dilutive. The options were still outstanding at the end of the period.
Warrants to purchase 109,448 and 5,183,731 shares of common stock for the years
ended June 30, 2001 and 2000, respectively, were not included in the computation
of diluted EPS because they were also anti-dilutive.
Fair Value of Financial Instruments
Cash equivalents are reflected at cost which approximate their fair values. The
fair value of notes and loans payable outstanding is estimated by discounting
the future cash flows using the current rates offered by lenders for similar
borrowings with similar credit ratings. The carrying amounts of the accounts
receivable and debt approximate their fair value.
F-10
Foreign Currency Transactions
In the normal course of business the Company has accounts receivable and
accounts payable that are transacted in foreign currencies. The Company accounts
for transaction differences in accordance with Statement of Financial Accounting
Standard Number 52, "Foreign Currency Translation", and accounts for the gains
or losses in operations. For all periods presented, these amounts were
immaterial to the Company's operations.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform with the 2002 presentation.
Recent Accounting Pronouncements
In July 2001, FASB issued SFAS No. 141 "Business Combinations". SFAS No. 141
supersedes APB No. 16 and requires that any business combinations initiated
after June 30, 2001, be accounted for as a purchase, therefore, eliminating the
pooling-of-interest method defined in APB No. 16. The statement was effective
for any business combination initiated after June 30, 2001, and must have been
applied to all business combinations accounted for by the purchase method for
which the date of acquisition was July 1, 2001, or later. The adoption of this
statement did not have a material impact to the Company's financial position or
results of operations, since the Company has not participated in such activities
covered under this pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles. This statement is effective for
fiscal years beginning after December 15, 2001. The Company adopted this
statement on July 1, 2002. Under the non-amortization approach, goodwill and
certain intangibles will not be amortized into results of operations, but
instead will be reviewed for impairment, written down and charged to results of
operations only in periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The Company is having an independent
valuation analysis completed and does not anticipate any material transitional
impairment; however, future impairment reviews may result in periodic
write-downs ranging from zero to $11,239,917. The Company amortized
approximately $596,000 of goodwill for each of the fiscal years ended June 30,
2002, 2001 and 2000, respectively.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which requires companies to record the fair value of a liability
for asset retirement obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable and is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized for the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sales, abandonment or in a distribution to owners) or
is classified as held for sale. Assets to be disclosed are reported at the lower
of the carrying amount or fair value less costs to sell. The Company adopted
F-11
SFAS No. 144 on July 1, 2002. The Company anticipates that adoption of SFAS No.
144 will not have a material impact to the Company's financial position or
results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
4. PROPERTY AND EQUIPMENT, NET
June 30, 2002 June 30, 2001
------------- -------------
Property and Equipment consists of the following:
Furniture and fixtures $ 864,517 $ 821,553
Furniture and fixtures - Capital Lease 63,494 -
Computer Equipment 317,827 212,821
Computer Equipment - Capital Lease 499,398 499,398
Computer Software 421,117 394,551
Leasehold Improvements 380,114 363,935
Vehicles 81,036 116,036
--------- ---------
2,627,503 2,408,294
Less: Accumulated depreciation and amortization (a) (2,011,897) (1,683,156)
----------- ----------
$ 615,606 $ 725,138
=========== ==========
(a) Includes accumulated depreciation and amortization of capital lease
assets of $463,997 and $386,377 for the year ended June 30, 2002 and
2001, respectively.
5. ASSET PURCHASE ACQUISITIONS
On November 30, 2001, the Company's Target Logistic Services, Inc. subsidiary
("Target") acquired the assets and certain liabilities of SDS Logistics, a
Newark, New Jersey based forwarder for a combination of an initial cash payment
and an earn out structure over five years.
On February 11, 2002, the company's Target subsidiary acquired the assets and
certain liabilities of Air America Freight Service, Inc., an Atlanta, Georgia
based forwarder for a combination of an initial cash payment and an earn out
structure over five years.
F-12
6. DEBT
As of June 30, 2002 and 2001, long-term and short-term debt consisted of the
following:
June 30, 2002 June 30, 2001
------------- -------------
Asset-based financing $5,993,475 $5,679,912
========== ==========
During the years ended June 30, 2002 and 2001, the Company's Target subsidiary
("Borrower") maintained an Accounts Receivable Management and Security Agreement
with GMAC Commercial Credit LLC ("GMAC") whereby the Borrower can receive
advances of up to 85% of the net amounts of eligible accounts receivable
outstanding to a maximum of $10,000,000. The credit line ("GMAC Facility") is
subject to interest at a rate of 1.0% per annum over the prevailing prime rate
as defined by GMAC (4.75% and 6.75%) as of June 30, 2002 and 2001, respectively,
but at no time can the rate be less than 6.0% per annum (and not less than 5%
after September 20, 2002). At June 30, 2002 and 2001, the outstanding balance on
the GMAC Facility was $5,993,475 and $5,679,912 which represented 83% and 82% of
the approximate $7,211,000 and $6,967,000 available thereunder, respectively. At
June 30, 2002, the remaining amount available under the GMAC Facility was
approximately $1,218,000. GMAC has a security interest in all present and future
accounts receivable, machinery and equipment and other assets of the Borrower
and the GMAC Facility is guaranteed by the Company. The GMAC Facility expires on
January 14, 2005.
7. SHAREHOLDERS' EQUITY
Preferred Stock
As of June 30, 2002, the authorized preferred stock of the Company is 2,500,000
shares. As of June 30, 2002, 320,696 shares of preferred stock are outstanding
as follows:
Number of Shares Outstanding
------------------------------------------------------------
Class A (a) Class C (b) Class D(c) Total
----------- ----------- ---------- -----
Balance at June 30, 1999 122,946 197,750 106,511 427,207
Issuances - - - -
Conversions - - (106,511) (106,511)
------- ------- -------- --------
Balance at June 30, 2000 122,946 197,750 - 320,696
Issuances - - - -
Conversions - - - -
------- ------- -------- -------
Balance at June 30, 2001 122,946 197,750 - 320,696
Issuances - - - -
Conversions - - - -
------- ------- -------- -------
Balance at June 30, 2002 122,946 197,750 - 320,696
======= ======= ======== =======
(a) Class A Preferred Stock. On July 3, 1996, the Company issued 200,000 shares
of Class A, non-voting, cumulative, convertible preferred stock with a par value
of $10.00 in exchange for a paydown of $2,000,000 on the $10,000,000 promissory
note.
The Class A Preferred Stock will pay cumulative cash dividends at an annual rate
of $1.00 per share in cash or, at the option of the Company, in shares of Class
A Preferred Stock, at the rate of $10.00 per share. The Company is prohibited
F-13
from paying any cash dividends on common stock unless all required Class A
Preferred Stock dividends have been paid. Each share of Class A Preferred Stock
may be converted at any time, at the option of the holder, into common stock at
a conversion price (subject to adjustment) of the lower of (i) $6.00 per share,
or (ii) 80% of the average of the closing bid and asked price per share of
Common Stock on the day prior to the conversion date. Class A Preferred Stock
holders are entitled to a liquidation preference of $10.00 per share plus all
accrued and unpaid dividends.
On December 31, 1996, June 30, 1997, December 31, 1997 and June 30, 1998, the
Company issued 10,000, 10,500, 6,887 and 5,809 respectively, shares of Class A,
non-voting, cumulative, convertible preferred stock with a par value of $10.00
representing the semi-annual dividend due the Class A preferred shareholders.
On September 23, 1997, 110,250 shares of Class A Preferred Stock were converted
into 1,102,500 shares of the Company's Common Stock.
There were no shares of Class A Preferred Stock converted into the Company's
Common Stock during fiscal years ending June 30, 2002 and 2001.
(b) Class C Preferred Stock. On June 13, 1997, the Company issued 257,500 shares
of Class C, non-voting, cumulative, convertible preferred stock with a par value
of $10.00 upon completion of a $2,575,000 private placement of equity securities
to individual investors (the "Private Placement").
The Class C Preferred Stock will pay cumulative cash dividends at an annual rate
of $1.00 per share payable the last day of each calendar quarter in cash or, at
the option of the Company, in shares of common stock provided a registration
statement with respect to the underlying shares of common stock is in effect.
The Company is prohibited from paying any dividends on common stock or Class A
Preferred Stock unless all required Class C Preferred Stock dividends have been
paid. Each share of Class C Preferred Stock may be converted at any time, at the
option of the holder, into 10 shares of common stock. There were no shares of
Class C Preferred Stock converted into the Company's Common Stock during fiscal
year ending June 30, 2002 and 2001.
(c) Class D Preferred Stock. On November 28, 1997, the Company acquired from
TIA, Inc. $1,000,000 of secured debt of a closed subsidiary in exchange for the
issuance of 100,000 shares of the Company's non-voting, cumulative, convertible
Class D Preferred Stock, par value $10.00 per share. On December 31, 1997 and
June 30, 1998, the Company issued 1,479 and 5,032 respectively, shares of Class
D, non-voting, cumulative, convertible preferred stock with a par value of
$10.00 representing the semi-annual dividend due the Class D Preferred
shareholders. On October 29 and November 1, 1999, 55,000 and 51,511 shares of
Class D Preferred Stock, respectively, were converted into 2,582,085 shares of
the Company's Common Stock. Therefore, as of November 1, 1999, there are no
shares of Class D Preferred Stock outstanding.
Warrants
As of June 30, 2002, the Company had no warrants outstanding.
Stock Option Plan
In June 1996, the Board of Directors of the Company adopted the Amertranz
Worldwide Holding Corp. 1996 Stock Option Plan ("1996 Plan"), which was
subsequently approved by shareholders. The 1996 Plan authorizes the granting of
awards, the exercise of which would allow up to an aggregate of 1,000,000 shares
of the Company's common stock to be acquired by the holders of said awards. The
awards can take the form of incentive stock options ("ISOs") or nonqualified
stock options ("NSOs") and may be granted to key employees, officers, directors
and consultants. Any plan participant who is granted an Incentive Stock Option
and possesses more than 10% of the voting rights of the Company's outstanding
common stock must be granted an option price at least 110% of the fair market
value on the date of grant and the option must be exercised within five years
from the date of grant. Under the 1996 Plan, stock options have been granted to
employees and directors for terms of up to 10 years at exercise prices ranging
from $.10 to $6.00 and are exercisable in whole or in part at stated times from
the date of grant up to ten years from the date of grant. At June 30, 2002,
356,957 stock options granted to employees and directors were exercisable. The
F-14
Company accounts for equity-based awards granted to employees and directors
under APB Opinion No. 25 under which no compensation cost has been recognized
for stock options granted at market value (Note 3). Had compensation cost for
these stock options been determined consistent with SFAS No. 123, the Company's
net income (loss) and net income (loss) per share would have been increased to
the following pro forma amounts:
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
Net income (loss):
As Reported $(934,527) $(1,771,583) $(1,196,605)
Pro Forma $(953,204) $(1,914,581) $(1,270,152)
Basic and Diluted EPS:
As Reported $(0.10) $(0.18) $(0.14)
Pro Forma $(0.10) $(0.19) $(0.15)
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated.
Prior to the adoption of the 1996 Plan, there were 224,399 options granted to
purchase common stock at exercise prices ranging from $0.048 to $0.408. These
options were granted pursuant to the terms of the Asset Exchange Agreement. At
each of June 30, 2002, 2001 and 2000, 6,957 of these options were outstanding
and exercisable.
The following table reflects activity under the plan for the three-year period
ended June 30, 2002:
Year Ended June 30, 2002 Year Ended June 30, 2001 Year Ended June 30, 2000
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 576,957 1.24 456,957 1.99 446,957 2.00
Granted - - 455,000 0.50 10,000 1.25
Exercised - - - - - -
Forfeited - - (25,000) 1.25 - -
Cancelled - - (310,000) 1.25 - -
Outstanding at end of year 576,957 $1.24 576,957 $1.24 456,957 $1.99
Exercisable at end of year 356,957 $1.70 259,290 $2.15 193,624 $2.99
The per share weighted average fair value of stock options granted during 2001
and 2000 was $0.22 and $0.72, respectively. No stock options were granted during
2002.
