SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to . ------------ ----------------
Commission file number: 0-29754
TARGET LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3309110
- --------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
112 East 25th Street, Baltimore, Maryland 21218
- ----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 338-0127
Securities registered pursuant to Section
12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
None None
-------------- -----------------------------------------
Securities registered pursuant to Section
12(g) of the Act:
Title of Class
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 25, 2002 was $551,626.
The number of shares of common stock outstanding as of September 25, 2002 was
12,179,002
DOCUMENTS INCORPORATED BY REFERENCE
To the extent specified, Part III of this Form 10-K incorporates information by
reference to the Registrant's definitive proxy statement for its 2002 Annual
Meeting of Shareholders (to be filed).
1
TARGET LOGISTICS, INC.
2002 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
----
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Executive Officers of the Registrant 6
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 8
Item 7A. Quantitative And Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 12
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 15
Signatures 17
Certifications 18
2
PART I
ITEM 1. BUSINESS
--------
Background
- ----------
Target Logistics, Inc. ("Company") provides freight forwarding
services and logistics services, through its wholly owned subsidiary, Target
Logistic Services, Inc. ("Target"). The Company has a network of offices in 34
cities throughout the United States. The Company was incorporated in Delaware in
January 1996 as the successor to operations commenced in 1970.
Description of Business
- -----------------------
The Company's freight forwarding services involve arranging for the
total transport of customers' freight from the shipper's location to the
designated recipients, including the preparation of shipping documents and the
providing of handling, packing and containerization services. The Company
concentrates on cargo shipments weighing more than 50 pounds and generally
requiring second-day delivery. The Company also assembles bulk cargo and
arranges for insurance. The Company has a network of offices in 34 cities
throughout the United States, including exclusive agency relationships in 21
cities. The Company has international freight forwarding operations consisting
of strategic relationships in over 20 countries including share ownership in its
exclusive agents in China and Philippines. The Company has developed several
niches including fashion services, consumer direct logistics of oversized
freight, the distribution of materials for the entertainment industry, and an
expertise in material supply logistics to manufacturing concerns.
Operations
- ----------
Movement of Freight. The Company does not own any airplanes or
significant trucking equipment and relies on independent contractors for the
movement of its cargo. The Company utilizes its expertise to provide forwarding
services that are tailored to meet customer requirements. It arranges for
transportation of customers' shipments via commercial airlines, air cargo
carriers, steamship lines, and, if delivery schedules permit, the Company makes
use of lower cost inter-city truck transportation services. The Company selects
the carrier for particular shipments on the basis of cost, delivery time and
available cargo capacity. Through the Company's advanced data processing system,
it can provide, at no additional cost to the customer, value-added services such
as electronic data interchange, computer based shipping and tracking systems and
customized computer generated reports. Additionally, the Company provides cargo
assembly and warehousing services.
The rates charged by the Company to its customers are based on
destination, shipment weight and required delivery time. The Company offers
graduated discounts for shipments with later scheduled delivery times and rates
generally decrease in inverse proportion to the increasing weight of shipments.
Due to the high volume of freight controlled by the Company, it is able to
obtain favorable contract rates from carriers and is often able to book freight
space at times when available space is limited. When possible, the Company
consolidates different customers' shipments to reduce its cost of
transportation.
Information Systems. An important component of the Company's business
strategy is to provide accurate and timely information to its management and
customers. Accordingly, the Company has invested, and will continue to invest,
substantial management and financial resources in developing these information
systems.
The Company leases two HP 9000 mainframe computers and has a
proprietary freight forwarding software system which the Company has named
"TRACS". TRACS is an integrated freight forwarding and financial management data
processing system. It provides the Company with the information needed to manage
its sourcing and distribution activities through either printed or electronic
medium. Specifically, the TRACS system permits the Company to track the flow of
a particular shipment from the point of origin through the transportation
process to the point of delivery. The Company intends to continuously upgrade
TRACS to enhance its ability to maintain a competitive advantage.
International Operations. The Company's international operations
consist of air and ocean freight movements imported to and exported from the
3
Company's Target subsidiary's network of offices in the United States. During
the fiscal year ended June 30, 2002, the Company's international freight
forwarding accounted for 25.5% of the Company's operating revenue.
Customers and Marketing
- -----------------------
The Company's principal customers include large manufacturers and
distributors of computers and other electronic and high-technology equipment,
computer software and wearing apparel. As of June 30, 2002, the Company had
approximately 5,000 accounts.
The Company markets its services through an organization of
approximately 20 full-time salespersons and 30 independent sales agents
supported by the sales efforts of senior management, and the operations staff in
the Company's offices. The Company strongly promotes team selling, wherein the
salesperson is able to utilize expertise from other departments in the Company
to provide value-added services to gain a specific account. The Company staffs
each office with operational employees to provide support for the sales team,
develop frequent contact with the customer's traffic department, and maintain
customer service. The Company believes that it is important to maintain frequent
contact with its customers to assure satisfaction and to immediately react to
resolve any problem as quickly as possible.
The Company has and continues to develop expertise in several niches:
fashion, consumer direct logistics, and entertainment and media. The Company's
fashion services division targets chain retail and department store customers
and provides specific expertise in handling fashion-related shipments. The
fashion services division specializes in the movement of wearing apparel from
manufacturing vendors to their department store customers located throughout the
United States. The Company's Consumer Direct Logistics (CDL) operation
specializes in oversize and/or heavy weight shipments primarily from
manufacturers and catalogue sales distribution centers moving direct to the
residential consumer. The Company has recently expanded its service geared
toward the entertainment industry. The Entertainment Media Logistics (EML)
service has now expanded beyond film and entertainment logistics with
specialized services aimed at broadcast companies.
Many of the Company's customers utilize more than one transportation
provider. In soliciting new accounts, the Company uses a strategy of becoming an
approved carrier in order to demonstrate the quality and cost-effectiveness of
its services. Using this approach, the Company has advanced its relationships
with several of its major customers, from serving as a back-up freight services
provider to primary freight forwarder.
Competition
- -----------
Although there are no weight restrictions on the Company's shipments,
the Company focuses primarily on cargo shipments weighing more than 50 pounds
and requiring second-day delivery. As a result, the Company does not directly
compete for most of its business with overnight couriers and integrated shippers
of principally small parcels, such as United Parcel Service of America, Inc.,
Federal Express Corporation, DHL Worldwide Express, Inc., Airborne Freight
Corporation and the United States Postal Service. However, some integrated
carriers, such as Emery Air Freight Corporation and Pittston BAX Group, Inc.,
primarily solicit the shipment of heavy cargo in competition with forwarders.
Additionally, there is a developing trend among integrated shippers of primarily
small parcels to solicit the shipment of heavy cargo.
There is intense competition within the freight forwarding industry.
While the industry is highly fragmented, the Company most often competes with a
relatively small number of forwarders who have nationwide networks and the
capability to provide a full range of services similar to those offered by the
Company. These include EGL, Inc., Pilot Air Freight, Inc., and USF Worldwide,
Inc. There is also competition from passenger and cargo air carriers and
trucking companies. On the international side of the business, the Company
competes with forwarders that have a predominantly international focus, such as
Exel plc, Danzas Group and Kuehne Nagal International. All of these companies,
as well as many other competitors, have substantially greater facilities,
resources and financial capabilities than those of the Company. The Company also
faces competition from regional and local air freight forwarders, cargo sales
agents and brokers, surface freight forwarders and carriers and associations of
shippers organized for the purpose of consolidating their members' shipments to
obtain lower freight rates from carriers.
