UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-29754
TARGET LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3309110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
500 Harborview Drive
Third Floor
Baltimore, Maryland 21230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 332-1598
Inapplicable
(Former name, former address and former fiscal year if changed
from last report.)
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 v No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes No X
----- -----
At November 10, 2003, the number of shares outstanding of the registrant's
common stock was 12,179,002.
TABLE OF CONTENTS
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Part I - Financial Information Page
----
Item 1. Financial Statements:
-------
Consolidated Balance Sheets,
September 30, 2003 (unaudited) and
June 30, 2003 (audited) 3
Consolidated Statements of Operations
for the Three Months Ended
September 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Shareholders' 5
Equity for the Year Ended June 30, 2003 (audited)
and the Three Months Ended September 30, 2003
(unaudited)
Consolidated Statements of Cash Flows 6
for the Three Months Ended September 30,
2003 and 2002 (unaudited)
Notes to Unaudited Consolidated Financial 7
Statements
Item 2. Management's Discussion and Analysis of 10
------- Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure
------- about Market Risk 12
Item 4. Controls and Procedures 12
-------
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 13
-------
Signatures 14
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 June 30, 2003
------------------ -------------
ASSETS (unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $3,975,523 $ 3,999,045
Accounts receivable, net of allowance for doubtful
accounts of $1,080,348 and $882,132, respectively
16,935,878 17,600,722
Deferred income taxes 630,674 668,000
Prepaid expenses and other current assets 300,671 146,329
----------- -----------
Total current assets 21,842,746 22,414,096
PROPERTY AND EQUIPMENT, net 455,670 508,876
OTHER ASSETS 1,196,599 1,266,772
DEFERRED INCOME TAXES 1,761,591 1,761,591
GOODWILL, net of accumulated amortization of $3,715,106 11,239,917 11,239,917
----------- -----------
Total assets $36,496,523 $37,191,252
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,095,385 $3,890,138
Accrued expenses 1,457,783 1,724,643
Accrued transportation expenses 8,554,491 8,262,487
Notes payable to bank 7,655,345 7,455,199
Dividends payable 49,844 110,270
Taxes payable 24,909 81,909
Lease obligation-current portion 26,631 26,144
----------- -----------
Total current liabilities 20,864,388 21,550,790
LEASE OBLIGATION--LONG-TERM 54,286 61,130
----------- -----------
Total liabilities $20,918,674 $21,611,920
----------- -----------
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 (11,315,693) (11,314,210)
Less: Treasury stock, 734,951 shares held at cost (644,805) (644,805)
----------- -----------
Total shareholders' equity 15,577,849 15,579,332
----------- -----------
Total liabilities and shareholders' equity $36,496,523 $37,191,252
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months ended September 30,
2003 2002
---- ----
Operating revenues $28,588,156 $26,082,685
Cost of transportation 18,832,288 17,829,022
----------- -----------
Gross profit 9,755,868 8,253,663
Selling, general and administrative expenses ("SG&A"):
Exclusive Forwarder Commissions - Target 4,164,797 3,685,237
subsidiary
SG&A - Target subsidiary 5,139,146 4,661,641
SG&A - Corporate 165,013 177,356
Depreciation and amortization 104,141 98,573
----------- -----------
Selling, general and administrative expenses 9,573,097 8,622,807
Operating income (loss) 182,771 (369,144)
Other income (expense):
Interest expense (90,084) (83,565)
----------- -----------
Income (loss) before income taxes 92,687 (452,709)
Provisions for income taxes 44,326 -
----------- -----------
Net income (loss) $ 48,361 $ (452,709)
=========== ===========
Income (loss) per share attributable to common shareholders:
Basic: - ($0.04)
=========== ===========
Diluted: - -
=========== ===========
Weighted average shares outstanding:
Basic: 12,179,002 12,179,002
=========== ===========
Diluted: 19,717,041 -
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
4
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003 AND THE
THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
Preferred Stock Common Stock Additional Treasury Stock
--------------- ------------ Paid-in -------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
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
Cash dividends associated
with the Class C
Preferred Stock - - - - - - - (49,844) (49,844)
Net income - - - - - - - 48,361 48,361
------- ---------- ---------- -------- ----------- -------- --------- ------------ -----------
