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 December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-29754
TARGET LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3309110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
500 Harborview Drive
Third Floor
Baltimore, Maryland 21230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 332-1598
Inapplicable
(Former name, former address and former fiscal year if changed
from last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes 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 February 11, 2004, the number of shares outstanding of the registrant's
common stock was 12,179,002.
TABLE OF CONTENTS
Part I - Financial Information Page
----
Item 1. Financial Statements:
-------
Consolidated Balance Sheets,
December 31, 2003 (unaudited) and
June 30, 2003 (audited) 3
Consolidated Statements of Income
for the Three Months Ended
December 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Income 5
for the Six Months Ended
December 31, 2003 and 2002 (unaudited)
Consolidated Statements of Shareholders' 6
Equity for the Year Ended June 30, 2002 (audited)
and the Six Months Ended December 31, 2003 (unaudited)
Consolidated Statements of Cash Flows 7
for the Six Months Ended December 31,
2003 and 2002 (unaudited)
Notes to Unaudited Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of 10
------- Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure about 13
------- Market Risk
Item 4. Controls and Procedures 13
-------
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
-------
Item 6. Exhibits and Reports on Form 8-K 14
-------
Signatures 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 June 30, 2003
----------------- -------------
ASSETS (unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $3,032,466 $3,999,045
Accounts receivable, net of allowance for doubtful
accounts of $1,013,590 and $882,132, respectively
21,711,052 17,600,722
Deferred income taxes 528,528 668,000
Prepaid expenses and other current assets 336,588 146,329
----------- -----------
Total current assets 25,608,634 22,414,096
PROPERTY AND EQUIPMENT, net 496,456 508,876
OTHER ASSETS 1,140,276 1,266,772
DEFERRED INCOME TAXES 1,761,591 1,761,591
GOODWILL, net of accumulated amortization of $3,715,106 11,239,917 11,239,917
----------- -----------
Total assets $40,246,874 $37,191,252
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $4,240,709 $3,890,138
Accrued expenses 1,796,474 1,724,643
Accrued transportation expenses 10,915,723 8,262,487
Notes payable to bank 7,357,178 7,455,199
Dividends payable 111,822 110,270
Taxes payable 45,796 81,909
Lease obligation-current portion 55,184 26,144
----------- ----------
Total current liabilities 24,522,886 21,550,790
LEASE OBLIGATION--LONG-TERM 104,059 61,130
----------- ----------
Total liabilities $24,626,945 $21,611,920
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $10 par value; 2,500,000 shares authorized,
320,696 shares issued and outstanding 3,206,960 3,206,960
Common stock, $.01 par value; 30,000,000 shares authorized,
12,913,953 and 12,913,953 shares issued and outstanding, respectively 129,139 129,139
Paid-in capital 24,202,248 24,202,248
Accumulated deficit (11,273,613) (11,314,210)
Less: Treasury stock, 734,951 shares held at cost (644,805) (644,805)
----------- -----------
Total shareholders' equity 15,619,929 15,579,332
----------- -----------
Total liabilities and shareholders' equity $40,246,874 $37,191,252
=========== ===========
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 December 31,
2003 2002
---- ----
Operating revenues $33,033,922 $32,319,371
Cost of transportation 22,102,596 21,534,361
----------- -----------
Gross profit 10,931,326 10,785,010
Selling, general and administrative expenses ("SG&A"):
Exclusive Forwarder Commissions - Target 5,150,733 4,979,403
Subsidiary
SG&A - Target subsidiary 5,128,943 5,252,007
SG&A - Corporate 174,426 184,963
Depreciation and amortization 105,844 113,694
----------- -----------
Selling, general and administrative expenses 10,559,946 10,530,067
Operating income 371,380 254,943
Other income (expense):
Interest expense (92,332) (94,084)
Other income (Note 7) - 1,447,699
----------- -----------
Income before income taxes 279,048 1,608,558
Provision for income taxes 125,146 429,434
----------- -----------
Net income $153,902 $1,179,124
=========== ===========
Income per share attributable to common shareholders:
- $0.09
=========== ===========
Basic:
$0.01 $0.05
=========== ===========
Diluted:
Weighted average shares outstanding:
12,179,002 12,179,002
=========== ===========
Basic:
19,717,041 21,845,657
=========== ===========
Diluted:
The accompanying notes are an integral part of these
consolidated financial statements.