4
Employees
- ---------
The Company and its subsidiaries had approximately 192 full-time
employees as of June 30, 2002. None of the Company's employees are currently
covered by a collective bargaining agreement. The Company has experienced no
work stoppages and considers its relations with its employees to be good.
Regulation
- ----------
The Company's freight forwarding business as an indirect air cargo
carrier is subject to regulation by the United States Department of
Transportation under the Federal Aviation Act. However, air freight forwarders
(including the Company) are exempted from most of such Act's requirements by the
Economic Aviation Regulations promulgated thereunder, but must adhere to certain
rules, such as security requirements. The Company's foreign air freight
forwarding operations are subject to regulation by the regulatory authorities of
the respective foreign jurisdictions. The air freight forwarding industry is
subject to regulatory and legislative changes which can affect the economics of
the industry by requiring changes in operating practices or influencing the
demand for, and the costs of providing, services to customers.
ITEM 2. PROPERTIES
----------
As of June 30, 2002, the Company leased terminal facilities consisting
of office and warehouse space in 13 cities located in the United States, and
also utilized 21 offices operated by exclusive agents. The Company's facilities
range in size from approximately 1,000 square feet to approximately 100,000
square feet and consist of offices and warehouses with loading bays. All of such
properties are leased from third parties. The Company's headquarters are located
in Baltimore, Maryland, and Target's headquarters are located in Los Angeles,
California, and consists of approximately 100,000 square feet of floor space
leased pursuant to the terms of a lease which expires in July 2005. Management
believes that its current facilities are more than sufficient for its planned
growth.
The Company has an additional 12 terminal facilities in the following locations:
Atlanta, Georgia Houston, Texas
Charlotte, North Carolina Memphis, Tennessee
Chicago, Illinois Miami, Florida
Dallas, Texas Newark, New Jersey
El Paso, Texas New York, New York
Greensboro, North Carolina Seattle, Washington
ITEM 3. LEGAL PROCEEDINGS
-----------------
On October 12, 2000, Pilot Air Freight Corp. ("Pilot"), a major
competitor of Target, sued Target in the United States District Court for the
Eastern District of Pennsylvania, Case No. 00-CV-5190, with respect to the
termination by a former Pilot freight forwarder of its relationship with Pilot
and entering into an exclusive forwarder relationship with Target. Pilot
alleged, among other things, intentional interference with contract, tortious
interference with business relations, violation of section 43(a) of the Lanham
Act, violation of Pennsylvania state statutes concerning stored electronic
communications, and misappropriation of trade secrets. Pilot sought an amount
"in excess of $100,000" in damages, punitive damages, and an injunction against
Target requiring it to cease competing in the Hartford, Connecticut market for
six months. During subsequent discovery proceedings, Pilot claimed that its
damages exceed $3 million. Target has denied all of Pilot's claims and believes
they are without merit. Target will continue to vigorously defend Pilot's
claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following is a listing of the executive officers of the Company as
of June 30, 2002. There are no family relationships between any Directors and
Officers of the Company.
NAME AGE POSITION
- ---- --- --------
Stuart Hettleman............... 52 President and Chief Executive
Officer
Philip J. Dubato............... 46 Vice President, Chief Financial
Officer and Secretary
Christopher Coppersmith........ 52 President and Chief Executive Officer,
Target Logistic Services, Inc.
STUART HETTLEMAN has been President, Chief Executive Officer and a director of
the Company since February 7, 1996, and a director and Chairman of Target since
May 8, 1997.
PHILIP J. DUBATO has been Vice President, Chief Financial Officer and Secretary
of the Company since February 3, 1997 and a director of the Company since
September 18, 1998. From 1984 through 1996, Mr. Dubato was employed by LEP
Profit International, Inc., a domestic and international freight forwarder,
where he held successive positions as Controller, Chief Financial Officer and
Executive Vice President.
CHRISTOPHER COPPERSMITH has been President and Chief Executive Officer of Target
Logistic Services, Inc. (acquired by the Company in May 1997) since November
1996, and a director of the Company since May 1997. From 1974 through October
1996, Mr. Coppersmith was Executive Vice President and Chief Operating Officer
of Target Airfreight, Inc.
6
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's common stock, $.01 par value (the "Common Stock")
trades, and the Company's Redeemable Common Stock Purchase Warrants (the
"Warrants") traded, on the Over-The-Counter (OTC) market under the symbols TARG
and TARGW, respectively. The warrants expired on June 28, 2001.
The following table shows the high and low sales prices of the Common
Stock and Warrants for each of the quarters during the fiscal years indicated,
as available through the OTC market. The quotations represent prices between
dealers and do not reflect the retailer markups, markdowns or commissions, and
may not represent actual transactions. There have been no dividends declared.
COMMON STOCK WARRANTS
Fiscal Year Ended June 30, 2002
First Quarter High $0.39 High -
Low $0.14 Low -
Second Quarter High $0.32 High -
Low $0.11 Low -
Third Quarter High $0.34 High -
Low $0.12 Low -
Fourth Quarter High $0.45 High -
Low $0.14 Low -
Fiscal Year Ended June 30, 2001
First Quarter High $0.53 High $0.00
Low $0.36 Low $0.00
Second Quarter High $0.45 High $0.00
Low $0.23 Low $0.00
Third Quarter High $0.47 High $0.00
Low $0.25 Low $0.00
Fourth Quarter High $0.36 High $0.00
Low $0.25 Low $0.00
On September 25, 2002 there were 703 shareholders of record of the
Company's Common Stock. The closing price of the Common Stock on that date was
$0.13 per share.
7
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
TARGET LOGISTICS, INC.
(in thousands, except per share data)
Year Ended June 30,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
Statement of Operations Data:
Operating revenue $ 97,784 $ 51,720 $ 84,088 $ 90,143 $ 93,484
Cost of transportation 73,599 34,790 56,949 60,912 63,174
---------- ---------- ---------- --------- ----------
Gross profit 24,185 16,930 27,139 29,231 30,310
Selling, general & administrative
expenses 21,880 20,471 27,194 30,655 29,969
Depreciation and Amortization 1,132 833 989 897 1,017
---------- ---------- ---------- --------- ----------
Operating income (loss) $ 1,173 $ (4,374) $ (1,044) $ (2,321) $ (676)
Gain on sale of subsidiary - 24,832 - - -
Net income (loss) $ 7,404 $ 14,016 $ (1,197) $ (1,772) $ (935)
Net income (loss) per common share $ 0.90 $ 1.63 $ (0.14) $ (0.18) $ (0.10)
Balance Sheet Data:
Total assets $ 38,547 $ 34,932 $ 36,669 $ 36,484 $ 37,388
Working capital (deficit) ( 2,340) 5,567 4,535 336 57
Current liabilities 26,085 15,251 18,474 20,440 22,293
Long-term indebtedness 4,138 24 92 34 34
Shareholders' equity $ 8,324 $ 19,657 $ 18,102 $ 16,010 $ 15,061
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
This Annual Report on Form 10-K contains certain forward-looking
statements reflecting the Company's current expectations with respect to its
operations, performance, financial condition, and other developments. Such
statements are necessarily estimates reflecting the Company's best judgment
based upon current information and involve a number of risks and uncertainties.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from expectations are: (i) the Company's
historic losses and ability to achieve operating profitability, (ii) the
Company's ability to increase operating revenue, improve gross profit margins
and reduce selling, general and administrative costs, (iii) competitive
practices in the industries in which the Company competes, (iv) the Company's
dependence on current management, (v) the impact of current and future laws and
governmental regulations affecting the transportation industry in general and
the Company's operations in particular, (vi) general economic conditions, and
(vii) other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements. There
can be no assurance that these and other factors will not affect the accuracy of
such forward-looking statements. Forward-looking statements are preceded by an
asterisk (*).
