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, 2003 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
500 Harborview Drive, Third Floor, Baltimore, Maryland 21218
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 332-1598
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
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
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes No X
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 23, 2003 was $1,103,252.
The number of shares of common stock outstanding as of September 23, 2003 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 2003 Annual
Meeting of Shareholders (to be filed).
TARGET LOGISTICS, INC.
2003 ANNUAL REPORT ON FORM 10-K
Table of Contents
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Page
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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 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 13
Item 9A. Controls and Procedures 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
Item 14. Principal Accountant Fees and Services 15
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16
Signatures 18
2
PART I
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ITEM 1. BUSINESS
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Background
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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 36 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 36 cities throughout the United States,
including exclusive agency relationships in 23 cities. The Company has
international freight forwarding operations consisting of strategic
relationships in over 20 countries. 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
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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 Company's
Target subsidiary's network of offices in the United States. During the fiscal
year ended June 30, 2003, the Company's international freight forwarding
accounted for 26.3% of the Company's operating revenue.
3
Customers and Marketing
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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, 2003, the Company had
approximately 3,500 accounts.
The Company markets its services through an organization of approximately
30 full-time salespersons and 44 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, entertainment and media and consumer direct logistics. 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 Entertainment Media Logistics (EML) service
provides logistic solutions to the film, entertainment and broadcast industries.
Until the end of the fiscal year, the Company's Consumer Direct Logistics (CDL)
operation specialized in oversize and/or heavy weight shipments primarily from
manufacturers and catalogue sales distribution centers moving direct to the
residential consumer. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" for further discussion of the
Company's CDL operation.)
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
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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., SEKO Worldwide and
Stonepath Group, 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, DHL 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.
Employees
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The Company and its subsidiaries had approximately 201 full-time employees
as of June 30, 2003. 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.
4
Regulation
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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
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As of June 30, 2003, the Company leased terminal facilities consisting of
office and warehouse space in 13 cities located in the United States, and also
utilized 23 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
Columbus, Ohio Newark, New Jersey
Dallas, Texas New York, New York
Greensboro, North Carolina Seattle, Washington
ITEM 3. LEGAL PROCEEDINGS
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As previously reported, 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. In February, 2003, Target
settled all of Pilot's claims against Target for $50,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following is a listing of the executive officers of the Company as of
June 30, 2003. There are no family relationships between any Directors and
Officers of the Company.
NAME AGE POSITION
Stuart Hettleman............ 53 President and Chief Executive
Officer
Philip J. Dubato............ 47 Vice President, Chief Financial
Officer and Secretary
Christopher Coppersmith..... 53 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
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's common stock, $.01 par value (the "Common Stock") trades on
the Over-The-Counter (OTC) market under the symbol TARG.
The following table shows the high and low sales prices of the Common Stock
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.
Fiscal Year Ended June 30, 2003
First Quarter High $0.30
Low $0.13
Second Quarter High $0.40
Low $0.12
Third Quarter High $0.47
Low $0.16
Fourth Quarter High $0.75
Low $0.23
Fiscal Year Ended June 30, 2002
First Quarter High $0.39
Low $0.14
Second Quarter High $0.32
Low $0.11
Third Quarter High $0.34
Low $0.12
Fourth Quarter High $0.45
Low $0.14
On September 23, 2003 there were 582 shareholders of record of the
Company's Common Stock. The closing price of the Common Stock on that date was
$0.26 per share.
7
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
TARGET LOGISTICS, INC.
(in thousands, except per share data)
Year Ended June 30,
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2003 2002 2001 2000 1999
Statement of Operations Data:
Operating revenue $113,381 $ 93,484 $ 90,143 $ 84,088 $ 51,720
Cost of transportation 75,773 63,174 60,912 56,949 34,790
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Gross profit 37,608 30,310 29,231 27,139 16,930
Selling, general & administrative expenses
36,941 29,969 30,655 27,194 20,471
Depreciation and Amortization 428 1,017 897 989 833
-------- -------- -------- -------- --------
Operating income (loss) $ 239 $ (676) $ (2,321) $ (1,044) $ (4,374)
Other Income 1,448 - - - 119
Gain on sale of subsidiary - - - - 24,832
Net income (loss) $ 840 $ (935) $ (1,772) $ (1,197) $ 14,016
Net income (loss) per common share $ 0.04 $ (0.10) $ (0.18) $ 0.14) $ 1.63
Balance Sheet Data:
Total assets $ 37,191 $ 37,388 $ 36,484 $ 36,669 $ 34,932
Working capital (deficit) 863 57 336 4,535 5,567
Current liabilities 21,551 22,293 20,440 18,474 15,251
Long-term indebtedness 61 34 34 92 24
Shareholders' equity $ 15,579 $ 15,061 $ 16,010 $ 18,102 $ 19,657
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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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 maintain 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
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The Company generated operating revenues of $113.4 million, $93.5 million,
and $90.1 million, and had a net profit of $0.8 million, a net loss of $0.9
million, and a net loss of $1.8 million for the fiscal years ended June 30,
2003, 2002, and 2001, respectively.
The Company had earnings or (losses) before interest, taxes, depreciation
and amortization (EBITDA) of approximately $2,114,530, $340,000, and
($1,424,000), for the fiscal years ended June 30, 2003, 2002, and 2001
respectively. EBITDA, is a non-GAAP measure of income and 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, 2003, the revenue of the Company's
Target subsidiary increased by 21.3% when compared to the fiscal year ended June
30, 2002. Target's gross profit margin (i.e., gross operating revenue less cost
of transportation expressed as a percentage of gross operating revenue)
increased to 33.2% for the fiscal year ended June 30, 2003 from 32.4% for the
fiscal year ended June 30, 2002. This increase is primarily due to increases in
domestic gross profit margins. Management continues to believe that the Company
must focus on increasing revenues and must increase gross profit margin to
maintain profitability. Management intends to continue to work on growing
revenue by increasing sales generated by the Company'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.
* During the fourth quarter ended June 30, 2003, Target greatly reduced its
CDL operation in response to Target's decision not to lower its charges to
retain a principal customer of the CDL services. The CDL service was a
self-contained operation with dedicated overhead expenses which will be
significantly reduced as a result of the reduction in the CDL operation.
Management believes that Target is positioned to increase revenue from its other
services to significantly offset the loss of revenue from the CDL operation.
Accordingly, management believes that the reduction in the CDL operation will
not have a material adverse impact on the Company's operating results.