4
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Six Months ended December 31,
2003 2002
---- ----
Operating revenues $61,622,078 $58,402,056
Cost of transportation 40,934,884 39,363,383
----------- -----------
Gross profit 20,687,194 19,038,673
Selling, general and administrative expenses ("SG&A"):
Exclusive Forwarder Commissions - Target 9,315,530 8,664,640
Subsidiary
SG&A - Target subsidiary 10,268,089 9,913,648
SG&A - Corporate 339,439 362,319
Depreciation and amortization 209,985 212,267
----------- -----------
Selling, general and administrative expenses 20,133,043 19,152,874
Operating income (loss) 554,151 (114,201)
Other income (expense):
Interest expense (182,416) (177,649)
Other Income (Note 7) - 1,447,699
----------- -----------
Income before income taxes 371,735 1,155,849
Provision for income taxes 169,472 429,434
----------- -----------
Net income $202,263 $726,415
=========== ===========
Income per share attributable to common shareholders:
- $0.05
=========== ===========
Basic:
0.01 $0.03
=========== ===========
Diluted:
Weighted average shares outstanding:
12,179,002 12,179,002
=========== ===========
Basic:
18,929,966 23,242,771
=========== ===========
Diluted:
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, 2003 AND THE
SIX MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
Preferred Stock Common Stock Additional Treasury Stock
--------------- ------------ Paid-in -------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
Balance, June 30, 2002 320,696 $3,206,960 12,913,953 $129,139 $24,202,248 (734,951) ($644,805) ($11,833,013) $15,060,529
Cash dividends associated
with the Class A and C
Preferred Stock - - - - - - - (320,697) (320,697)
Net income - - - - - - - 839,500 839,500
------- ---------- ---------- -------- ----------- -------- --------- ------------ -----------
Balance, June 30, 2003 320,696 $3,206,960 12,913,953 $129,139 $24,202,248 (734,951) ($644,805) ($11,314,210) $15,579,332
Cash dividends associated
with the Class C
Preferred Stock - - - - - - - (161,666) (161,666)
Net income - - - - - - - 202,263 202,263
------- ---------- ---------- -------- ----------- -------- --------- ------------ -----------
Balance, December 31, 2003 320,696 $3,206,960 12,913,953 $129,139 $24,202,248 (734,951) ($644,805) ($11,273,613) $15,619,929
======= ========== ========== ======== =========== ======== ========= ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
6
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended December 30,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $202,263 $726,415
Bad debt expense 413,300 372,399
Depreciation and amortization 209,985 212,267
Decrease in deferred tax asset 139,472 429,434
Adjustments to reconcile net income to net cash used in operating
activities -
Increase in accounts receivable (4,523,630) (1,870,039)
Increase in prepaid expenses and other current assets (190,259) (88,580)
Decrease in other assets 126,496 52,651
Increase (decrease) in accounts payable and accrued expenses 2,951,904 (66,554)
---------- ----------
Net cash used for operating activities (670,469) (232,007)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and asset purchase (109,944) (167,365)
Asset Purchase Acquisition (Note 5) - (240,942)
---------- ----------
Net cash used for investing activities (109,944) (408,307)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (160,114) (160,115)
Borrowing from note payable to bank 55,963,909 59,924,319
Repayment of note payable to bank (56,061,930) (58,932,927)
Proceeds (payment) of lease obligations 71,969 (8,211)
----------- -----------
Net cash (used for) provided by financing activities (186,166) 823,066
----------- -----------
Net (decrease) increase in cash and cash equivalents ($966,579) $182,752
CASH AND CASH EQUIVALENTS, beginning of the period 3,999,045 4,333,015
---------- ----------
CASH AND CASH EQUIVALENTS, end of the period $3,032,466 $4,515,767
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest $197,323 $213,177
Income Taxes $ 69,225 $ 2,360
The accompanying notes are an integral part of these
consolidated financial statements.
7
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
December 31, 2003 and their consolidated results of operations and cash flows
for the six months ended December 31, 2003 have been included. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for the entire year. Reference should be made to the annual
financial statements, including footnotes thereto, included in the Target
Logistics, Inc. (the "Company") Form 10-K for the year ended June 30, 2003.
Note 2 - Use of Estimates
In the process of preparing its consolidated financial statements, the Company
estimates the appropriate carrying value of certain assets and liabilities which
are not readily apparent from other sources. Management bases its estimates on
historical experience and on various assumptions which are believed to be
reasonable under the circumstances. The primary estimates underlying the
Company's consolidated financial statements include allowance for doubtful
accounts, accruals for transportation and other direct costs, accruals for cargo
insurance, and the classification of NOL and tax credit carry forwards between
current and long-term assets.
