UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-29754
TARGET LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3309110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
500 Harborview Drive, Third Floor
Baltimore, Maryland 21230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 332-1598
Inapplicable
(Former name, former address and former fiscal year if
changed from last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes |_| No [X]
At April 28, 2005, the number of shares outstanding of the registrant's common
stock was 15,834,778.
TABLE OF CONTENTS
Part I - Financial Information Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets,
March 31, 2005 (unaudited) and
June 30, 2004 (audited) 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Income 5
for the Nine months Ended
March 31, 2005 and 2004 (unaudited)
Consolidated Statements of Shareholders' 6
Equity for the Year Ended June 30, 2004
(audited) and the Nine months Ended
March 31, 2005 (unaudited)
Consolidated Statements of Cash Flows 7
for the Nine months Ended March 31,
2005 and 2004 (unaudited)
Notes to Unaudited Consolidated Financial 9
Statements
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 16
Item 4. Controls and Procedures 16
Part II - Other Information
Item 6. Exhibits 17
Signatures 18
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2005 June 30, 2004
------------ ------------
ASSETS (unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,821,202 $ 5,896,878
Accounts receivable, net of allowance for doubtful
accounts of $861,799 and $989,974, respectively
19,314,856 20,505,947
Deferred income taxes 601,319 1,394,000
Prepaid expenses and other current assets 439,943 100,348
------------ ------------
Total current assets 26,177,320 27,897,173
PROPERTY AND EQUIPMENT, net 296,946 386,138
OTHER ASSETS (Note 8 and 9) 1,799,940 977,700
DEFERRED INCOME TAXES 674,658 674,658
GOODWILL, net of accumulated amortization of $3,715,106 11,239,917 11,239,917
------------ ------------
Total assets $ 40,188,781 $ 41,175,586
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,617,531 $ 4,492,664
Accrued expenses 3,230,322 1,814,628
Accrued transportation expenses 7,357,237 9,214,874
Accrued purchase price liability (Note 8) 727,699 --
Line of credit 4,287,457 7,572,116
Dividends payable 48,575 110,472
Taxes payable 75,930 20,520
Lease obligation-current portion 51,553 57,193
------------ ------------
Total current liabilities 21,396,304 23,282,467
LEASE OBLIGATION--LONG-TERM 38,082 74,950
------------ ------------
Total liabilities $ 21,434,386 $ 23,357,417
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $10 par value; 2,500,000 shares authorized,
319,946 and 320,696 shares issued and outstanding, respectively 3,199,460 3,206,960
Common stock, $.01 par value; 30,000,000 shares authorized,
16,569,729 and 16,562,229 shares issued and outstanding, respectively 165,697 165,622
Paid-in capital 26,293,190 26,285,765
Stock subscription note receivable (10,000) (100,000)
Accumulated deficit (10,249,147) (11,095,373)
Less: Treasury stock, 734,951 shares held at cost (644,805) (644,805)
------------ ------------
Total shareholders' equity 18,754,395 17,818,169
------------ ------------
Total liabilities and shareholders' equity $ 40,188,781 $ 41,175,586
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended March 31,
2005 2004
------------ ------------
Operating revenues $ 31,394,399 $ 31,257,287
Cost of transportation 21,010,858 21,244,830
------------ ------------
Gross profit 10,383,541 10,012,457
------------ ------------
Selling, general and administrative expenses ("SG&A"):
Exclusive Forwarder Commissions - Target
subsidiary 3,692,913 3,579,114
SG&A - Target subsidiary 5,840,371 5,736,614
SG&A - Corporate 269,478 257,182
Depreciation and amortization 109,463 111,357
------------ ------------
Selling, general and administrative expenses 9,912,225 9,684,267
------------ ------------
Operating income 471,316 328,190
Other income (expense):
Interest expense (10,954) (96,323)
------------ ------------
Income before income taxes 460,362 231,867
Provisions for income taxes 195,468 116,886
------------ ------------
Net income $ 264,894 $ 114,981
============ ============
Income per share attributable to common shareholders:
Basic: $ 0.01 $ 0.01
============ ============
Diluted: $ 0.01 $ 0.01
============ ============
Weighted average shares outstanding:
Basic: 15,834,445 12,179,002
============ ============
Diluted: 21,510,082 16,907,192
