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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, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to ___________.
Commission file number: 0-29754
TARGET LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3309110
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
112 East 25th Street, Baltimore, Maryland 21218
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 338-0127
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 16, 1999 was $2,703,863.
The number of shares of common stock outstanding as of September 16, 1999 was
9,296,917.
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 1999 Annual
Meeting of Shareholders (to be filed).
TARGET LOGISTICS, INC.
1999 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
----
PART I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 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
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 16
2
PART I
------
ITEM 1. BUSINESS
--------
Background
- - ----------
Target Logistics, Inc. (formerly, Amertranz Worldwide Holding Corp.)
("Company") provides freight forwarding services and logistics services, through
its wholly owned subsidiary, Target Logistic Services, Inc. (formerly, Target
Airfreight, Inc.) ("Target"). Prior to July 13, 1998, the Company also provided
services through its wholly-owned subsidiary, Caribbean Air Services, Inc.
("CAS"), and, until June 23, 1997, also provided services through its Amertranz
Worldwide, Inc. ("Amertranz") subsidiary. The Company has a network of offices
in 29 cities throughout the United States.
The Company was incorporated in Delaware in January 1996 as the
successor to operations commenced in 1970 as the "Wrangler Aviation" division of
Blue Bell, Inc., an apparel manufacturer. The Wrangler Aviation division
transported raw material to Blue Bell facilities in Puerto Rico and returned the
finished goods to its facilities in Greensboro, North Carolina. In 1988, new
owners of Blue Bell, Inc. separately incorporated the division in Delaware as
Wrangler Aviation, Inc. ("Wrangler"), and then sold Wrangler in October 1990. At
that time, Caribbean Freight System, Inc. ("CFS") was incorporated in Puerto
Rico to act as the marketing arm of Wrangler.
In December 1991, the owners of Wrangler engaged a new management team
following the discovery of certain improprieties performed under the old
management. As a result of investigations by the new management, it was
determined to reorganize both Wrangler and CFS under Chapter 11 of the United
States Bankruptcy Code. CFS and Wrangler both successfully emerged from the
Chapter 11 proceedings in November 1992 and June 1993, respectively. In January
1994, Wrangler changed its name to TIA, Inc. ("TIA"). Thereafter, TIA and CFS
continued to specialize in the movement of large freight shipments for
manufacturers, and maintained sales and/ or full offices in Philadelphia, New
York, Chicago, Los Angeles, Hartford, and Greensboro, North Carolina, as well as
a network of sales persons in Puerto Rico.
Amertranz and its predecessor began operations in June 1985 as an
independently owned exclusive agent of a domestic and international air freight
forwarder. During the next eight years, Amertranz opened nine offices under its
exclusive agency arrangement.
In January 1994, Amertranz acquired the domestic air freight forwarding
business (i.e., the transport of freight which has both its point of origin and
its point of destination within the United States) of the freight forwarder for
which Amertranz was acting as an exclusive agent, as a result of the settlement
of a lawsuit. Thereafter, Amertranz owned and operated 20 offices primarily
focusing on the movement of domestic freight and, in its original nine offices,
international air freight. As an independent freight operation, Amertranz
established an internal infrastructure, including accounting, data processing
and communications departments, to support its 20 office network.
In February 1996, the Company acquired all of the issued and
outstanding stock of Amertranz and received the freight forwarding business of
TIA and CFS, and contributed the TIA and CFS freight forwarding business to CAS.
As a result, Amertranz became a wholly-owned subsidiary of the Company
conducting Amertranz's freight forwarding and logistics services businesses, and
the freight forwarding business of TIA and CFS was transferred to the Company
and is conducted by CAS.
In October 1996, the Company acquired Consolidated Air Services, Inc.
("Consolidated"), a Phoenix based freight forwarder. As a result, Consolidated
became a wholly-owned subsidiary of the Company with Amertranz conducting
Consolidated's freight forwarding business. In May 1997, the Company acquired
(by merger into the Company's Target subsidiary) Target Air Freight, Inc., a Los
Angeles-based freight forwarder ("Air Freight"). Under the terms of the merger,
the Company (i) paid $400,000 to Air Freight's stockholders at the time of the
merger and an additional $77,000 on June 8, 1999, and (ii) issued to Air
Freight's stockholders 900,000 shares of Common
3
Stock at the time of the merger and an additional 1,077,922 shares of Common
Stock on June 8, 1999, pursuant to Regulation D promulgated under the Securities
Act of 1933.
Since the business of the Company's Amertranz subsidiary incurred
operating losses for each of its operating periods, on June 23, 1997 the
Company's Amertranz subsidiary ceased operations and transferred its customer
accounts to the Company's Target subsidiary for fair consideration.
On July 13, 1998, CAS sold substantially all of the operating assets of
CAS to Geologistics Air Services, Inc. an indirect wholly owned subsidiary of
Geologistics Corporation ("Geologistics") for $27 million in cash (the "CAS
Sale"), in accordance with the terms of an Asset Purchase Agreement dated June
15, 1998 (the "Asset Purchase Agreement"). Under the terms of the Asset Purchase
Agreement, CAS retained its accounts receivable. CAS realized $2.7 million from
these accounts receivable after payment of liabilities during the twelve months
ended June 30, 1999.
Following the CAS Sale, the Company operates through its wholly-owned
subsidiary, Target. On November 30, 1998, the Company changed its name to
"Target Logistics, Inc."
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 29 cities
throughout the United States, including exclusive agency relationships in 18
cities. The Company has international freight forwarding operations consisting
of strategic relationships in over 20 countries including share ownership in its
exclusive agents in China, Hong Kong, Philippines and Singapore.
Operations
- - ----------
Movement of Freight. The Company does not own any airplanes or
significant trucking equipment and relies on independent contractors for the
movement of its cargo. The Company utilizes its expertise to provide forwarding
services that are tailored to meet customers' 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, shipments 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 an HP 9000 mainframe computer 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
4
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. During the fiscal year ended June 30, 1999,
the Company's international freight forwarding accounted for 37.2% of the
Company's operating revenue. On a pro forma basis (assuming the CAS Sale closed
on July 1, 1998), after elimination of revenue from CAS, international freight
forwarding would account for 38.3% of the Company's operating revenue.
Customers and Marketing
- - -----------------------
The Company's principal customers include large manufacturers and
distributors of computers and other electronic and high-technology equipment,
computer software and wearing apparel. As of June 30, 1999, the Company had
approximately 3,200 accounts.
The Company markets its services through an organization of
approximately 20 full-time salespersons and 32 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's Fashion Services Division targets customers from
manufacturers to retail establishments and provides specific expertise in
handling fashion-related shipments. The Fashion Services Division specializes in
the movement of wearing apparel for manufacturing customers to their department
store customers located throughout the United States.
Many of the Company's customers utilize more than one transportation
provider. In soliciting new accounts, the Company uses a strategy of becoming an
approved carrier in order to demonstrate the quality and cost- effectiveness of
its services. Using this approach, the Company has advanced its relationships
with several of its major customers, from serving as a back-up freight services
provider to primary freight forwarder.
Competition
- - -----------
Although there are no weight restrictions on the Company's shipments,
the Company focuses primarily on cargo shipments weighing more than 50 pounds
and requiring second-day delivery. As a result, the Company does not directly
compete for most of its business with overnight couriers and integrated shippers
of principally small parcels, such as United Parcel Service of America, Inc.,
Federal Express Corporation, DHL Worldwide Express, Inc., Airborne Freight
Corporation and the United States Postal Service. However, some integrated
carriers, such as Emery Air Freight Corporation and Pittston BAX Group, Inc.,
primarily solicit the shipment of heavy cargo in competition with forwarders.