Balance, September 30, 2003 320,696 $3,206,960 12,913,953 $129,139 $24,202,248 (734,951) ($644,805) ($11,315,693) $15,577,849
======= ========== ========== ======== =========== ======== ========= ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
------------------
September 30,
-------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 48,361 ($452,709)
Bad debt expense 280,763 103,349
Depreciation and amortization 104,141 98,573
Decrease in deferred tax asset 37,326 -
Adjustments to reconcile net income (loss) to net cash used in
operating activities -
Decrease in accounts receivable 384,081 308,070
Increase in prepaid expenses and other current assets (154,342) (140,354)
Decrease in other assets 70,173 21,398
Decrease in accounts payable and accrued expenses (870,420) (286,303)
----------- -----------
Net cash used for operating activities (99,917) (347,976)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,124) (42,693)
----------- -----------
Net cash used for investing activities (7,124) (42,693)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (110,270) (110,271)
Borrowing from note payable to bank 26,823,184 29,975,734
Repayment of note payable to bank (26,623,038) (30,699,449)
Payment of lease obligations (6,357) (47,905)
----------- -----------
Net cash provided by (used for) financing activities 83,519 (881,891)
----------- -----------
Net decrease in cash and cash equivalents ($23,522) ($1,272,560)
CASH AND CASH EQUIVALENTS, beginning of the period 3,999,045 4,333,015
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ 3,975,523 $ 3,060,455
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest $98,287 $103,572
Income Taxes $69,225 2,360
The accompanying notes are an integral part of these consolidated
financial statements.
6
TARGET LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Notes to Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and Regulation S-X related to
interim period financial statements and, therefore, do not include all
information and footnotes required by generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments and accruals) considered necessary for a fair presentation
of the consolidated financial position of the Company and its subsidiaries at
September 30, 2003 and their consolidated results of operations and cash flows
for the three months ended September 30, 2003 have been included. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for the entire year. Reference should be made to the annual
financial statements, including footnotes thereto, included in the Target
Logistics, Inc. (the "Company") Form 10-K for the year ended June 30, 2003.
Note 2 - 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 carry forwards between
current and long-term assets.
Note 3 - Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (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.
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.
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.
7
Note 4 - 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.
Diluted income (loss) per share is calculated by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding, adjusted for potentially dilutive securities. For the three
month period ended September 30, 2002, diluted loss per share has not been
presented since the inclusion of outstanding convertible preferred stock and
stock options would be antidilutive.
The following table summarizes the equivalent number of common shares assuming
the related securities that were outstanding as of September 30, 2002 had been
converted, but not included in the calculation of diluted loss per share as such
shares are antidilutive. The following table does not include the related
securities that were outstanding as of September 30, 2003, as the equivalent
number of common shares are dilutive and included in the calculation of diluted
earnings per share on the Statement of Operations for the three months ended
September 30, 2003:
September 30,
-------------
2002
----
Convertible preferred stock.................. 12,455,852
Stock options................................ 576,957
----------
Antidilutive securities 13,032,809
==========
Options to purchase 590,000 and 576,957 shares of common stock for the three
months ended September 30, 2003 and 2002, 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, and thus are
anti-dilutive. The options were still outstanding at the end of the period.
Note 5 - Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees." Under APB No. 25, the Company measures compensation cost for
stock-based employee compensation plans based on the intrinsic value of the
award at the date of grant. Intrinsic value is the excess of the fair value of
the underlying stock over the amount an employee must pay to acquire the stock.