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
-4-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Nine months ended March 31
2005 2004
------------- -------------
Operating revenues $ 101,654,195 $ 92,879,365
Cost of transportation 69,224,605 62,157,964
------------- -------------
Gross profit 32,429,590 30,721,401
------------- -------------
Selling, general and administrative expenses ("SG&A"):
Exclusive Forwarder Commissions - Target
Subsidiary 11,963,888 12,150,906
SG&A - Target subsidiary 17,308,705 16,770,191
SG&A - Corporate 827,390 596,621
Depreciation and amortization 335,652 321,342
------------- -------------
Selling, general and administrative expenses 30,435,635 29,839,060
------------- -------------
Operating income 1,993,955 882,341
Other income (expense):
Interest expense (63,807) (278,739)
------------- -------------
Income before income taxes 1,930,148 603,602
Provision for income taxes 874,290 286,358
------------- -------------
Net income $ 1,055,858 $ 317,244
============= =============
Income per share attributable to common shareholders:
Basic: $ 0.05 $ 0.01
============= =============
Diluted: $ 0.05 $ 0.02
============= =============
Weighted average shares outstanding:
Basic: 15,829,632 12,179,002
============= =============
Diluted: 21,489,936 18,260,760
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2004 AND THE
NINE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
Stock
Preferred Stock Common Stock Additional Subscription
--------------- ------------ Paid in Note
Shares Amount Shares Amount Capital Receivable
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2003 320,696 $ 3,206,960 12,913,953 $ 129,139 $ 24,202,248 --
Cash dividends associated with the
Class A, C and F Preferred Stock -- -- -- -- -- --
Common Stock issued in conjunction
with a private placement -- -- 3,448,276 34,483 1,965,517 --
Common Stock issued pursuant to
Subscription Agreement -- -- 200,000 2,000 118,000 --
Stock subscription note receivable -- -- -- -- -- (100,000)
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2004 320,696 $ 3,206,960 16,562,229 $ 165,622 $ 26,285,765 (100,000)
Cash dividends associated with the
Class C Preferred Stock -- -- -- -- -- --
Common Stock issued in connection
with the conversion of Class C (750) (7,500) 7,500 75 7,425 --
Preferred Stock
Stock subscription note receivable -- -- -- -- -- 90,000
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2005 (unaudited) 319,946 $ 3,199,460 16,569,729 $ 165,697 $ 26,293,190 (10,000)
============ ============ ============ ============ ============ ============
Treasury Stock
-------------- Accumulated
Shares Amount Deficit Total
------------ ------------ ------------ ------------
Balance, June 30, 2003 (734,951) ($ 644,805) ($11,314,210) $ 15,579,332
Cash dividends associated with the
Class A, C and F Preferred Stock -- -- (321,305) (321,305)
Common Stock issued in conjunction
with a private placement -- -- -- 2,000,000
Common Stock issued pursuant to
Subscription Agreement -- -- -- 120,000
Stock subscription note receivable -- -- -- (100,000)
Net income -- -- 540,142 540,142
------------ ------------ ------------ ------------
Balance, June 30, 2004 (734,951) ($ 644,805) ($11,095,373) $ 17,818,169
Cash dividends associated with the
Class C Preferred Stock -- -- (209,632) (209,632)
Common Stock issued in connection
with the conversion of Class C -- -- -- --
Preferred Stock
Stock subscription note receivable -- -- -- 90,000
Net income -- -- 1,055,858 1,055,858
------------ ------------ ------------ ------------
Balance, March 31, 2005 (unaudited) (734,951) ($ 644,805) ($10,249,147) $ 18,754,395
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months Ended March 31,
2005 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,055,858 $ 317,244
Bad debt expense 316,523 758,815
Depreciation and amortization 335,652 321,342
Decrease in deferred tax asset 792,681 225,358
Services performed pursuant to stock subscription agreement 90,000 --
Adjustments to reconcile net income to net cash used in operating
activities -
Decrease (increase) in accounts receivable 2,522,681 (2,453,321)
Increase in prepaid expenses and other current assets (125,612) (150,151)
Decrease in other assets 80,542 200,202
(Decrease) increase in accounts payable and accrued expenses (1,130,922) 703,491
------------- -------------
Net cash provided by (used for) operating activities 3,937,403 (77,020)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (76,237) (128,243)