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 service similar to that offered by the
Company. These include Eagle USA Air Freight, Inc., Pilot Air Freight, Inc., and
Geologistics Americas, 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 Fritz Companies, Inc., Air Express International Corporation and
Circle International Group, Inc. 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,
5
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
- - ---------
The Company and its subsidiaries had approximately 170 full-time
employees as of June 30, 1999. None of the Company's employees are currently
covered by a collective bargaining agreement. The Company has experienced no
work stoppages and considers its relations with its employees to be good.
Regulation
- - ----------
The Company's freight forwarding business as an indirect air cargo
carrier is subject to regulation by the United States Department of
Transportation under the Federal Aviation Act. However, air freight forwarders
(including the Company) are exempted from most of such Act's requirements by the
Economic Aviation Regulations promulgated thereunder. The Company's foreign air
freight forwarding operations are subject to regulation by the regulatory
authorities of the respective foreign jurisdictions. The air freight forwarding
industry is subject to regulatory and legislative changes which can affect the
economics of the industry by requiring changes in operating practices or
influencing the demand for, and the costs of providing, services to customers.
ITEM 2. PROPERTIES
----------
As of June 30, 1999, the Company leased terminal facilities consisting
of office and warehouse space in 11 cities located in the United States, and
also utilized 18 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 its principal warehouse facility is 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 2002.
Management believes that its current facilities are underutilized and are more
than sufficient for its planned growth.
The Company has an additional 10 terminal facilities in the following locations:
Atlanta, Georgia Houston, Texas
Charlotte, North Carolina Miami, Florida
Chicago, Illinois Newark, New Jersey
Dallas, Texas New York, New York
Greensboro, North Carolina Seattle, Washington
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company had previously reported in its Annual Report on Form 10-K
for the fiscal year ended June 30, 1998, that on June 15, 1998, the Company was
served with a complaint filed in the United States District Court for the
Eastern District of New York (case number CV 98 3777), by Martin Hoffenberg, a
former consultant to the Company. The Company, its Amertranz, Target, and CAS
subsidiaries, Stuart Hettleman (president and a director of the Company), and
Richard A. Faieta, (a former officer and director of the Company), and two
principal shareholders of the Company, are named defendants in the lawsuit. The
complaint is based on events occurring prior to February 1996, when Mr.
Hoffenberg controlled the Amertranz subsidiary as its president and chairman,
and on events occurring subsequent thereto, when Mr. Hoffenberg served as a
consultant to the Company. The complaint alleges breach of contract, violations
of the federal anti-racketeering laws, fraud, and failure to pay wages and
benefits. The complaint seeks economic damages in excess of $5.6 million, and
punitive damages of $7.5 million. Upon motion filed on behalf of the Company,
the court dismissed the action, but permitted Mr. Hoffenberg to file an amended
complaint. The Company then served a motion to dismiss the amended complaint.
The parties
6
then filed a stipulation pursuant to which Mr. Hoffenberg dismissed all claims
against all parties except claims for breach of contract and vacation pay
totalling $135,333 in the aggregate against the Company and its Amertranz
subsidiary. The Company intends to vigorously defend the action, which is now a
claim for $135,333. The Company believes that the complaint is without merit and
that any material recovery by Mr. Hoffenberg is unlikely.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
- - ------------------------------------
The following is a listing of the executive officers of the Company as
of June 30, 1999. There are no family relationships between any Directors and
Officers of the Company.
NAME AGE POSITION
Stuart Hettleman ............. 49 President and Chief Executive
Officer
Philip J. Dubato ............. 43 Vice President, Chief Financial
Officer and Secretary
Christopher Coppersmith ...... 49 President and Chief Executive
Officer, Target Logistic
Services, Inc.
STUART HETTLEMAN has been President, Chief Executive Officer and a director of
the Company and a director and Executive Vice President of each of Amertranz and
CAS, since February 7, 1996, and a director and Chairman of Target since May 8,
1997. Mr. Hettleman is also an executive officer of several of the Company's
predecessors. Specifically, he has been Vice President of TIA since 1990 and is
currently the Executive Vice President of TIA; and has been Vice President of
CFS since 1991 and is currently Executive Vice President of CFS.
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.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
-------------------------------------------------------------
Prior to February 25, 1998, the Company's common stock, $.01 par value
(the "Common Stock") and Redeemable Common Stock Purchase Warrants (the
"Warrants") were listed on the NASDAQ SmallCap Market under the symbols AMTZ and
AMTZW, respectively. From February 25, 1998 to December 3, 1998 both the Common
Stock and the Warrants were traded on the Over-The-Counter (OTC) market under
the same symbols (AMTZ and AMTZW). Since December 4, 1998, as a result of the
name change, both the Common Stock and the Warrants have been traded on the OTC
market under the symbols TARG and TARGW, respectively.
The following table shows the high and low sales prices of the Common
Stock and Warrants for each of the quarters during the fiscal years indicated,
as reported by NASDAQ and as available through the OTC market. The quotations
represent prices between dealers and do not reflect the retailer markups,
markdowns or commissions, and may not represent actual transactions. There have
been no dividends declared.
COMMON STOCK WARRANTS
Fiscal Year Ended June 30, 1998
First Quarter High - 1 3/4 High - 1/2
Low - 7/8 Low - 1/8
Second Quarter High - 2 1/4 High - 7/16
Low - 1 Low - 1/16
Third Quarter High - 2 1/4 High - 1/4
Low - 9/16 Low - 3/16
Fourth Quarter High - 1 9/16 High - 3/16
Low - 1 1/16 Low - 1/16
Fiscal Year Ended June 30, 1999
First Quarter High - 1 7/8 High - 1/8
Low - 11/16 Low - 3/100
Second Quarter High - 1 7/8 High - 2/25
Low - 1/2 Low - 1/100
Third Quarter High - 1 5/8 High - 1/10
Low - 9/16 Low - 1/100
Fourth Quarter High - 1 1/8 High - 1/16
Low - 35/50 Low - 1/50
On September 16, 1999 there were 841 shareholders of record of the
Company's Common Stock and 718 holders of record of the Company's Warrants. The
closing price of the Common Stock on that date was $0.75 per share. The closing
price of the Warrants on that date was $0.0625 per Warrant.
8
ITEM 6. SELECTED FINANCIAL DATA
TARGET LOGISTICS, INC.