Note 3 - Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets", which requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles. This statement is effective for
fiscal years beginning after December 15, 2001. The Company adopted this
statement on July 1, 2002. Under the non-amortization approach, goodwill and
certain intangibles will not be amortized into results of operations, but
instead will be reviewed for impairment, written down and charged to results of
operations only in periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The Company obtained an independent
valuation analysis completed in January 2004, and based on the valuation, the
Company 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 Target subsidiary
achieving certain future results. These include the following major assumptions:
(a) Revenue growth of 4.5% for fiscal 2004, 7.5% for fiscal 2005 thru 2006 and
4.5% for fiscal 2007 thru 2010; (b) Gross Profit percentage increasing from
33.9% in fiscal 2004 to 34.1% in fiscal 2005, to 34.3% in fiscal 2006, and to
34.5% in fiscal 2007 and thereafter; (c) Operating expenses (excluding forwarder
commissions) reducing from 17.2% in fiscal 2004 and 2005, to 17.1% in fiscal
2006, 2007 and 2008, and to 17.0% in fiscal 2009 and 2010; and (d) a 16.00%
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 intends to perform an annual valuation analysis. Based on the
results of these annual valuation analyses, the Company's financial results
could be impacted by impairment of goodwill, which could result in periodic
write-downs ranging from zero to $11,239,917.
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.
There were outstanding options to purchase 590,000 shares of common stock for
the six months ended December 31, 2003 and 2002. These options were included in
the computation of diluted EPS for the six months ended December 31, 2003, but
were not included in the computation of diluted EPS for the six months ended
8
December 31, 2002 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 - Asset Purchase Acquisition
On October 13, 2002, the Company's Target Logistic Services, Inc. subsidiary
("Target") acquired the assets and certain liabilities of Cassady Air
Transportation, Inc., a Columbus, Ohio based forwarder for a combination of an
initial cash payment and an earn out structure over five years.
Note 6 - Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees." Under APB No. 25, the Company measures compensation cost for
stock-based employee compensation plans based on the intrinsic value of the
award at the date of grant. Intrinsic value is the excess of the fair value of
the underlying stock over the amount an employee must pay to acquire the stock.
For the three and six-month periods ended December 31, 2003 and 2002, the
Company recorded no expense for stock option grants under APB No. 25. The pro
forma disclosure requirements of SFAS No. 148, "Accounting for Stock Based
Compensation", are not presented as the amounts are immaterial.
Note 7 - Reclassifications
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform with the 2003 presentation.
Note 8 - Other Income
During the Company's fiscal years ended June 30, 1997 through 2001, the Company
included reserves for accrued expenses, accounts payable and contingencies
relating to subsidiaries of the Company that were either closed or sold. The
Company has determined that those reserves are no longer necessary. As a result,
other income of $1,447,699 has been recognized for the three and six months
ended December 31, 2002.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
----------------------------------
This Quarterly Report on Form 10-Q contains certain forward-looking
statements reflecting the Company's current expectations with respect to its
operations, performance, financial condition, and other developments. Such
statements are necessarily estimates reflecting the Company's best judgment
based upon current information and involve a number of risks and uncertainties.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from expectations are: (i) the Company's
historic losses and ability to maintain operating profitability, (ii) the
Company's ability to increase operating revenue, improve gross profit margins
and reduce selling, general and administrative costs, (iii) competitive
practices in the industries in which the Company competes, (iv) the Company's
dependence on current management, (v) the impact of current and future laws and
governmental regulations affecting the transportation industry in general and
the Company's operations in particular, (vi) general economic conditions, and
(vii) other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements. There
can be no assurance that these and other factors will not affect the accuracy of
such forward-looking statements. Forward-looking statements are preceded by an
asterisk (*).