Payment for purchase of ACI, net of cash acquired (Note 8) (338,164)
-------------
-------------
Net cash used for investing activities (414,383) (128,243)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (271,529) (271,936)
Borrowing from note payable to bank 104,690,599 87,995,059
Repayment of note payable to bank (107,975,258) (87,798,807)
Proceeds from (payment of) lease obligations (42,508) 58,539
------------- -------------
Net cash (used for) provided by financing activities: (3,598,696) (17,145)
------------- -------------
Net increase (decrease) in cash and cash equivalents (75,676) ($ 222,408)
CASH AND CASH EQUIVALENTS, beginning of the period 5,896,878 3,999,045
------------- -------------
CASH AND CASH EQUIVALENTS, end of the period $ 5,821,202 $ 3,776,637
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 189,844 $ 299,619
Income Taxes $ 30,792 $ 107,500
The accompanying notes are an integral part of these
consolidated financial statements.
-7-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(unaudited)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTMENT AND FINANCING ACTIVITIES:
Nine months Ended March 31,
---------------------------
2005 2004
------- -------
Accrued purchase price liability 727,699
Conversion of 750 Class C Preferred Shares (7,500) --
Issuance of Common Stock for Conversion of 750
Class C Preferred Shares 75 --
-8-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Notes to Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and Regulation S-X related to
interim period financial statements and, therefore, do not include all
information and footnotes required by generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments and accruals) considered necessary for a fair presentation
of the consolidated financial position of the Company and its subsidiaries at
March 31, 2005 and their consolidated results of operations and cash flows for
the nine months ended March 31, 2005 have been included. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for the entire year. Reference should be made to the annual
financial statements, including footnotes thereto, included in the Target
Logistics, Inc. (the "Company") Form 10-K for the year ended June 30, 2004.
Note 2 - Use of Estimates
In the process of preparing our consolidated financial statements, management
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 our
consolidated financial statements include 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 carry
forwards between current and long-term assets.
Note 3 - Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets", which requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles. We adopted this statement on July 1,
2002. Under the non-amortization approach, goodwill and certain intangibles are
not amortized into results of operations, but instead are 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 last annual independent valuation analysis was completed in
January 2005, and based on the valuation, we determined that the goodwill was
not impaired.
The independent valuation analysis is dependent on a discounted seven-year cash
flow analysis.
The discounted cash flow analysis is dependent on the Company's Target Logistic
Services, Inc. ("Target") subsidiary achieving certain future results. These
include the following major assumptions: (a) Revenue growth of 10.0% for fiscal
2005, 7.5% for fiscal 2006 thru 2007 and 4.5% for fiscal 2008 thru 2011; (b)
Gross Profit percentage increasing from 32.0% in fiscal 2005 to 32.2% in fiscal
2006, to 32.4% in fiscal 2007 and thereafter; (c) Operating expenses (excluding
forwarder commissions) reducing from 16.2% in fiscal 2005 and 2006, to 16.1% in
fiscal 2007, 2008 and 2009, and to 16.0% in fiscal 2010 and 2011; and (d) a 16%
discount rate. While management believes that these are achievable, any downward
variation in these major assumptions or in any other portion of the discounted
cash flow analysis could negatively impact the overall valuation analysis.
The Company performs an annual valuation analysis. Based on the results of these
annual valuation analyses, our financial results could be impacted by impairment
of goodwill, which could result in periodic write-downs ranging from zero to
$11,239,917.
Note 4 - Per Share Data
Basic income (loss) per share is calculated by dividing net income (loss)
attributable to common shareholders less preferred stock dividends, by the
weighted average number of shares of common stock outstanding during the period.