(in thousands, except per share data) (1)
Year Ended Six Months
December 31, Ended June 30, Year Ended June 30,
------------------------------------------------------------------
1995 1996 1997 1998 1999
Statement of Operations Data:
Operating revenue $38,211 $27,446 $75,352 $97,784 $51,720
Cost of transportation 30,300 20,961 56,884 73,599 34,790
------- ------- ------- ------- ------
Gross profit 7,911 6,485 18,468 24,185 16,930
Selling, general &
administrative
expenses 4,513 8,772 24,300 23,012 21,304
Restructuring charge - - (3,407) - -
Operating income (loss) $ 3,398 $(2,288) $(9,239) $ 1,173 $(4,374)
Gain on sale of subsidiary - - - - 24,832
Net income (loss) $ 2,366 $(6,397) (10,508) $ 7,404 $14,016
Net income (loss) per common share $ (1.84) $ (1.74) $ 0.90 $ 1.63
Balance Sheet Data:
Total assets $22,740 $29,821 $38,547 $34,932
Working capital (deficit) (13,937) (12,541) (2,340) 5,717
Current liabilities 22,470 27,158 26,085 15,251
Long-term indebtedness 8,018 4,094 4,138 24
Shareholders' equity (deficit) $(7,749) $(1,430) $ 8,324 $19,657
(1) The amounts for the freight forwarding business of the Company represent the
historical operations associated with the freight forwarding business of TIA and
CFS contributed to the Company in the combination of these businesses. The
freight forwarding business of TIA and CFS did not operate as a separate legal
or reporting entity during the period presented. Management believes that if the
operations data were restated to exclude the operation of these aviation assets,
cost of transportation would be higher but would be more than offset by a
reduction in selling, general and administrative expenses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
This Annual Report on Form 10-K contains certain forward-looking
statements reflecting the Company's current expectations with respect to its
operations, performance, financial condition, and other developments. Such
statements are necessarily estimates reflecting the Company's best judgement
based upon current information and involve a number of risks and uncertainties.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from expectations are: (i) the Company's
historic losses and ability to achieve operating profitability following the CAS
Sale, (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 was incorporated in January 1996 to continue the freight
forwarding business of TIA and CFS and acquire Amertranz. The Company generated
operating revenues of $51.7 million, 97.8 million, and 75.4 million, and had a
net profit of $14.0 million and $7.4 million, and a net loss of $10.5 million,
for the fiscal years
9
ended June 30, 1999, 1998 and 1997, respectively. The fiscal year 1999 profit
includes a $16.6 million gain (net of tax) arising from the CAS sale which
closed on July 13, 1998, the fiscal year 1998 profit includes a $7.6 million net
income tax benefit arising from the CAS Sale, and the fiscal year 1997 loss
included a charge of $3.4 million attributed to restructuring costs in
connection with the closing of the Company's Amertranz subsidiary. The Company
had consolidated earnings (losses) before interest, taxes, depreciation and
amortization (EBITDA) of approximately $22.0 million, $2.6 million, and ($8.3
million), for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
* Following the closing of the Amertranz subsidiary in June 1997, the
Company determined that it would be in the best interests of the Company and its
shareholders to deleverage the Company's balance sheet and create the cash
resources needed to grow the Company's freight forwarding and logistics
business. While the Company's CAS subsidiary has been historically profitable,
management determined that this strategy can best be accomplished by the sale of
the operations of its CAS subsidiary. On July 13, 1998, the Company's CAS
subsidiary sold substantially all of its operating assets to a subsidiary of
Geologistics Corporation for $27 million in cash pursuant to the terms of an
Asset Purchase Agreement dated June 15, 1998. As a result of the CAS Sale, the
Company deleveraged its balance sheet by repaying approximately $15 million in
outstanding liabilities and obtained required working capital to take advantage
of growth opportunities available to the Company's Target subsidiary. These
opportunities include improved vendor pricing and attracting quality personnel
and agents on a world-wide basis, which the Company believes will drive its
future profitability. In addition, the Company may consider strategic
acquisitions. There can be no assurance that this strategy to increase
profitability will be successful.
* Management believes that the results of the Company's operations for
the fiscal year ended June 30, 1999 (all but 12 days of which were following the
CAS Sale) indicate management's concentrated focus on Target's business together
with the Company's available resources following the CAS Sale will enable the
Company to achieve the intended growth. For the year ended June 30, 1999,
Target's revenue increased by 15.7% to $50,156,285, and its gross profit margin
(i.e., gross operating revenues less cost of transportation expressed as a
percentage of gross operating revenue) improved to 33.3% from 29.3%, from the
corresponding period of 1998, a 13.7% improvement. This increased margin
accounts for approximately $2,006,000 of Target's gross profit for the fiscal
year ended June 30, 1999. As a result, Target's actual gross profit increased by
31.9%, or $4,043,474, to $16,725,039 for the year ended June 30, 1999 from
$12,681,565 for the year June 30, 1998. Management intends to continue to work
on improving Target's gross profit margins while focusing on increasing
operating revenue by adding quality sales personnel and exclusive forwarders
(previously referred to as independent agents) and reducing fixed selling,
general and administrative costs to improve the Company's net income.
Results of Operations
- - ---------------------
Years Ended June 30, 1999 and 1998
Operating Revenue. Operating revenue decreased to $51.7 million for the
year ended June 30, 1999 from $97.9 million for the year ended June 30, 1998, a
47.1% decrease. This decrease resulted from the inclusion of CAS's operating
revenue for the full 1998 period but only for 12 days of the 1999 period due to
the CAS Sale on July 13, 1998. Within the operations of the Company's Target
subsidiary operating revenue increased by 15.7% to $50,156,285 for the year
ended June 30, 1999 from $43,351,754 for the year ended June 30, 1998, a
$6,804,531 increase, due to increased freight volume.
Cost of Transportation. Cost of transportation was 67.3% of operating
revenue for the year ended June 30, 1999, and 75.3% of operating revenue for the
year ended June 30, 1998. This decrease is due to (i) a reduction in the Target
subsidiary's cost of transportation as a percentage of sales (66.7% for the 1999
period, from 70.7% for the 1998 period), and (ii) the historically higher cost
of transportation for the Company's CAS subsidiary (the assets of which were
sold on July 13, 1998) than the Company's Target subsidiary.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit for the year ended June 30, 1999 increased to 32.7% of
operating revenue from 24.7% of operating revenue for the year ended June 30,
1998.
10
Within the Company's Target subsidiary, gross profit margin increased
to 33.3% from 29.3% for the years ended June 30, 1999 and 1998, respectively.
This increase in gross profit margin accounts for approximately $2,006,000 of
Target's gross profit for the year ended June 30, 1999. Target's actual gross
profit increased by 31.9%, or $4,043,474, to $16,725,039 for the year ended June
30, 1999 from $12,681,565 for the year June 30, 1998.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were 41.2% of operating revenue (39.7% excluding
non-recurring expenses explained in (iii) and (iv), below) for the year ended
June 30, 1999, and 23.5% of operating revenue for the year ended June 30, 1998.
This increase was primarily due to (i) an increase in exclusive forwarder
commission expense due to the Company's addition of new exclusive forwarders;
(ii) the historically lower selling, general and administrative expenses as a
percentage of sales for the CAS subsidiary than the Target subsidiary; (iii)
non-recurring expenses of $244,943 incurred in the 1999 period to wind down the
Company's CAS subsidiary (primarily, the collection of accounts receivable and
payment of accounts payable); and (iv) the non-recurring accrual in the 1999
period (reflected within "Selling, general and administrative expenses -
Corporate") of executive bonus compensation of $537,820 primarily as a result of
the CAS Sale.
Within the Company's Target subsidiary, selling, general and
administrative expenses (excluding agent commission expense) were 24.8% of
operating revenue for the year ended June 30, 1999 and 26.4% for the year ended
June 30, 1998, a 6.1% decrease. Exclusive forwarder commission expense was 11.8%
of operating revenue for the year ended June 30, 1999 and 7.1% for the year
ended June 30, 1998. This increase is due to the Company's addition of new
exclusive forwarders.
Net Income. The Company realized net income of $14,016,436 for the year
ended June 30, 1999, compared to a net income of $7,403,643 for the year ended
June 30, 1998. This increase was due to the CAS Sale.
Years Ended June 30, 1998 and 1997
Operating Revenue. Operating revenue increased to $97.8 million for the
year ended June 30, 1998 from $75.4 million for the year ended June 30, 1997, a
29.8% increase. Of this increase, 61% resulted from growth in the Company's CAS
subsidiary and the balance was due to the operations of the Company's Target
subsidiary which the Company acquired in May 1997.
Cost of Transportation. Cost of transportation was 75.3% of operating
revenue for the year ended June 30, 1998, and 75.5% of operating revenue for the
year ended June 30, 1997. This increase is due to (i) the February 2, 1998 start
up of a new service between Indianapolis and Aquadilla, Puerto Rico by the
Company's CAS subsidiary, and (ii) the Company's Target subsidiary international
freight forwarding services, which historically reflect a higher cost of
transportation as a percentage of sales.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit for the year ended June 30, 1998 decreased to 24.7% of
operating revenue from 24.5% of operating revenue for the year ended June 30,
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 23.5% of operating revenue for the year ended June
30, 1998, and 32.3% (excluding restructuring charges in connection with the
closing of the Company's Amertranz subsidiary) of operating revenue for the year
ended June 30, 1997. This decrease was primarily due to (i) the closing of the
Amertranz subsidiary prior to beginning of the 1998 fiscal year (while the
Amertranz subsidiary was included for almost all of the 1997 fiscal year); and
(ii) the historically lower selling, general and administrative expenses as a
percentage of sales of the Company's Target subsidiary (acquired in May 1997),
and the inclusion of those results in the Company's consolidated results of
operations for the year ended June 30, 1998.