The following table illustrates the effect on net income and earnings per share
if compensation expense had been determined for fixed plan awards based on an
estimate of fair value of the option at the date of grant consistent with SFAS
No. 123, "Accounting for Stock Based Compensation," as amended.
Three months ended
9/30/03 9/30/02
------- -------
Net income (loss) as reported $48,361 ($452,709)
Deduct: total stock-based employee compensation expense determined
using a fair value based method for fixed plan awards,
net of tax effect (4,869) (4,640)
------- ---------
Pro forma net income (loss) $43,492 ($457,349)
======= =========
Basic earnings (loss) per share - ($0.04)
======= =========
Pro forma basic earnings (loss) per share - ($0.04)
======= =========
Diluted earnings per share - -
======= =========
Pro forma diluted earnings per share - -
======= =========
The fair value of options was estimated at the grant date using a Black-Scholes
option pricing model, which requires the input of subjective assumptions.
Because the Company's common stock and stock options have characteristics
significantly different from listed securities and traded options, and because
changes in the subjective input assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of stock options. There were no options granted during
the three months ended September 30, 2003 and 2002. Weighted average assumptions
used in the valuation model include risk-free interest rates of 4.05% and 4.25%;
8
and expected stock price volatility of 477.00% and 0.00% in 2003 and 2002,
respectively; and, dividend yields of 0.00%; and, expected lives of options of 5
years in 2003 and 2002.
Note 6 - Reclassifications
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform with the 2003 presentation.
Note 7 - Recently Issued Accounting Pronouncements
In January 2003, FASB issued FASB Interpretation (FIN) 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 (VIE) to be consolidated by a company if that company
is subject to a majority of the risk of loss from the VIE's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a VIE is called the primary beneficiary of that
entity. The consolidation requirements of FIN 46 are applicable immediately to
VIEs created after January 31, 2003 and where originally applicable to older
entities in the first fiscal year or interim period beginning after June 15,
2003, with certain of the disclosure requirements applicable in all financial
statements issued after January 31, 2003, regardless of when the VIE was
established. During October 2003, the FASB issued Staff Position No. FIN 46
deferring the effective date for applying the provisions of FIN 46 until the end
of the first interim or annual period ending after December 31, 2003 if the VIE
was created prior to February 1, 2003 and the public entity has not issued
financial statements reporting that VIE in accordance with FIN 46. The FASB also
indicated it would be issuing a modification to FIN 46 prior to the end of 2003.
Accordingly, the Company has deferred the adoption of FIN 46 with respect to
VIEs created prior to February 1, 2003. Management is currently assessing the
impact, if any, FIN 46 may have on the Company; however, management does not
believe there will be any material impact on its consolidated financial
statements, results of operations or liquidity resulting from the adoption of
this interpretation.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
This Quarterly Report on Form 10-Q 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
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 results for the fiscal year ended June
30, 2003 include $1.4 million of other income resulting from a non-recurring
reversal of accruals for expenses, accruals for contingencies, and accounts
payable of previously closed and sold subsidiaries. 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 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 three months ended September 30, 2003, the revenue of the
Company's Target subsidiary increased by 9.6%, when compared to the prior year's
corresponding period. Target's gross profit margin (i.e., gross operating
revenues less cost of transportation expressed as a percentage of gross
operating revenue) for the three months ended September 30, 2003 increased to
34.1% from 31.6% for the three months ended September 30, 2002. The 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.
RESULTS OF OPERATIONS
Three Months ended September 30, 2003 and 2002
- ----------------------------------------------
Operating Revenue. Operating revenue increased to $28.6 million for the
three months ended September 30, 2003 from $26.1 million for the three months
ended September 30, 2002, a 9.6% increase. Domestic revenue increased by 9.4% to
$21,132,728 for the three months ended September 30, 2003 from $19,317,784 for
the three months ended September 30, 2002, due to increased domestic freight
volume. In addition, international revenue increased by 10.2% to $7,455,428 for
the three months ended September 30, 2003 from $6,764,901 for the three months
ended September 30, 2002, mainly due to increased international air export and
import freight volume.