Diluted income (loss) per share is calculated by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding, adjusted for potentially dilutive securities.
-9-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
There were outstanding options to purchase 706,957 and 596,957 shares of common
stock for the nine months ended March 31, 2005 and 2004, respectively. Options
to purchase 75,000 and 75,000 were not included in the computation of diluted
EPS for the nine months ended March 31, 2005 and 2004, respectively, because the
exercise prices of those options were greater than the average market price of
the common shares, and thus are anti-dilutive. The options were still
outstanding at the end of the period.
Note 5 - Stock-Based Compensation
The Company accounts for 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", and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock options as if the fair value based method of accounting in SFAS
No. 123 had been applied to these transactions.
The following table illustrates the effect on net income and earnings per share
if compensation expense had been determined for fixed plan awards based on an
estimate of fair value of the option at the date of grant consistent with SFAS
No. 123, "Accounting for Stock Based Compensation," as amended.
Nine months ended
3/31/05 3/31/04
----------- -----------
Net income as reported $ 1,055,858 $ 317,244
Add: Total stock-based employee compensation expense included in the
determination of net income, net of tax effect -- --
Deduct: total stock-based employee compensation expense determined
using a fair value based method for fixed plan awards, net of tax effect (45,000) (9,738)
----------- -----------
Pro forma net income $ 1,010,858 $ 307,506
=========== ===========
Basic earnings per share $ 0.05 $ 0.01
=========== ===========
Pro forma basic earnings per share $ 0.05 $ 0.01
=========== ===========
Diluted earnings per share $ 0.05 $ 0.02
=========== ===========
Pro forma diluted earnings per share $ 0.05 $ 0.02
=========== ===========
The fair value of options was estimated at the grant date using a Black-Scholes
option pricing model, which requires the input of subjective assumptions.
Because the Company's common stock and stock options have characteristics
significantly different from listed securities and traded options, and because
changes in the subjective input assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of stock options. There were 110,000 options granted
during the nine months ended March 31, 2005 and no options granted during the
nine months ended March 31, 2004. Weighted average assumptions used in the
valuation model include risk-free interest rates of 4.29% and 4.05%; and
expected stock price volatility of 270.47% and 477.00% in 2005 and 2004,
respectively; and, dividend yields of 0.00%; and, expected lives of options of
10 years in 2005 and 2004.
See Note 10 for a recent accounting pronouncement which will impact the way the
Company reports the information set forth above.
-10-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Note 6 - Stock Options
The following summarizes the Company's stock option activity and related
information:
Range of Weighted average
Shares Exercise Price Exercise Price
------ -------------- --------------
Outstanding at June 30, 2004 596,957 $0.04 - 6.00 1.22
Granted 110,000 $0.75 - 0.75 0.75
Exercised -- -- --
Forfeited -- -- --
Cancelled -- --- --
Outstanding at March 31, 2005 706,957 $0.04 - 6.00 1.15
Exercisable at March 31, 2005 656,957 $0.04 - 6.00 1.19
Note 7 - Reclassifications
Certain amounts in the prior year's consolidated statements of income have been
reclassified to conform with the 2004 presentation. These changes resulted from
an internal reclassification of how the Target subsidiary allocates expenses
arising from freight handled by one station on behalf of another station. These
reclassifications are reflected primarily within the Company's presentation of
selling, general and administrative expenses and had no impact on operating
income or net income.
Note 8 - Stock Purchase Acquisition
On March 15, 2005, the Company acquired the stock of Air Cargo International and
Domestic, Inc. ("ACI") for a combination of (i) $1,000,000 cash payment on date
of closing, (ii) cash payment based on the ACI shareholder's equity after
winding down the ACI balance sheet, and (iii) an earn-out structure based on
certain future gross profit achievement over the next five years. Any payments
from the earn-out structure will be considered an increase to the purchase price
in the period such amount is determinable. The Company has no minimum commitment
or obligation under the earn-out or the wind down of the balance sheet. The
Company does not expect that the earn-out payments will have a material impact
on its liquidity.