Overview
- --------
The Company generated operating revenues of $93.5 million, $90.1
million, and $84.1 million, and had a net loss of $0.9 million, $1.8 million,
and $1.2 million for the fiscal years ended June 30, 2002, 2001, and 2000,
respectively.
The Company had earnings or (losses) before interest, taxes,
depreciation and amortization (EBITDA) of approximately $340,000, ($1,424,000),
and ($54,000), for the fiscal years ended June 30, 2002, 2001, and 2000
respectively. EBITDA, like operating income, does not include the effects of
interest and taxes, and excludes the "non-cash" effects of depreciation and
amortization on current assets. Companies have some discretion as to which
elements of depreciation and amortization are excluded in the EBITDA
8
calculation. The Company excludes all depreciation charges related to property,
plant and equipment, and all amortization charges, including amortization of
goodwill, leasehold improvements and other intangible assets. While management
considers EBITDA useful in analyzing the Company's results, it is not intended
to replace any presentation included in the Company's consolidated financial
statements.
* For the fiscal year ended June 30, 2002, the revenue of the
Company's Target subsidiary increased by 3.7% when compared to the fiscal year
ended June 30, 2001. Target's gross profit margin (i.e., gross operating revenue
less cost of transportation expressed as a percentage of gross operating
revenue) was 32.4% for the 2002 and 2001 periods. Management continues to
believe that the Company must focus on increasing revenues and must increase
gross profit margin to restore the Company to profitability. Management intends
to continue to work on growing revenue by increasing sales generated by Target's
employed sales personnel, sales generated by exclusive forwarders, and by
strategic acquisitions. Management also intends to continue to work on improving
Target's gross profit margins by reducing transportation costs.
Results of Operations
- ---------------------
Years ended June 30, 2002 and 2001
Operating Revenue. Operating revenue increased to $93.5 million for
the year ended June 30, 2002 from $90.1 million for the year ended June 30,
2001, a 3.7% increase, due to increased domestic freight volume. Domestic
revenue increased by 6.7% to $69,652,711 for the year ended June 30, 2002 from
$65,255,740 for the year ended June 30, 2001, while international revenue
decreased by 4.2% to $23,831,028 for the year ended June 30, 2002 from
$24,887,462 for the year ended June 30, 2001, primarily as a result of decreases
in air export freight volume.
Cost of Transportation. Cost of transportation was 67.6% of operating
revenue for each of the years ended June 30, 2002 and 2001.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit was 32.4% of operating revenue for the years ended June
30, 2002 and 2001.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses decreased to 33.1% of operating revenue for the year
ended June 30, 2002, from 35.0% of operating revenue for the year ended June 30,
2001. Within the Company's Target subsidiary, selling, general and
administration expenses (excluding exclusive forwarder commission expense) were
16.7% of operating revenue for each of the years ended June 30, 2002 and 2001.
Exclusive forwarder commission expense was 14.6% and 16.4% of operating revenue
for the year June 30, 2002 and 2001, respectively, an 11.0% decrease, resulting
from decreases in forwarder agent freight volume.
Net Loss. The Company realized a net loss of ($934,527) for the year
ended June 30, 2002, compared to a net loss of ($1,771,583) for the year ended
June 30, 2001. The 2001 results include a $777,895 benefit for income taxes.
Years ended June 30, 2001 and 2000
Operating Revenue. Operating revenue increased to $90.1 million for
the year ended June 30, 2001 from $84.1 million for the year ended June 30,
2000, a 7.2% increase, due to increased domestic freight volume. Domestic
revenue increased by 16.3% to $65,255,740 for the year ended June 30, 2001 from
$56,093,399 for the year ended June 30, 2000, while international revenue
decreased by 11.1% to $24,887,462 for the year ended June 30, 2001 from
$27,994,796 for the year ended June 30, 2000, primarily the result of decreases
in air export and import freight volume.
Cost of Transportation. Cost of transportation decreased slightly to
67.6% of operating revenue for the year ended June 30, 2001 from 67.7% of
operating revenue for the year ended June 30, 2000.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit for the year ended June 30, 2001 increased slightly to
32.4% of operating revenue from 32.3% of operating revenue for the year ended
June 30, 2000.
9
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased to 35.0% of operating revenue for the year
ended June 30, 2001, from 33.5% of operating revenue for the year ended June 30,
2000. Within the Company's Target subsidiary, selling, general and
administration expenses (excluding exclusive forwarder commission expense) were
16.7% of operating revenue for the year ended June 30, 2001 and 16.3% for the
year ended June 20, 2000, a 2.5% increase. This increase was primarily due to
increased operating labor costs to handle the increased freight volume and
increased selling labor cost resulting from increases in the number of sales
personnel employed by Target. Exclusive forwarder commission expense was 16.4%
and 15.2% of operating revenue for the year June 30, 2001 and 2000,
respectively, a 7.9% increase, resulting from increases in forwarder agent
freight volume.
Net Loss. The Company realized a net loss of ($1,771,583) for the year
ended June 30, 2001, compared to a net loss of ($1,196,605) for the year ended
June 30, 2000. The 2001 results include a $777,895 benefit for income taxes.
Liquidity and Capital Resources
- -------------------------------
General. During the year ended June 30, 2002, net cash used in
operating activities was $315,838. Cash used in investing activities was
$839,950, which consisted of $311,287 of capital expenditures and $528,663
relating to the purchase by the Company's Target subsidiary of the assets of SDS
Logistics and Air America Freight Service, Inc. Cash provided by financing
activities was $1,910.
Currently, approximately $1.4 million of the Company's outstanding
accounts payable represent unsecured trade payables of closed subsidiaries
which, at this time, the Company continues to carry on its books.
Capital expenditures. Capital expenditures for the fiscal year ended
June 30, 2002 were $311,287.
GMAC Facility. The Company's Target subsidiary maintains a $10 million
revolving credit facility ("GMAC Facility") with GMAC Commercial Credit LLC
("GMAC"), guaranteed by the Company. The interest rate of the GMAC Facility is
prime plus 1%, however, at any time prior to September 20, 2002, the interest
rate could not be less than 6.0% and after September 20, 2002 cannot be less
than 5.0%. Under the terms of the GMAC Facility, Target can borrow the lesser of
$10 million or 85% of eligible accounts receivable. The borrowings under the
GMAC Facility are secured by a first lien on all of the Company's and its
subsidiaries' assets. As of June 30, 2002, there were outstanding borrowings of
$5,993,475 under the GMAC Facility (which represented 83% of the amount
available thereunder) out of a total amount available for borrowing under the
GMAC Facility of approximately $7,211,000. The GMAC Facility expires on January
14, 2005. The Company entered into the GMAC Facility on January 16, 1997, and
subsequently extended the facility for an additional three-year term and most
recently for an additional two-year term.
* Working Capital Requirements. Cash needs of the Company are
currently met by the Company's accounts receivable financing facility and cash
on hand. As of June 30, 2002, the Company had $1,217,761 available under its $10
million accounts receivable financing facility and approximately $4,333,015 in
cash from operations and cash on hand. The Company believes that its current
financial resources will be sufficient to finance its operations and obligations
(current and long-term liabilities) for the long and short terms. However, the
Company's actual working capital needs for the long and short terms will depend
upon numerous factors, including the Company's operating results, the cost of
increasing the Company's sales and marketing activities, and, competition, none
of which can be predicted with certainty.