The Company's results for the year ended June 30, 2003 have been impacted
by SFAS No. 142, "Goodwill and Other Intangible Assets" (see Note 3). Under this
statement, from and after July 1, 2002, the Company may no longer amortize
goodwill, including the goodwill included in the carrying value of investments
accounted for using the equity method of accounting, and certain other
intangible assets deemed to have an indefinite useful life. Therefore, the
results for the year ended June 30, 2003 are not comparable to the results for
the year ended June 30, 2002. In order to make the operating results for the
year ended June 30, 2002 more comparable to the presentation of the operating
results for the year ended June 30, 2003 and make an analysis of 2003 and 2002
more meaningful, the following discussion is based on financial information for
the year ended June 30, 2002 prepared on a pro forma basis as if SFAS No. 142
had been applied for that period. Please refer to the Consolidated Statements of
Operations contained in this Annual Report for a reconciliation of the
differences between the GAAP and pro forma presentations of this information.
Results of Operations
- ---------------------
Years ended June 30, 2003 and 2002
Operating Revenue. Operating revenue increased to $113.4 million for the
year ended June 30, 2003 from $93.5 million for the year ended June 30, 2002, a
21.3% increase. Domestic revenue increased by 20.0% to $83,610,134 for the year
ended June 30, 2003 from $69,652,711 for the year ended June 30, 2002, due to
increased domestic freight volume. In addition, international revenue increased
by 24.9% to $29,771,065 for the year ended June 30, 2003 from $23,831,028 for
the year ended June 30, 2002, mainly due to increased international air import
and export freight volume.
Cost of Transportation. Cost of transportation decreased to 66.8% of
operating revenue for the year ended June 30, 2003 from 67.6% of operating
revenue for the year ended June 30, 2002. This decrease was primarily due to a
lower cost of transportation, as a percentage of sales, on domestic freight
movements.
Gross Profit. As a result of the factors described above, gross profit for
the year ended June 30, 2003 increased to 33.2% from 32.4% of operating revenue
for the year ended June 30, 2002, a 2.5% increase. This increase is primarily
due to increases in domestic gross profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 33.0% of operating revenue for the year
ended June 30, 2003 from 32.5% of operating revenue for the pro forma year ended
June 30, 2002. Within the Company's Target subsidiary, selling, general and
administration expenses (excluding exclusive forwarder commission expense) were
17.3% of operating revenue for the year ended June 30, 2003 and 16.7% for the
year ended June 30, 2002, a 3.6% increase. This increase was primarily due to
9
expenses incurred at Target's new Columbus, Ohio terminal (see "Liquidity and
Capital Resources - Asset Purchase Acquisitions", below). Exclusive forwarder
commission expense was 14.6% of operating revenue for each of the years ended
June 30, 2003 and 2002.
Other Income. Other income of $1,447,699 for the year ended June 30, 2003
is the result of a non-recurring reversal of accruals for expenses, accruals for
contingencies, and accounts payable of previously closed and sold subsidiaries.
Net Profit. For the year ended June 30, 2003, the Company realized a net
profit of $839,500, compared to a net loss of ($338,659) for the pro forma year
ended June 30, 2002.
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.
Liquidity and Capital Resources
- -------------------------------
General. During the year ended June 30, 2003, net cash used in operating
activities was $945,185. Cash used in investing activities was $506,102
representing capital expenditures and asset purchase acquisitions. Cash provided
by financing activities was $1,117,317, which primarily consisted of borrowings
under the Company's accounts receivable financing facility.
Capital expenditures. Capital expenditures for the fiscal year ended June
30, 2003 were $506,102, representing capital expenditures and asset purchase
acquisitions.
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, 2003, there were outstanding borrowings of
$7,455,199 under the GMAC Facility (which represented 80% of the amount
available thereunder) out of a total amount available for borrowing under the
GMAC Facility of approximately $9,357,165. 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.
10
* Asset Purchase Acquisitions. On November 30, 2001, February 11, 2002, and
October 13, 2002, the Company's Target subsidiary acquired the assets and
certain liabilities of SDS Logistics, a Newark, New Jersey based forwarder, Air
America Freight Service, Inc., an Atlanta, Georgia based forwarder, and Cassady
Air Transportation, Inc., a Columbus, Ohio based forwarder, respectively, in
each instance for a combination of an initial cash payment and an earn out
structure over five years. The earn-out structures are strictly dependent on
future profits achieved at the location acquired, and the Company has no minimum
commitment or obligation. The Company does not expect that the earn-out payments
will have a material impact on its liquidity.
* 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, 2003, the Company had $1,901,966 available under its $10 million
accounts receivable financing facility and approximately $3,999,045 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
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.
During the Company's fiscal years ended June 30, 1997 through 2001, the
Company included reserves for accrued expenses, accounts payable and
contingencies relating to subsidiaries of the Company that were either closed or
sold. Following discussions with the Company's Audit Committee, independent
auditors and Company counsel, the Company determined that those reserves were no
longer necessary. As a result, during the fiscal year ended June 30, 2003, the
Company recognized $1,447,699 of other income. Had the Company not made the
adjustment during the fiscal year ended June 30, 2003, the Company would have
reported a net loss before taxes of $103,790 for the fiscal year.
The Company's balance sheet includes an asset in the amount of $11,239,917
for purchased goodwill. In accordance with accounting pronouncements, the amount
of this asset must be reviewed annually for impairment, written down and charged
to results of operations in the period(s) in which the recorded value of
goodwill is more than its fair value. The Company obtained an independent
valuation analysis completed during the second quarter ended December 31, 2002,
and based on the valuation, the Company determined that the goodwill was not
impaired. Had the determination been made that the goodwill asset was impaired,
the value of this asset would have been reduced by an amount ranging from zero
to $11,239,917, and the Company's financial statements would reflect the
reduction. For additional description, please refer to Note 3 to the Company's
Notes to the audited Consolidated Financial Statements contained in this Annual
Report.
11
New Accounting Pronouncements
- -----------------------------
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure provisions of FASB 123 and Accounting Principles Board (APB)
Opinion No. 28, "Interim Financial Reporting", to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. Amendments to SFAS 123 related to the transition and annual
disclosures are effective for fiscal year ending after December 15, 2002.
Amendments to disclosure requirements of APB Opinion 28 are effective for
interim periods beginning after December 15, 2002. The Company does not expect
the adoption of SFAS 148 will have a material impact on its financial position,
results of operations or cash flows.
In November 2002, FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for the
fair value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statement periods ending
after December 15, 2002. The adoption of FIN 45 has not had a material impact on
the Company's financial position, results of operations or cash flows.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". FIN 46 changed the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
FIN 46 has not had a material impact on the Company's financial position or
results of operations.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is
effective for contracts entered into or modified after June 30, 2003. This
Statement amends Statement 133 for decisions made (i) as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, (ii) in connection with other FASB projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative, in particular, the meaning
of an initial net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to changes
in market factors, the meaning of underlying, and the characteristics of a
derivative that contains financing components. The Company does not anticipate
that the adoption of this pronouncement will have a material effect on the
financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
12
with FASB's proposal to revise that definition to encompass certain obligations
that a reporting entity can or must settle by issuing its own equity shares,
depending on the nature of the relationship established between the holder and
the issuer. While FASB still plans to revise that definition through an
amendment to Concepts Statement 6, FASB decided to defer issuing that amendment
until it has concluded its deliberations on the next phase of this project. That
next phase will deal with certain compound financial instruments including
puttable shares, convertible bonds, and dual-indexed financial instruments. The
Company does not anticipate that the adoption of this pronouncement will have a
material effect on the financial statements.