The fair value of each stock option grant is estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
2002 2001 2000
---- ---- ----
Risk-Free Interest Rates 4.25% 4.35% 6.34%
Expected Lives 5 5 5
Expected Volatility 67.50% 368.23% 72.28%
Expected Dividend Yields 0.00% 0.00% 0.00%
F-15
The following table summarizes information about stock options outstanding at
June 30, 2002:
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Number Weighted Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise Prices at 6/30/02 Contractual Life Exercise Price at 6/30/02 Exercise Price
- --------------- ---------- ---------------- -------------- ----------- --------------
$0.04 - $1.13 501,957 7.63 $0.53 281,957 $0.56
$4.00 - $6.00 75,000 4.00 $6.00 75,000 $6.00
------- ----- ----- ------- -----
$0.04 - $6.00 576,957 7.22 $1.24 356,957 $1.70
======= ===== ===== ======= =====
8. COMMITMENTS AND CONTINGENCIES
Leases
As of June 30, 2002, future minimum lease payments for capital leases and
operating leases relating to equipment and rental premises are as follows:
YEAR ENDING CAPITAL LEASES OPERATING LEASES
----------- -------------- ----------------
2003 $51,870 $1,035,743
2004 17,359 1,057,656
2005 17,359 942,976
2006 4,339 269,477
2007 - 12,856
------- ----------
Total minimum lease payments $90,927 $3,318,708
==========
Less - Amount representing interest (9,636)
-------
$81,291
Employment Agreements
The Company has employment agreements with certain employees expiring at various
times through June 30, 2007. Such agreements provide for minimum salary levels
and for incentive bonuses which are payable if specified management goals are
attained. The aggregate commitment for future salaries at June 30, 2002,
excluding bonuses, was approximately $680,000.
Litigation
On October 12, 2000, Pilot Air Freight Corp. ("Pilot"), a major competitor of
Target, sued Target in the United States District Court for the Eastern District
of Pennsylvania, Case No. 00-CV-5190, with respect to the termination by a
former Pilot freight forwarder of its relationship with Pilot and entering into
an exclusive forwarder relationship with Target. Pilot alleged, among other
things, intentional interference with contract, tortious interference with
business relations, violation of section 43(a) of the Lanham Act, violation of
Pennsylvania state statutes concerning stored electronic communications, and
misappropriation of trade secrets. Pilot sought an amount "in excess of
$100,000" in damages, punitive damages, and an injunction against Target
requiring it to cease competing in the Hartford, Connecticut market for six
months. During subsequent discovery proceedings, Pilot claimed that its damages
exceed $3 million. Target has denied all of Pilot's claims and believes they are
without merit. Target will continue to vigorously defend Pilot's claims.
9. SEGMENT INFORMATION
The Company's revenue includes both domestic and international freight
movements. Domestic freight movements originate and terminate within the United
States, and never leave the United States. International freight movements are
F-16
either exports from the United States or imports to the United States. With
regard to international freight movements, the account receivable can be due
from either a domestic debtor or from one of the Company's Target subsidiary's
international agents (an international debtor).
A reconciliation of the Company's domestic and international segment revenues,
gross profit, and accounts receivable for the years ended June 30, 2002, 2001
and 2000 is as follows:
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
Domestic revenue $69,652,711 $65,255,740 $56,093,399
International revenue 23,831,028 24,887,462 27,994,796
----------- ----------- -----------
Total revenue $93,483,739 $90,143,202 $84,088,195
----------- ----------- -----------
Domestic gross profit $23,876,294 $22,900,071 $20,152,072
International gross profit 6,433,463 6,330,859 6,987,312
----------- ----------- -----------
Total gross profit $30,309,757 $29,230,930 $27,139,384
----------- ----------- -----------
Domestic accounts receivable 16,394,974 $13,579,181 $12,731,926
International accounts receivable 1,812,948 2,867,349 4,048,666
Less: allowance for doubtful accounts (995,245) (1,391,157) (1,630,768)
----------- ----------- -----------
Accounts receivable, net of
allowance for doubtful accounts $17,212,677 $15,055,373 $15,149,824
----------- ----------- -----------
10. QUARTERLY FINANCIAL DATA SCHEDULE (unaudited)
Year Ended
June 30, 2002
9/30/01 12/31/01 03/31/02 06/30/02 Fiscal Year
----------- ----------- ----------- ----------- -----------
Operating revenue $21,552,498 $24,020,827 $21,414,092 $26,526,322 $93,483,739
Cost of transportation 14,395,369 16,314,144 14,323,881 18,140,588 63,173,982
----------- ----------- ----------- ----------- -----------
Gross profit 7,127,129 7,706,683 7,090,211 8,385,734 30,309,757
Selling, general & administrative
expense 7,528,749 7,725,386 7,326,125 8,405,969 30,986,229
Interest (expense) (68,482) (58,760) (57,308) (73,505) (258,055)
Provision (benefit) for income taxes - - - - -
Net (loss) ($470,102) ($77,463) ($293,222) ($93,740) ($934,527)
Net (loss) per share:
Basic and diluted loss per share
attributable to common
shareholders ($0.04) ($0.02) ($0.03) ($0.02) ($0.10)
Weighted average shares outstanding 11,879,002 11,879,002 11,879,002 12,179,002 11,953,797
F-17
Year Ended
June 30, 2001
9/30/00 12/31/00 03/31/01 06/30/01 Fiscal Year
----------- ----------- ----------- ----------- -----------
Operating revenue $21,380,041 $24,700,710 $22,864,467 $21,197,984 $90,143,202
Cost of transportation 14,164,019 16,679,273 15,468,266 14,600,714 60,912,272
----------- ----------- ----------- ----------- -----------
Gross profit 7,216,022 8,021,437 7,396,201 6,597,270 29,230,930
Selling, general & administrative
expense 7,476,197 8,127,358 8,199,735 7,748,667 31,551,957
Interest (expense) (57,091) (45,328) (60,940) (65,092) (228,451)
(Benefit) provision for income taxes - - (255,209) (522,686) (777,895)
Net (loss) ($317,266) ($151,249) ($609,265) ($693,803) ($1,771,583)
Net (loss) per share:
Basic and diluted loss per share
attributable to common
shareholders ($0.03) ($0.02) ($0.06) ($0.07) ($0.18)
Weighted average shares outstanding 11,879,002 11,879,002 11,879,002 11,879,002 11,879,002
11. INCOME TAXES
The Company has tax net operating loss carryforwards of approximately $13.1
million, which are available to offset future regular taxable income. The losses
expire from 2011 through 2022. Some of the losses are limited to annual maximum
amounts, due to a prior ownership change, as defined in regulations under
Section 382 of the Internal Revenue Code.
The components of current and deferred income tax expense (benefit) are as
follows:
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
(In thousands)
Current:
State $ - $ - $ 3
Federal - -
Deferred:
State - - -
Federal - (778) 106
--- ---- ----
Net income tax expense (benefit) $ - $ 778 $109
=== ===== ====
F-18
A reconciliation of income taxes between the statutory and effective tax rates
on income before income taxes is as follows:
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
(In thousands)
Income tax (benefit) expense at U.S. statutory rate $ (318) $(867) $(370)
Tax deductible goodwill - - -
Non-deductible goodwill 203 203 203
State and local income taxes - - 3
(net of federal benefit)
AMT Credit - - (17)
Valuation Allowance 117 - -
Non-deductible expenses (2) (114) 290
----- ------ -----
$ - $(778) $ 109
===== ====== =====
The components of deferred income taxes are as follows:
Year Ended Year Ended
June 30, 2002 June 30, 2001
------------- -------------
(In thousands)
NOLs $4,468 $4,170
Tax credits 286 286
Accrued amounts and other 694 877
------ ------
5,448 5,333
Depreciation and amortization 87 85
------ ------
5,535 5,418
Valuation allowance (2,601) (2,484)
------ ------
$2,934 $2,934
====== ======
F-19
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
------- -------- -------- ---------- -----------
For the fiscal year ended June 30, 2000
Allowance for doubtful accounts $ 1,318 $ 536 $ - $ (223) $ 1,631
======= ====== ======= ======= =======
Reserve for restructuring $ $ - $ - $ (22) $ -
======= ====== ======= ======= =======
For the fiscal year ended June 30, 2001
Allowance for doubtful accounts $ 1,631 $ 180 $ - $ (420) $ 1,391
======= ====== ======= ======= =======
For the fiscal year ended June 30, 2002
Allowance for doubtful accounts $ 1,391 $ 341 $ - $ (737) $ 995
======= ====== ======= ======= =======
S-1
EXHIBIT 10.4
as of September 20, 2002
GMAC COMMERCIAL CREDIT LLC
1290 Avenue of the Americas
New York, New York 10104
Re: Amendment to ARMS Agreement
---------------------------
Gentlemen:
Reference is made to that certain Restated and Amended Accounts
Receivable Management and Security Agreement, dated July 13, 1998 (as the same
now exists or may hereafter be amended, restated, renewed, replaced,
substituted, supplemented, extended, or otherwise modified, the "ARMS
Agreement"), by and between GMAC COMMERCIAL CREDIT LLC, formerly known as BNY
Factoring LLC, as successor by merger to BNY Financial Corporation ("Lender")
and TARGET LOGISTIC SERVICES, INC. ("Borrower") formerly known as Target Air
Freight, Inc. All capitalized terms used and not otherwise defined herein shall
have the respective meanings ascribed to them in the ARMS Agreement.
Borrower has requested that Lender amend and modify certain terms of
the ARMS Agreement, which Lender has agreed to do subject to and on the terms
and conditions contained in this Letter Re: Amendment to ARMS Agreement (the
"Amendment").
In consideration of the foregoing, the parties hereto mutually agree
as follows:
1. Definitions.
-----------
(a) Amendment to Definitions. Effective as of the date hereof, the
following definitions appearing in paragraph 1(A) of the ARMS Agreement are
hereby amended and restated in their entirety as follows:
(i) ""Advance Rates" means the Accounts Advance Rate."
-------------
(ii) ""Collateral" means and includes:
----------
(a) all Accounts;
(b) all Equipment;
(c) all General Intangibles;
(d) all Inventory;
(e) all of Borrower's present and future right,
title and interest in and to (i) goods and other property
including, but not limited to, all merchandise returned or
rejected by Customers, relating to or securing any of the
Receivables; (ii) all additional amounts due to Borrower
from any Customer relating to the Receivables; (iii) other
property, including warranty claims, relating to any goods
securing this Agreement; (iv) all of Borrower's contract
rights, rights of payment which have been earned under a
contract right, instruments (including all promissory
notes), documents, chattel paper (including all tangible and
electronic chattel paper), warehouse receipts, deposit
accounts, money, securities and investment property
(including securities, whether certificated or
uncertificated, securities accounts, security entitlements,
commodity contracts or commodity accounts), monies, credit
balances, deposits and other property of Borrower now or
hereafter held or received by or in transit to Lender or any
of Lender's Affiliates or at any other depository or other
institution from or for the account of Borrower whether for
- 1 -
safekeeping, pledge, custody, transmission, collection or
otherwise; (v) any other goods, personal property or real
property now owned or hereafter acquired in which Borrower
has expressly granted a security interest or may in the
future grant a security interest to Lender hereunder, or in
any amendment or supplement hereto or thereto, or under any
other agreement between Lender and Borrower; (vi) all
letters of credit, banker's acceptances and similar
instruments and including all letter-of-credit rights; and
(vii) all commercial tort claims, including, without
limitation, all commercial tort claims set forth on Schedule
6(j);
(f) all present and future supporting obligations
and all present and future liens, security interests,
rights, remedies, title and interest in, to and in respect
of Receivables and other Collateral, including (i) rights
and remedies under or relating to guaranties, contracts of
suretyship, letters of credit and credit and other insurance
related to the Collateral, (ii) rights of stoppage in
transit, setoff, detinue, replevin, repossession,
reclamation, repurchase and other rights and remedies of an
unpaid vendor, consignor, consignee, mechanic, artisan,
lienor or secured party, (iii) goods described in invoices,
documents, contracts or instruments with respect to, or
otherwise representing or evidencing, Receivables or other
Collateral, including returned, repossessed and reclaimed
goods, and (iv) if and when obtained by Borrower, all real
and personal property of third parties in which Borrower has
been granted a lien or security interest as security for the
payment or enforcement of Receivables and including deposits
by and property of account debtors or other persons securing
the obligations of account debtors;
(g) to the extent not otherwise described above, all
Receivables;
(h) all of Borrower's ledger sheets, ledger cards,
files, correspondence, Records, books of account, business
papers, computers, computer software (whether owned by
Borrower or in which Borrower has an interest), computer
programs, tapes, disks and documents relating to the
property and rights described in subparagraphs (a), (b),
(c), (d), (e), (f) or (g) above; and
(i) all proceeds and products of the property and
rights described in subparagraphs (a), (b), (c), (d), (e),
(f), (g) and (h) above in whatever form, including, but not
limited to: cash, deposit accounts (whether or not comprised
solely of proceeds), certificates of deposit, insurance
proceeds (including hazard, flood, credit and business
interruption insurance), negotiable instruments and other
instruments for the payment of money, chattel paper,
security agreements, documents, eminent domain proceeds,
condemnation proceeds and tort claim proceeds."