The Company is in the process of completing its determination for the allocation
of the excess purchase between goodwill and intangible assets such as customer
lists and non-compete agreements. The Company anticipates that this
determination will be completed by June 30, 2005.
As of March 15, 2005, the Company has estimated the allocation of the purchase
price in accordance with SFAS No. 141 as follows:
Purchase price:
Cash paid on closing date $ 1,000,000
Estimated additional cash payment to be paid based upon final ACI
shareholder equity after wind down of balance sheet 727,699
Expenses related to acquisition: legal and accounting 25,166
Total purchase price $ 1,752,865
Allocated to:
Cash $ 687,020
Accounts receivable 1,648,114
Prepaid expenses and other current assets 213,983
Property and equipment, net 47,839
Accounts payable (920,529)
Accrued expenses (948,728)
Net assets (liabilities) 727,699
Net amount allocated to excess of purchase price over assets acquired $ 1,025,166
-11-
TARGET LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Pro forma results as if the acquisition had taken place at the beginning of the
period have not been presented because they would not be materially different
than the historical statements.
Note 9 - Other Assets
Included in other assets is the excess of purchase price over assets acquired of
$1,025,166 (See Note 8).
Note 10 - Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". This statement will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. This statement covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans, and replaces FASB SFAS No. 123, "Accounting for
Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance in APB No. 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
SFAS No. 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. The Company has evaluated the impact of the adoption of
SFAS No. 123(R), and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
When used in this discussion and elsewhere in this Form 10-Q, the words or
phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, and reflect our current expectations
with respect to our operations, performance, financial condition, and other
developments. Such statements are necessarily estimates reflecting our best
judgment based upon current information and involve a number of risks and
uncertainties. We caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and readers
are advised that various factors could cause our actual results for future
periods to differ materially from those anticipated or projected. While it is
impossible to identify all such factors, they include (i) our ability to
increase operating revenue, improve gross profit margins and reduce selling,
general and administrative costs, (ii) competitive practices in the industries
in which we compete, (iii) our dependence on current management, (iv) the impact
of current and future laws and governmental regulations affecting the
transportation industry in general and our operations in particular, (v) general
economic conditions, and (vi) other factors which may be identified from time to
time in our Securities and Exchange Commission (SEC) filings and other public
announcements. We do not undertake and specifically disclaim any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
OVERVIEW
We generated operating revenues of $126.1 million, $113.4 million, and
$93.5 million, and had a net profit of $0.5 million, $0.8 million, and a net
loss of $0.9 million, for the fiscal years ended June 30, 2004, 2003 and 2002,
respectively. The results for the fiscal year ended June 30, 2003 include $1.4
million of other income resulting from a non-recurring reversal of accruals for
expenses, accruals for contingencies, and accounts payable of previously closed
and sold subsidiaries. We had earnings before interest, taxes, depreciation and
amortization (EBITDA) of approximately $1,760,000, and $2,115,000 and $340,000,
for the fiscal years ended June 30, 2004, 2003, and 2002 respectively. EBITDA is
a non-GAAP measure of income and does not include the effects of interest and
taxes, and excludes the "non-cash" effects of depreciation and amortization on
current assets. Companies have some discretion as to which elements of
depreciation and amortization are excluded in the EBITDA calculation. We exclude
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 nine months ended March 31, 2005, the revenue of our Target
subsidiary increased by 9.4%, when compared to the prior year's corresponding
period. Target's gross profit margin (i.e., gross operating revenues less cost
of transportation expressed as a percentage of gross operating revenue) for the
nine months ended March 31, 2005 decreased to 31.9% from 33.1% for the nine
months ended March 31, 2004. The decrease is primarily due to increased
international ocean import freight volume which historically reflects a lower
gross profit margin as a percentage of sales. Management continues to believe
that we must focus on increasing revenues and must increase gross profit margin
to increase profitability. Management intends to continue to work on growing
revenue by increasing sales through expanding our sales force, increasing sales
generated by the Company's employed sales personnel and sales generated by
exclusive forwarders, and strategic acquisitions. Management also intends to
continue to work on improving Target's gross profit margins by reducing
transportation costs.