Inflation
- ---------
The Company does not believe that the relatively moderate rates of
inflation in the United States in recent years have had a significant effect on
its operations.
Critical Accounting Policies
- ----------------------------
The Company's accounting policies are more fully described in Note 3
of the Notes to the Consolidated Financial Statements, starting on page F-8. As
discussed there, the preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions about future events that affect the amounts reported
in the financial statements and accompanying notes. Since future events and
their effects cannot be determined with absolute certainty, the determination of
estimates requires the exercise of judgment. Actual results could differ from
10
those estimates, and such difference may be material to the financial
statements. The most significant accounting estimates inherent in the
preparation of the Company's financial statements include estimates as to the
appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, primarily allowance for doubtful accounts,
accruals for transportation and other direct costs, accruals for cargo
insurance, and the classification of net operating loss and tax credit
carryforwards between current and long-term assets. Management bases its
estimates on historical experience and on various assumptions which are believed
to be reasonable under the circumstances. The Company reevaluates these
significant factors as facts and circumstances change. Historically, actual
results have not differed significantly from the Company's estimates.
New Accounting Pronouncements
- -----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations." SFAS No. 141 supersedes Accounting
Principles Board ("APB") No. 16 and requires that any business combinations
initiated after June 30, 2001, be accounted for as a purchase, therefore,
eliminating the pooling-of-interest method defined in APB No. 16. The statement
was effective for any business combination initiated after June 30, 2001, and
must have been applied to all business combinations accounted for by the
purchase method for which the date of acquisition was July 1, 2001, or later.
The adoption of this statement did not have a material impact to the Company's
financial position or results of operations, since the Company has not
participated in such activities covered under this pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. This statement is
effective for fiscal years beginning after December 15, 2001. The Company
adopted this statement on July 1, 2002. Under the non-amortization approach,
goodwill and certain intangibles will not be amortized into results of
operations, but instead will be reviewed for impairment, written down and
charged to results of operations only in periods in which the recorded value of
goodwill and certain intangibles is more than its fair value. The Company is
having an independent valuation analysis completed and does not anticipate any
material transitional impairment; however, future impairment reviews may result
in periodic write-downs ranging from zero to $11,239,917. The Company amortized
approximately $596,000 of goodwill for each of the fiscal years ended June 30,
2002, 2001 and 2000, respectively.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable and is measured by a comparison
of the carrying amount of an asset to undiscounted future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future undiscounted cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds the
fair value of the asset. SFAS No. 144 requires companies to separately report
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sales, abandonment or in a distribution to
owners) or is classified as held for sale. Assets to be disclosed are reported
at the lower of the carrying amount or fair value less costs to sell. The
Company adopted SFAS No. 144 on July 1, 2002. The Company anticipates that
adoption of SFAS No. 144 will not have a material impact to the Company's
financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
11
Corrections". This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's principal financial instrument is long-term debt under
the GMAC Facility which provides for interest at the prime rate plus 1% with a
minimum interest rate of 6.0% prior to September 20, 2002, and a minimum
interest rate of 5.0% after September 20, 2002. The Company is affected by
market risk exposure primarily through the effect of changes in interest rates
on amounts payable by the Company under the GMAC Facility. A significant rise in
the prime rate could materially adversely affect the Company's business,
financial condition and results of operations. At June 30, 2002, an aggregate
principal amount of $5,993,475 was outstanding under the GMAC Facility bearing
interest at an annual rate of 6.0%. If principal amounts outstanding under the
Company's credit facility remained at this year-end level for an entire year and
the prime rate increased or decreased, respectively, by 0.5%, the Company would
pay or save, respectively, an additional $29,967 in interest in that year. The
Company does not utilize derivative financial instruments to hedge against
changes in interest rates or for any other purpose.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data required by this Item
8 are included in the Company's Consolidated Financial Statements and set forth
in the pages indicated in Item 14(a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURES
------------------------------------
On April 22, 2002, the Company filed a Current Report on Form 8-K.
Item 4 of Form 8-K, "Changes in Registrant's Certifying Accountant" was reported
as follows:
On April 18, 2002, Target Logistics, Inc. (the "Company") determined,
for itself and on behalf of its subsidiaries, to dismiss its independent
auditors, Arthur Andersen LLP ("Arthur Andersen"), and to engage the services of
Stonefield Josephson, Inc. ("Stonefield Josephson") as its new independent
auditors. The change in auditors became effective immediately. This
determination followed the Company's decision to seek proposals from independent
accountants to audit the financial statements of the Company, and was approved
by the Company's Board of Directors upon the recommendation of its Audit
Committee. Stonefield Josephson was engaged to review the financial statements
of the Company beginning with the fiscal quarter ended March 31, 2002.
During the two most recent fiscal years of the Company ended June 30,
2001, and the subsequent interim period through April 18, 2002, there were no
disagreements between the Company and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to Arthur Andersen's
satisfaction, would have caused Arthur Andersen to make reference to the subject
matter of the disagreement in connection with its reports.
12
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the two most recent fiscal years of the Company
ended June 30, 2001 or within the interim period through April 18, 2002.
The audit reports of Arthur Andersen on the consolidated financial
statements of the Company as of and for the fiscal years ended June 30, 2000 and
2001 did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles. A
letter from Arthur Andersen was attached as Exhibit 16.1 to the Form 8-K filing.
During the two most recent fiscal years of the Company ended June 30,
2001, and the subsequent interim period through April 18, 2002, neither the
Company nor any of its subsidiaries consulted with Stonefield Josephson
regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii)
of Regulation S-K.
13
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information with respect to the identity and business experience
of the directors of the Company and their remuneration in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A and issued in
conjunction with the 2002 Annual Meeting of Shareholders, is incorporated herein
by reference. The information with respect to the identity and business
experience of executive officers of the Company is set forth in Part I of this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this item is incorporated by reference
from the Company's definitive Proxy Statement to be issued in conjunction with
the 2002 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
------------------------------------------
The information required by this item is incorporated by reference
from the Company's definitive Proxy Statement to be issued in conjunction with
the 2002 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is incorporated by reference
from the Company's definitive Proxy Statement to be issued in conjunction with
the 2002 Annual Meeting of Shareholders.
14
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
-----------------------------------------------------------------
(a) 1. Financial Statements
--------------------
Page
----
Report of Independent Public Accountants F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of June 30, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended
June 30, 2002, 2001, and 2000 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 2002, 2001, and 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2002, 2001, and 2000 F-6
Notes to Consolidated Financial Statements F-8
(a) 2. Financial Statement Schedules
-----------------------------
Schedule II - Schedule of Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable, are not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
-----------------------------------------------------------
Exhibit No.
- -----------
3.1 Certificate of Incorporation of Registrant, as amended (incorporated
by reference to Exhibit 3.1 to the Registrant's Current Report on Form
8-K dated November 30, 1998, File No. 0-29754)
3.2 By-Laws of Registrant, as amended (incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended December 31, 1998, File No. 0-29754)
4.1 Warrant Agent Agreement (incorporated by reference to Exhibit 4.3 to
the Registrant's Registration Statement on Form S-1, Registration No.