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, 2003, an aggregate
principal amount of $7,455,199 was outstanding under the GMAC Facility bearing
interest at an annual rate of 5.0%. 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 $37,226 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 15(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, 2002,
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.
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, 2002 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.
13
During the two most recent fiscal years of the Company ended June 30, 2002,
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.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
The Company maintains a system of disclosure controls and procedures that
is designed to provide reasonable assurance that information, which is required
to be disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is accumulated and communicated
to management in a timely manner. The Company's Chief Executive Officer and
Chief Financial Officer have evaluated this system of disclosure controls and
procedures as of the end of the period covered by this annual report, and
believe that the system is operating effectively to ensure appropriate
disclosure. There have been no changes in the Company's internal control over
financial reporting during the most recent fiscal year that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
14
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 2003 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 2003
Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
----------------------------------------------------------------------
Equity Compensation Plan Information. The following table provides
information, as of June 30, 2003, with respect to all compensation arrangements
maintained by the Company under which shares of Common Stock may be issued:
Plan Category Number of securities Weighted-average exercise Number of securities
to be issued upon price of outstanding remaining available for
exercise of options, warrants and future issuance under
outstanding options, rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a))
(a) (b) (c)
Equity compensation plans
approved by security holders 596,957* $1.22 910,000
Equity compensation plans not
approved by security holders 0 0 0
Total 596,957* $1.22 910,000
* Of this amount, 590,000 shares are issuable pursuant to options granted
under the Company's 1996 Stock Option Plan, and 6,957 shares are issuable
pursuant to options otherwise granted prior to the Company's initial public
offering in 1996.
The balance of the information required by this item is incorporated by
reference from the Company's definitive Proxy Statement to be issued in
conjunction with the 2003 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 2003
Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement to be issued in conjunction with the 2003
Annual Meeting of Shareholders.
15
PART IV
ITEM 15. 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, 2003 and 2002 F-3
Consolidated Statements of Operations for the Years Ended
June 30, 2003, 2002, and 2001 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 2003, 2002, and 2001 F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2003, 2002, and 2001 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
march 31, 2003, 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)
16
10.4 Amendment to GMAC Facility Agreement, dated September 20, 2002
(incorporated by reference to Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended June 30, 2002, File No.
0-29754)
10.5 Amendment to GMAC Facility Agreement, dated February 12, 2003
(incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2003,
File No. 0-29754)
10.6 Employment Agreement dated June 24, 1996 between the Registrant and
Stuart Hettleman, as amended (incorporated by reference to Exhibits
10.5, 10.6 and 10.7 of the Registrant's Annual Report on Form 10-K for
the Fiscal Year Ended June 30, 2002, File No. 0-29754)
10.7 Addendum to Employment Agreement dated June 30, 2003 between the
Registrant 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 (incorporated by
reference to Exhibit 10.9 to the Registrant's Annual Report on Form
10-K for the Year Ended June 30, 2002, File No. 0-29754)
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.
31.1 Rule 15d-14(a) Certification of Chief Executive Officer
31.2 Rule 15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
99.1 Press Release issued September 26, 2003
(b) Reports on Form 8-K
-------------------
None.
17
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 26, 2003 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 26, 2003
- --------------------------- Officer and Director
Stuart Hettleman
/s/ Michael Barsa Director September 26, 2003
- ---------------------------
Michael Barsa
/s/ Brian K. Coventry Director September 26, 2003
- ---------------------------
Brian K. Coventry
/s/ Christopher Coppersmith Director September 26, 2003
- ---------------------------
Christopher Coppersmith
/s/ Philip J. Dubato Vice President, Chief September 26, 2003
- --------------------------- Financial Officer,
Philip J. Dubato Principal Accounting Officer
and Director
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, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years 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 audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, 2003 and 2002, and the results
of their consolidated operations and their consolidated cash flows for the years
ended June 30, 2003 and 2002, in conformity with accounting principles generally
accepted in the United States of America.
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 audits 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
September 5, 2003
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, 2002 (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, 2003 June 30, 2002
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,999,045 $ 4,333,015
Accounts receivable, net of allowance for doubtful accounts of
$882,132 and $995,245, respectively 17,600,722 17,012,677
Deferred income taxes 668,000 694,333
Prepaid expenses and other current assets 146,329
-----------
310,543
Total current assets 22,414,096 22,350,568
PROPERTY AND EQUIPMENT, NET 508,876 615,606
OTHER ASSETS 1,266,772 942,110
DEFERRED INCOME TAXES 1,761,591 2,239,667
GOODWILL, net of accumulated amortization of $3,715,106
and $3,715,106, respectively 11,239,917 11,239,917
----------- -----------
Total assets $37,191,252 $37,387,868
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,890,138 $ 5,834,820
Accrued expenses 1,724,643 1,783,136
Accrued transportation expenses 8,262,487 8,430,078
Note payable to bank 7,455,199 5,993,475
Dividends payable 110,270 110,270
Taxes payable 81,909 64,576
Lease obligation - current portion 26,144 76,982
----------- -----------
Total current liabilities 21,550,790 22,293,337
LEASE OBLIGATION -- LONG TERM 61,130 34,002
----------- -----------
Total liabilities $21,611,920 $22,327,339
----------- -----------
COMMITMENTS 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 12,913,953 shares issued and outstanding, respectively 129,139 129,139
Paid-in capital 24,202,248 24,202,248
Accumulated deficit (11,314,210) (11,833,013)
Less: Treasury stock, 734,951 shares held at cost (644,805) (644,805)
Total shareholders' equity 15,579,332 15,060,529
----------- -----------
Total liabilities and shareholders' equity $37,191,252 $37,387,868
=========== ===========
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 Year Ended June 30, 2001 Year Ended
June 30, 2003 Pro Forma* June 30, 2002 Pro Forma* June 30, 2001