RESULTS OF OPERATIONS
Three months ended March 31, 2005 and 2004
Operating Revenue. Operating revenue increased to $31.4 million for the
three months ended March 31, 2005 from $31.3 million for the three months ended
March 31, 2004, a 0.4% increase. While our operating revenue for the quarter
ended March 31, 2005 increased only slightly when compared with operating
revenue for the quarter ended March 31, 2004, our revenue for the 2004 period
reflected an increase of 21.8% over the corresponding 2003 period, a level of
growth which exceeded other fiscal 2004 quarters and the entire fiscal 2004.
Accordingly, we believe that our 0.4% revenue growth in the quarter ended March
31, 2005 is not indicative of a trend. The Company's operating revenue consists
of domestic freight revenue and international freight revenue. Domestic revenue
decreased by 3.5% to $20,964,477 from $21,730,405 for the three months ended
March 31, 2004, primarily as a result of lower freight volumes in our fashion
services. We believe that this decrease is a function of the timing of shipments
by our fashion services customers. International revenue increased by 9.5% to
$10,429,922 for the three months ended March 31, 2005 from $9,526,882 for the
three months ended March 31, 2004, primarily due to increased international
ocean import freight volume.
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Cost of Transportation. Cost of transportation decreased to 66.9% of operating
revenue for the three months ended March 31, 2005 from 68.0% of operating
revenue for the three months ended March 31, 2004. This decrease was due to (i)
a lower cost of transportation on our domestic freight, and (ii) a decrease in
international ocean import freight volume which historically reflects a higher
cost of transportation as a percentage of sales.
Gross Profit Margin. As a result of the factors described above, gross
profit margin for the three months ended March 31, 2005 increased to 33.1% from
32.0% of operating revenue for the three months ended March 31, 2004, a 3.4%
increase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 31.6% of operating revenue for the three
months ended March 31, 2005 from 31.0% of operating revenue for the three months
ended March 31, 2004. Within our Target subsidiary, selling, general and
administration expenses (excluding exclusive forwarder commission expenses) were
18.6% of operating revenue for the three months ended March 31, 2005 and 18.4%
for the three months ended March 31, 2004, a 1.1% increase. Exclusive forwarder
commission expenses (which are primarily commissions to our agents and earn-out
expenses from our acquisitions) was 11.8% and 11.5% of operating revenue for the
three months ended March 31, 2005 and 2004, respectively, a 2.6% increase
resulting from an increase in acquisition earn-out payments due to higher
profits from previously acquired forwarders.
Net Profit. For the three months ended March 31, 2005, we realized a net
profit of $264,894, compared to a net profit of $114,981 for the three months
ended March 31, 2004.
Nine months ended March 31, 2005 and 2003
Operating Revenue. Operating revenue increased to $101.7 million for the
nine months ended March 31, 2005 from $92.9 million for the nine months ended
March 31, 2004, a 9.4% increase. The Company's operating revenue consists of
domestic freight revenue and international freight revenue. Domestic revenue
decreased by 0.2% to $66,484,839 for the nine months ended March 31, 2005 from
$66,610,904 for the corresponding 2004 period. International revenue increased
by 33.9% to $35,169,356 for the nine months ended March 31, 2005 from
$26,268,461 for the 2004 period, mainly due to increased international ocean
import freight volume.
Cost of Transportation. Cost of transportation increased to 68.1% of
operating revenue for the nine month period ended March 31, 2005, from 66.9% of
operating revenue for the nine month period ended March 31, 2004. This increase
was primarily due to increased international ocean import freight volume which
historically reflects a higher cost of transportation as a percentage of sales.