(iii) ""Contract Rate" means an interest rate per annum equal to
(i) the Alternate Base Rate plus (ii) one percent (1%), provided, however, that
the Contract Rate shall not at any time be less than five percent (5%)."
(iv) ""Credit Risk" means the risk of loss resulting solely and
exclusively from a Customer's financial inability to pay at maturity with
respect to any Account purchased hereunder."
(v) ""Dispute" means any cause asserted for nonpayment of
Accounts, including, without limitation, any alleged defense, counterclaim,
offset, dispute or other claim (real or merely asserted) whether arising from or
relating to the sale of goods or rendition of services or arising from or
relating to any other transaction or occurrence."
(vi) ""Equipment" means all of Borrower's now owned and hereafter
acquired goods (other than Inventory), wherever located, including, without
limitation, equipment, machinery, vehicles, tools, furniture, fixtures, data
processing and computer equipment and computer hardware and software, whether
owned or licensed, and including, embedded software, all attachments, accessions
and property now or hereafter affixed thereto or used in connection therewith,
and substitutions and replacements thereof, wherever located."
- 2 -
(vii) ""General Intangibles" means and includes all of Borrower's
general intangibles, whether now owned or hereafter acquired including, without
limitation, all choses in action, causes of action, corporate or other business
records, patents, patent rights, patent applications, manufacturing procedures,
quality control procedures, trademarks, service marks, service mark
applications, goodwill (including any goodwill associated with any trademark or
the license of any trademark), copyrights, works which are the subject matter of
copyrights, rights in works of authorship, copyright registrations, inventions,
trade secrets, formulas, processes, compounds, drawings, designs, blueprints,
surveys, reports, manuals and operating standards, design rights, registrations,
licenses, franchises, customer lists, tax refunds, tax refund claims, computer
programs, internet domain names, internet domain name registrations, software
and contract rights relating to software, all claims under guaranties, security
interests or other security held by or granted to Borrower to secure payment of
any of the Receivables by a Customer, all rights of indemnification and all
other intangible property of every kind and nature (other than Receivables)."
(viii) ""Guarantor" means Holding and any other Person who may
now or hereafter guarantee payment and performance of the whole or part of the
Obligations; and "Guarantors" means collectively all such Persons."
(ix) ""Holding" means Target Logistics, Inc., formerly known as
Amertranz Worldwide Holding Corp., together with its successors and assigns."
(x) ""Inventory" means all of Borrower's now owned and hereafter
existing or acquired goods, wherever located, which (a) are leased by Borrower
as lessor; (b) are held by Borrower for sale or lease or to be furnished under a
contract of service; (c) are furnished by Borrower under a contract of service;
or (d) consist of raw materials, work in process, finished goods or materials
used or consumed in its business, together with all documents of title or other
documents representing or relating to any of the foregoing."
(xi) ""Net Face Amount" of Accounts means the gross face invoice
amount thereof, less returns, discounts (the calculation of which shall be
determined by Lender where optional terms are given), anticipation or any other
unilateral deductions taken by Customers, and credits and allowances to
Customers of any nature."
(xii) ""Receivables" means, all of the following now owned or
hereafter arising or acquired property of Borrower: (a) all Accounts; (b) all
interest, fees, late charges, penalties, collection fees and other amounts due
or to become due or otherwise payable in connection with any Account; (c) all
payment intangibles of Borrower and other contract rights, chattel paper,
instruments, notes, and other forms of obligations owing to Borrower, whether
from the sale and lease of goods or other property, licensing of any property
(including General Intangibles), rendition of services or from loans or advances
by Borrower or to or for the benefit of any third person (including loans or
advances to any Affiliates or Subsidiaries of Borrower) or otherwise associated
with any Accounts, Inventory or General Intangibles of Borrower (including,
without limitation, choses in action, causes of action, tax refunds, tax refund
claims, any funds which may become payable to Borrower in connection with the
termination of any employee benefit plan and any other amounts payable to
Borrower from any employee benefit plan, rights and claims against carriers and
shippers, rights to indemnification, business interruption insurance and
proceeds thereof, casualty or any similar types of insurance and any proceeds
thereof and proceeds of insurance covering the lives of employees on which
Borrower is beneficiary)."
(xiii) ""Revolving Credit Advances" shall have the meaning set
forth in paragraph 2(b)."
(xiv) ""Settlement Date" means two (2) Business Days after the
day on which the applicable Account is actually collected by Lender."
(xv) ""Term" means the Closing Date through January 14, 2005,
subject to acceleration upon the occurrence of an Event of Default hereunder or
other termination hereunder."
- 3 -
(b) Additional Definitions. Effective as of the date hereof, paragraph
1(A) of the ARMS Agreement is hereby amended by adding the following
definitions:
(i) ""Accounts" means all present and future rights of Borrower
to payment of a monetary obligation, whether or not earned by performance, which
is not evidenced by chattel paper or an instrument, (a) for property that has
been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (b)
for services rendered or to be rendered, (c) for a secondary obligation incurred
or to be incurred, or (d) arising out of the use of a credit or charge card or
information contained on or for use with the card."
(ii) ""Accounts Advance Rate" shall have the meaning set forth in
the definition of Accounts Availability."
(iii) ""Accounts Availability" means the amount of Revolving
Credit Advances against Eligible Accounts Lender may from time to time during
the term of this Agreement make available to Borrower up to eighty-five percent
(85%) (the "Accounts Advance Rate") of the net face amount of Borrower's
Eligible Accounts."
(iv) ""Blocked Account" shall have the meaning set forth in
paragraph 22(a)."
(v) ""Borrowing Base Certificate" shall have the meaning set
forth in paragraph 9."
(vi) ""Collateral Access Agreement" means an agreement in
writing, in form and substance satisfactory to Lender, from any lessor of
premises to Borrower, or any other person to whom any Collateral (including
Inventory, Equipment, bills of lading or other documents of title) is consigned
or who has custody, control or possession of any such Collateral or is otherwise
the owner or operator of any premises on which any of such Collateral is
located, pursuant to which such lessor, consignee or other person, inter alia,
acknowledges the first priority security interest of Lender in such Collateral,
agrees to waive any and all claims such lessor, consignee or other person may,
at any time, have against such Collateral, whether for processing, storage or
otherwise, and agrees to permit Lender access to, and the right to remain on,
the premises of such lessor, consignee or other person so as to exercise
Lender's rights and remedies and otherwise deal with such Collateral and, in the
case of any consignee or other person who at any time has custody, control or
possession of any Collateral, acknowledges that it holds and will hold
possession of the Collateral for the benefit of Lender and agrees to follow all
instructions of Lender with respect thereto."
(vii) ""Deposit Account Control Agreement" means an agreement in
writing, in form and substance satisfactory to Lender, by and among Lender,
Borrower and any bank at which any deposit account of Borrower is at any time
maintained which provides that such bank will comply with the irrevocable
instructions originated by Lender directing disposition of the funds in the
deposit account without further consent by Borrower and such other terms and
conditions as Lender may require, including as to any such agreement with
respect to any Blocked Account, providing that all items received or deposited
in the Blocked Accounts are the property of Lender, that the bank has no lien
upon, or right to setoff against the Blocked Account, the items received for
deposit therein, or the funds from time to time on deposit therein and that the
bank will wire, or otherwise transfer, in immediately available funds, on a
daily basis to an account designated by Lender in writing all funds received or
deposited into the Blocked Account."
(viii) ""Eligible Accounts" means and includes each Account which
conforms to the following criteria: (a) such Accounts arise from the actual and
bona fide sale and delivery of goods by Borrower or rendition of services by
Borrower in the ordinary course of its business which transactions are completed
in accordance with the terms and provisions contained in any documents related
thereto and shipment of the merchandise or the rendition of services has been
completed; (b) no return, rejection or repossession of the merchandise has
occurred; (c) merchandise or services shall not have been rejected or disputed
by the Customer and there shall not have been asserted any offset, defense,
counterclaim, or Dispute; (d) continues to be in full conformity with the
representations and warranties made by Borrower to Lender with respect thereto;
(e) Lender is, and continues to be, satisfied with the credit standing of the
- 4 -
Customer in relation to the amount of credit extended; (f) is documented by an
invoice in a form approved by Lender and shall not be unpaid more than (i)
ninety (90) days from invoice date or (ii) sixty (60) days from the due date;
(g) less than fifty percent (50%) of the unpaid amount of invoices due from such
Customer remain unpaid more than (i) ninety (90) days from invoice date or (ii)
sixty (60) days from the due date; (h) is not evidenced by chattel paper or an
instrument of any kind with respect to or in payment of the Account unless such
instrument is duly endorsed to and in possession of Lender or represents a check
in payment of an Account; (i) if the Customer is located outside of the United
States, the goods which gave rise to such Account were shipped after receipt by
Borrower from or on behalf of the Customer of an irrevocable letter of credit,
assigned and delivered to Lender and confirmed by a financial institution
acceptable to Lender and is in form and substance acceptable to Lender, payable
in the full amount of the Account in United States dollars at a place of payment
located within the United States and, if required by Lender, the original of
such letter of credit has been delivered to Lender or Lender's agent and
Borrower has complied with the terms of paragraph 6(i) hereof with respect to
the assignment of the proceeds of such letter of credit to Lender or naming
Lender as transferee beneficiary thereunder, as Lender may specify; (j) is not
subject to any lien, other than Permitted Liens; (k) does not arise out of
transactions with any employee, officer, agent, director, stockholder or
Affiliate of Borrower; (l) is payable to Borrower; (m) does not arise out of a
bill and hold sale prior to shipment and, if the Account arises out of a sale to
any Person to which Borrower is indebted, the amount of such indebtedness, and
any anticipated indebtedness, is deducted in determining the face amount of such
Account; (n) is net of any returns, discounts, claims, credits and allowances;
(o) if the Account arises out of contracts between Borrower and the United
States, any state, or any department, agency or instrumentality of any of them,
Borrower has so notified Lender, in writing, prior to the creation of such
Account, and, if Lender so requests, there has been compliance with any
governmental notice or approval requirements, including, without limitation,
compliance with the Federal Assignment of Claims Act; (p) is a good and valid
account representing an undisputed bona fide indebtedness incurred by the
Customer therein named, for a fixed sum as set forth in the invoice relating
thereto with respect to an unconditional sale and delivery upon the stated terms
of goods sold by Borrower, or work, labor and/or services rendered by Borrower;
and (q) is otherwise satisfactory to Lender as determined in good faith by
Lender in the reasonable exercise of its discretion."
(ix) "" Interest Coverage Ratio" shall mean and include, with
respect to any fiscal period of Holding, the ratio of (a) the sum of (i) EBITDA
minus (ii) cash capital expenditures and cash dividends, to (b) Interest Expense
during such fiscal period, all determined on a consolidated basis and in
accordance with GAAP consistently applied."
(x) ""Interest Expense" shall mean, for any period, interest
expenses for such Person (including the amortization of debt discount and
premium, the interest component under capital leases and the implied interest
component under synthetic leases, net of interest income) for such period, as
determined in accordance with GAAP consistently applied."