------------- ------------- ------------- ------------- -------------
OPERATING REVENUES: $113,381,199 $93,483,739 $93,483,739 $90,143,202 $90,143,202
COST OF TRANSPORTATION: 75,773,354 63,173,982 63,173,982 60,912,272 60,912,272
------------ ----------- ----------- ----------- -----------
GROSS PROFIT: 37,607,845 30,309,757 30,309,757 29,230,930 29,230,930
------------ ----------- ----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
("SG&A"):
SG&A - Target subsidiary 19,654,757 15,600,538 15,600,538 15,025,467 15,025,467
SG&A - Target subsidiary
(Exclusive forwarder commissions) 16,502,352 13,620,593 13,620,593 14,802,994 14,802,994
SG&A - Corporate 783,905 748,411 748,411 826,886 826,886
Depreciation and amortization 428,031 420,819** 1,016,687 300,742** 896,610
------------ ----------- ----------- ----------- -----------
Selling, general and administrative expenses 37,369,045 30,390,361 30,986,229 30,956,089 31,551,957
------------ ----------- ----------- ----------- -----------
Operating income (loss) 238,800 (80,604) (676,472) (1,725,159) (2,321,027)
OTHER INCOME (EXPENSE):
Interest (expense) (342,590) (258,055) (258,055) (228,451) (228,451)
Other income 1,447,699 - - - -
------------ ----------- ----------- ----------- -----------
Income (loss) before income taxes 1,343,909 (338,659) (934,527) (1,953,610) (2,549,478)
Provision (benefit) for income taxes 504,409 - - ( 777,895) ( 777,895)
------------ ----------- ----------- ----------- -----------
Net income (loss) $ 839,500 $ (338,659) $ (934,527) $(1,175,715) $(1,771,583)
============ =========== =========== =========== ===========
Income (loss) per share attributable to common
shareholders:
Basic $0.04 ($0.05) ($0.10) ($0.13) ($0.18)
===== ====== ====== ====== ======
Diluted $0.04 - - - -
===== ====== ====== ====== ======
Weighted average shares outstanding:
Basic 12,179,002 11,953,797 11,953,797 11,879,002 11,879,002
========== ========== ========== ========== ==========
Diluted 20,673,589 - - - -
========== ========== ========== ========== ==========
* Pro Forma. Under FASB No. 142 (see Note 3), adopted by the Company on July
1, 2002, goodwill and certain intangibles are not amortized into results of
operations. In order to enhance comparability of the years ended June 30,
2003, 2002, and 2001, pro forma statements for the years ended June 30,
2002 and 2001 are presented supplementally as if FASB 142 had been applied
for that period.
** Reflects the exclusion of goodwill amortization expense in the amount of
$595,868 for the years ended June 30, 2002 and 2001.
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, 2003, 2002 AND 2001
Preferred Stock Common Stock Additional Treasury Stock
--------------- ------------ Paid-In -------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
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
Cash dividends associated
with the Class A and C
Preferred Stock - - - - - - - (320,697) (320,697)
Net income - - - - - - - 839,500 839,500
------- ---------- ---------- -------- ----------- -------- --------- ------------ -----------
Balance, June 30, 2003 320,696 $3,206,960 12,913,953 $129,139 $24,202,248 (734,951) $(644,805) $(11,314,210) $15,579,332
======= ========== ========== ======== =========== ======== ========= ============ ===========
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 Year Ended June 30, 2001 Year Ended
June 30, 2003 Pro Forma* June 30, 2002 Pro Forma* June 30, 2001
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $839,500 $(338,659)** $ (934,527) $(1,175,715)** $(1,771,583)
Bad debt expense 702,446 341,090 341,090 (239,611) (239,611)
Depreciation and amortization 428,031 420,819** 1,016,687 300,742** 896,610
Deferred income tax 504,409 - - (777,895) (777,895)
Adjustments to reconcile net income (loss) to net
cash used in operating activities-
(Increase) decrease in accounts receivable (1,199,069) (2,498,395) (2,498,395) 334,062 334,062
Decrease (increase) in prepaid expenses and other 164,214 (122,408) (122,408) (155,774) (155,774)
current assets
Increase (decrease) in other assets (179,142) 45,270 45,270 9,898 9,898
(Decrease) increase in accounts payable and accrued (2,209,574) 1,836,445 1,836,445 937,752 937,752
expenses ---------- --------- ---------- ----------- -----------
Net cash used for operating activities (945,185) (315,838) (315,838) (766,541) (766,541)
---------- --------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (265,160) (311,287) (311,287) (450,694) (450,694)
Asset Purchase Acquisitions (Note 5) (240,942) (528,663) (528,663) - -
---------- --------- ---------- ----------- -----------
Net cash used for investing activities (506,102) (839,950) (839,950) (450,694) (450,694)
---------- --------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (320,697) (315,104) (315,104) (320,626) (320,626)
Borrowing from note payable to bank 113,843,212 87,585,081 87,585,081 83,376,995 83,376,995
Repayment of note payable to bank (112,381,488) (87,271,518) (87,271,518) (82,333,904) (82,333,904)
Proceeds (payment) of lease obligations (23,710) 3,451 3,451 (73,441) (73,441)
---------- --------- ---------- ----------- -----------
Net cash provided by financing 1,117,317 1,910 1,910 649,024 649,024
activities ---------- --------- ---------- ----------- -----------
Net decrease in cash and cash (333,970) (1,153,878) (1,153,878) (568,211) (568,211)
equivalents
CASH AND CASH EQUIVALENTS, beginning of year 4,333,015 5,486,893 5,486,893 6,055,104 6,055,104
---------- --------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $3,999,045 $4,333,015 $4,333,015 $ 5,486,893 $ 5,486,893
========== ========== ========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $412,334 $382,320 $382,320 $506,793 $506,793
Income taxes $ 3,740 $ 800 $ 800 $ 2,499 $ 2,499
* Pro Forma. Under FASB No. 142 (see Note 3), adopted by the Company on July
1, 2002, goodwill and certain intangibles are not amortized into results of
operations. In order to enhance comparability of the years ended June 30,
2003, 2002, and 2001, pro forma statements for the years ended June 30,
2002 and 2001 are presented supplementally as if FASB 142 had been applied
for that period.
** Reflects the exclusion of goodwill amortization expense in the amount of
$595,868 for the years ended June 30, 2002 and 2001.
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, 2003 June 30, 2002 June 30, 2001
------------- ------------- -------------
Issuance of 300,000 shares of Common Stock pursuant to Subscription Agreements - $300,000 -
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED JUNE 30, 2003
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 36 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 36 cities throughout the United States,
including exclusive agency relationships in 23 cities. The Company has
international freight forwarding operations consisting of strategic
relationships in over 20 countries. The Company has developed several niches
including fashion services, the distribution of materials for the entertainment
industry, an expertise in material supply logistics to manufacturing concerns,
and consumer direct logistics of oversized freight.
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, 2003, 2002 and 2001, 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.
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
F-8
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. 144, "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 or disposal of long-lived assets. The statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that its carrying amount may be 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. 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, 2003.