333-03613)
4.2 Form of Amendment No. 1 to Warrant Agent Agreement dated June 13, 1997
(incorporated by reference to Exhibit 4.7 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-30351)
4.3 Certificate of Designations with respect to the Registrant's Class A
Preferred Stock (contained in Exhibit 3.1)
4.4 Certificate of Designations with respect to the Registrant's Class B
Preferred Stock (contained in Exhibit 3.1)
4.5 Certificate of Designations with respect to the Registrant's Class C
Preferred Stock (contained in Exhibit 3.1)
4.6 Certificate of Designations with respect to the Registrant's Class D
Preferred Stock (contained in Exhibit 3.1)
4.7 Certificate of Designations with respect to the Registrant's Class E
Preferred Stock (contained in Exhibit 3.1)
10.1 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
December 31, 1997, File No. 0-29754)
10.2 Restated and Amended Accounts Receivable Management and Security
Agreement, dated as of July 13, 1998 by and between GMAC Commercial
Credit LLC, as Lender, and Target Logistic Services, Inc., as
Borrower, and guaranteed by the Registrant ("GMAC Facility Agreement")
(incorporated by reference to Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended June 30, 1999, File No.
0-29754)
10.3 Letter amendment to GMAC Facility Agreement, dated January 25, 2001
(incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended December 31, 2000,
File No. 0-29754)
10.4 Amendment to GMAC Facility Agreement, dated September 20, 2002
15
10.5 Employment Agreement dated June 24, 1996 between Amertranz Worldwide
Holding Corp. and Stuart Hettleman (incorporated by reference to
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended June 30, 1996, File No. 0-29754)
10.6 Addendum to Employment Agreement effective June 24, 1999 between
Target Logistics, Inc. and Stuart Hettleman (incorporated by reference
to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended June 30, 2000, File No. 0-29754)
10.7 Addendum to Employment Agreement dated June 30, 2002 between Target
Logistics, Inc. and Stuart Hettleman
10.8 (P) Lease Agreement for Los Angeles Facility (incorporated by
reference to Exhibit 10.17 to the Registrant's Annual Report on Form
10-K for the Year Ended June 30, 1997, File No. 0-29754)
10.9 Amendment to Lease Agreement for Los Angeles Facility
21 Subsidiaries of Registrant (incorporated by reference to Exhibit 21 to
the Registrant's Annual Report on Form 10-K for the Year Ended June
30, 1997, File No. 0-29754)
23 Consent of Stonefield Josephson, Inc.
99 Certification Required Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
-------------------
On April 22, 2002, the Registrant filed a Current Report on Form 8-K reporting
its change of auditors from Arthur Andersen LLP to Stonefield Josephson, Inc.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
TARGET LOGISTICS, INC.
Date: September 27, 2002 By: /s/ Stuart Hettleman
---------------------------------
Stuart Hettleman
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Stuart Hettleman President, Chief Executive September 27, 2002
- ---------------------------- Officer and Director
Stuart Hettleman
/s/ Michael Barsa Director September 27, 2002
- ----------------------------
Michael Barsa
/s/ Brian K. Coventry Director September 27, 2002
- ----------------------------
Brian K. Coventry
/s/ Christopher Coppersmith Director September 27, 2002
- ----------------------------
Christopher Coppersmith
/s/ Philip J. Dubato Vice President, Chief September 27, 2002
- ---------------------------- Financial Officer,
Philip J. Dubato Principal Accounting Officer
and Director
17
CERTIFICATIONS
I, Stuart Hettleman, certify that:
1. I have reviewed this Annual Report on Form 10-K of Target
Logistics, Inc.;
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report; and 3. Based on my knowledge, the financial statements, and other
financial information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Annual Report.
Date: September 27, 2002 /s/ Stuart Hettleman
------------------------------------
Stuart Hettleman
Chief Executive Officer
I, Philip J. Dubato, certify that:
1. I have reviewed this Annual Report on Form 10-K of Target
Logistics, Inc.;
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Annual Report.
Date: September 27, 2002 /s/ Philip J. Dubato
------------------------------------
Philip J. Dubato
Chief Financial Officer
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Target Logistics, Inc.
Baltimore, Maryland
We have audited the consolidated balance sheet of Target Logistics, Inc. (a
Delaware corporation) and subsidiaries, as of June 30, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Target
Logistics, Inc. and subsidiaries, as of June 30, 2002, and the results of their
consolidated operations and their consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
STONEFIELD JOSEPHSON, INC.
Santa Monica, California
August 9, 2002
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Target Logistics, Inc.:
We have audited the accompanying consolidated balance sheets of Target
Logistics, Inc. (a Delaware corporation), and subsidiaries as of June 30, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for the three years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Target Logistics,
Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for the years ended June 30, 2001, 2000 and
1999, in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
August 10, 2001
EXPLANATORY NOTE REGARDING REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
On April 18, 2002, the Company decided to no longer engage Arthur Andersen
LLP ("Andersen") as its independent public accountants and engaged Stonefield
Josephson, Inc. to serve as its independent public accountants for the year
ending June 30, 2002. More information regarding the Company's change in
independent public accountants is contained in a Current Report on Form 8-K
filed with the Securities and Exchange Commission on April 22, 2002.
We could not obtain permission of Andersen to the inclusion in this Annual
Report on Form 10-K of their Report of Independent Public Accountants, above.
Accordingly, the above Report of Independent Public Accountants is merely
reproduced from the Company's Annual Report on Form 10-K for the year ended June
30, 2001 (although the consolidated balance sheet as of June 30, 2000, and the
consolidated statements of operations, shareholders' equity and cash flows for
the year ended June 30, 1999 referred to in that report are not included herein)
and does not include the manual signature of Andersen.
Because Andersen has not consented to the inclusion of its report in this Annual
Report, it may be more difficult to seek remedies against Andersen and the
ability to seek relief against Andersen may be impaired.