Net Income (Loss). The Company realized a net profit of $7,403,643 for
the year ended June 30, 1998, compared to a net loss of ($10,508,334) for the
year ended June 30, 1997. This increase was due to the $7,662,135 net income tax
benefit realized as the result of the CAS Sale on July 13, 1998, the increased
operating revenue from
11
growth in the Company's CAS subsidiary, the operations of the Company's Target
subsidiary, the decrease in expenses as a result of the closing of the Company's
Amertranz subsidiary, the decrease in restructuring charges (which were recorded
in their entirety in the prior year) in connection with the closing of the
Amertranz subsidiary, and $187,129 of debt cancellation income (see "Liquidity
and Capital Resources", below).
Liquidity and Capital Resources
- - -------------------------------
General. During the year ended June 30, 1999, net cash used in
operating activities was $2,240,763. Cash provided by investing activities was
$25,080,305, which consisted of net proceeds in connection with the CAS Sale
totaling $25,762,000, less (i) capital expenditures of $605,000, and (ii)
$77,000 of additional costs incurred in connection with the Target acquisition.
Cash used in financing activities was $15,837,744, which primarily consisted of
the repayment of long and short term debt and the purchase of subsidiaries' long
and short term debt.
Following the closing of the Company's Amertranz subsidiary, the
Company entered into an Extension and Composition Agreement dated as of November
7, 1997 with certain general unsecured creditors of the Company's Amertranz
subsidiary, whereby $1,581,799 of trade debt of the Amertranz subsidiary was
acquired by the Company in exchange for the issuance of 158,180 shares of the
Company's Class E Preferred Stock. On September 24, 1998 the Company announced
the redemption of the Class E Preferred Shares. The Company has reserved
$1,581,799 for this redemption. As of June 30, 1999, approximately $1,142,000 of
this reserve has been paid.
Currently, approximately $1.7 million of the Company's outstanding
accounts payable represent unsecured trade payables of the Company's closed
Amertranz subsidiary.
Capital expenditures. Capital expenditures for the fiscal year ended
June 30, 1999 were $605,092.
GMAC Facility. During the year ended June 30, 1999, the Company's
Target subsidiary maintained a $10 million revolving credit facility ("GMAC
Facility") with GMAC Commercial Credit LLC (successor by merger to BNY Financial
Corp.) ("GMAC"), guaranteed by the Company. The GMAC Facility was originally
established in 1997 with all of the Company's subsidiaries as individual
borrowers thereunder. In connection with the CAS Sale, the outstanding
obligations then due from the Target and CAS subsidiaries under the GMAC
Facility were repaid on July 13, 1998 by CAS with the proceeds from the CAS
Sale, and CAS acquired the Amertranz subsidiary's portion of the debt. The
interest rate of the GMAC Facility is prime plus 2%. 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,
1999, there were outstanding borrowings of $1,349,978 under the GMAC Facility
which represented 27% of the amount available thereunder, and the amount
available for borrowing under the GMAC Facility was approximately $5,058,000.
Revolver Note. As part of the combination of Amertranz and the freight
forwarding business of TIA and CFS, TIA and CFS agreed to advance to CAS, on a
revolving loan basis, up to an aggregate maximum of $4,000,000 outstanding at
any time, pursuant to the terms of a Revolving Credit Promissory Note ("Revolver
Note"), bearing interest at the greater of (i) 1% per month, or (ii) a
fluctuating rate equal to the prime rate of interest as published in The Wall
Street Journal, plus 4%. All obligations under the Revolver Note were guaranteed
by the Company and its Amertranz subsidiary and secured by a first priority lien
on all of the issued and outstanding shares of CAS, a first priority lien on all
of the assets of the Company and CAS, and a lien on the accounts receivable of
Amertranz, subordinate only to the first priority lien granted in connection
with the GMAC Facility and the second position lien granted to TIA in connection
with the TIA Loan (described below). All obligations under the Revolver Note
were repaid on July 13, 1998 with the proceeds from the CAS Sale.
Exchange Note. As part of the combination of Amertranz and the freight
forwarding business of TIA and CFS, the Company issued to TIA and CFS a
promissory note in the original principal amount of $10,000,000, bearing
interest at the rate of 8% per annum ("Exchange Note"). In June 1996, TIA
exchanged $2,000,000 principal amount of the Exchange Note for 200,000 shares of
the Company's Class A Preferred Stock, and of the proceeds of the Company's
initial public offering, $2,000,000 was used to repay a portion of the Exchange
Note. The
12
Company's indebtedness under the Exchange Note was subordinated to the Company's
obligations under the GMAC Facility. All obligations under the Exchange Note
were repaid on July 13, 1998 with the proceeds from the CAS Sale.
* Working Capital Requirements. Cash needs of the Company are currently
met by funds generated from operations, the Company's accounts receivable
financing facility, and funds remaining from the CAS Sale. As of June 30, 1999,
the Company had $3,915,000 available under its $10 million accounts receivable
financing facility and approximately $7,882,000 from operations and remaining
proceeds from the CAS Sale. The Company believes that its current financial
resources will be sufficient to finance its operations and obligations for the
long and short term. 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.
Year 2000
- - ---------
The Company is on schedule with a project that addresses the Year 2000
(Y2K) issue of computer systems and other equipment with embedded chips or
processors not being able to properly recognize and process date- sensitive
information after December 31, 1999. Many systems use only two digits rather
than four to define the year, and these systems will not be able to distinguish
between the year 1900 and the year 2000. This may lead to disruptions in the
operations of business and governmental entities resulting from miscalculations
or system failures. The Company's Y2K project is designed to ensure the
compliance of all of the Company's applications, operating system and hardware
platforms, and to address the compliance of key business partners. Key business
partners are those customers and vendors that have a material impact on the
Company's operations. All phases of the project should be completed by 1999 year
end, thus minimizing the impact of the Y2K problem on the Company's operations.
The total estimated cost of the required modifications to become Y2K compliant
should not be material to the Company's financial position. Failure to make all
internal business systems Y2K compliant could result in an interruption in, or a
failure of, some of the Company's business activities or operations. Y2K
disruptions in the operations of key vendors could impact the Company's ability
to obtain transportation services necessary for the Company's operations. If one
or more of these situations occur, the Company's results of operations,
liquidity and financial condition could be materially and adversely affected.
The Company is unable to determine the readiness of its key business partners at
this time and is therefore unable to determine whether the consequences of Y2K
failures will have a material impact on the Company's results of operations,
liquidity or financial condition. The Y2K project is expected to significantly
reduce the Company's level of uncertainty about the Y2K problem and reduce the
possibility of significant interruptions of normal business operations.
Impact of the CAS Sale
- - ----------------------
On July 13, 1998, in the CAS Sale, the Company's CAS subsidiary sold
substantially all of its operating assets to a subsidiary of Geologistics
Corporation for $27 million in cash pursuant to the terms of an Asset Purchase
Agreement dated June 15, 1998. Under the terms of the Asset Purchase Agreement,
CAS retained its accounts receivable, and CAS realized $2.7 million from these
accounts receivable after payment of its liabilities during the year ended June
30, 1999.
* While the Company's CAS subsidiary has been historically profitable,
the Company's strategy in entering into and concluding the CAS Sale was to
deleverage the Company's balance sheet by repaying approximately $15 million in
outstanding liabilities and provide required working capital to take advantage
of growth opportunities available to the Company's Target subsidiary. These
opportunities include improved vendor pricing and attracting quality personnel
and agents on a world-wide basis, which the Company believes will drive its
future profitability.