Goodwill
Goodwill represents the excess of cost over net assets acquired and was
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 obtained an independent
valuation analysis completed during the second quarter ended December 31, 2002,
and based on the valuation, the Company determined that the goodwill was not
impaired; 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 and 2001,
respectively.
The independent valuation analysis is substantially dependent on three separate
analyses: (1) discounted seven-year cash flow analysis, (2) comparable public
companies analysis and (3) comparable transactions analysis.
The discounted cash flow analysis is dependent on the Target subsidiary
achieving certain future results. These include the following major assumptions:
(a) Revenue growth of 20% for fiscal 2003, 7.5% for fiscal 2004 thru 2006 and
4.5% for fiscal 2007 thru 2009; (b) Gross Profit percentage increasing from
32.7% in fiscal 2003 to 33.1% in fiscal 2006 and thereafter; (c) Operating
expenses (excluding forwarder commissions) reducing from 16.5% in fiscal 2003 to
16.2% in fiscal 2007 and thereafter; and (d) a 17.68% discount rate. While
management believes that these are achievable, any downward variation in these
major assumptions or in any other portion of the discounted cash flow analysis
could negatively impact the overall valuation analysis.
The comparable public company analysis is dependent on the future value of
companies in the same business as Target. While management believes that this
industry segment is growing, any reduction in growth rates or trends or other
factors impacting on comparable public companies could negatively impact the
overall valuation analysis.
The comparable transactions analysis is dependent on future transactions in the
industry that Target is engaged. While management believes that based on current
transactions and trends these values are maintaining, any reduction in
comparable transactions could negatively impact the overall valuation analysis.
F-9
The Company intends to perform an annual valuation analysis. Based on the
results of these annual valuation analyses, the Company's financial results
could be impacted by impairment of goodwill, which could result in periodic
write-downs ranging from zero to $11,239,917.
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.
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.
The Company recognizes revenue on a gross basis, in accordance with Emerging
Issues Task Force (EITF) 99-19, "Reporting Revenue Gross versus Net", as a
result of the following: Target is the primary obligor responsible for providing
the service desired by the customer and is responsible for fulfillment,
including the acceptability of the service(s) ordered or purchased by the
customer. The prices charged by Target to its customers are set by Target in its
sole discretion and Target is not required to obtain approval or consent from
any other party in establishing its prices. Target has multiple suppliers for
the services it sells to a customer and Target has the absolute and complete
discretion and right to select the supplier that will provide the product(s) or
service(s) ordered by a customer, including changing the supplier on a shipment
by shipment basis. Target, in most cases, does determine the nature, type,
characteristics, and specifications of the service(s) ordered by the customer.
Target assumes credit risk for the amount billed to the customer.
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 income (loss) per share is calculated by dividing net income (loss)
attributable to common shareholders less preferred stock dividends, by the
weighted average number of shares of common stock outstanding during the period.
F-10
Diluted income per share is calculated by dividing net income 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 for the years ended June 30, 2002 and 2001 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 and 2001 had
been converted, but not included in the calculation of diluted loss per share as
such shares are antidilutive:
June 30,
2002 2001
---- ----
Convertible preferred stock............................. 9,983,626 6,951,166
Stock Options........................................... 576,957 576,957
Stock Warrants.......................................... - 109,448
---------- ---------
Antidilutive securities 10,560,583 7,637,571
========== =========
Options to purchase 590,000, 576,957, and 576,957, shares of common stock for
the years ended June 30, 2003, 2002 and 2001, 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 shares of common stock for the year ended June 30,
2001 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.
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 2003 presentation.
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure provisions of FASB 123 and Accounting Principles Board (APB)
Opinion No. 28, "Interim Financial Reporting", to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. Amendments to SFAS 123 related to the transition and annual
F-11
disclosures are effective for fiscal year ending after December 15, 2002.
Amendments to disclosure requirements of APB Opinion 28 are effective for
interim periods beginning after December 15, 2002. The Company does not expect
the adoption of SFAS 148 will have a material impact on its financial position,
results of operations or cash flows.
In November 2002, FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 requires that the guarantor
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statement periods ending
after December 15, 2002. The adoption of FIN 45 has not had a material impact on
the Company's financial position, results of operations or cash flows.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities". FIN 46 changed the criteria by which one company includes
another entity in its consolidated financial statements. Previously, the
criteria were based on control through voting interest. FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
FIN 46 has not had a material impact on the Company's financial position or
results of operations.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is
effective for contracts entered into or modified after June 30, 2003. This
Statement amends Statement 133 for decisions made (i) as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, (ii) in connection with other FASB projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative, in particular, the meaning
of an initial net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to changes
in market factors, the meaning of underlying, and the characteristics of a
derivative that contains financing components. The Company does not anticipate
that the adoption of this pronouncement will have a material effect on the
financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with FASB's proposal to revise that definition to encompass certain obligations
that a reporting entity can or must settle by issuing its own equity shares,
depending on the nature of the relationship established between the holder and
the issuer. While FASB still plans to revise that definition through an
amendment to Concepts Statement 6, FASB decided to defer issuing that amendment
until it has concluded its deliberations on the next phase of this project. That
next phase will deal with certain compound financial instruments including
puttable shares, convertible bonds, and dual-indexed financial instruments. The
Company does not anticipate that the adoption of this pronouncement will have a
material effect on the financial statements.