F-2
TARGET LOGISTICS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2002 June 30, 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $4,333,015 $5,486,893
Accounts receivable, net of allowance for doubtful accounts of
$995,245 and $1,391,157, respectively 17,012,677 14,855,373
Deferred income taxes 694,333 245,960
Prepaid expenses and other current assets 310,543 188,135
------- -------
Total current assets 22,350,568 20,776,361
PROPERTY AND EQUIPMENT, NET 615,606 725,138
OTHER ASSETS 942,110 458,717
DEFERRED INCOME TAXES 2,239,667 2,688,040
GOODWILL, net of accumulated amortization of $3,715,106
and $3,119,239, respectively 11,239,917 11,835,784
---------- ----------
Total assets $37,387,868 $36,484,040
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $5,834,820 $5,594,124
Accrued expenses 1,783,136 2,197,726
Accrued transportation expenses 8,430,078 6,713,348
Note payable to bank 5,993,475 5,679,912
Dividends payable 110,270 115,862
Taxes payable 64,576 65,375
Lease obligation - current portion 76,982 73,909
---------- ----------
Total current liabilities 22,293,337 20,440,256
LEASE OBLIGATION -- LONG TERM 34,002 33,624
----------- -----------
Total liabilities $22,327,339 $20,473,880
----------- -----------
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $10 par value; 2,500,000 shares authorized,
320,696 shares issued and outstanding 3,206,960 3,206,960
Common Stock, $.01 par value; 30,000,000 shares authorized,
12,913,953 and 12,613,953 shares issued and outstanding,
respectively 129,139 126,139
Paid-in capital 24,202,248 23,905,248
Accumulated deficit (11,833,013) (10,583,382)
Less: Treasury stock, 734,951 shares held at cost (644,805) (644,805)
----------- -----------
Total shareholders' equity 15,060,529 16,010,160
----------- -----------
Total liabilities and shareholders' equity $37,387,868 $36,484,040
=========== ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
OPERATING REVENUES: $93,483,739 $90,143,202 $84,088,195
COST OF TRANSPORTATION: 63,173,982 60,912,272 56,948,811
----------- ----------- -----------
GROSS PROFIT: 30,309,757 29,230,930 27,139,384
----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
("SG&A"):
SG&A - Target subsidiary 15,600,538 15,025,467 13,692,166
SG&A - Target subsidiary
(Exclusive forwarder commissions) 13,620,593 14,802,994 12,803,075
SG&A - Corporate 748,411 826,886 698,635
Depreciation and amortization 1,016,687 896,610 989,205
----------- ---------- ----------
Selling, general and administrative expenses 30,986,229 31,551,957 28,183,081
----------- ---------- ----------
Operating loss (676,472) (2,321,027) (1,043,697)
OTHER EXPENSE:
Interest expense (258,055) (228,451) (44,013)
----------- ---------- -----------
Loss before income taxes (934,527) (2,549,478) (1,087,710)
(Benefit) provision for income taxes - (777,895) 108,895
----------- ----------- -----------
Net loss $ (934,527) $(1,771,583) $(1,196,605)
=========== =========== ===========
Basic and diluted loss per share attributable to $(0.10) $(0.18) $(0.14)
====== ====== ======
common shareholders
Weighted average shares outstanding 11,953,797 11,879,002 11,015,126
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Preferred Stock Common Stock Additional Treasury Stock
--------------- ------------ Paid-In -------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
Balance, June 30, 1999 427,207 $4,272,070 10,031,868 $100,318 $22,877,209 (839,855) $(654,935) $(6,937,598) $19,657,064
Cash dividends associated
with the Class A, C and D
Preferred Stock - - - - - - - (357,172) (357,172)
Common Stock issued in
connection with the conversion
of Class D Preferred Stock (106,511)(1,065,110) 2,582,085 25,821 1,039,289 - - - -
Purchase of Treasury Stock
at cost - - - - - (1,400) (1,120) - (1,120)
Treasury Stock retired,
at cost - - - - (11,250) 106,304 11,250 - -
Net loss - - - - - - - (1,196,605) (1,196,605)
-------- ---------- ---------- -------- ----------- -------- --------- ----------- -----------
Balance, June 30, 2000 320,696 $3,206,960 12,613,953 $126,139 $23,905,248 (734,951) $(644,805) $(8,491,375) $18,102,167
Cash dividends associated
with the Class A and C
Preferred Stock - - - - - - - (320,424) (320,424)
Net loss - - - - - - - (1,771,583) (1,771,583)
-------- ---------- ---------- -------- ----------- -------- --------- ------------ -----------
Balance, June 30, 2001 320,696 $3,206,960 12,613,953 $126,139 $23,905,248 (734,951) $(644,805)$ (10,583,382) $16,010,160
Cash dividends associated
with the Class A and C
Preferred Stock - - - - - - - (315,104) (315,104)
Common Stock issued pursuant
to Subscription Agreements
- - 300,000 3,000 297,000 - - - 300,000
Net loss - - - - - - - (934,527) (934,527)
-------- ---------- ---------- ------- ----------- -------- --------- ------------ -----------
Balance, June 30, 2002 320,696 $3,206,960 12,913,953 $129,139 $24,202,248 (734,951) $(644,805) $(11,833,013) $15,060,529
======== ========== ========== ======== =========== ======== ========= ============= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(934,527) $(1,771,583) $(1,196,605)
Bad debt expense 341,090 (239,611) 312,659
Depreciation and amortization 1,016,687 896,610 989,205
Deferred income tax - (777,895) 108,895
Adjustments to reconcile net loss to net cash used in operating activities-
(Increase) decrease in accounts receivable (2,498,395) 334,062 (4,609,167)
(Increase) decrease in prepaid expenses and other current assets (122,408) (155,774) 120,579
Decrease in other assets 45,270 9,898 9,767
Increase (decrease) in accounts payable and accrued expenses 1,836,445 937,752 (44,945)
---------- ----------- -----------
Net cash used for operating activities (315,838) (766,541) (4,309,612)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (311,287) (450,694) (435,787)
Asset Purchase Acquisitions (Note 5) (528,663) - -
----------- ----------- -----------
Net cash used for investing activities (839,950) (450,694) (435,787)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (315,104) (320,626) (409,788)
Purchase of treasury stock - - (1,120)
Borrowing from note payable to bank 87,585,081 83,376,995 76,853,359
Repayment of note payable to bank (87,271,518) (82,333,904) (73,566,516)
Repayment of long-term debt - - (10,500)
Proceeds (payment) of lease obligations 3,451 (73,441) 53,473
----------- ------------ -----------
Net cash provided by financing activities 1,910 649,024 2,918,908
----------- ----------- -----------
Net decrease in cash and cash equivalents (1,153,878) (568,211) (1,826,491)
CASH AND CASH EQUIVALENTS, beginning of year 5,486,893 6,055,104 7,881,595
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $4,333,015 $5,486,893 $6,055,104
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $382,320 $506,793 $361,349
Income taxes $ 800 $ 2,499 $ 19,934
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
Issuance of 300,000 shares of Common Stock pursuant to Subscription Agreements $300,000 - -
TIA, Inc. conversion of 106,511 Class D Preferred Shares - - $(1,065,110)
Issuance of Common Stock for TIA, Inc. conversion of 106,511
Class D Preferred Shares - - $ 25,821
Retirement of Treasury Stock - - $ 11,250
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 2002
1. BUSINESS
Target Logistics, Inc. ("Company") provides freight forwarding
services and logistics services, through its wholly owned subsidiary, Target
Logistic Services, Inc. ("Target"). The Company has a network of offices in 34
cities throughout the United States. The Company was incorporated in Delaware in
January 1996 as the successor to operations commenced in 1970.
The Company's freight forwarding services involve arranging for the
total transport of customers' freight from the shipper's location to the
designated recipients, including the preparation of shipping documents and the
providing of handling, packing and containerization services. The Company
concentrates on cargo shipments weighing more than 50 pounds and generally
requiring second-day delivery. The Company also assembles bulk cargo and
arranges for insurance. The Company has a network of offices in 34 cities
throughout the United States, including exclusive agency relationships in 21
cities. The Company has international freight forwarding operations consisting
of strategic relationships in over 20 countries including share ownership in its
exclusive agents in China and Philippines. The Company has developed several
niches including fashion services, consumer direct logistics of oversized
freight, the distribution of materials for the entertainment industry, and an
expertise in material supply logistics to manufacturing concerns.
2. CHANGE IN AUDITORS
On April 18, 2002, the Company determined, for itself and on behalf of
its subsidiaries, to dismiss its independent auditors, Arthur Andersen LLP, and
to engage the services of Stonefield Josephson, Inc. ("Stonefield Josephson") as
its new independent auditors. The change in auditors became effective
immediately. This determination followed the Company's decision to seek
proposals from independent accountants to audit the financial statements of the
Company, and was approved by the Company's Board of Directors upon the
recommendation of its Audit Committee.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Company, as summarized below, are in
conformity with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation
For the fiscal years ended June 30, 2002, 2001 and 2000, the
consolidated financial statements include the accounts of the Company, Target,
and other inactive subsidiaries. All significant intercompany balances and
transactions have been eliminated upon consolidation.
Use of Estimates
In the process of preparing its consolidated financial statements, the Company
estimates the appropriate carrying value of certain assets and liabilities which
are not readily apparent from other sources. Management bases its estimates on
historical experience and on various assumptions which are believed to be
reasonable under the circumstances. The primary estimates underlying the
Company's consolidated financial statements include allowance for doubtful
accounts, accruals for transportation and other direct costs, accruals for cargo
insurance, and the classification of NOL and tax credit carryforwards between
current and long-term assets.