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.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data required by this Item 8
are included in the Company's Consolidated Financial Statements and set forth in
the pages indicated in Item 14(a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
---------------------------------------------------------------
None
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 1999 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 1999
Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement to be issued in conjunction with the 1999
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 1999
Annual Meeting of Shareholders.
15
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
-----------------------------------------------------------------
(a) 1. Financial Statements
TARGET LOGISTICS, INC. PAGE
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-2
Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Deficit for the Years Ended
June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
(a) 2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable, are not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
-----------------------------------------------------------
Exhibit No.
3.1 Certificate of Incorporation of Registrant, as amended (incorporated by reference to Exhibit 3.1
to the Registrant's Current Report on Form 8-K dated November 30, 1998, File No. 0-29754)
3.2 By-Laws of Registrant, as amended (incorporated by
reference to Exhibit 3.2 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended
December 31, 1998, File No. 0-29754)
4.1 Warrant Agent Agreement (incorporated by reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-03613)
4.2 Form of Amendment No. 1 to Warrant Agent Agreement
dated June 13, 1997 (incorporated by reference to
Exhibit 4.7 to the Registrant's Registration
Statement on Form S-1, Registration No.
333-30351)
4.3 Certificate of Designations with respect to the Registrant's Class A Preferred Stock (contained in
Exhibit 3.1)
4.4 Certificate of Designations with respect to the Registrant's Class B Preferred Stock (contained in
Exhibit 3.1)
4.5 Certificate of Designations with respect to the Registrant's Class C Preferred Stock (contained in
Exhibit 3.1)
4.6 Certificate of Designations with respect to the Registrant's Class D Preferred Stock (contained in
Exhibit 3.1)
4.7 Certificate of Designations with respect to the Registrant's Class E Preferred Stock (contained in
Exhibit 3.1)
10.1 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended December 31, 1997, File No. 0-29754)
10.2 Restated and Amended Accounts Receivable Management and Security Agreement, dated as of
July 13, 1998 by and between GMAC Commercial Credit LLC (successor by merger to BNY
Financial Corp.), as Lender, and Target Logistic Services, Inc., as Borrower, and guaranteed by
the Registrant ("GMAC Facility Agreement")
10.3 Shadow Warrant entered into in connection with the GMAC Facility Agreement (incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1997, File No. 0-29754)
16
10.4 Loan and Security Agreement dated October 25, 1995 between Amertranz Worldwide, Inc. and
TIA, Inc., as amended January 24, 1996 (incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, Registration No. 333-03613)
10.5 Form of Amended and Restated Promissory Note of Amertranz Worldwide, Inc. payable to TIA,
Inc. in principal amount of $800,000 (incorporated by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-03613)
10.6 Revolving Credit Promissory Note dated February 7, 1996 of Caribbean Air Services, Inc. payable
to TIA, Inc. and Caribbean Freight System, Inc. in the principal amount of $4,000,000
(incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1,
Registration No. 333-03613)
10.7 Promissory Note dated February 7, 1996 of Amertranz Worldwide Holding Corp. payable to TIA,
Inc. and Caribbean Freight System, Inc. in the principal amount of $10,000,000 (incorporated by
reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, Registration No.
333-03613)
10.8 Employment Agreement dated June 24, 1996 between Amertranz Worldwide Holding Corp. and
Stuart Hettleman (incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on
Form 10-K for the Fiscal Year Ended June 30, 1996, File No. 0-29754)
10.9 Asset Purchase Agreement dated as of June 15, 1998, by and among Amertranz Worldwide
Holding Corp., Caribbean Air Services, Inc., and Geologistics Corporation (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K, dated July 13, 1998, File
No. 0-29754)
10.10(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)
21 Subsidiaries of Amertranz Worldwide Holding Corp. (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 Arthur Andersen LLP
27 Financial Data Schedule
(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 28, 1999 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 28, 1999
- - --------------------------- Officer and Director
Stuart Hettleman
/s/ Michael Barsa Director September 28, 1999
- - ---------------------------
Michael Barsa
/s/ Brian K. Coventry Director September 28, 1999
- - ---------------------------
Brian K. Coventry
/s/ Christopher Coppersmith Director September 28, 1999
- - ---------------------------
Christopher Coppersmith
/s/ Philip J. Dubato Vice President, Chief September 28, 1999
- - --------------------------- Financial Officer,
Philip J. Dubato Principal Accounting Officer
and Director
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Target Logistics, Inc. (formerly Amertranz Worldwide Holding Corp.):
We have audited the accompanying consolidated balance sheets of Target
Logistics, Inc. (formerly Amertranz Worldwide Holding Corp.), a Delaware
corporation, as of June 30, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended June 30, 1999, 1998 and 1997. 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 generally accepted auditing
standards. 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. as of June 30, 1999 and 1998, and the results of its operations and cash
flows for the years ended June 30, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
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
September 24, 1999
F-1
TARGET LOGISTICS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 June 30, 1998
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,881,595 $ 879,797
Accounts receivable, net of allowance for doubtful
accounts of $1,318,109 and, $514,542 respectively 10,853,316 14,555,151
Deferred income taxes (Note 9) 2,080,105 7,705,092
Prepaid expenses and other current assets 152,940 604,588
---------- ----------
Total current assets 20,967,956 23,744,628
PROPERTY AND EQUIPMENT, net (Note 4) 473,398 755,822
OTHER ASSETS 278,382 238,904
DEFERRED INCOME TAXES (Note 9) 184,895 184,895
GOODWILL, net of accumulated amortization of
$1,927,504 and $1,305,445, respectively (Notes 3 and 5) 13,027,520 13,622,579
---------- ----------
Total assets $34,932,151 $38,546,828
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,413,792 $ 8,542,850
Accrued expenses 2,360,211 1,990,880
Accrued transportation expenses 6,745,613 3,880,195
Reserve for restructuring 21,567 264,143
Note payable to bank (Note 6) 1,349,978 6,745,853
Note payable to affiliate (Note 6) --- 905,913
Note payable to creditors --- 53,835
Current portion of long-term debt due to affiliate (Note 6) --- 3,332,126
Current portion of long-term debt (Note 6) 10,500 50,000
Dividends payable 168,680 117,524
Taxes payable 77,245 110,000
Lease obligation-current portion (Note 8) 103,385 91,735
---------- ----------
Total current liabilities 15,250,971 26,085,054
LONG-TERM DEBT DUE TO AFFILIATE (Note 6) --- 4,000,000
LONG TERM DEBT (Note 6) --- 10,500
LEASE OBLIGATION--LONG-TERM (Note 8) 24,116 127,506
---------- ----------
Total liabilities $15,275,087 $30,223,060
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 7):
Preferred Stock, $10 par value; 2,500,000 shares authorized,
427,207 and 621,387 shares issued and outstanding, respectively 4,272,070 6,213,870
Common Stock, $.01 par value; 15,000,000 shares authorized,
10,031,868 and 8,419,094 shares issued and 9,192,013 and
8,312,790 shares outstanding, respectively 100,318 84,190
Paid-in capital 22,877,209 22,546,331
Accumulated deficit $(6,937,598) (20,509,373)
Less: Treasury stock, 839,855 and 106,304 shares held at cost,
respectively (654,935) (11,250)