F-12
4. 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, 2003,
437,957 stock options granted to employees and directors were exercisable. The
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, 2003 June 30, 2002 June 30, 2001
------------- ------------- -------------
Net income (loss):
As Reported $839,500 $(934,527) $(1,771,583)
Pro Forma $820,140 $(953,204) $(1,914,581)
Basic EPS:
As Reported $0.04 $(0.10) $(0.18)
Pro Forma $0.04 $(0.10) $(0.19)
Diluted EPS:
As Reported $0.04 --- ---
Pro Forma $0.04 --- ---
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, 2003, 2002 and 2001, 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, 2003:
F-13
Year Ended June 30, 2003 Year Ended June 30, 2002 Year Ended June 30, 2001
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of year 576,957 1.22 576,957 1.24 456,957 1.99
Granted 20,000 0.50 - - 455,000 0.50
Exercised - - - - - -
Forfeited - - - - (25,000) 1.25
Cancelled - - - - (310,000) 1.25
Outstanding at end of year 596,957 1.22 576,957 $1.24 576,957 $1.24
Exercisable at end of year 437,957 1.48 356,957 $1.70 259,290 $2.15
The per share weighted average fair value of stock options granted during 2003
and 2001 was $0.20 and $0.22, 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:
2003 2002 2001
---- ---- ----
Risk-Free Interest Rates 4.05% 4.25% 4.35%
Expected Lives 5 5 5
Expected Volatility 477% --- 368%
Expected Dividend Yields 0.00% 0.00% 0.00%
The following table summarizes information about stock options outstanding at
June 30, 2003:
Options Outstanding Options Exercisable
------------------------------- ----------------------------
Number Weighted Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise Prices at 6/30/03 Contractual Life Exercise Price at 6/30/03 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$0.04 - $1.13 521,957 6.89 $0.53 362,957 $0.55
$4.00 - $6.00 75,000 3.00 $6.00 75,000 $6.00
------- -------
$0.04 - $6.00 596,957 6.50 $1.22 437,957 $1.48
======= =======
5. PROPERTY AND EQUIPMENT, NET
June 30, 2003 June 30, 2002
------------- -------------
Property and Equipment consists of the following:
Furniture and fixtures $ 883,650 $ 864,517
Furniture and fixtures - Capital Lease 140,098 63,494
Computer Equipment 385,617 317,827
Computer Equipment - Capital Lease 499,398 499,398
Computer Software 437,278 421,117
Leasehold Improvements 381,714 380,114
Vehicles 2,500 81,036
----------- -----------
2,730,255 2,627,503
Less: Accumulated depreciation and amortization (a) (2,221,379) (2,011,897)
----------- -----------
$ 508,876 $ 615,606
=========== ===========
F-14
(a) Includes accumulated depreciation and amortization of capital lease assets
of $531,260 and $463,997 for the year ended June 30, 2003 and 2002,
respectively.
6. ASSET PURCHASE ACQUISITIONS
On October 13, 2002, the Company's Target subsidiary acquired the assets and
certain liabilities of Casady Air Transportation, Inc., a Columbus, Ohio 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.
On November 30, 2001, the Company's Target subsidiary 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.
The earn-out structures are strictly dependent on future profits achieved at the
location acquired, and the Company has no minimum commitment or obligation. The
Company does not expect that the earn-out payments will have a material impact
on its overall financial results.
7. OTHER ASSETS
As of June 30, 2003 and 2002, the Company's Target subsidiary had long-term
other assets of $1,266,772 and $942,110, respectively. The June 30, 2003 balance
includes (i) $236,125 note receivable, net of a $95,422 reserve, due from an
overseas agent, (ii) $200,000 note receivable due from an independent sales
organization representing the Company's Target subsidiary, (iii) $704,120
remaining amortization associated with asset purchase acquisitions (refer to
Note 5), and (iv) $126,527 of outstanding security deposits. The June 30, 2002
balance includes (i) $200,000 long-term note receivable due from an independent
sales organization representing the Company's Target subsidiary, (ii) $600,691
remaining amortization associated with asset purchase acquisitions (refer to
Note 5), and (iii) $141,420 of outstanding security deposits.
The $236,125 note receivable is subject to interest at a rate of 7.0% and is for
a four-year term. The $200,000 note receivable is subject to interest at the
prime rate with principal repayments made once the monthly commission payments
earned exceed an established threshold defined in the agreement between Target
and the independent sales organization, upon termination of the agreement, or
upon the sale of the rights under the agreement to Target.
8. DEBT
As of June 30, 2003 and 2002, long-term and short-term debt consisted of the
following:
June 30, 2003 June 30, 2002
------------- -------------
Asset-based financing $7,455,199 $5,993,475
========== ==========
During the years ended June 30, 2003 and 2002, 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 (4.0% and 4.75%) as of June 30, 2003 and 2002, respectively,
but at no time can the rate be less than 5.0% per annum (and not less than 6.0%
prior to September 20, 2002). At June 30, 2003 and 2002, the outstanding balance
F-15
on the GMAC Facility was $7,455,199 and $5,993,475 which represented 80% and 83%
of the approximate $9,347,165 and $7,211,000 available thereunder, respectively.
At June 30, 2003, the remaining amount available under the GMAC Facility was
approximately $1,901,966. 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.
9. SHAREHOLDERS' EQUITY
Preferred Stock
As of June 30, 2003, the authorized preferred stock of the Company is 2,500,000
shares. As of June 30, 2003, 320,696 shares of preferred stock are outstanding
as follows:
Class A (a) Class C (b) Total
----------- ----------- -----
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
Issuances - - -
Conversions - - -
----------- ----------- -------
Balance at June 30, 2003 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
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, 2003 and 2002.
F-16
(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.
During fiscal years ending June 30, 1997 and 1998, 23,750 and 36,000,
respectively, shares of Class C Preferred Stock were converted into 597,500 of
the Company's common stock.
There were no shares of Class C Preferred Stock converted into the Company's
Common Stock during fiscal year ending June 30, 2003 and 2002.
Warrants
As of June 30, 2003, the Company had no warrants outstanding.
10. OTHER INCOME
Other income of $1,447,699 for the year ended June 30, 2003 is the result of a
non-recurring reversal of accruals for expenses, accruals for contingencies, and
accounts payable of previously closed and sold subsidiaries.
11. COMMITMENTS AND CONTINGENCIES
Leases
As of June 30, 2003, 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
----------- -------------- ----------------
2004 $ 33,053 $1,332,254
2005 31,708 1,055,801
2006 17,548 278,004
2007 13,127 14,472
2008 2,370 -
-------- ----------
Total minimum lease payments 97,806 $2,680,531
==========
Less - Amount representing interest (10,532)
--------
$87,274
========
Employment Agreements
The Company has employment agreements with certain employees expiring at various
times through June 30, 2008. 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, 2003,
excluding bonuses, was approximately $1,240,000.
F-17
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. In February, 2003, Target settled all of Pilot's claims
against Target for $50,000.