(xi) ""Investment Property Control Agreement" means an agreement
in writing, in form and substance satisfactory to Lender, by and among Lender,
Borrower and any securities intermediary, commodity intermediary or other person
who has custody, control or possession of any investment property of Borrower
acknowledging that such securities intermediary, commodity intermediary or other
person has custody, control or possession of such investment property on behalf
of Lender, that it will comply with entitlement orders originated by Lender with
respect to such investment property, or other instructions of Lender, or (as the
case may be) apply any value distributed on account of any commodity contract as
directed by Lender, in each case, without the further consent of Borrower and
including such other terms and conditions as Lender may require."
(xii) ""Records" means, all of Borrower's present and future
books of account of every kind or nature, purchase and sale agreements,
invoices, ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data relating to the
Collateral or any account debtor, together with the tapes, disks, diskettes and
other data and software storage media and devices, file cabinets or containers
in or on which the foregoing are stored (including any rights of Borrower with
respect to the foregoing maintained with or by any other person)."
- 5 -
(xiii) ""Reserves" shall mean, with respect to Borrower, (a) all
Obligations then chargeable to any account of Borrower, and (b) Obligations
which may, in Lender's sole discretion, be chargeable to Borrower's account
thereafter, by reason of or in connection with any of the following: (i)
Accounts which are not Eligible Accounts, disputed items, deductions,
allowances, credits, bill and hold sales, consignment sales, offsets asserted by
or granted to account debtors, and sales calling for payment in currencies other
than United States Dollars, all of the foregoing without duplication to the
extent included in the calculation of Accounts Availability; (ii) letters of
credit; (iii) steamship guarantees; (iv) airway releases; (v) to adjust for
audit/examination of Borrower's accounts(s) or for any documentation correction;
and (vi) such additional reserves as Lender in its sole discretion, reasonably
exercised, deems appropriate, including, but not limited to, to adjust for any
condition or prospect of the Borrower or the Borrower's industry."
(xiv) ""Sanction/Embargo Programs" shall mean economic and other
sanctions and embargo program restrictions promulgated by the government of the
United States of America or any office or agency thereof including, but not
limited to, the President and the Office of Foreign Assets Control of the
Treasury Department, or either of them."
(xv) ""Tangible Net Worth" shall mean, at a particular date and
determined on a consolidated basis, (i) the aggregate amount of all assets of
Holding as may be properly classified as such in accordance with GAAP
consistently applied excluding such other assets as are properly classified as
intangible assets under GAAP, less (ii) the aggregate amount of all liabilities
of the Holding."
(xvi) ""UCC" means the Uniform Commercial Code as in effect in
the State of New York and any successor statute, as in effect from time to time
(except, that, terms used herein which are defined in the Uniform Commercial
Code as in effect in the State of New York on the date hereof shall continue to
have the same meaning notwithstanding any replacement or amendment of such
statute except as Lender may otherwise determine)."
(c) Deletion of Certain Definitions. Effective as of the date hereof,
paragraph 1(A) of the ARMS Agreement is hereby amended by deleting the following
definitions in their entirety: "BNYFC Interest Coverage Ratio"; "Eligible
Receivables";"Receivables Advance Rate"; and"Receivables Availability".
2. Amendment to ARMS Agreement.
---------------------------
(a) Effective as of the date hereof, paragraph 1(C) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(C) UCC Terms. All UCC terms used herein and defined
in the UCC, shall have the meaning given therein
unless otherwise defined herein."
(b) Effective as of the date hereof, paragraph 1 of the ARMS
Agreement is hereby amended by adding the following at the end thereof:
- 6 -
"(D) Certain Matters of Construction. The terms
"herein", "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a
whole and not to any particular section, paragraph
or subdivision. All references to a specific
"Section" or "paragraph" of this Agreement (and
not any references to any Section or paragraph in
any other Ancillary Agreements or any statutes or
related regulations) shall mean the corresponding
"paragraph" of this Agreement (for example, the
reference to "Section 14" as used in the
definition of "Reports" shall mean paragraph 14 of
this Agreement). Any pronoun used shall be deemed
to cover all genders. Wherever appropriate in the
context, terms used herein in the singular also
include the plural and vice versa. All references
to statutes and related regulations shall include
any amendments of same and any successor statutes
and regulations. All references to any instruments
or agreements, including, without limitation,
references to any of the Ancillary Agreements
shall include any and all modifications or
amendments thereto and any and all extensions or
renewals thereof. All references to the term "good
faith" used herein when applicable to Lender shall
mean, notwithstanding anything to the contrary
contained herein or in the UCC, honesty in fact in
the conduct or transaction concerned. Borrower
shall have the burden of proving any lack of good
faith on the part of Lender alleged by Borrower at
any time."
(c) Effective as of the date hereof, paragraph 2(a) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(a) Lender shall not assume the Credit Risk on any
Accounts. Accordingly, all Accounts shall be
purchased by Lender with full recourse to Borrower
in the event of non-payment thereof for any reason
whatsoever and Lender may charge back to
Borrower's account the amount of any Account that
is not paid on its due date. "
(d) Effective as of the date hereof, paragraph 2(b) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(b) Subject to the terms and conditions set forth
herein and in the Ancillary Agreements, and
provided there does not exist an Event of Default
or an Incipient Event of Default, Lender shall
make revolving credit advances (the "Revolving
Credit Advances") to Borrower from time to time
during the Term which, in the aggregate at any
time outstanding, shall not exceed the lesser of
(x) the Maximum Revolving Amount or (y) an amount
equal to the sum of:
(A) Accounts Availability, minus
(B) Reserves.
The sum of paragraph 2(b)(y)(A) minus paragraph 2(b)(y)(B) shall be
referred to as the "Formula Amount". In this regard, without limitation of
Lender's rights under paragraph 9 hereof, upon each request for a Revolving
Credit Advance or more frequently as Lender may request, Borrower agrees that it
shall submit a Borrowing Base Certificate to Lender, in form and substance
satisfactory to Lender which shall include such calculations, in each instance
that Lender may deem necessary or desirable in order to verify whether Borrower
is in compliance with the preceding limitations pertaining to Revolving Credit
Advances."
(e) Effective as of the date hereof, paragraph 4 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"4. Procedure for Revolving Credit Advances. The
Borrower may request a borrowing of Revolving
Credit Advances prior to 1:00 P.M. New York time
on the Business Day of its request to incur, on
that day, a Revolving Credit Advance, provided
that, Borrower shall make any such request via
telephone at [(678) 937-4101], which request shall
be recorded, and Borrower shall concurrently
confirm such request in writing to Lender. All
Revolving Credit Advances shall be disbursed from
whichever office or other place Lender may
designate from time to time and, together with any
and all other Obligations of Borrower to Lender,
shall be charged to the Borrower's account on
Lender's books. The proceeds of each Revolving
Credit Advance made by the Lender shall be made
available to the Borrower on the day so requested
by way of credit to any general operating account
designated by Borrower in writing. Any and all
- 7 -
Obligations due and owing hereunder may be charged
to Borrower's account and shall constitute
Revolving Credit Advances."
(f) Effective as of the date hereof, paragraph 6 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"6. Security Interest.
-----------------
(a) To secure the prompt payment to Lender of the
Obligations, Borrower hereby assigns, pledges
and grants to Lender a continuing security
interest in and to the Collateral, whether
now owned or existing or hereafter acquired
or arising and wheresoever located (whether
or not the same is subject to Article 9 of
the UCC). All of Borrower's ledger sheets,
files, records, books of account, business
papers and documents relating to the
Collateral shall, until delivered to or
removed by Lender, be kept by Borrower in
trust for Lender until all Obligations have
been paid in full. Each confirmatory
assignment schedule or other form of
assignment hereafter executed by Borrower
shall be deemed to include the foregoing
grant, whether or not the same appears
therein.
(b) Borrower irrevocably and unconditionally
authorizes Lender (or its agent) to file at
any time and from time to time such financing
statements with respect to the Collateral
naming Lender or its designee as the secured
party and Borrower as debtor, as Lender may
require, and including any other information
with respect to Borrower or otherwise
required by Article 9 of the UCC of such
jurisdiction as Lender may determine,
together with any amendment and continuations
with respect thereto, which authorization
shall apply to all financing statements filed
on, prior to or after the date hereof.
Borrower hereby ratifies and approves all
financing statements naming Lender or its
designee as secured party and Borrower as
debtor with respect to the Collateral (and
any amendments and continuations with respect
to such financing statements) filed by or on
behalf of Lender prior to the date hereof and
ratifies and confirms the authorization of
Lender to file such financing statements (and
amendments and continuations, if any).
Borrower hereby authorizes Lender to adopt on
behalf of Borrower any symbol required for
authenticating any electronic filing. In no
event shall Borrower at any time file, or
permit or cause to be filed, any correction
statement or termination statement with
respect to any financing statement (or
amendment or continuation with respect
thereto) naming Lender or its designee as
secured party and Borrower as debtor. In the
event the indication of collateral in any
financing statement naming Lender or its
designees as secured party and Borrower as
debtor includes assets or properties of
Borrower that do not at any time constitute
Collateral, whether hereunder, under any
Ancillary Agreement or otherwise, the filing
of such financing statement shall nonetheless
be deemed authorized by Borrower to the
extent of the Collateral included in such
indication and it shall not render the
financing statement ineffective as is any of
the Collateral or otherwise affect the
financing statement as it applies to any of
the Collateral.
(c) Borrower does not have any chattel paper
(whether tangible or electronic) or
instruments as of the date hereof, except as
set forth on Schedule 6(c). In the event that
Borrower shall be entitled to or shall
receive any chattel paper or instrument after
the date hereof, Borrower shall promptly
notify Lender thereof in writing. Promptly
upon the receipt thereof by or on behalf of
Borrower (including by any agent or
representative), Borrower shall deliver, or
cause to be delivered to Lender, all tangible
chattel paper and instruments that Borrower
or may at any time acquire, accompanied by
such instruments of transfer or assignment
duly executed in blank as Lender may from
time to time specify, in each case except as
Lender may otherwise agree. At Lender's
option, Borrower shall, or Lender may at any
time on behalf of Borrower, cause the
original of any such instrument or chattel
paper to be conspicuously marked in a form
and manner acceptable to Lender with a legend
indicating that the chattel paper or
instrument, as applicable, is subject to the
security interest and rights of Lender and
any sale, transfer, assignment or encumbrance
of the chattel paper or instrument, as
applicable, violates the rights of Lender.
(d) In the event that Borrower shall at any time
hold or acquire an interest in any electronic
chattel paper or any "transferable record"
(as such term is defined in Section 201 of
the Federal Electronic Signatures in Global
and National Commerce Act or in Section 16 of
the Uniform Electronic Transactions Act as in
effect in any relevant jurisdiction),
Borrower shall promptly notify Lender thereof
in writing. Promptly upon Lender's request,
Borrower shall take, or cause to be taken,
such actions as Lender may reasonably request
to give Lender control of such electronic
chattel paper under Section 9-105 of the UCC
- 8 -
and control of such transferable record under
Section 201 of the Federal Electronic
Signatures in Global and National Commerce
Act or, as the case may be, Section 16 of the
Uniform Electronic Transactions Act, as in
effect in such jurisdiction.
(e) Borrower has no deposit accounts as of the
date hereof, except as set forth on Schedule
6(e). Borrower shall not, directly or
indirectly, after the date hereof open,
establish or maintain any deposit account
unless each of the following conditions is
satisfied: (i) Lender shall have received not
less than five (5) Business Days prior
written notice of the intention of Borrower
to open or establish such account which
notice shall specify in reasonable detail and
specificity acceptable to Lender the name of
the account, the owner of the account, the
name and address of the bank at which such
account is to be opened or established, the
individual at such bank with whom Borrower is
dealing and the purpose of the account, (ii)
the bank where such account is opened or
maintained shall be acceptable to Lender, and
(iii) on or before the opening of such
deposit account, Borrower shall as Lender may
specify either (A) deliver to Lender a
Deposit Account Control Agreement with
respect to such deposit account duly
authorized, executed and delivered by
Borrower and the bank at which such deposit
account is opened and maintained, or (B)
arrange for Lender to become the customer of
the bank with respect to the deposit account
on terms and conditions acceptable to Lender.