Gross Profit. As a result of the factors described above, gross profit
margin for the nine month period ended March 31, 2005 decreased to 31.9% from
33.1% of operating revenue for the corresponding 2004 period, a 3.6% decrease.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 29.9% of operating revenue for the nine
months ended March 31, 2005 from 32.1% of operating revenue for the
corresponding 2004 period. Within our Target subsidiary, selling, general and
administration expenses (excluding exclusive forwarder commission expenses) were
17.0% of operating revenue for the nine months ended March 31, 2005 and 18.1%
for the nine months ended March 31, 2004, a 6.1% decrease. Exclusive forwarder
commission expenses (which are primarily commissions to our agents and earn-out
expenses from our acquisitions) was 11.8% and 13.1% of operating revenue for the
nine months ended March 31, 2005 and 2004, respectively, a 9.9% decrease
resulting from a reduction in forwarder agent gross profit margin.
Net Profit. For the nine months ended March 31, 2005, the Company realized
a net profit of $1,055,858, compared to a net profit of $317,244 for the nine
months ended March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
General. During the nine months ended March 31, 2005, net cash provided by
operating activities was $3,937,403. Cash used for investing activities was
$414,383, representing capital expenditures and a stock purchase acquisition.
Cash used for financing activities was $3,598,696, which primarily consisted of
repayments under our line of credit.
Capital expenditures. Capital expenditures for the nine months ended March
31, 2005 were $414,383, representing capital expenditures and a stock purchase
acquisition.
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GMAC Facility. The Company's Target subsidiary maintains a $13 million
revolving credit facility ("GMAC Facility") with GMAC Commercial Finance LLC
("GMAC"), guaranteed by the Company, for a three-year term ending March 31,
2007. Under the terms of the GMAC Facility, Target can borrow (i) the lesser of
$13 million or 85% of eligible accounts receivable for the period beginning May
3, 2004 through March 31, 2005, and (ii) the lesser of $15 million or 85% of
eligible accounts receivable for the period beginning April 1, 2005 through
March 31, 2007. The interest rate of the facility, which can be adjusted
quarterly, is either (i) prime plus three-quarters of one percent (0.75%), or
(ii) upon the achievement of certain financial milestones (measured quarterly),
prime plus one-half of one percent (0.50%). For the period November 1, 2004
through March 31, 2005, interest was at a rate of prime plus 0.50%, and for the
period May 3, 2004 through October 31, 2004, interest was at the rate of prime
plus 0.75%. Prior to May 3, 2004, the interest rate of the GMAC Facility was
prime plus 1%, however, at any time prior to September 20, 2002, the interest
rate could not be less than 6.0%, and from September 20, 2002 through May 2,
2004 could not be less than 5.0%. The borrowings under the GMAC Facility are
secured by a first lien on all of the Company's and its subsidiaries' assets. As
of March 31, 2005, there were outstanding borrowings of $4,287,457 under the
GMAC Facility (which represented 38.7% of the amount available thereunder) out
of a total amount available for borrowing under the GMAC Facility of
approximately $11,079,798. We entered into the GMAC Facility on January 16,
1997, and subsequently extended the facility for an additional three-year term
and on September 20, 2002 for an additional two-year term. On May 3, 2004, the
GMAC Facility was extended for an additional three-year term ending March 31,
2007.
Stock Purchase Acquisition. On March 15, 2005, the Company acquired the
stock of Air Cargo International and Domestic, Inc. ("ACI") for a combination of
cash, a deferred payment based on the ACI shareholder's equity after winding
down the ACI balance sheet, and an earn-out structure based on future gross
profit achievement over the next five years. (See Note 8 to the Company's Notes
to the unaudited Consolidated Financial Statements contained in this Quarterly
Report.) The Company has no minimum commitment or obligation under the earn-out
or the wind down of the balance sheet. The Company does not expect that the
earn-out payments will have a material impact on its liquidity.