OVERVIEW
The Company generated operating revenues of $113.4 million, $93.5
million, and $90.1 million, and had a net profit of $0.8 million, a net loss of
$0.9 million, and a net loss of $1.8 million for the fiscal years ended June 30,
2003, 2002 and 2001, respectively. The results for the fiscal year ended June
30, 2003 include $1.4 million of other income resulting from a non-recurring
reversal of accruals for expenses, accruals for contingencies, and accounts
payable of previously closed and sold subsidiaries. The Company had earnings or
(losses) before interest, taxes, depreciation and amortization (EBITDA) of
approximately $2,114,530, $340,000, and ($1,424,000), for the fiscal years ended
June 30, 2003, 2002, and 2001 respectively. EBITDA, is a non-GAAP measure of
income and does not include the effects of interest and taxes, and excludes the
"non-cash" effects of depreciation and amortization on current assets. Companies
have some discretion as to which elements of depreciation and amortization are
excluded in the EBITDA calculation. The Company excludes all depreciation
charges related to property, plant and equipment, and all amortization charges,
including amortization of goodwill, leasehold improvements and other intangible
assets. While management considers EBITDA useful in analyzing the Company's
results, it is not intended to replace any presentation included in the
Company's consolidated financial statements.
* For the three and six months ended December 31, 2003, the revenue of
the Company's Target subsidiary increased by 2.2% and 5.5%, respectively, when
compared to the prior year's corresponding periods. Target's gross profit margin
(i.e., gross operating revenues less cost of transportation expressed as a
percentage of gross operating revenue) for the three months ended December 31,
2003 decreased to 33.1% from 33.4%, primarily due to increases in international
import freight volume which traditionally have lower gross profit margins than
domestic freight movements. For the six months ended December 31, 2003 gross
profit margin increased to 33.6% from 32.6%., primarily due to increases in
domestic gross profit margins. Management continues to believe that the Company
must focus on increasing revenues and must increase gross profit margin to
maintain profitability. Management intends to continue to work on growing
revenue by increasing sales generated by the Company's employed sales personnel,
sales generated by exclusive forwarders, and by strategic acquisitions.
Management also intends to continue to work on improving Target's gross profit
margins by reducing transportation costs.
RESULTS OF OPERATIONS
Three Months ended December 31, 2003 and 2002
- ---------------------------------------------
Operating Revenue. Operating revenue increased to $33.0 million for
the three months ended December 31, 2003 from $32.3 million for the three months
ended December 31, 2002, a 2.2% increase. The Company's operating revenue
consists of domestic freight revenue and international freight revenue. Domestic
revenue decreased by 0.5% to $23,747,771 for the three months ended December 31,
2003 from $23,877,402 for the three months ended December 31, 2002. This
decrease is primarily due to the elimination of the Company's Consumer Direct
Logistics (CDL) operation at the end of last fiscal year, significantly offset
by increased domestic freight volume from other customers. International freight
revenue increased by 10.0% to $9,286,151 for the three months ended December 31,
2003 from $8,441,969 for the corresponding 2002 period, mainly due to increased
international air import freight volume.
Cost of Transportation. Cost of transportation increased to 66.9% of
operating revenue for the three month period ended December 31, 2003, from 66.6%
of operating revenue for the three month period ended December 31, 2002. This
10
increase was primarily due to increases in international air import freight
volume which traditionally have a higher cost of transportation, as a percentage
of sales than domestic freight movements.
Gross Profit. As a result of the factors described above, gross profit
for the three month period ended December 31, 2003 decreased to 33.1% from 33.4%
of operating revenue for the corresponding 2002 period, a 0.9% decrease. The
decrease is primarily due to increases in international air import freight
volume which traditionally have lower gross profit margins than domestic freight
movements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 32.0% of operating revenue for the three
months ended December 31, 2003 from 32.6% of operating revenue for the 2002
period. Within the Company's Target subsidiary, selling, general and
administration expenses (excluding exclusive forwarder commission expense) were
15.5% of operating revenue for the three months ended December 31, 2003 and
16.3% for the 2002 period, a 2.3% decrease. Exclusive forwarder commission
expense was 15.6% and 15.4% of operating revenue for the three months ended
December 31, 2003 and 2002, respectively, a 1.3% increase resulting from
increases in forwarder agent freight volume.
Other Income. Other income of $1,447,699 for the three months ended
December 31, 2002 is the result of a non-recurring reversal of accruals for
expenses, accruals for contingencies, and accounts payable of previously closed
and sold subsidiaries.
Net Profit. For the three months ended December 31, 2003, the Company
realized a net profit of $153,902, compared to a net profit of $1,179,124 for
the three months ended December 31, 2002.