The terms of this subsection (e) shall not
apply to deposit accounts specifically and
exclusively used for payroll, payroll taxes
and other employee wage and benefit payments
to or for the benefit of Borrower's salaried
employees.
(f) Borrower does not own or hold, directly or
indirectly, beneficially or as record owner
or both, any investment property, as of the
date hereof, or have any investment account,
securities account, commodity account or
other similar account with any bank or other
financial institution or other securities
intermediary or commodity intermediary as of
the date hereof, in each case except as set
forth on Schedule 6(f).
(g) In the event that Borrower shall be entitled
to or shall at any time after the date hereof
hold or acquire any certificated securities,
Borrower shall promptly endorse, assign and
deliver the same to Lender, accompanied by
such instruments of transfer or assignment
duly executed in blank as Lender may from
time to time specify. If any securities, now
or hereafter acquired by Borrower are
uncertificated and are issued to Borrower or
its nominee directly by the issuer thereof,
Borrower shall immediately notify Lender
thereof and shall as Lender may specify,
either (i) cause the issuer to agree to
comply with instructions from Lender as to
such securities, without further consent of
Borrower or such nominee, or (ii) arrange for
Lender to become the registered owner of the
securities.
(h) Borrower shall not, directly or indirectly,
after the date hereof open, establish or
maintain any investment account, securities
account, commodity account or any other
similar account (other than a deposit
account) with any securities intermediary or
commodity intermediary unless each of the
following conditions is satisfied: (i) Lender
shall have received not less than five (5)
Business Days prior written notice of the
intention of Borrower to open or establish
such account which notice shall specify in
reasonable detail and specificity acceptable
to Lender the name of the account, the owner
of the account, the name and address of the
securities intermediary or commodity
intermediary at which such account is to be
opened or established, the individual at such
intermediary with whom Borrower is dealing
and the purpose of the account, (ii) the
securities intermediary or commodity
intermediary (as the case may be) where such
account is opened or maintained shall be
acceptable to Lender, and (iii) on or before
the opening of such investment account,
securities account or other similar account
with a securities intermediary or commodity
intermediary, Borrower shall as Lender may
specify either (A) execute and deliver, and
cause to be executed and delivered to Lender,
an Investment Property Control Agreement with
respect thereto duly authorized, executed and
delivered by Borrower and such securities
intermediary or commodity intermediary, or
(B) arrange for Lender to become the
entitlement holder with respect to such
investment property on terms and conditions
acceptable to Lender.
(i) Borrower is not the beneficiary or otherwise
entitled to any right to payment under any
letter of credit, banker's acceptance or
similar instrument as of the date hereof,
except as set forth on Schedule 6(i). In the
event that Borrower shall be entitled to or
- 9 -
shall receive any right to payment under any
letter of credit, banker's acceptance or any
similar instrument, whether as beneficiary
thereof or otherwise after the date hereof,
Borrower shall promptly notify Lender thereof
in writing. Borrower shall immediately, as
Lender may specify, either (i) deliver, or
cause to be delivered to Lender, with respect
to any such letter of credit, banker's
acceptance or similar instrument, the written
agreement of the issuer and any other
nominated person obligated to make any
payment in respect thereof (including any
confirming or negotiating bank), in form and
substance satisfactory to Lender, consenting
to the assignment of the proceeds of the
letter of credit to Lender by Borrower and
agreeing to make all payments thereon
directly to Lender or as Lender may otherwise
direct or (ii) cause Lender to become, at
Borrower's expense, the transferee
beneficiary of the letter of credit, banker's
acceptance or similar instrument (as the case
may be).
(j) Borrower has no commercial tort claims as of
the date hereof, except as set forth on
Schedule 6(j). In the event that Borrower
shall at any time after the date hereof have
any commercial tort claims, Borrower shall
promptly notify Lender thereof in writing,
which notice shall (i) set forth in
reasonable detail the basis for and nature of
such commercial tort claim and (ii) include
the express grant by Borrower to Lender of a
security interest in such commercial tort
claim (and the proceeds thereof). In the
event that such notice does not include such
grant of a security interest, the sending
thereof by Borrower to Lender shall be deemed
to constitute such grant to Lender. Upon the
sending of such notice, any commercial tort
claim described therein shall constitute part
of the Collateral and shall be deemed
included therein. Without limiting the
authorization of Lender provided in paragraph
6(b) hereof or otherwise arising by the
execution by Borrower of this Agreement or
any of the Ancillary Agreements, Lender is
hereby irrevocably authorized from time to
time and at any time to file such financing
statements naming Lender or its designee as
secured party and Borrower as debtor, or any
amendments to any financing statements,
covering any such commercial tort claim as
Collateral. In addition, Borrower shall
promptly upon Lender's request, execute and
deliver, or cause to be executed and
delivered, to Lender such other agreements,
documents and instruments as Lender may
require in connection with such commercial
tort claim.
(k) Borrower does not have any goods, documents
of title or other Collateral in the custody,
control or possession of a third party as of
the date hereof, except as set forth on
Schedule 6(k) and except for goods located in
the United States in transit to a location of
Borrower permitted herein in the ordinary
course of business of Borrower in the
possession of the carrier transporting such
goods. In the event that any goods, documents
of title or other Collateral are at any time
after the Closing Date in the custody,
control or possession of any other person not
referred to in Schedule 6(k) or such
carriers, Borrower shall promptly notify
Lender thereof in writing. Promptly upon
Lender's request, Borrower shall deliver to
Lender a Collateral Access Agreement duly
authorized, executed and delivered by such
person and Borrower.
(l) Borrower shall take any other actions
reasonably requested by Lender from time to
time to cause the attachment, perfection and
first priority of, and the ability of Lender
to enforce, the security interest of Lender
in any and all of the Collateral, including,
without limitation, (i) executing, delivering
and, where appropriate, filing financing
statements and amendments relating thereto
under the UCC or other applicable law, to the
extent, if any, that Borrower's signature
thereon is required therefor, (ii) causing
Lender's name to be noted as secured party on
any certificate of title for a titled good if
such notation is a condition to attachment,
perfection or priority of, or ability of
Lender to enforce, the security interest of
Lender in such Collateral, (iii) complying
with any provision of any statute, regulation
or treaty of the United States as to any
Collateral if compliance with such provision
is a condition to attachment, perfection or
priority of, or ability of Lender to enforce,
the security interest of Lender in such
Collateral, and (iv) obtaining the consents
and approvals of any governmental authority
or third party, including, without
limitation, any consent of any licensor,
lessor or other person obligated on
Collateral, and taking all actions required
by any earlier versions of the UCC or by
other law, as applicable in any relevant
jurisdiction."
(g) Effective as of the date hereof, paragraph 7(b) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(b) all Accounts (i) represent complete bona fide
transactions which require no further act
under any circumstances on Borrower's part to
make such Accounts payable by Customers, (ii)
unless they do not exceed $500 in any one
instance or $5,000 in the aggregate, to the
best of Borrower's knowledge, are not subject
to any present, future or contingent
Disputes; (iii) unless they do not exceed
$500 in any one instance or $5,000 in the
aggregate, do not represent bill and hold
- 10 -
sales, consignment sales, guaranteed sales,
sale or return or other similar
understandings or obligations of any
Affiliate or Subsidiary of Borrower; (iv)
included in any Borrowing Base Certificate as
an Eligible Account meets all criteria
specified in the definition of Eligible
Accounts, except as may otherwise be
specifically disclosed in such Borrowing Base
Certificate or as otherwise theretofore
disclosed in writing to Lender; and (v)
Borrower has no knowledge of any fact or
circumstance not disclosed to Lender in the
pertinent Borrowing Base Certificate or
otherwise in writing, which would impair the
validity or collectibility of any Account and
that all documents in connection with each
Account are genuine."
(h) Effective as of the date hereof, paragraph 7(c) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(c) in the event any amounts due and owing from
any account debtor to Borrower on any
Eligible Account shall become subject to any
Dispute, or to any other adjustment otherwise
permitted to be made in accordance with the
terms and provisions hereof in the ordinary
course of business and prior to the
occurrence of an Event of Default hereunder,
Borrower agrees that it shall, at the time of
the submission of the next Borrowing Base
Certificate required to be delivered to
Lender immediately following the date on
which Borrower learns thereof, provide Lender
with notice thereof. Borrower further agrees
that it shall also notify Lender promptly of
all returns and credits in excess of $500 in
any one instance or $5,000 in the aggregate
at any time outstanding in respect of any
Accounts included within a Borrowing Base
Certificate, which notice shall specify the
Accounts affected."
(i) Effective as of the date hereof, paragraph 8(f) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(f) not extend the payment terms of any Account
or other Receivable without prompt notice
thereof to Lender;"
(j) Effective as of the date hereof, paragraph 8 of the ARMS Agreement
is hereby amended by adding the following at the end thereof:
"(i) Borrower shall not change its name unless
each of the following conditions is
satisfied: (i) Lender shall have received not
less than thirty (30) days prior written
notice from Borrower of such proposed change
in its corporate name, which notice shall
accurately set forth the proposed new name;
and (ii) Lender shall receive a copy of the
amendment to the Certificate of Incorporation
of Borrower providing for the name change
certified by the Secretary of State of the
jurisdiction of incorporation or organization
of Borrower as soon as it is available;
(j) Borrower shall not change its chief executive
office or its mailing address or
organizational identification number (or if
it does not have one, Borrower shall not
acquire an organizational identification
number) unless Lender shall have received not
less than thirty (30) days prior written
notice from Borrower of such proposed change,
which notice shall set forth such information
with respect thereto as Lender may require
and Lender shall have received such
agreements as Lender may reasonably require
in connection therewith;
(k) Borrower shall not change its type of
organization, jurisdiction of organization or
other legal structure; and
(l) Borrower may open any new location within the
continental United States provided Borrower
(i) gives Lender sixty (60) days written
notice of the opening of any such new
location, and (ii) if requested by Lender,
executes and delivers, or causes to be
executed and delivered, to Lender such
agreements, documents, and instruments as
Lender may deem necessary or desirable to
protect its interests in the Collateral at
such location."
(k) Effective as of the date hereof, paragraph 9 of the ARMS Agreement
is hereby amended and restated in its entirety as follows:
- 11 -
"9. Collection and Maintenance of Collateral and
Records. Lender may at any time verify
Borrower's Accounts purchased hereunder by
utilizing an audit control company or any
other agent of Lender. Lender or Lender's
designee may notify Customers, at any time at
Lender's sole discretion, of Lender's
security interest in such Accounts, collect
them directly and charge the collection costs
and expenses to Borrower's account, but,
unless and until Lender does so or gives
Borrower other instructions, Borrower shall
instruct all of its Customers to make
payments on account of such Accounts to an
account under Lender's dominion and control
at such bank as Lender may designate, as
provided by the terms of paragraph 22. To the
extent Borrower receives any payments on
account of Accounts and other Receivables, it
shall hold such payments for Lender's benefit
in trust as Lender's trustee and immediately
deliver them to Lender in their original form
with all necessary endorsements or, as
directed by Lender, deposit such payments as
directed by Lender pursuant to paragraph 22
hereof. Lender will credit (conditional upon
final collection) all such payments to
Borrower's account on the Settlement Date.
Promptly after the creation of any Account
purchased hereunder, Borrower shall provide
Lender with schedules describing all such
Accounts created or acquired by Borrower and
shall execute and deliver confirmatory
written assignments of such Accounts to
Lender, but Borrower's failure to execute and
deliver such schedules or written
confirmatory assignments of such Accounts
shall not affect or limit Lender's security
interest or other rights in and to such
Accounts. Borrower shall furnish, at Lender's
request, copies of contracts, invoices or the
equivalent, and any original shipping and
delivery receipts for all merchandise sold or
services rendered and such other documents
and information as Lender may require. All of
Borrower's invoices shall bear the terms
stated on the applicable customer order, and
no change from the original terms of such
customer order shall be made without the
prior written consent of Lender. Borrower
shall provide Lender on a monthly (within ten
(10) days after the end of each month), or
more frequent basis, as requested by Lender,
a summary report of Borrower's current
Inventory, certified as true and accurate by
Borrower's President or Chief Financial
Officer, as well as an aged trial balance of
Borrower's existing accounts payable.