F-8
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED JUNE 30, 2002
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed under the
straight-line method over estimated useful lives ranging from 3 to 8 years.
Assets under capital leases are depreciated over the shorter of the estimated
useful life of the asset or the lease term. The Company utilizes a half-year
convention for assets in the year of acquisition and disposal. Leasehold
improvements are amortized using the straight-line method over the shorter of
the asset life of the asset or the remaining lease term.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. Management has performed
a review of all long-lived assets and has determined that no impairment of the
respective carrying value has occurred as of June 30, 2002.
Goodwill
Goodwill represents the excess of cost over net assets acquired and is amortized
on a straight-line basis over 25 years.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles. This statement is effective for
fiscal years beginning after December 15, 2001. The Company adopted this
statement on July 1, 2002. Under the non-amortization approach, goodwill and
certain intangibles will not be amortized into results of operations, but
instead will be reviewed for impairment, written down and charged to results of
operations only in periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The Company is having an independent
valuation analysis completed and does not anticipate any material transitional
impairment; however, future impairment reviews may result in periodic
write-downs ranging from zero to $11,239,917. The Company amortized
approximately $596,000 of goodwill for each of the fiscal years ended June 30,
2002, 2001 and 2000, respectively.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in the
period that the tax change occurs.
Stock Options
The Company accounts for its employee stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Compensation
expense relating to employee stock options is recorded only if, on the date of
grant, the fair value of the underlying stock exceeds the exercise price. The
Company adopted the disclosure-only requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation", which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
options as if the fair value based method of accounting in SFAS No. 123 had been
applied to these transactions.
F-9
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
Revenue Recognition
In accordance with EITF 91-9 "Revenue and Expense Recognition for Freight
Services in Process", revenue from freight forwarding is recognized upon
completed delivery of goods, and direct expenses associated with the cost of
transportation are accrued concurrently. Ongoing provision is made for doubtful
receivables, discounts, returns and allowances.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are not held as
collateral, and which are purchased with an original maturity of three months or
less, to be cash equivalents.
Per Share Data
Basic loss per share is calculated by dividing net loss attributable to common
shareholders plus preferred stock dividends, by the weighted average number of
shares of common stock outstanding during the period. Diluted income per share
is calculated by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding, adjusted for potentially
dilutive securities. Diluted loss per share has not been presented since the
inclusion of outstanding convertible preferred stock and stock options would be
antidilutive.
The following table summarizes the equivalent number of common shares assuming
the related securities that were outstanding as of June 30, 2002, 2001 and 2000
had been converted, but not included in the calculation of diluted loss per
share as such shares are antidilutive:
June 30,
--------
2002 2001 2000
---- ---- ----
Convertible preferred stock........... 9,983,626 6,951,166 5,127,730
Stock Options......................... 576,957 576,957 456,957
Stock Warrants........................ 109,448 5,183,731
---------- --------- ----------
Antidilutive securities 10,560,583 7,637,571 10,768,418
========== ========= ==========
Options to purchase 576,957, 576,957, and 456,957 shares of common stock for the
years ended June 30, 2002, 2001 and 2000, respectively, were not included in the
computation of diluted EPS because the exercise prices of those options were
greater than the average market price of the common shares, thus they are
anti-dilutive. The options were still outstanding at the end of the period.
Warrants to purchase 109,448 and 5,183,731 shares of common stock for the years
ended June 30, 2001 and 2000, respectively, were not included in the computation
of diluted EPS because they were also anti-dilutive.
Fair Value of Financial Instruments
Cash equivalents are reflected at cost which approximate their fair values. The
fair value of notes and loans payable outstanding is estimated by discounting
the future cash flows using the current rates offered by lenders for similar
borrowings with similar credit ratings. The carrying amounts of the accounts
receivable and debt approximate their fair value.
F-10
Foreign Currency Transactions
In the normal course of business the Company has accounts receivable and
accounts payable that are transacted in foreign currencies. The Company accounts
for transaction differences in accordance with Statement of Financial Accounting
Standard Number 52, "Foreign Currency Translation", and accounts for the gains
or losses in operations. For all periods presented, these amounts were
immaterial to the Company's operations.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform with the 2002 presentation.
Recent Accounting Pronouncements
In July 2001, FASB issued SFAS No. 141 "Business Combinations". SFAS No. 141
supersedes APB No. 16 and requires that any business combinations initiated
after June 30, 2001, be accounted for as a purchase, therefore, eliminating the
pooling-of-interest method defined in APB No. 16. The statement was effective
for any business combination initiated after June 30, 2001, and must have been
applied to all business combinations accounted for by the purchase method for
which the date of acquisition was July 1, 2001, or later. The adoption of this
statement did not have a material impact to the Company's financial position or
results of operations, since the Company has not participated in such activities
covered under this pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles. This statement is effective for
fiscal years beginning after December 15, 2001. The Company adopted this
statement on July 1, 2002. Under the non-amortization approach, goodwill and
certain intangibles will not be amortized into results of operations, but
instead will be reviewed for impairment, written down and charged to results of
operations only in periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The Company is having an independent
valuation analysis completed and does not anticipate any material transitional
impairment; however, future impairment reviews may result in periodic
write-downs ranging from zero to $11,239,917. The Company amortized
approximately $596,000 of goodwill for each of the fiscal years ended June 30,
2002, 2001 and 2000, respectively.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which requires companies to record the fair value of a liability
for asset retirement obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable and is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized for the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sales, abandonment or in a distribution to owners) or
is classified as held for sale. Assets to be disclosed are reported at the lower
of the carrying amount or fair value less costs to sell. The Company adopted
F-11
SFAS No. 144 on July 1, 2002. The Company anticipates that adoption of SFAS No.
144 will not have a material impact to the Company's financial position or
results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
4. PROPERTY AND EQUIPMENT, NET
June 30, 2002 June 30, 2001
------------- -------------
Property and Equipment consists of the following:
Furniture and fixtures $ 864,517 $ 821,553
Furniture and fixtures - Capital Lease 63,494 -
Computer Equipment 317,827 212,821
Computer Equipment - Capital Lease 499,398 499,398
Computer Software 421,117 394,551
Leasehold Improvements 380,114 363,935
Vehicles 81,036 116,036
--------- ---------
2,627,503 2,408,294
Less: Accumulated depreciation and amortization (a) (2,011,897) (1,683,156)
----------- ----------
$ 615,606 $ 725,138
=========== ==========
(a) Includes accumulated depreciation and amortization of capital lease
assets of $463,997 and $386,377 for the year ended June 30, 2002 and
2001, respectively.
5. ASSET PURCHASE ACQUISITIONS
On November 30, 2001, the Company's Target Logistic Services, Inc. subsidiary
("Target") acquired the assets and certain liabilities of SDS Logistics, a
Newark, New Jersey based forwarder for a combination of an initial cash payment
and an earn out structure over five years.
On February 11, 2002, the company's Target subsidiary acquired the assets and
certain liabilities of Air America Freight Service, Inc., an Atlanta, Georgia
based forwarder for a combination of an initial cash payment and an earn out
structure over five years.