Cost of Transportation. Cost of transportation decreased to 65.9% of
operating revenue for the three month period ended September 30, 2003, from
68.4% of operating revenue for the three month period ended September 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 three month period ended September 30, 2003 increased to 34.1% from 31.6% of
operating revenue for the three month period ended September 30, 2002, a 7.9%
increase. The increase is primarily due to increases in domestic gross profit
margins.
10
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 33.5% of operating revenue for the three
months ended September 30, 2003 from 33.1% of operating revenue for the three
months ended September 30, 2002. Within the Company's Target subsidiary,
selling, general and administration expenses (excluding exclusive forwarder
commission expense) were 18.0% of operating revenue for the three months ended
September 30, 2003 and 17.9% for the three months ended September 30, 2002, a
0.6% increase. Exclusive forwarder commission expense was 14.6% and 14.1% of
operating revenue for the three months ended September 30, 2003 and 2002,
respectively, a 3.6% increase resulting from increases in forwarder agent
freight volume.
Net Profit. For the three months ended September 30, 2003, the Company
realized a net profit of $48,361, compared to a net loss of $(452,709) for the
three months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
General. During the three months ended September 30, 2003, net cash used in
operating activities was $99,917. Cash used in investing activities was $7,124,
representing capital expenditures. Cash provided by financing activities was
$83,519, which primarily consisted of borrowings under the Company's accounts
receivable financing facility.
Capital expenditures. Capital expenditures for the three months ended
September 30, 2003 were $7,124, representing capital expenditures.
* 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 the 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 September 30, 2003, there were outstanding
borrowings of $7,655,345 under the GMAC Facility (which represented 80.1% of the
amount available thereunder) out of a total amount available for borrowing under
the GMAC Facility of approximately $9,478,950. 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.
* 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
September 30, 2003, the Company had $1,823,605 available under its $10 million
accounts receivable financing facility and $3,975,523 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, competition, and the availability of a revolving
credit facility, none of which can be predicted with certainty.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, intangible assets, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
11
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. 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. These accounting policies are described at relevant sections in this
discussion and analysis and in the notes to the consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2003.
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 ending December 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 unaudited Consolidated Financial Statements contained in this
Quarterly Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Not applicable.
ITEM 4. 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 quarterly 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 quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
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 September 30, 1998, File No. 0-29754)
4.1 Certificate of Designations with respect to the Registrant's Class A
Preferred Stock (contained in Exhibit 3.1)
4.2 Certificate of Designations with respect to the Registrant's Class B
Preferred Stock (contained in Exhibit 3.1)
4.3 Certificate of Designations with respect to the Registrant's Class C
Preferred Stock (contained in Exhibit 3.1)
4.4 Certificate of Designations with respect to the Registrant's Class D
Preferred Stock (contained in Exhibit 3.1)
4.5 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 (successor by merger to BNY Financial Corp.), 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
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 September 30,
2001, File No. 0-29754)
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 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, and Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the Fiscal Year Ended June
30, 2003, File No. 0-29754)
10.7(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)
10.8 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)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
99.1 Press Release dated November 11, 2003
(b) Reports on Form 8-K:
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 12, 2003 TARGET LOGISTICS, INC.