---------- -----------
Total shareholders' equity 19,657,064 8,323,768
---------- -----------
Total liabilities and shareholders' equity $34,932,151 $38,546,828
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
TARGET LOGISTICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
OPERATING REVENUES:
Operating revenues - Target subsidiary $50,156,285 $43,351,754 $ 4,392,713
Operating revenues - Caribbean subsidiary 1,563,298 54,432,657 40,690,013
Operating revenues - Amertranz subsidiary - - 30,269,339
------------ ----------- -----------
Operating revenues 51,719,583 97,784,411 75,352,065
COST OF TRANSPORTATION:
Cost of transportation - Target subsidiary 33,431,246 30,670,189 3,186,175
Cost of transportation - Caribbean subsidiary 1,358,031 42,928,749 32,498,656
Cost of transportation - Amertranz subsidiary - - 21,199,576
----------- ----------- -----------
Cost of transportation 34,789,277 73,598,938 56,884,407
GROSS PROFIT:
Gross profit - Target subsidiary 16,725,039 12,681,565 1,206,538
Gross profit - Caribbean subsidiary 205,267 11,503,908 8,191,357
Gross profit - Amertranz subsidiary - - 9,069,763
----------- ----------- -----------
Gross profit 16,930,306 24,185,473 18,467,658
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ("SG&A"):
SG&A - Target subsidiary 12,454,287 11,444,841 1,284,996
SG&A - Target subsidiary
(Exclusive forwarder commissions) 5,929,533 3,078,945 314,390
SG&A - Caribbean subsidiary 595,338 6,270,882 4,882,073
SG&A - Amertranz subsidiary - - 16,083,199
SG&A - Corporate 1,491,598 1,085,513 864,832
Restructuring charge - - 3,407,482
Depreciation and amortization 833,268 1,131,994 870,123
----------- ---------- -----------
Selling, general and administrative expenses 21,304,024 23,012,175 27,707,095
OTHER INCOME (EXPENSE):
Interest income (expense) 291,510 (1,645,902) (1,335,833)
Other income 119,291 214,112 66,936
Gain on sale of subsidiary 24,832,353 - -
----------- ----------- -----------
Income (loss) before income taxes 20,869,436 (258,492) (10,508,334)
Provision (benefit) for income taxes (Note 9) 6,853,000 (7,662,135)
----------- ----------- ----------
Net income (loss) $14,016,436 $ 7,403,643 $(10,508,334)
=========== =========== ===========
Net income (loss) per share:
Basic $1.63 $0.90 ($1.74)
===== ===== ======
Diluted $0.99 $0.55 -
===== ===== ======
Weighted average shares outstanding:
Basic 8,351,386 7,949,705 6,048,148
=========== =========== ===========
Diluted 14,121,246 13,468,964 -
============= ============= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Additional
Preferred Stock Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
Balance, July 1, 1996 - - 3,626,504 $36,265 $8,567,675 (106,304)($11,250)($16,341,341)($7,748,651)
Common stock issued in
connection with the IPO - - 2,300,000 $23,000 $11,013,288 - - - $11,036,288
Preferred stock issued in
exchange for a principal
reduction in the Exchange Note 200,000 2,000,000 - - - - - - 2,000,000
Common stock issued in connection
with the acquisition of Target - - 900,000 9,000 1,014,750 - - - 1,023,750
Acquisition of Consolidated 20,000 200,000 - - 371,000 - - - 571,000
Stock Options exercised - - - - 5,543 - - - 5,543
Preferred stock issued in
connection with the Private
Placement 257,500 2,575,000 - - - - - (372,145) 2,202,855
Cash dividends associated with the
Class C Preferred stock - - - - - - - (12,875) (12,875)
Preferred Stock dividends associated
with the Class A Preferred stock 20,500 205,000 - - - - - (205,000) -
Net loss - - - - - - - (10,508,334)(10,508,334)
-------- --------- ------- ----- ---------- -------- ------- ----------- ----------
Balance June 30, 1997 498,000 $4,980,000 6,826,504 $68,265 $20,972,256 (106,304)($11,250)($27,439,695)($1,430,424)
Additional costs associated with
the Private Placement - - - - - - - (34,908) (34,908)
Common stock issued in connection
with the conversion of Class A
Preferred Stock (110,250)(1,102,500) 1,102,500 11,025 1,091,475 - - - -
Stock options exercised - - 52,590 525 (525) - - - -
Preferred stock issued for repayment
of secured long-term debt of
Amertranz Worldwide, Inc. 100,000 1,000,000 - - - - - - 1,000,000
Preferred stock issued for purchase
of $1,581,800 of trade debt of
Amertranz Worldwide, Inc. 158,180 1,581,800 - - - - - - 1,581,800
Common stock issued in connection
with the conversion of Class B
Preferred Stock (20,000) (200,000) 200,000 2,000 198,000 - - - -
Common stock issued in connection
with the conversion of Class C
Preferred Stock (23,750) (237,500) 237,500 2,375 235,125 - - - -
Preferred stock dividends associated
with the Class A Preferred Stock 12,696 126,960 - - - - - (126,960) -
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, 1999, 1998 AND 1997-- (Continued)
Additional
Preferred Stock Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
Preferred stock dividends associated
with the Class D Preferred Stock 6,511 65,110 - - - - - (65,110) -
Cash dividends associated with the
Class C Preferred Stock - - - - - - - (246,343) (246,343)
Warrants issued in connection with
the sale of the assets of CAS - - - - 50,000 - - - 50,000
Net income - - - - - - - 7,403,643 7,403,643
--------- ------- ------ --------- ------- ------- ------- --------- ---------
Balance, June 30, 1998 621,387 $6,213,870 8,419,094 $84,190 $22,546,331 (106,304) ($11,250)($20,509,373) $8,323,768
Common stock issued in connection
with the conversion of Class C
Preferred Stock (36,000) (360,000) 360,000 3,600 356,400 - - - -
Stock Options exercised - - 174,852 1,749 62,256 - - - 64,005
Cash dividends associated with the
Class A, C and D Preferred Stock - - - - - - - (444,661) (444,661)
Redemption of Class E
Preferred Stock (158,180)(1,581,800) - - - - - - (1,581,800)
Purchase of Treasury Stock, at cost - - - - - (733,551)(643,685) - (643,685)
Additional Common Stock issued
in connection with the acquisition
of Target - - 1,077,922 10,779 (87,778) - - - (76,999)
Net income - - - - - - - 14,016,436 14,016,436
--------- ---------- --------- --------- ---------- -------- ------- ---------- ----------
Balance, June 30, 1999 427,207 $4,272,070 10,031,868 $100,318 $22,877,209 (839,855)($654,935)($6,937,598) $19,657,064
========= ========== ========== ========= =========== ======== ======== ========== ===========
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, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $14,016,436 $7,403,643 $(10,508,334)
Bad debt expense 803,567 (268,065) 411,285
Depreciation and amortization 833,268 1,196,480 870,123
Gain on sale of CAS (24,832,353) - -
Deferred income tax benefit 5,624,987 (7,889,987) -
Write off and write down of fixed assets - - 727,938
Decrease in debt issuance costs - - 103,466
Restructuring charge - - 3,407,482
Adjustments to reconcile net loss to net cash used in operating activities-
Decrease (increase) in accounts receivable 2,898,268 (1,796,390) (485,963)
Decrease (increase) in prepaid expenses and other current assets 245,395 138,981 (257,630)
(Increase) decrease in other assets (113,962) (15,136) 32,913
(Decrease) increase in accounts payable and accrued expenses (1,716,369) 204,052 (2,000,123)
---------- ------- ----------
Net cash used in operating activities (2,240,763) (1,026,422) (7,698,843)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (605,092) (556,557) (468,912)
Proceeds from sale of CAS, net of closing costs 25,762,397 - -
Acquisition of Consolidated - - 105,602
Acquisition of Target (77,000) - (452,032)
------------ --------- ----------
Net cash provided by (used in) investing activities 25,080,305 (556,557) (815,342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering ("IPO") - net of costs - - 12,190,682
Proceeds from Private Placement - net of costs - (34,908) 2,202,855
Issuance of common stock in connection with the IPO - - 23,000
Dividends paid (340,660) (128,819) -
Stock options exercised 64,005 - 5,543
Purchase of treasury stock (643,685) - -
Redemption of Class E Preferred Stock (1,141,750) - -
Net (repayments) borrowings from note payable to bank (5,395,875) 278,295 4,676,355
(Repayment) proceeds from long-term debt due to affiliates (7,332,126) 698,853 (6,104,227)
Repayment of long-term debt (50,000) (50,000) -
(Repayment) proceeds from revolving loan due to affiliate (905,913) 116,185 (3,454,235)
(Payment) proceeds of lease obligations (91,740) 200,927 (21,035)
--------- --------- ----------