F-12
6. DEBT
As of June 30, 2002 and 2001, long-term and short-term debt consisted of the
following:
June 30, 2002 June 30, 2001
------------- -------------
Asset-based financing $5,993,475 $5,679,912
========== ==========
During the years ended June 30, 2002 and 2001, the Company's Target subsidiary
("Borrower") maintained an Accounts Receivable Management and Security Agreement
with GMAC Commercial Credit LLC ("GMAC") whereby the Borrower can receive
advances of up to 85% of the net amounts of eligible accounts receivable
outstanding to a maximum of $10,000,000. The credit line ("GMAC Facility") is
subject to interest at a rate of 1.0% per annum over the prevailing prime rate
as defined by GMAC (4.75% and 6.75%) as of June 30, 2002 and 2001, respectively,
but at no time can the rate be less than 6.0% per annum (and not less than 5%
after September 20, 2002). At June 30, 2002 and 2001, the outstanding balance on
the GMAC Facility was $5,993,475 and $5,679,912 which represented 83% and 82% of
the approximate $7,211,000 and $6,967,000 available thereunder, respectively. At
June 30, 2002, the remaining amount available under the GMAC Facility was
approximately $1,218,000. GMAC has a security interest in all present and future
accounts receivable, machinery and equipment and other assets of the Borrower
and the GMAC Facility is guaranteed by the Company. The GMAC Facility expires on
January 14, 2005.
7. SHAREHOLDERS' EQUITY
Preferred Stock
As of June 30, 2002, the authorized preferred stock of the Company is 2,500,000
shares. As of June 30, 2002, 320,696 shares of preferred stock are outstanding
as follows:
Number of Shares Outstanding
------------------------------------------------------------
Class A (a) Class C (b) Class D(c) Total
----------- ----------- ---------- -----
Balance at June 30, 1999 122,946 197,750 106,511 427,207
Issuances - - - -
Conversions - - (106,511) (106,511)
------- ------- -------- --------
Balance at June 30, 2000 122,946 197,750 - 320,696
Issuances - - - -
Conversions - - - -
------- ------- -------- -------
Balance at June 30, 2001 122,946 197,750 - 320,696
Issuances - - - -
Conversions - - - -
------- ------- -------- -------
Balance at June 30, 2002 122,946 197,750 - 320,696
======= ======= ======== =======
(a) Class A Preferred Stock. On July 3, 1996, the Company issued 200,000 shares
of Class A, non-voting, cumulative, convertible preferred stock with a par value
of $10.00 in exchange for a paydown of $2,000,000 on the $10,000,000 promissory
note.
The Class A Preferred Stock will pay cumulative cash dividends at an annual rate
of $1.00 per share in cash or, at the option of the Company, in shares of Class
A Preferred Stock, at the rate of $10.00 per share. The Company is prohibited
F-13
from paying any cash dividends on common stock unless all required Class A
Preferred Stock dividends have been paid. Each share of Class A Preferred Stock
may be converted at any time, at the option of the holder, into common stock at
a conversion price (subject to adjustment) of the lower of (i) $6.00 per share,
or (ii) 80% of the average of the closing bid and asked price per share of
Common Stock on the day prior to the conversion date. Class A Preferred Stock
holders are entitled to a liquidation preference of $10.00 per share plus all
accrued and unpaid dividends.
On December 31, 1996, June 30, 1997, December 31, 1997 and June 30, 1998, the
Company issued 10,000, 10,500, 6,887 and 5,809 respectively, shares of Class A,
non-voting, cumulative, convertible preferred stock with a par value of $10.00
representing the semi-annual dividend due the Class A preferred shareholders.
On September 23, 1997, 110,250 shares of Class A Preferred Stock were converted
into 1,102,500 shares of the Company's Common Stock.
There were no shares of Class A Preferred Stock converted into the Company's
Common Stock during fiscal years ending June 30, 2002 and 2001.
(b) Class C Preferred Stock. On June 13, 1997, the Company issued 257,500 shares
of Class C, non-voting, cumulative, convertible preferred stock with a par value
of $10.00 upon completion of a $2,575,000 private placement of equity securities
to individual investors (the "Private Placement").
The Class C Preferred Stock will pay cumulative cash dividends at an annual rate
of $1.00 per share payable the last day of each calendar quarter in cash or, at
the option of the Company, in shares of common stock provided a registration
statement with respect to the underlying shares of common stock is in effect.
The Company is prohibited from paying any dividends on common stock or Class A
Preferred Stock unless all required Class C Preferred Stock dividends have been
paid. Each share of Class C Preferred Stock may be converted at any time, at the
option of the holder, into 10 shares of common stock. There were no shares of
Class C Preferred Stock converted into the Company's Common Stock during fiscal
year ending June 30, 2002 and 2001.
(c) Class D Preferred Stock. On November 28, 1997, the Company acquired from
TIA, Inc. $1,000,000 of secured debt of a closed subsidiary in exchange for the
issuance of 100,000 shares of the Company's non-voting, cumulative, convertible
Class D Preferred Stock, par value $10.00 per share. On December 31, 1997 and
June 30, 1998, the Company issued 1,479 and 5,032 respectively, shares of Class
D, non-voting, cumulative, convertible preferred stock with a par value of
$10.00 representing the semi-annual dividend due the Class D Preferred
shareholders. On October 29 and November 1, 1999, 55,000 and 51,511 shares of
Class D Preferred Stock, respectively, were converted into 2,582,085 shares of
the Company's Common Stock. Therefore, as of November 1, 1999, there are no
shares of Class D Preferred Stock outstanding.
Warrants
As of June 30, 2002, the Company had no warrants outstanding.
Stock Option Plan
In June 1996, the Board of Directors of the Company adopted the Amertranz
Worldwide Holding Corp. 1996 Stock Option Plan ("1996 Plan"), which was
subsequently approved by shareholders. The 1996 Plan authorizes the granting of
awards, the exercise of which would allow up to an aggregate of 1,000,000 shares
of the Company's common stock to be acquired by the holders of said awards. The
awards can take the form of incentive stock options ("ISOs") or nonqualified
stock options ("NSOs") and may be granted to key employees, officers, directors
and consultants. Any plan participant who is granted an Incentive Stock Option
and possesses more than 10% of the voting rights of the Company's outstanding
common stock must be granted an option price at least 110% of the fair market
value on the date of grant and the option must be exercised within five years
from the date of grant. Under the 1996 Plan, stock options have been granted to
employees and directors for terms of up to 10 years at exercise prices ranging
from $.10 to $6.00 and are exercisable in whole or in part at stated times from
the date of grant up to ten years from the date of grant. At June 30, 2002,
356,957 stock options granted to employees and directors were exercisable. The
F-14
Company accounts for equity-based awards granted to employees and directors
under APB Opinion No. 25 under which no compensation cost has been recognized
for stock options granted at market value (Note 3). Had compensation cost for
these stock options been determined consistent with SFAS No. 123, the Company's
net income (loss) and net income (loss) per share would have been increased to
the following pro forma amounts:
Year Ended Year Ended Year Ended
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
Net income (loss):
As Reported $(934,527) $(1,771,583) $(1,196,605)
Pro Forma $(953,204) $(1,914,581) $(1,270,152)
Basic and Diluted EPS:
As Reported $(0.10) $(0.18) $(0.14)
Pro Forma $(0.10) $(0.19) $(0.15)
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated.
Prior to the adoption of the 1996 Plan, there were 224,399 options granted to
purchase common stock at exercise prices ranging from $0.048 to $0.408. These
options were granted pursuant to the terms of the Asset Exchange Agreement. At
each of June 30, 2002, 2001 and 2000, 6,957 of these options were outstanding
and exercisable.
The following table reflects activity under the plan for the three-year period
ended June 30, 2002:
Year Ended June 30, 2002 Year Ended June 30, 2001 Year Ended June 30, 2000
------------------------ ------------------------ ------------------------