Borrower shall provide Lender, as requested
by Lender, such other schedules, documents
and/or information regarding the Collateral
as Lender may require. Without limiting the
foregoing, Borrower shall provide to Lender a
borrowing base certificate at least once
daily ("Borrowing Base Certificate"), which
must be in form and substance acceptable to
Lender and which Borrowing Base Certificate
shall certify to Lender, and shall contain
sufficient information and calculations as
Lender may deem necessary or desirable, in
order to verify any Accounts Availability,
the applicable Formula Amount and whether or
not Accounts included therein are Eligible
Accounts. Without limiting the foregoing, a
Borrowing Base Certificate must be executed
and delivered by Borrower to Lender at the
time of or prior to each request for
Revolving Credit Advances pursuant to
paragraph 4. Each such Borrowing Base
Certificate shall be delivered to Lender at
its office described in paragraph 25 below,
on each relevant Business Day."
(l) Effective as of the date hereof, paragraph 12(a) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(a) (i) Borrower is a corporation duly organized
and validly existing under the laws of the
State of Delaware and duly qualified and in
good standing in every other state or
jurisdiction in which the nature of
Borrower's business requires such
qualification.
(ii) The exact legal name of Borrower is Target
Logistic Services, Inc. Borrower has not,
during the past five years, been known by or
used any other composite or fictitious name
or been a party to any merger or
consolidation, or acquired all or
substantially all of the assets of any
Person, or acquired any of its properties or
assets out of the ordinary course of
business, except as set forth on Schedule
12(a)(ii).
(iii)Borrower is an organization of the type and
organized in the jurisdiction set forth on
Schedule 12(a)(iii). Schedule 12(a)(iii)
accurately sets forth the organizational
identification number of Borrower or
accurately states that Borrower has none and
accurately sets forth the federal employer
identification number of Borrower.
- 12 -
(iv) The chief executive office and mailing
address of Borrower and Borrower's Records
concerning Accounts or other Receivables are
located only at the address identified as
such on Schedule 12(a)(iv) and its only other
places of business and the only other
locations of Collateral, if any, are the
addresses set forth on Schedule 6(k), subject
to the right of Borrower to establish new
locations in accordance with paragraph 8(l)
above. Schedule 12(l) correctly identifies
any of such locations which are not owned by
Borrower and sets forth the owners and/or
operators thereof."
(m) Effective as of the date hereof, paragraph 12(e)(i) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(e) (i) the operation of Borrower's business is and
will continue to be in compliance in all material
respects with all applicable federal, state and
local laws, including, but not limited to, all
applicable environmental laws and regulations and
Sanction/Embargo Programs."
(n) Effective as of the date hereof, paragraph 12(e)(ii) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(e) (ii) Borrower has established and maintained, and
will continue to maintain, a system to assure and
monitor continued compliance with all applicable
environmental laws, and Sanction/Embargo Programs,
which system shall include periodic reviews of
such compliance."
(o) Effective as of the date hereof, paragraph 12(e)(v) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(e) (v) Borrower shall defend and indemnify Lender and
hold Lender harmless from and against all loss,
liability, damage and expense, claims, costs,
fines and penalties, including attorney's fees,
suffered or incurred by Lender under or on account
of (A) any environmental laws, including, without
limitation, the assertion of any lien thereunder,
with respect to any Hazardous Discharge, the
presence of any hazardous substances affecting
Borrower's property, whether or not the same
originates or emerges from Borrower's property or
any contiguous real estate, including any loss of
value of the Collateral as a result of the
foregoing except to the extent such loss,
liability, damage and expense is attributable to
any Hazardous Discharge resulting from actions on
the part of Lender, and (B) any Sanction/Embargo
Program. Borrower's obligations under paragraph
12(e)(v)(A) shall arise upon the discovery of the
presence of any Hazardous Substances on Borrower's
property, whether or not any federal, state, or
local environmental agency has taken or threatened
any action in connection with the presence of any
hazardous substances, and under paragraph
12(e)(v)(B) on failure to comply with any
Sanction/Embargo Program. Borrower's obligation
and the indemnifications hereunder shall survive
the termination of this Agreement; and"
(p) Effective as of the date hereof, paragraph 12(n) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(n) it shall not permit consolidated Tangible Net
Worth of Holding, determined in accordance with
GAAP on a consolidated basis, as of the end of any
fiscal quarter to be less than the amount set
forth below for each respective measurement date:
Quarter Ended 2002 2003
----------------------------------------------------
September 30 3,100,000
December 31 3,328,000
March 31 3,392,000
June 30 3,614,000
September 30 and
for each fiscal quarter thereafter: 100% of the Net Income
for such fiscal quarter
(excluding losses) less
dividends paid or
accrued during such
quarter
- 13 -
To the extent that Holding pays any dividends
to the holders of any preferred stock issued in
its settlement with trade creditors and to the
extent Holding pays any dividends to the holders
of any holders or other classes of preferred stock
(which dividends shall not exceed an aggregate
amount of $350,000 during any fiscal year to the
holders of Class A and Class C Preferred Stock and
$240,000 during any fiscal year to the holders of
Class E Preferred Stock), then in such event the
dollar amounts set forth above shall be decreased
by an amount equal to the aggregate amount of the
dividends paid."
(q) Effective as of the date hereof, paragraph 12(p) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(p) At the end of any month, the aggregate sum of
Borrower's and Holding's (i) unrestricted cash
plus (ii) the Formula Amount less Revolving Credit
Advances, shall not be less than: (A) for the
months of September, 2002 through and including
February, 2003, $1,800,000; and (B) for the month
of March 2003 and for each month thereafter,
2,400,000."
(r) Effective as of the date hereof, paragraph 12(q) of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"(q) (i) Borrower will not contract for, purchase or
make any expenditure or commitments for fixed or
capital assets (including capitalized leases) in
any fiscal year in an amount in excess of
$500,000; and (ii) in addition to paragraph
12(q)(i) above, Borrower will not, in any fiscal
year, acquire or purchase any assets of any
Person, except that so long as no Event of Default
exists or would exist after giving effect to the
proposed acquisition or purchase, Borrower may
acquire or purchase any assets of any Person
provided that the aggregate amount of such
purchases and acquisitions in any fiscal year does
not exceed $500,000."
(s) Effective as of the date hereof, paragraph 12 of the ARMS
Agreement is hereby amended by adding the following at the end thereof:
"(u) Holding, on a consolidated basis, will maintain
for the twelve (12) month period ending on last
day of each fiscal quarter, commencing with the
fiscal quarter ending June 30, 2003, an Interest
Coverage Ratio equal to or greater than 1.0:1.0."
(t) Effective as of the date hereof, paragraph 17 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"17. Term of Agreement. This Agreement shall continue
in full force and effect until the expiration of
the Term. The Term shall be automatically extended
for successive periods of one (1) year each unless
either party shall have provided the other with a
written notice of termination, at least ninety
(90) days prior to the expiration of the initial
Term or any renewal Term. The Borrower may
terminate this Agreement at any time upon sixty
(60) days' prior written notice ("Termination
Date") upon payment in full of the Obligations;
provided, that, Borrower pays an early termination
fee in an amount equal to the Required Percentage
of the Maximum Revolving Amount. For the purposes
hereof, Required Percentage shall mean one percent
(1%)."
- 14 -
(u) Effective as of the date hereof, paragraph 18 of the ARMS
Agreement is hereby amended by adding the
following at the end thereof:
"(s) any bank at which any deposit account of Borrower
is maintained shall fail to comply with any of the
terms of any Deposit Account Control Agreement to
which such bank is a party or any securities
intermediary, commodity intermediary or other
financial institution at any time in custody,
control or possession of any investment property
of Borrower shall fail to comply with any of the
terms of any Investment Property Control Agreement
to which such person is a party."
(v) Effective as of the date hereof, paragraph 22 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"22. Blocked Accounts.
----------------
(a) Borrower shall establish and maintain, at its
expense, blocked accounts or lockboxes and related
blocked accounts (in either case, a "Blocked
Account"), as Lender may specify, with such banks
as are acceptable to Lender into which Borrower
shall promptly deposit and direct its account
debtors to directly remit all payments on
Receivables and all payments constituting proceeds
of Inventory or other Collateral in the identical
form in which such payments are made, whether by
cash, check or other manner. Borrower shall
deliver, or cause to be delivered to Lender, a
Deposit Account Control Agreement duly authorized,
executed and delivered by each bank where a
Blocked Account is maintained as provided in
paragraph 6(e) hereof or at any time and from time
to time Lender may become bank's customer with
respect to a Blocked Account and promptly upon
Lender's request, Borrower shall execute and
deliver such agreements or documents as Lender may
require in connection therewith. Borrower agrees
that all payments made to any such Blocked Account
or other funds received and collected by Lender,
whether in respect of the Receivables, as proceeds
of Inventory or other Collateral or otherwise
shall be treated as payments to Lender in respect
of the Obligations and, therefore, shall
constitute the property of Lender to the extent of
the then outstanding Obligations.
(b) Borrower and its shareholders, directors,
employees, agents, Subsidiaries or other
Affiliates shall, acting as trustee for Lender,
receive, as the property of Lender, any monies,
checks, notes, drafts or any other payment
relating to and/or proceeds of Accounts or other
Collateral which come into their possession or
under their control and immediately upon receipt
thereof, shall deposit or cause the same to be
deposited in the Blocked Account, or remit the
same or cause the same to be remitted, in kind, to
Lender. In no event shall the same be commingled
with Borrower's own funds. Borrower agrees to
reimburse Lender on demand for any amounts owed or
paid to any bank at which a Blocked Account is
established or any other bank or person involved
in the transfer of funds to or from any Blocked
Account arising out of Lender's payments to or
indemnification of such bank or person. The
obligation of Borrower to reimburse Lender for
such amounts pursuant to this paragraph 22 shall
survive the termination or non-renewal of this
Agreement."
(w) Effective as of the date hereof, paragraph 23 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"23. Lender's Discretion. Lender shall have the right
in its sole discretion to determine which rights,
Liens, security interests or remedies Lender may
at any time pursue, relinquish, subordinate, or
modify or to take any other action with respect
thereto and such determination will not in any way
modify or affect any of Lender's rights hereunder.
To the extent that applicable law imposes duties
on Lender to exercise remedies in a commercially
reasonable manner (which duties cannot be waived
under such law), Borrower acknowledges and agrees
that it is not commercially unreasonable for
Lender (a) to fail to incur expenses reasonably
deemed significant by Lender to prepare Collateral
for disposition or otherwise to complete raw
material or work in process into finished goods or
other finished products for disposition; (b) to
fail to obtain third party consents for access to
Collateral to be disposed of, or to obtain or, if
- 15 -
not required by other law, to fail to obtain
consents of any governmental authority or other
third party for the collection or disposition of
Collateral to be collected or disposed of; (c) to
fail to exercise collection remedies against
account debtors, secondary obligors or other
persons obligated on Collateral or to remove liens
or encumbrances on or any adverse claims against
Collateral; (d) to exercise collection remedies
against account debtors and other persons
obligated on Collateral directly or through the
use of collection agencies and other collection
specialists; (e) to advertise dispositions of
Collateral through publications or media of
general circulation, whether or not the Collateral
is of a specialized nature; (f) to contact other
persons, whether or not in the same business as
Borrowers for expressions of interest in acquiring
all or any portion of the Collateral; (g) to hire
one or more professional auctioneers to assist in
the disposition of Collateral, whether or not the
collateral is of a specialized nature; (h) to
dispose of Collateral by utilizing Internet sites
that provide for the auction of assets of the
types included in the Collateral or that have the
reasonable capability of doing so, or that match
buyers and sellers of assets; (i) to dispose of
assets in wholesale rather than retail markets;
(j) to disclaim disposition warranties; (k) to
purchase insurance or credit enhancements to
insure Lender against risks of loss, collection or
disposition of Collateral or to provide to Lender
a guaranteed return from the collection or
disposition of Collateral; or (l) to the extent
deemed appropriate by Lender, to obtain the
services of other brokers, investment bankers,
consultants and other professionals to assist
Lender in the collection or disposition of any of
the Collateral. Borrower acknowledges that the
purpose of this paragraph 23 is to provide
non-exhaustive indications of certain actions or
omissions by Lender that would not be commercially
unreasonable in Lender's exercise of remedies
against the Collateral and that other actions or
omissions by Lender shall not be deemed
commercially unreasonable solely on account of not
being indicated in this paragraph 23. Without
limitation of the foregoing, nothing contained in
this paragraph 23 shall be construed to grant any
rights to Borrower or to impose any duties on
Lender that would not have been granted or imposed
by this Agreement or by applicable law in the
absence of this paragraph 23."