12. 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
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, 2003, 2002
and 2001 is as follows:
June 30, 2003 June 30, 2002 June 30, 2001
------------- ------------- -------------
Domestic revenue $83,610,134 $69,652,711 $65,255,740
International revenue 29,771,065 23,831,028 24,887,462
------------ ----------- -----------
Total revenue $113,381,199 $93,483,739 $90,143,202
------------ ----------- -----------
Domestic gross profit $30,671,475 $23,876,294 $22,900,071
International gross profit 6,936,370 6,433,463 6,330,859
------------ ----------- -----------
Total gross profit $37,607,845 $30,309,757 $29,230,930
------------ ----------- -----------
Domestic accounts receivable $17,405,552 16,194,974 $13,579,181
International accounts receivable 1,077,292 1,812,948 2,867,349
Less: allowance for doubtful accounts (977,544) (995,245) (1,391,157)
------------ ----------- -----------
Accounts receivable, net of
allowance for doubtful accounts $17,505,300 $17,012,677 $15,055,373
------------ ----------- -----------
F-18
13. QUARTERLY FINANCIAL DATA SCHEDULE (unaudited)
Year Ended
----------
June 30, 2003
-------------
09/30/02 12/31/02 03/31/03 06/30/03 Fiscal Year
-------- -------- -------- -------- -----------
Operating revenue $26,082,685 $32,319,371 $25,657,889 $29,321,154 $113,381,199
Cost of transportation 17,829,022 21,534,361 16,721,872 19,688,099 75,773,354
---------- ---------- ---------- ----------- ----------
Gross profit 8,253,663 10,785,010 8,936,017 9,633,155 37,607,845
Selling, general & administrative
expense 8,622,807 10,530,067 8,731,164 9,485,007 37,369,045
Interest (expense) (83,565) (94,084) (86,183) (78,768) (342,590)
Other income - 1,447,699 - - 1,447,699
Provision for income taxes - 429,434 50,718 24,257 504,409
------------ ----------- ---------- ----------- -----------
Net income (loss) $ (452,709) $ 1,179,124 $ 67,952 $ 45,133 $ 839,500
=========== =========== ========== =========== ===========
Income (loss) per share
attributable to common shareholders:
Basic $(0.04) $0.09 - $(0.01) $0.04
======= ===== ========== ====== =====
Diluted - $0.05 - - $0.04
======= ===== ========== ====== =====
Weighted average shares outstanding:
Basic 12,179,002 12,179,002 12,179,002 12,179,002 12,179,002
========== ========== ========== ========== ==========
Diluted - 21,845,657 19,284,660 16,850,538 20,673,589
========== ========== ========== ========== ==========
Year Ended
----------
June 30, 2002
-------------
09/30/01 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)
----------- --------- ---------- ---------- ----------
Net (loss) $(470,102) $(77,463) $(293,222) $(93,740) $(934,527)
=========== ========= ========== ========= ==========
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
========== ========== ========== ========== ==========
14. INCOME TAXES
The Company has tax net operating loss carryforwards of approximately $11.2
million, which are available to offset future regular taxable income. The losses
expire from 2011 through 2023. 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. Certain net operating loss
carryforwards for the State of California have been suspended for the years
ending June 30, 2003 and 2004.
The components of current and deferred income tax expense (benefit) are as
follows:
F-19
Year Ended Year Ended Year Ended
June 30, 2003 June 30, 2002 June 30, 2001
------------- ------------- -------------
(In thousands)
Current:
State $ - $ - $ -
Federal - - -
Deferred:
State - - -
Federal 504 - (778)
--- --- ----
Net income tax expense (benefit) 504 $ - $778
--- === ====
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, 2003 June 30, 2002 June 30, 2001
------------- ------------- -------------
(In thousands)
Income tax (benefit) expense at U.S. statutory rate $ 457 $ (318) $(867)
Non-deductible goodwill - 203 203
Valuation Allowance 302 (117) -
Utilization of loss carryforward (666) - -
Non-deductible expenses 411 232 (114)
----- ------ -----
$ 504 $ - $(778)
===== ====== =====
The components of deferred income taxes are as follows:
Year Ended Year Ended
June 30, 2003 June 30, 2002
------------- -------------
(In thousands)
NOLs $3,802 $4,468
Tax credits 286 286
Accrued amounts and other 667 694
------ ------
4,755 5,448
Depreciation and amortization 39 87
------ ------
4,794 5,535
Valuation allowance (2,299) (2,601)
------ ------
$2,495 $2,934
====== ======
F-20
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, 2001
Allowance for doubtful accounts $ 1,631 $ 180 $ - $ (420) $ 1,391
========= ======== ======== ====== ========
Reserve for restructuring $ $ - $ $ $ -
========= ======== ======== ====== ========
22 - (22)
========= ======== ======== ====== ========
For the fiscal year ended June 30, 2002
Allowance for doubtful accounts $ 1,391 $ 341 $ - $ (737) $ 995
========= ======== ======== ====== ========
For the fiscal year ended June 30, 2003
Allowance for doubtful accounts $ 995 $ 706 $ - $ (723) $ 978
========= ======== ======== ====== ========
S-1
EXHIBIT 10.7
------------
ADDENDUM TO EMPLOYMENT AGREEMENT
THIS ADDENDUM TO EMPLOYMENT AGREEMENT (the "Addendum") is made as of
the 30th day of June, 2003 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 Addendums to Employment Agreement effective
June 24, 1999 and June 30, 2002, respectively (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, 2004.
C. 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
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 Statements on Form S-8, File No. 333-71197 and File No.
333-107458.
STONEFIELD JOSEPHSON, INC.
Santa Monica, California
September 26, 2003
EXHIBIT 31.1
CERTIFICATION
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter (the Registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial
reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's board of directors
(or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: September 26, 2003 /s/ Stuart Hettleman
-----------------------------------
Stuart Hettleman
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(d) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(e) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(f) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter (the Registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial
reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's board of directors
(or persons performing the equivalent function):
(c) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
(d) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: September 26, 2003 /s/ Philip J. Dubato
------------------------------------
Philip J. Dubato
Chief Financial Officer
EXHIBIT 32.1
SECTION 1350 CERTIFICATIONS
In connection with the Annual Report of Target Logistics, Inc. (the
"Company") on Form 10-K for the fiscal year ended June 30, 2003 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 26, 2003 /s/ Stuart Hettleman
------------------------------------
Stuart Hettleman
Chief Executive Officer
/s/ Philip J. Dubato
------------------------------------
Philip J. Dubato
Chief Financial Officer
Exhibit 99.1
------------
FOR: TARGET LOGISTICS, INC.
CONTACT: Stuart Hettleman
(410) 332-1598
KCSA Joseph A. Mansi/Robert Greenberg
CONTACT: (212) 896-1205/(212) 896-1265
jmansi@kcsa.com / rgreenberg@kcsa.com
---------------
FOR IMMEDIATE RELEASE
TARGET LOGISTICS, INC. ANNOUNCES
FISCAL FOURTH QUARTER AND FISCAL YEAR RESULTS
BALTIMORE, Md., September 29, 2003-- Target Logistics, Inc. (OTC BB: TARG) today
announced results for the fiscal fourth quarter and year ended June 30, 2003.
The Company said operating revenues for the fiscal fourth quarter ended
June 30, 2003 totaled $29,321,254, a 10.5 percent increase over revenues of
$26,526,322 reported for the fiscal fourth quarter ended June 30, 2002. The
operating income for the quarter ended June 30, 2003 was $148,148, compared with
an operating loss of $20,235 reported for the fourth quarter of fiscal 2002. The
Company reported a net income of $45,133, or $0.00 per basic and diluted shares
for the fourth quarter, compared with a net loss of $93,740, or $(0.01) per
basic share, for the fourth quarter ended June 30, 2002.