Net cash (used in) provided by financing activities (15,837,744) 1,080,533 9,518,938
Net increase (decrease) in cash and cash equivalents 7,001,798 (502,446) 1,004,753
CASH AND CASH EQUIVALENTS, beginning of year 879,797 1,382,243 377,490
----------- --------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 7,881,595 $ 879,797 $ 1,382,243
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 105,157 $ 821,336 $ 468,588
Income taxes $ 1,243,022 $ 82,492 $ 46,396
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, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
Conversion of 36,000 and 23,750, respectively, Class C Preferred Shares $ (360,000) $ (237,500) -
Issuance of Common Stock for Conversion of 36,000 and 23,750, respectively,
Class C Preferred Shares $ 3,600 $ 2,375 -
Issuance of Common Stock for Stock Options exercised $ 1,749 $ 525 -
Issuance of Common Stock in connection with the acquisition of Target $ 10,779 - $ 9,000
TIA, Inc. conversion of 110,250 Class A Preferred Shares - $(1,102,500) -
Issuance of Common Stock for TIA, Inc. conversion of
110,250 Class A Preferred Shares - $ 11,025 -
Issuance of 100,000 Class D Preferred Stock for repayment
of secured long-term debt of Amertranz Worldwide, Inc. - $ 1,000,000 -
Issuance of 158,180 Class E Preferred Stock for the purchase
of $1,581,800 of trade debt of Amertranz Worldwide, Inc. - $ 1,581,800 -
Conversion of 20,000 Class B Preferred Shares - $ (200,000) -
Issuance of Common Stock for conversion of 20,000
of Class B Preferred Shares - $ 2,000 -
Issuance of preferred stock as partial repayment of long-term debt due to affiliates - - $2,000,000
Issuance of preferred stock for the Private Placement - - $2,575,000
Issuance of preferred stock for the acquisition of Consolidated - - $200,000
Issuance of preferred stock as dividends for the Class A preferred stock - - $205,000
Issuance of note payable to Consolidated stockholders - - $150,000
On October 10, 1996, Consolidated Air Services, Inc. ("Consolidated") merged
with and into the Company pursuant to the terms of a merger agreement dated as
of September 30, 1996. In conjunction with the acquisition, the resulting
goodwill is as follows:
Net assets assumed - $ (121,539) -
Purchase Price - 786,428 -
-------------
Goodwill - $ 664,889 -
=============
On May 8, 1997, Target merged with and into the Company pursuant to the terms of
a merger agreement dated as of April 17, 1997. In conjunction with the
acquisition, the resulting goodwill is as follows:
Net liabilities assumed - $ 709,157 -
Purchase Price - 1,488,782 -
-------------
Goodwill - $ 2,197,939 -
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND
In January 1996, Target Logistics, Inc. (formerly, Amertranz Worldwide Holding
Corp.) ("Holding" or the "Company") was incorporated in the state of Delaware.
Effective February 7, 1996, Holding concluded an Asset Exchange Agreement (the
"Agreement") with TIA, Inc. ("TIA"), Caribbean Freight System, Inc. ("CFS"),
Amertranz Worldwide, Inc. ("Amertranz") and the stockholders and convertible
note holders of Amertranz. As part of this transaction, Holding received (i) all
of the issued and outstanding stock of Amertranz, (ii) $1,379,110 in convertible
notes of Amertranz, and (iii) the air freight forwarding business of TIA and
CFS. Holding then contributed the air freight forwarding business of TIA and CFS
to Caribbean Air Services, Inc. ("CAS") in return for all of the issued and
outstanding shares of CAS. TIA and CFS received 2,100,000 shares of common stock
of the Company and a $10,000,000 promissory note, as discussed in Note 6, in
addition to stock in the Company.
The transactions between the Company, TIA, CFS and CAS described above have been
accounted for as a recapitalization of TIA and CFS, whereby the historical data
for their freight forwarding operations are being presented as that of Holdings
for all periods presented. The issuance of the $10,000,000 Promissory Note has
been reflected as a charge to retained earnings and the distribution of assets
and liabilities to TIA and CFS has been reflected as a net adjustment to equity,
at book value (which approximates fair value). The transaction with Amertranz
has been accounted for as an acquisition under purchase accounting.
On July 3, 1996, the Company completed an initial public offering ("IPO") of
2,300,000 shares of common stock and redeemable common stock purchase warrants
at an initial offering price of $6.10 per share. Prior to the IPO, there was no
public market for the Company's capital stock. The net proceeds to the Company
of $12,213,682 were used to pay down existing debt of $6,503,000 and the balance
was used for working capital purposes. Additionally, 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 payment of $2,000,000 of its promissory note
with TIA and CFS.
2. DISPOSITION OF ASSETS
On July 13, 1998, the Company's CAS subsidiary sold substantially all of the
operating assets of CAS to Geologistics Air Services, Inc., an indirect
wholly-owned subsidiary of Geologistics Corporation ("Geologistics"), for
approximately $26 million in cash, net of costs (the "CAS Sale"), in accordance
with the terms of the Asset Purchase Agreement dated June 15, 1998 (the "Asset
Purchase Agreement").
Under the terms of the Asset Purchase Agreement CAS retained its accounts
receivable. CAS realized $2.7 million from these accounts receivable after
payment of its liabilities during the fiscal year ended June 30, 1999.
Other than with respect to certain obligations pursuant to leases and other
agreements included in the assigned assets, Geologistics did not assume any
obligations of the Company or CAS.
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 year ended June 30, 1999 and 1998, the consolidated financial
statements include the accounts of Holding, CAS, Target Logistic Services, Inc.
("Target"), Amertranz and Consolidated Air Services, Inc. ("Consolidated").
F-8
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the fiscal year ended June 30, 1997, the consolidated financial statements
include the accounts of Holding, CAS, Amertranz, Target (since May 1, 1997) and
Consolidated (since October 1, 1996).
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed under the
straight-line method over estimated useful lives ranging from 3 to 8 years.
Assets under capital leases are depreciated over the shorter of the estimated
useful life of the asset or the lease term. The Company utilizes a half-year
convention for assets in the year of acquisition and disposal.
Goodwill
Goodwill represents the excess of cost over the net assets acquired and is
amortized on a straight-line basis over 25 years.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. Management has performed
a review of all long-lived assets and has determined that no impairment of the
respective carrying value has occurred as of June 30, 1999.
Stock Options
The Company grants stock options to certain officers and related parties.
Compensation expense is recognized based upon the aggregate difference between
the fair market value of the Company's stock at date of grant and the option
price. Compensation expense is recognized equally over the vesting period.
In October, 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes a fair
value based method of accounting for an employee stock option or similar equity
instrument but allows companies to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees". Companies
electing to continue using the accounting under APB Onion No. 25 must, however,
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in SFAS No. 123 had been applied (Note
7). These disclosure requirements are effective for fiscal years beginning after
December 16, 1995. The Company has elected to continue accounting for its
stock-based compensation awards to employees and directors under the accounting
prescribed by APB Opinion No. 25 and to provide the disclosures required by SFAS
No. 123.
Revenue Recognition
Revenue from freight forwarding is recognized upon delivery of goods, and direct
expenses associated with the cost of transportation are accrued concurrently.
Monthly provision is made for doubtful receivables, discounts, returns and
allowances.
F-9
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Cash and Cash Equivalents
Cash at June 30, 1999 and 1998 includes $274,000 and $323,000 of overnight
repurchase agreements.