(x) Effective as of the date hereof, paragraph 25 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"25. Notices. Any notice or request hereunder may be
given to Borrower or Lender at the respective
addresses set forth below or as may hereafter be
specified in a notice designated as a change of
address under this paragraph. Any notice or
request hereunder shall be given by registered or
certified mail, return receipt requested, or by
overnight mail or by telecopy (confirmed by mail).
Notices and requests shall be, in the case of
those by mail or overnight mail, deemed to have
been given when deposited in the mail or with the
overnight mail carrier, and, in the case of a
telecopy, when confirmed.
Notices shall be provided as follows:
If to the Lender: GMAC Commercial Credit LLC
1290 Avenue of the Americas
New York, New York 10104
Attention: Frank Imperato, SVP
Telephone: (212) 408-7026
Telecopy: (212) 408-7162
If to the Borrower: Target Logistic Services, Inc.
c/o Target Logistics, Inc.
112 East 25th Street
Baltimore, MD 21218
Attention: Stuart Hettleman
Telephone: (410) 338-0127
Telecopy: (410) 330-1105
- 16 -
with copy to: Hillel Tendler, Esq.
Neuberger, Quinn, Gielen, Rubin
and Gibber, P.A.
One South Street, 27th Floor
Baltimore, MD 21202-3201
Telephone: (410) 332-8552
Telecopy: (410) 951-6038"
(y) Effective as of the date hereof, paragraph 27 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"27. Limitation of Liability. Borrower acknowledges and
understands that in order to assure repayment of
the Obligations hereunder Lender may be required
to exercise any and all of Lender's rights and
remedies hereunder and agrees that neither Lender
nor any of Lender's agents shall be liable for
acts taken or omissions made in connection
herewith or therewith except for actual bad faith.
Except as prohibited by law, Borrower waives any
right which it may have to claim or recover in any
litigation with Lender any special, exemplary,
punitive or consequential damages or any damages
other than, or in addition to, actual damages
unless such damages are directly caused by
Lender's willful misconduct. Borrower: (a)
certifies that neither Lender nor any
representative, agent or attorney acting for or on
behalf of Lender has represented, expressly or
otherwise, that Lender would not, in the event of
litigation, seek to enforce any of the waivers
provided for in this Agreement or any of the
Ancillary Agreements, and (b) acknowledges that in
entering into this Agreement and the other
Ancillary Agreements, Lender is relying upon,
among other things, the waivers and certifications
set forth in this paragraph 27 and elsewhere
herein and therein."
(z) Effective as of the date hereof, paragraph 28 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"28. Entire Understanding. This Agreement and the
Ancillary Agreements contain the entire
understanding between Borrower and Lender and
constitute the complete agreement between the
parties with respect to the subject matter hereof
and thereof, and any promises, representations,
warranties, understandings, or guarantees not
contained in this Agreement or the Ancillary
Agreements shall have no force and effect."
(aa) Effective as of the date hereof, paragraph 29 of the ARMS
Agreement is hereby amended and restated in its entirety as follows:
"29. Modification. Neither this Agreement, the
Ancillary Agreements, nor any portion or
provisions thereof may be changed, modified,
amended, waived, supplemented, discharged,
cancelled or terminated orally or by any course of
dealing, or in any manner other than by an
agreement in writing, signed by the parties hereto
and thereto."
3 Conditions Precedent/Conditions Subsequent. (a) This Amendment shall
be effective, and the effectiveness of the terms and conditions contained
hereof, shall be subject to:
(i) the receipt by Lender of an original of this Amendment
duly authorized, executed and delivered by Borrower and consented and
agreed to by the Guarantor; and
(ii) no Event of Default shall exist or have occurred.
(b) Borrower agrees to deliver to Lender within ten (10) days from
the date hereof all Schedules required to be delivered in connection herewith.
The failure to deliver such Schedules shall constitute an Event of Default.
4 Renewal Fee. In consideration of the terms and provisions hereof and
the agreements of Lender contained herein, in addition to all other fees payable
- 17 -
by Borrower under the ARMS Agreement, Borrower shall pay to Lender a
non-refundable fee in an amount equal to $15,000, which fee shall be fully
earned and payable as of the date hereof and may, at the option of Lender, be
charged to any account of Borrower maintained with Lender.
5 Ratification. Except as otherwise set forth herein, no other changes
or modifications to the ARMS Agreement are intended or implied and, in all other
respects, the ARMS Agreement remains in full force and effect in accordance with
its existing terms and provisions and is hereby specifically ratified and
confirmed as of the date hereof. Except as specifically set forth herein,
nothing contained herein shall evidence a waiver or amendment by the Lender of
any other provision of the ARMS Agreement.
6 Successors and Assigns. The terms and provisions of this Amendment
shall be for the benefit of the parties hereto and their respective successors
and assigns; no other person, firm, entity or corporation shall have any right,
benefit or interest under this Amendment.
7 Counterparts. This Amendment may be signed in counterparts, each of
which shall be an original and all of which taken together constitute one
amendment. In making proof of this Amendment, it shall not be necessary to
produce or account for more than one counterpart signed by the party to be
charged.
8 Entire Agreement. This Amendment sets forth the entire agreement and
understanding of the parties with respect to the matters set forth herein. This
Amendment cannot be changed, modified, amended or terminated except in a writing
executed by the party to be charged.
Very truly yours,
TARGET LOGISTIC SERVICES, INC.
By: /s/ Philip J. Dubato
-------------------------------------------
Title: Vice President, Secretary and Treasurer
ACKNOWLEDGED AND AGREED:
GMAC COMMERCIAL CREDIT LLC
By: /s/ Edward Hill
------------------------------
Title: Senior Vice President
- 18 -
ACKNOWLEDGMENT AND CONSENT OF GUARANTOR
1. Target Logistics, Inc. (as successor in interest to Amertranz
Worldwide Holding Corp., the "Guarantor") has executed and delivered a Guaranty,
dated January 14, 1997 (the "Guaranty") in favor of GMAC Commercial Credit LLC,
formerly known as BNY Factoring LLC, as successor by merger to BNY Financial
Corporation (the "Lender"). Guarantor hereby acknowledges and consents to the
annexed Letter re: Amendment to Restated and Amended Accounts Receivable
Management and Security Agreement, by and between Target Logistic Services, Inc.
and Lender and the transactions referred to thereunder (the "Amendment").
2. Guarantor hereby acknowledges, confirms and agrees that the
Guaranty, the General Security Agreement, dated January 14, 1997, by and between
Guarantor and Lender and all other documents and agreements executed by
Guarantor in connection therewith, are and remain in full force and effect in
accordance with their respective terms as of the date hereof, and that all
Obligations (as defined in the Guaranty) are due and payable to Lender without
offset, defense or counterclaim of any kind, nature or description whatsoever.
TARGET LOGISTIC SERVICES, INC.
By: /s/ Philip J. Dubato
-------------------------------------------
Title: Vice President, Chief Financial Officer
EXHIBIT 10.7
ADDENDUM TO EMPLOYMENT AGREEMENT
THIS ADDENDUM TO EMPLOYMENT AGREEMENT (the "Addendum") is made as of
the 30th day of June, 2002, by and between TARGET LOGISTICS, INC., a Delaware
corporation (the "Company") and STUART HETTLEMAN (the "Executive").
INTRODUCTORY STATEMENT
The Company and Executive entered into an Employment Agreement dated
as of June 24, 1996, as amended by an Addendum to Employment Agreement effective
June 24, 1999 (the "Original Agreement"). The parties desire to extend the term
of the Original Agreement for an additional one-year term, and amend certain
other provisions of the Original Agreement to be effective from and after the
date hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
A. All capitalized terms not otherwise defined in this Addendum shall
have the meanings set forth in the Original Agreement.
B. The first sentence of Section 2(a) of the Original Agreement is
hereby amended in it entirety to read as follows:
The Executive shall serve as President and Chief
Executive Officer of the Company and as Executive Vice
President of each of Amertranz and CAS for a term commencing
on the Commencement Date and expiring on June 30, 2003.
C. Section 3(a) of the Original Agreement is hereby amended in its
entirety to read as follows:
Base Salary. In consideration of his employment
hereunder, the Company shall pay to the Executive, in such
installments as shall accord with the normal pay practices
of the Company, but no less frequently than monthly, an
annual salary at the initial rate of $180,000 per annum
("Base Salary").
D. The introductory text and clauses (i), (ii) and (iii) of Section
3(b) of the Original Agreement are hereby amended in their entirety to read as
follows:
Incentive Compensation. Executive shall be entitled to
receive incentive compensation ("Incentive Compensation") in
addition to the Base Salary, in an amount equal to the total
of the following calculations based on the Company's Defined
Earnings (as defined below) with respect to each fiscal year
of the Company during the term hereof:
(i) 3% of Defined Earnings up to and including $1
million;
(ii) 4% of Defined Earnings in excess of $1 million up
to and including $2 million; and
(iii) 5% of Defined Earnings in excess of $2 million.
E. Section 3(c) of the Original Agreement is hereby amended in its
entirety to read as follows:
Definition of "Defined Earnings". For purposes of this
Agreement, the term "Defined Earnings" shall be the income
of the Company, but before any (i) income taxes or other
taxes based on income, (ii) income resulting from the sale
by the Company or any of its subsidiaries of any assets
(other than sales in the ordinary course of business), and
(iii) the effects of charges resulting from any change in
accounting principles. The calculation of Defined Earnings
shall be derived from the audited financial statements of
the Company, computed in accordance with generally accepted
accounting principles, consistently applied.
F. In all other respects, the Original Agreement, as amended hereby,
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the
day and year first above written.
TARGET LOGISTICS, INC.
By: /s/ Philip J. Dubato
-------------------------------------------
Philip J. Dubato, Vice President
/s/ Stuart Hettleman
-------------------------------------------
Stuart Hettleman
- 2 -
EXHIBIT 10.9
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease ("Amendment") is made and entered into
as of March 20, 2002, by and between AMB Property L.P., a Delaware limited
partnership, successor in interest to West Carob Street Partners, a California
general partnership ("Lessor") and Target Logistic Services, Inc., a Delaware
corporation, successor in interest to AmerTranz Worldwide Holding Corporation, a
Delaware corporation ("Lessee").
I. RECITALS
Lessor and Lessee are parties to that certain Standard
Industrial/Commercial Single-Lessee Lease - Net dated May 19, 1997 ("Lease").
The Lease was amended by that certain First Amendment to Lease ("First
Amendment") dated June 12, 1997. The Lease and First Amendment are also
collectively referred to as the "Lease." Pursuant to the terms and conditions of
the Lease, Lessee leased the premises commonly known as 201 West Carob Street,
Compton, CA 90220 ("Premises"). The original term of the Lease expires on July
31, 2002. By this Amendment Lessor and Lessee desire and intend to amend the
Lease as set forth in this Amendment.
II. AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants, conditions and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Lessor and Lessee hereby agree as follows:
1. Lessor and Lessee. Notwithstanding anything to the contrary in the
Lease, "Lessor" shall mean AMB Property, L.P., a Delaware limited partnership,
and "Lessee" shall mean Target Logistic Services, Inc., a Delaware corporation.