Operating revenues for fiscal 2003 increased 21.3 percent to $113,381,199,
compared with $93,483,739 for the fiscal year ended June 30, 2002. The Company
reported operating income of $238,800 for fiscal 2003, compared with an
operating loss of $676,472 in fiscal 2002. The Company reported net income of
$839,500, or $0.04 per basic and diluted shares for the fiscal year ended June
30, 2003, compared with a net loss of $934,527, or $(0.10) per basic share for
the fiscal year ended June 30, 2002.
Net income for the year ended June 30, 2003 includes $1,447,699 in
non-recurring reversals of accruals for expenses, accruals for contingencies and
accruals for accounts payable of previously closed and sold subsidiaries. On a
pro forma basis, net income for the fourth quarter of fiscal 2002 was $55,227 or
$0.00 per basic and diluted shares. For the year ended June 30, 2002 pro forma
net loss was $338,659 or $(0.05) per basic. Since 2003 results are presented in
accordance with a new accounting pronouncement (FASB 142) under which goodwill
and certain intangibles are not amortized into results of operations, the 2002
pro forma results are presented supplementally to enhance comparison as if FASB
142 had been applied at the beginning of the 2002 fiscal year.
Stuart Hettleman, President and Chief Executive Officer of Target
Logistics, said, "We are pleased that during this stagnant economic period we
were able to report our fourth consecutive year of operating revenue growth.
Fiscal 2003 revenues increased 21.3% over 2002 and demonstrated the continuing
success of our growth through our acquisition strategy and the expansion of our
team of sales executives. We are also pleased with the growth of our gross
profit margins which increased 2.5% in fiscal 2003."
Mr. Hettleman continued, "For fiscal 2004 we are committed to continue our
strategies for increased growth in revenue and gross margins while containing
expenses. As a result of these strategies we expect improved operating income in
fiscal 2004."
Target Logistics, Inc. provides freight forwarding and logistics services
through its wholly-owned subsidiary, Target Logistic Services, Inc.
(Table to follow)
Statements contained in this press release that are not historical facts are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Although Target Logistics believes that the
expectations reflected in such forward-looking statements are reasonable, the
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projections.
You may view prior releases, or register to receive Target Logistics future
press releases by clicking on the "KCSA Interactive Platform" icon at
www.kcsa.com.
Target Logistics, Inc.
Consolidated Statement of Operations (unaudited)
Three Months Ended June 30,
2002
2003 Pro Forma (a) 2002
---- ------------- ----
Operating revenues $29,321,254 $26,526,322 $26,526,322
Cost of transportation 19,688,099 18,140,588 18,140,588
----------- ----------- -----------
Gross profit 9,633,155 8,385,734 8,385,734
Selling, general and administrative expenses (SG&A):
Target subsidiary (exclusive
forwarder commissions) 3,944,635 3,718,173 3,718,173
Target subsidiary 5,183,736 4,239,103 4,239,103
Corporate 262,465 178,109 178,109
Depreciation and amortization 94,171 121,617(b) 270,584
----------- ----------- -----------
Selling, general and
administrative expenses 9,485,007 8,257,002 8,405,969
Operating income (loss) 148,148 128,732 (20,235)
Other (expense):
Interest expense (78,758) (73,505) (73,505)
Other Income (expense) 0 0 0
----------- ----------- -----------
Income (loss) before income taxes 69,390 55,227 (93,740)
Provision for income taxes 24,257 $---------- $----------
----------- ----------- -----------
Net income (loss) $ 45,133 $ 55,227 $ (93,740)
=========== =========== ===========
Net income (loss) per share
Basic shares
Attributable to shareholders $ (0.01) $---------- $ (0.01)
=========== =========== ===========
Diluted shares
Attributable to shareholders (c) $---------- $---------- $----------
=========== =========== ===========
Weighted average shares outstanding:
Basic: 12,179,002 12,179,002 12,179,002
=========== =========== ===========
Diluted: 16,850,538 20,392,208 20,392,208
=========== =========== ===========
a) Pro Forma. Under FASB No. 142, adopted by the Company on July 1, 2002,
goodwill and certain intangibles are not amortized into results of
operations. In order to enhance comparability of the three months ending
June 30, 2003 and 2002, pro forma statements for the three months ending
June 30, 2002 are presented supplementally as if FASB 142 had been applied
for that period.
b) Reflects the exclusion of goodwill amortization expense in the amount of
$148,967 for the three months ending June 30, 2002, respectively.
c) Diluted loss per share for the three months ending June 30, 2003 are anti-
dilutive.
Target Logistics, Inc.
Consolidated Statement of Operations (unaudited)
Twelve Months Ended June 30,
----------------------------
2002
2003 Pro Forma (a) 2002
---- ------------- ----
Operating revenues $113,381,199 $93,483,739 $93,483,739
Cost of transportation 75,773,354 63,173,982 63,173,982
---------- ---------- -----------
Gross profit 37,607,845 30,309,757 30,309,757
Selling, general and administrative expenses (SG&A):
Target subsidiary (exclusive
forwarder commissions) 16,502,352 13,620,593 13,620,593
Target subsidiary 19,654,757 15,600,538 15,600,538
Corporate 783,905 748,411 748,411
Depreciation and amortization 428,031 420,819(b) 1,016,687
------------ ----------- -----------
Selling, general and
administrative expenses 37,369,045 30,390,361 30,986,229
Operating income (loss) 238,800 (80,604) (676,472)
Other income (expense):
Interest expense (342,590) (258,055) (258,055)
Other Income 1,447,699 ---------- ----------
------------ ----------- -----------
Income (loss) before income taxes 1,343,909 (338,659) (934,527)
Provision for income taxes 504,409 ------------ ----------
------------ ------------- -----------
Net income (loss) $ 839,500 $ (338,659) $ (934,527)
============ ============= ===========
Net income (loss) per share
Basic shares
Attributable to shareholders $ 0.04 $ (0.05) $ (0.10)
============ ============= ===========
Diluted shares
Attributable to shareholders (c) $ 0.04 $ ------- $ -------
============ ============= ===========
Weighted average shares outstanding:
Basic: 12,179,002 11,953,797 11,953,797
============ ============= ===========
Diluted: 20,673,589 21,942,757 21,942,757
============ ============= ===========
a) Pro Forma. Under FASB No. 142, adopted by the Company on July 1, 2002,
goodwill and certain intangibles are not amortized into results of
operations. In order to enhance comparability of the years ending June 30,
2003 and 2002, pro forma statements for the year ending June 30, 2002 are
presented supplementally as if FASB 142 had been applied for that period.
b) Reflects the exclusion of goodwill amortization expense in the amount of
$595,868 for the year ending June 30, 2002, respectively.
c) Diluted loss per share for the year ending June 30, 2003 are anti-
dilutive.
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