Per Share Data
In accordance with the requirements of SFAS No. 128, "Earnings per Share", net
earnings per common share amounts ("basic EPS") were computed by dividing net
earnings after deducting preferred stock dividend requirements, by the weighted
average number of common shares outstanding and contingently issuable shares
(which satisfy certain conditions) and excluding any potential dilution. Net
earnings per common share amounts -
assuming dilution ("diluted EPS") were computed by reflecting potential
dilution from the exercise of stock options. SFAS No. 128 requires the
presentation of both basic EPS and diluted EPS on the face of the income
statement. Earnings per share amounts for the same prior-year periods have been
restated to conform with the provisions of SFAS No. 128.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings for the year ended June 30, 1999 and
1998 is as follows:
Year Ended June 30, 1999 Year Ended June 30, 1998
------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
Net earnings $14,016,436 $7,403,643
Preferred stock dividends (444,661) (246,343)
--------
BASIC EPS
Net earnings attributable to
common stock $13,571,775 8,351,386 $1.63 $7,157,300 7,949,705 $0.90
========== ========= ==== ========= ========= ====
EFFECT OF DILUTIVE SECURITIES
Convertible Preferred Stock 5,698,663 5,327,969
Stock Options 71,197 191,290
DILUTED EPS
Net earnings attributable to common stock
and assumed preferred conversions
and option exercises $14,016,436 14,121,246 $0.99 $7,403,643 13,468,964 $0.55
========== ========== ===== ========= ========== ====
Options to purchase 440,000 and 225,800 shares of common stock for the years
ended June 30, 1999 and 1998, 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 5,183,731 shares of common stock for the years ended June
30, 1999 and 1998 were not included in the computation of diluted EPS because
they were also anti-dilutive.
Adoption of SFAS No. 128 required that the Company's reported loss per share for
fiscal 1997 be restated. There are no material differences between the amounts
previously recorded and the restated amounts. For the year ended June 30, 1997
no diluted EPS is presented, as the effect of dilutive securities would be
anti-dilutive on loss per common share. A reconciliation between the numerators
and denominators of the basic EPS computation for net loss for the year ended
June 30, 1997 is as follows:
F-10
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Year Ended June 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amounts
Net loss ($10,508,334)
Preferred stock dividends (12,875)
------------
BASIC EPS
Net loss attributable to common stock ($10,521,209) 6,048,148 ($1.74)
============= ========= =======
For the year ended June 30, 1997, 2,008,889 shares of convertible preferred
stock were not included in the computation of diluted EPS due to their effect
being 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 1999 presentation.
4. PROPERTY AND EQUIPMENT, NET
June 30, June 30,
1999 1998
-------- --------
Property and Equipment consists of the following:
Furniture and fixtures $ 614,530 $726,888
Computer equipment 471,683 658,617
Leasehold improvements 319,565 202,059
Vehicles 116,036 116,036
---------- ---------
1,521,814 1,703,600
Less: Accumulated depreciation and amortization 1,048,416 947,778
--------- --------
$ 473,398 $ 755,822
========== =========
5. ACQUISITIONS
(a) On February 7, 1996, Holding acquired all of the issued and outstanding
stock of Amertranz and the former stockholders of Amertranz received 870,254
shares (which consist of the investment in Amertranz Worldwide of
F-11
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
518,056 shares, assigned notes of 280,888 shares and 71,310 shares associated
with the Interim Financing) of Holding's common stock and options to purchase
224,399 shares of Holding's common stock valued at $4,415,000 or approximately
$4.25 per share and option. The Amertranz transaction has been accounted for as
a purchase and resulted in goodwill of approximately $12.1 million which
represents the excess of the cost over the fair value of the assets acquired.
(b) On October 10, 1996, the Company acquired all of the issued and outstanding
stock of Consolidated Air Services, Inc. ("Consolidated") for 20,000 shares of
Holding's Class B Preferred Stock valued at $571,000 or approximately $28.55 per
share. The Consolidated transaction has been accounted for as a purchase and
resulted in goodwill of approximately $665,000 which represents the excess cost
over the fair value of the assets acquired.
(c) On May 8, 1997, the Company acquired all of the issued and outstanding stock
of Target Airfreight, Inc. ("Target Air") for $400,000 cash and 900,000 shares
of the Company's common stock valued at $1,023,750 or approximately $1.14 per
share. On June 8, 1999, pursuant to the terms of the Target Air acquisition, the
Company paid an additional $77,000 cash and issued an additional 1,077,922
shares of common stock valued at $0.77 per share to Target Air's former
shareholders. The transaction has been accounted for as a purchase and resulted
in goodwill of approximately $2.2 million which represents the excess cost over
the fair value of the assets acquired.
(d) The following unaudited pro forma financial information for the Company for
the year ended June 30, 1997, gives effect to the Consolidated and Target Air
acquisitions as if they occurred at the beginning of the fiscal period
presented. These pro forma results have been prepared for comparative purposes
only, and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions occurred on the date indicated
or which may result in the future:
Pro Forma
Year Ended
June 30, 1997
Operating revenue $ 100,026,271
Net loss ($ 10,545,825)
Net loss per share ($ 1.55)
6. DEBT
As of June 30, 1999 and 1998, long-term and short-term debt consisted of the
following:
June 30, 1999 June 30, 1998
Promissory note to TIA and CFS (a) $ -- $7,332,126
Revolving loan to TIA and CFS (b) -- 905,913
Asset-based financing (c) 1,349,978 6,745,853
Promissory note to
Consolidated Shareholders (d) 10,500 60,500
------------ ---------
Total debt 1,360,478 15,044,392
Less: Current portion (1,360,478 (11,033,892)
----------- -----------
Long-term debt $ -- $4,010,500
=============== ============
F-12
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(a) On February 7, 1996, as part of the Agreement, Holding issued to TIA and CFS
a $10,000,000 promissory note which bears interest at the rate of 8.0% per
annum. On July 3, 1996, Holding repaid $2,000,000 of this debt from the proceeds
of the IPO and converted $2,000,000 of the note into Class A, non-voting,
cumulative, convertible preferred stock. As of June 30, 1998, $7,332,126
(includes $1,332,126 of accrued interest), was outstanding under this note. All
obligations under this note were repaid on July 13, 1998 with the proceeds from
the CAS Sale.
(b) As part of the Agreement, TIA and CFS agreed to lend to CAS on a revolving
loan basis, an amount up to the net cash collections of TIA and CFS's accounts
receivable as of February 7, 1996 and additional amounts at the discretion of
TIA and CFS, up to an aggregate maximum of $4,000,000 outstanding at any time,
pursuant to the terms of a Revolving Credit Promissory Note. Only funds advanced
at the discretion of TIA and CFS bear interest, at the greater of (i) 1% per
month or (ii) at a rate of 4% over prime. The note was secured by all of the
assets of CAS and was guaranteed by the Company and Amertranz. Furthermore, the
note discussed here and in (a) above were subordinated to the Company's
revolving credit obligations under the GMAC Facility (see below). On January 16,
1997, upon the closing of the GMAC Facility, the Company repaid $3,570,768 of
this note. As of June 30, 1998 and 1997, $905,913 and $789,728, respectively,
was outstanding under this facility. All obligations under this note were repaid
on July 13, 1998 with the proceeds from the CAS Sale.
(c) During the year ended June 30, 1999, the Company's Target subsidiary
("Borrower") maintained an Accounts Receivable Management and Security Agreement
with GMAC Commercial Credit LLC (successor by merger to BNY Financial Corp.)
("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 2.0% per
annum over the prevailing prime rate as defined by GMAC (7.75% as of June 30,
1999). At June 30, 1999, the outstanding balance on the GMAC Facility was
$1,349,978 which represented 27% of the approximate $5,058,000 available
thereunder. GMAC has a security