2. Sublease. Lessee entered into a written Standard Sublease
("Sublease") with Yoon Shin Kim dba Turbo Air, Inc. ("Subtenant"), dated May 13,
1998. The term of the Sublease was to expire on May 30, 1999. Lessee warrants
and represents to Lessor that Subtenant is no longer in possession of any
portion of the Premises and that there are no subleases or assignment of all or
any portion of the Premises.
3. Extension of Term. The term of the Lease is hereby extended
("Extended Term") until and including July 31, 2005 ("Lease Termination Date").
The Extended Term commencement date ("Extended Term Commencement Date") is
August 1, 2002.
4. Rent During Extended Term. From the Extended Term Commencement Date
through the end of the Extended Term, the monthly Base Rent, as defined in
Section 1.5 of the Lease, shall be as follows
Months 1-12 - $40,112.50
Months 13-24 - $43,120.00
Months 25-36 - $45,126.00
5. Security Deposit. Upon execution of this Amendment, Lessee shall
deliver to Landlord $7,019.60 which shall become an additional security deposit
under the Lease pursuant to Sections 1.7 and 5 of the Lease and shall bring the
total security deposit to $40,112.00.
6. New Option to Extend. Lessor hereby grants to Lessee the option
("Option") to extend the term of this Lease for one 2-year period commencing
August 1, 2005 and terminating July 31, 2007 ("Option Period") upon the
following terms:
- 1 -
a). Exercise Date: In order to exercise the Option, Lessee must
give written notice ("Notice") of such election to Lessor and Lessor
must receive the same not earlier than 9 months nor later than 6
months prior to the Lease Termination Date ("Option Exercise Period").
If the Notice is not received, the Option shall automatically expire.
Lessee acknowledges that because of the importance to Lessor of
knowing no later than the end of the Option Exercise Period whether or
not Lessee will exercise the Option, the failure of Lessee to notify
Lessor by the end of the Option Exercise Period will conclusively be
presumed an election by Lessee not to exercise the Option.
b). Base Monthly Rent: The Base Monthly Rent and any increases
for each month of the Option Period shall be the market rent
determined as follows:
i). Four months prior to the commencement of the Option
Period, the Parties shall negotiate in good faith to determine
the Base Rent and increases for the Option Period. If a written
agreement cannot be reached within thirty days and if Lessor and
Lessee mutually agree in writing ("Arbitration Agreement") no
more than three months prior to the commencement of the Option
Period to submit such determination to binding arbitration as set
forth hereafter, then Lessor and Lessee shall each, no later than
90 days prior to the commencement of the Option Period, make a
reasonable determination of the fair market rental and increases
for the Premises for the Option Period and submit such
determination, in writing, to arbitration in accordance with the
following provisions:
aa). No later than 90 days prior to the commencement of
the Option Period, Lessor and Lessee shall each select an
industrial leasing broker to act as an arbitrator. The two
arbitrators so appointed shall, no later than 75 days prior
to the commencement of the Option Period, select a third
mutually acceptable industrial leasing broker to act as a
third arbitrator.
bb). The three arbitrators, acting by a majority, shall
no later than 75 days prior to the commencement of the
Option Period, determine the actual fair market rental and
increases for the Premises for the Option Period. The
decision of a majority of the arbitrators shall be binding
on the Parties. The fair market rental determination of
Lessor or Lessee which is closest to the fair market rental
as determined by the arbitrators shall be the Base Rent for
the Option Period. In no event shall the base rent for the
Option Period be less than the rent paid in the previous
period.
cc). If either of the Parties fails to appoint an
arbitrator within the period required by this Addendum, the
arbitrator timely appointed shall determine the Base Rent
and increases for the Option Period.
dd). The entire cost of such arbitration shall be paid
by the party whose fair market rental submission is not
selected.
Notwithstanding the foregoing, if Lessor and Lessee do not execute the
Arbitration Agreement, the Option shall be null and void.
c). Conditions to Exercise of Option: Lessee's right to extend is
conditioned upon and subject to each of the following:
i). Lessee shall have no right to exercise the Option (i) if
Lessee is in default or (ii) in the event that Lessor has given to
Lessee three (3) or more notices of separate defaults during the 12
month period immediately preceding the exercise of the Option, whether
or not the defaults are cured. The period of time within which the
Option may be exercised shall not be extended or enlarged by reason of
Lessee's inability to exercise the Option because of the provisions of
this paragraph.
ii). All of the terms and conditions of this Lease except
where specifically modified by this Amendment
shall apply.
iii). The Option is personal to the Lessee, cannot be
assigned or exercised by anyone other than the Lessee and only while
the Lessee is in full possession of the Premises and without the
intention of thereafter assigning or subletting. Lessee acknowledges
and agrees that it has no option to extend the term of the Lease
beyond the Option Period.
7. Improvements and Repairs. Lessor shall repair the concrete portion
of the driveway at entrance of the yard area as depicted on Exhibit "A" to this
Amendment. During the Extended Term Lessor shall, at its sole cost and expense,
replace (as deemed necessary by Lessor) up to four heating, ventilating and
- 2 -
air-conditioning units serving the Premises. Further, Lessee shall be reimbursed
by Lessor for an amount up to $28,980.00 as set forth hereafter
("Reimbursement") to be used by Lessee solely for the purchase and installation
of carpeting and carpet padding (collectively "Carpeting") in the Premises.
Lessee shall not be entitled to the Reimbursement until and unless it has
delivered to Lessor written evidence reasonably satisfactory to Lessor showing
that the Carpeting has been installed and fully paid for by Lessee. Except as
set forth in this Section 6 and notwithstanding anything to the contrary in the
Lease, Lessor shall have no obligation to perform any work in the Premises other
than that to which Lessor is obligated by the Lease. As of the date of this
Amendment, Lessee has no knowledge of any repair, replacement or maintenance in,
on or under the Premises which would be Lessor's obligation to repair.
8. No Brokers. Lessee warrants and represents that it has not been
represented in any capacity by any real estate broker, salesperson, or agent or
any other person who might claim a fee from Lessor in connection with the
representation or alleged representation of Lessee regarding the Lease or this
Amendment (collectively "Broker Claims"). Lessee shall indemnify, defend (by
counsel satisfactory to Lessor) and hold harmless Lessor, its partners,
officers, shareholders, directors, employees, agents, members, insurers,
contractors, and attorneys from any claim, damage, loss or liability arising
from any and all Broker Claims.
9. Execution of Guaranty. This Amendment shall not effective unless
and until a Guaranty of Lease in form and substance identical to that attached
hereto as Exhibit B, is executed by Target Logistics, Inc., a Delaware
corporation.
10. Reaffirmation. Except as otherwise provided in this Amendment, all
other terms and conditions of the Lease shall remain the same and the Lease
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment as of
the date first written above.
A. Lessor: Lessee:
AMB Property, L.P. Target Logistic Services, Inc.,
a Delaware limited partnership a Delaware corporation
By: AMB Property Corporation
Maryland corporation
Its General Partner
By: /s/ Christopher A. Coppersmith
--------------------------------
Its: President
By: /s/ Martin J. Coyne
-------------------------------
Martin J. Coyne, Vice President
- 3 -
GUARANTY OF LEASE
WHEREAS, AMB Property, L.P., a Delaware limited partnership
("Landlord") has agreed, pursuant to a written Second Amendment to Lease
("Amendment") executed contemporaneously with this Guaranty to extend the Term
and change the name of the "Tenant" under the written lease, dated May 19, 1997
("Lease") between it, as Landlord, and the predecessor in interest to Target
Logistic Services, Inc. ("Tenant"), for the premises commonly known as 201 West
Carob Street, Compton, CA 90220; WHEREAS, Target Logistics, Inc., a Delaware
corporation ("Guarantor") has a financial interest in Tenant; and WHEREAS,
Landlord would not extend the Term of the Lease, change the name of the Tenant
or execute the Amendment if Guarantor did not execute and deliver to Landlord
this Guaranty of Lease.
NOW THEREFORE, in consideration of the extension of the Term of the
Lease, the change of the name of the Tenant thereunder and the execution of the
Amendment by Landlord and as a material inducement to Landlord for the
foregoing:
1. Guarantor hereby unconditionally and irrevocably guarantees the
prompt payment by Tenant of all rents and all other sums payable by Tenant under
the Lease and the faithful and prompt performance by Tenant of each and every
one of the terms, conditions, and covenants of the Lease to be kept and
performed by Tenant.
2. The terms of the Lease may, without the consent of or notice to
Guarantor, be modified by Landlord and Tenant or by a course of conduct, and
this Guaranty shall guarantee the performance of said Lease as so modified. The
Lease may be assigned by Landlord or any assignee of Landlord without consent or
notice to Guarantor.
3. This Guaranty shall not be released, modified, or affected by the
failure or delay on the part of Landlord to enforce any of the rights or
remedies of the Landlord under the Lease, whether pursuant to the terms thereof
or at law or in equity.
4. No notice of default need be given to Guarantor. The guaranty of
the undersigned is a continuing guaranty under which Landlord may proceed
immediately against Tenant and/or against Guarantor following any breach or
default by Tenant or for the enforcement of any rights which Landlord may have
against Tenant under the terms of the Lease or at law or in equity.
5. Landlord shall have the right to proceed against Guarantor
hereunder following any breach or default by Tenant without first proceeding
against Tenant and without previous notice to or demand upon either Tenant or
Guarantor.
6. Guarantor hereby waives (a) notice of acceptance of this Guaranty,
(b) demand of payment, presentation, and protest, (c) all right to assert or
plead any statute of limitations relating to this Guaranty or the Lease, (d) any
right to require the Landlord to proceed against the Tenant or any other
Guarantor or any other person or entity liable to Landlord, (e) any right to
require Landlord to apply to any default any security deposit or other security
it may hold under the Lease, (f) any right to require Landlord to proceed under
any other remedy Landlord may have before proceeding against Guarantor, and (g)
any right of subrogation.
7. Guarantor does hereby subrogate all existing or future indebtedness
of Tenant to Guarantor to the obligations owed to Landlord under the Lease and
this Guaranty.
8. If a Guarantor is married, such Guarantor expressly agrees that
recourse may be had against his or her separate property for all of the
obligations hereunder.
9. The obligations of Tenant under the Lease to execute and deliver
estoppel certificates and financial statements shall be deemed to also require
the Guarantor hereunder to do and provide the same.
10. The term "Landlord" refers to and means the Landlord named in the
Lease, as amended, and also Landlord's successors and assigns. So long as
Landlord's interest in the Lease, the leased premises, or the rents, issues, and
profits therefrom, are subject to any mortgage or deed of trust or assignment
for security, no acquisition by Guarantor of the Landlord's interest shall
affect the continuing obligation of Guarantor under this Guaranty which shall
nevertheless continue in full force and effect for the benefit of the mortgagee,
beneficiary, trustee, or assignee under such mortgage, deed of trust, or
assignment, and their successors and assigns.
11. The term "Tenant" refers to and means the Tenant named in the
Lease, as amended, and also Tenant's successors and assigns.
12. In the event any action is brought by said Landlord against
Guarantor hereunder to enforce the obligation of Guarantor hereunder, the
unsuccessful party in such action shall pay to the prevailing party therein a
reasonable attorney's fee which shall be fixed by the court.
Executed at Target Logistics, Inc.,
-------------------------- a Delaware corporation
- 1 -
on March 20, 2002 By: /s/ Stuart Hettleman
---------------------------------
Its: President
Address
----------------------------- "Guarantor"
-----------------------------
- 2 -
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-3, File No. 333-30351 and
File No. 333-03613, and Registration Statement on Form S-8, File No. 333-71197.
STONEFIELD JOSEPHSON, INC.
Santa Monica, California
September 26, 2002
EXHIBIT 99
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Target Logistics, Inc. (the
"Company") on Form 10-K for the fiscal year ended June 30, 2002 as filed with
the Securities and Exchange Commission and to which this Certification is an
exhibit (the "Report"), the undersigned hereby certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company for the periods reflected therein.
Date: September 27, 2002 /s/ Stuart Hettleman
------------------------------------
Stuart Hettleman
Chief Executive Officer
/s/ Philip J. Dubato
------------------------------------
Philip J. Dubato
Chief Financial Officer