Working Capital Requirements. The Company's and Target's cash needs are
currently met by the GMAC Facility and cash on hand. As of March 31, 2005, the
Company had $6,792,341 available under its $13 million GMAC Facility and
$5,821,202 in cash from operations, cash on hand, and cash balances associated
with the stock purchase acquisition. We believe that our current financial
resources will be sufficient to finance our operations and obligations (current
and long-term liabilities) for the long and short terms. However, our actual
working capital needs for the long and short terms will depend upon numerous
factors, including our operating results, the cost of increasing the Company's
sales and marketing activities, competition, and the availability of a revolving
credit facility, none of which can be predicted with certainty.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions about future events that affect the
amounts reported in the financial statements and accompanying notes. Since
future events and their effects cannot be determined with absolute certainty,
the determination of estimates requires the exercise of judgment. Actual results
could differ from those estimates, and such difference may be material to the
financial statements. The most significant accounting estimates inherent in the
preparation of our 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. We reevaluate these significant factors as facts and
circumstances change. Historically, actual results have not differed
significantly from our estimates. These accounting policies are described at
relevant sections in this discussion and analysis and in the notes to the
consolidated financial statements included in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2004.
Our balance sheet includes an asset in the amount of $11,239,917 for
purchased goodwill. In accordance with accounting pronouncements, the amount of
this asset must be reviewed annually for impairment, written down and charged to
results of operations in the period(s) in which the recorded value of goodwill
is more than its fair value. The last independent annual valuation analysis was
completed in January 2005, and based on the valuation, we determined that the
goodwill was not impaired. Had the determination been made that the goodwill
asset was impaired, the value of this asset would have been reduced by an amount
ranging from zero to $11,239,917, and our financial statements would reflect the
reduction. For additional description, please refer to Note 3 to the Company's
Notes to the unaudited Consolidated Financial Statements contained in this
Quarterly Report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission, and is accumulated and communicated
to management in a timely manner. Our Chief Executive Officer and Chief
Financial Officer have evaluated this system of disclosure controls and
procedures as of the end of the period covered by this quarterly report, and
believe that the system is effective. There have been no changes in our internal
control over financial reporting during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
--------
Exhibit No.
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3.1 Certificate of Incorporation of Registrant, as amended
(incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
2004, 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 Certificate of Designations with respect to the Registrant's
Class C Preferred Stock (contained in Exhibit 3.1)
4.2 Certificate of Designations with respect to the Registrant's
Class F Preferred Stock (contained in Exhibit 3.1)
10.1 1996 Stock Option Plan (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 2003, File No. 0-29754)
10.2 Restated and Amended Accounts Receivable Management and
Security Agreement, dated as of July 13, 1998 by and between
GMAC Commercial Credit LLC, as Lender, and Target Logistic
Services, Inc., as Borrower, and guaranteed by the Registrant
("GMAC Facility Agreement") (incorporated by reference to
Exhibit 10.2 to the Registrant's Annual Report on Form 10-K
for the Fiscal Year Ended June 30, 1999, File No. 0-29754)
10.3 Letter amendment to GMAC Facility Agreement, dated January 25,
2001 (incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended December 31, 2000, File No. 0-29754)
10.4 Amendment to GMAC Facility Agreement, dated September 20, 2002
(incorporated by reference to Exhibit 10.4 to the Registrant's
Annual Report on Form 10-K for the Fiscal Year Ended June 30,
2002, File No.
0-29754)
10.5 Amendment to GMAC Facility Agreement, dated February 12, 2003
(incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
2003, File No. 0-29754)
10.6 Amendment to GMAC Facility Agreement, dated May 3, 2004
(incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
2004, File No. 0-29754)
10.7 (P) Lease Agreement for Los Angeles Facility (incorporated by
reference to Exhibit 10.17 to the Registrant's Annual Report
on Form 10-K for the Year Ended June 30, 1997, File No.
0-29754)
10.8 Amendment to Lease Agreement for Los Angeles Facility
(incorporated by reference to Exhibit 10.9 to the Registrant's
Annual Report on Form 10-K for the Year Ended June 30, 2002,
File No. 0-29754)
10.9 Lease Agreement for new Los Angeles Facility (to be effective
approximately October 1, 2005)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32.1 Section 1350 Certifications
99.1 Press Release dated April 28, 2005
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 29, 2005 TARGET LOGISTICS, INC.
egistrant
/s/ Stuart Hettleman
------------------------------------------
President, Chief Executive Officer
/s/ Philip J. Dubato
------------------------------------------
Vice President, Chief Financial Officer
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