Registrant
/s/ Stuart Hettleman
---------------------------------------
President, Chief Executive Officer
/s/ Philip J. Dubato
---------------------------------------
Vice President, Chief Financial Officer
14
Exhibit 31.1
------------
CERTIFICATION
I, Stuart Hettleman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q 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: November 12, 2003 /s/ Stuart Hettleman
------------------------------------
Stuart Hettleman
Chief Executive Officer
Exhibit 31.2
------------
CERTIFICATION
I, Philip J. Dubato, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q 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: November 12, 2003 /s/ Philip J. Dubato
------------------------------------
Philip J. Dubato
Chief Financial Officer
Exhibit 32.1
------------
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of Target Logistics, Inc. (the
"Company") on Form 10-Q for the period ending September 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: November 12, 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) 338-0127
KCSA Joseph A. Mansi / Robert Greenberrg
CONTACT: (212) 896-1205 / (212) 896-1265
jmansi@kcsa.com / emwangi@kcsa.com
---------------
FOR IMMEDIATE RELEASE
TARGET LOGISTICS, INC. ANNOUNCES FISCAL FIRST QUARTER RESULTS
BALTIMORE, Md., November 11, 2003-- Target Logistics, Inc. (OTC BB: TARG)
announced today results for the first fiscal quarter ended September 30, 2003.
Operating revenues for the quarter were $28,588,156, a 9.6 % increase
over the $26,082,685 reported in the first quarter of fiscal 2003. The company
reported operating income of $182,771 for the first quarter, compared with an
operating loss of $(369,144) reported in last year's first quarter. Net income
for the fiscal first quarter was $48,361, compared with a net loss of
$(452,709), or $(0.04) per basic and diluted share reported for the first
quarter of fiscal 2002.
Stuart Hettleman, President and Chief Executive Officer, said, "We are
pleased with our continued strong revenue growth and the improvement in
operating income of approximately $550,000 over last year's first quarter. This
is a trend that we expect to continue. As a result of our investment in
infrastructure, our operating revenues continue to grow and our profit margins
continue to improve."
Mr. Hettleman continued, "The acquisitions we have made and the
execution of our sales strategy have added significantly to our internal growth
and have gained our operating subsidiary increased recognition throughout the
industry. It is our intention to continue our strategies for increased growth in
revenue and gross profit margins while containing expenses, and we will continue
to seek additional acquisitions. Our balance sheet remains strong and we are
confident that, we have the resources necessary to continue our growth
strategies."
About Target Logistics, Inc.:
Target Logistics, Inc. provides freight forwarding and logistics
services through its wholly-owned subsidiary, Target Logistic Services, Inc.
(Tables 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. This release
and prior releases are available on the KCSA Public Relations Worldwide website
at www.kcsa.com.
------------
Target Logistics, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30,
2003 2002
---- ----
Operating revenues $28,588,156 $26,082,685
Cost of transportation 18,832,288 17,829,022
----------- -----------
Gross profit 9,755,868 8,253,663
Selling, general and administrative expenses ("SG&A"):
Target Subsidiary (Exclusive
Forward Commissions) 4,164,797 3,685,237
Target subsidiary 5,139,146 4,661,641
Corporate 165,013 177,356
Depreciation and amortization 104,141 98,573
----------- -----------
Selling, general and administrative expenses 9,573,097 8,622,807
Operating income (loss) 182,771 (369,144)
Other expense:
Interest expense (90,084) (83,565)
----------- -----------
Income (loss) before income taxes 92,687 (452,709)
Provision for income taxes 44,326 -
----------- -----------
Net income (loss) $ 48,361 $ (452,709)
=========== ===========
Net income (loss) per share attributable to
common shareholders :
Basic - $ (0.04)
=========== ===========
Diluted (a) - -
=========== ===========
Weighted average shares outstanding:
Basic 12,179,002 $12,179,002
=========== ===========
Diluted (a) 19,717,041 -
=========== ===========
(a) Diluted loss per share for three months ending September 30, 2002 are
anti-dilutive.
Target Logistics, Inc. and Subsidiaries
Selected Balance Sheet Data
September 30, June 30,
2003 2003
---- ----
Cash and Cash Equivalents $ 3,975,523 $ 3,999,045
Total Current Assets $21,842,746 $22,414,096
Total Assets $36,496,523 $37,191,252
Current Liabilities $20,864,388 $21,550,790
Long Term Indebtedness $ 54,286 $ 61,130
Working Capital $ 978,358 $ 863,306
Shareholders' Equity $15,577,849 $15,579,332
# # #