Six Months ended December 31, 2003 and 2002
- -------------------------------------------
Operating Revenue. Operating revenue increased to $61.6 million for
the six months ended December 31, 2003 from $58.4 million for the six months
ended December 31, 2002, a 5.5% increase. The Company's operating revenue
consists of domestic freight revenue and international freight revenue. Domestic
revenue increased by 3.9% to $44,880,499 for the six months ended December 31,
2003 from $43,195,186 for the corresponding 2002 period. This increase is
primarily due to the movement of larger size shipments, partially offset by the
elimination of the Company's CDL operation at the end of last fiscal year.
International revenue increased by 10.1% to $16,741,579 for the six months ended
December 31, 2003 from $15,206,870 for the 2002 period, mainly due to increased
international air import freight volume.
Cost of Transportation. Cost of transportation decreased to 66.4% of
operating revenue for the six month period ended December 31, 2003, from 67.4%
of operating revenue for the six month period ended December 31, 2002. This
decrease was primarily due to a lower cost of transportation, as a percentage of
sales, on domestic freight movements.
Gross Profit. As a result of the factors described above, gross profit
for the six month period ended December 31, 2003 increased to 33.6% from 32.6%
of operating revenue for the corresponding 2002 period, a 3.1% increase. The
increase is primarily due to increases in domestic gross profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 32.7% of operating revenue for the six
months ended December 31, 2003 from 32.8% of operating revenue for the
corresponding 2002 period. Within the Company's Target subsidiary, selling,
general and administration expenses (excluding exclusive forwarder commission
expense) were 16.7% of operating revenue for the six months ended December 31,
2003 and 17.0% for the six months ended December 31, 2002, a 1.8% decrease.
Exclusive forwarder commission expense was 15.1% and 14.8% of operating revenue
for the six months ended December 31, 2003 and 2002, respectively, a 2.0%
increase resulting from increases in forwarder agent freight volume.
Other Income. Other income of $1,447,699 for the six months ended
December 31, 2002 is the result of a non-recurring reversal of accruals for
expenses, accruals for contingencies, and accounts payable of previously closed
and sold subsidiaries.
Net Profit. For the six months ended December 31, 2003, the Company
realized a net profit of $202,263, compared to a net profit of $726,415 for the
six months ended December 31, 2002.
11
LIQUIDITY AND CAPITAL RESOURCES
General. During the six months ended December 31, 2003, net cash used
in operating activities was $670,469. Cash used in investing activities was
$109,944, representing capital expenditures. Cash used for financing activities
was $186,166, which primarily consisted of dividend payments associated with the
Company's Class A and C preferred stock and repayments under the Company's
accounts receivable financing facility.
Capital expenditures. Capital expenditures for the six months ended
December 31, 2003 were $109,944, representing capital expenditures.
* GMAC Facility. The Company's Target subsidiary maintains a $10
million revolving credit facility ("GMAC Facility") with GMAC Commercial Credit
LLC ("GMAC"), guaranteed by the Company. The interest rate of the GMAC Facility
is prime plus 1%, however, at any time prior to September 20, 2002, the interest
rate could not be less than 6.0%, and after September 20, 2002 cannot be less
than 5.0%. Under the terms of the GMAC Facility, Target can borrow the lesser of
$10 million or 85% of the eligible accounts receivable. The borrowings under the
GMAC Facility are secured by a first lien on all of the Company's and its
subsidiaries' assets. As of December 31, 2003, there were outstanding borrowings
of $7,357,178 under the GMAC Facility (which represented 73.6% of the amount
available thereunder) out of a total amount available for borrowing under the
GMAC Facility of $10,000,000. 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.
* Asset Purchase Acquisitions. On November 30, 2001, February 11,
2002, and October 13, 2002, the Company's Target subsidiary acquired the assets
and certain liabilities of SDS Logistics, a Newark, New Jersey based forwarder,
Air America Freight Service, Inc., an Atlanta, Georgia based forwarder, and
Cassady Air Transportation, Inc., a Columbus, Ohio based forwarder,
respectively, in each instance for a combination of an initial cash payment and
an earn out structure over five years. The earn-out structures are strictly
dependent on future profits achieved at the location acquired, and the Company
has no minimum commitment or obligation. The Company does not expect that the
earn-out payments will have a material impact on its liquidity.
* Working Capital Requirements. Cash needs of the Company are
currently met by the Company's accounts receivable financing facility and cash
on hand. As of December 31, 2003, the Company had $2,642,822 available under its
$10 million accounts receivable financing facility and $3,032,466 in cash from
operations and cash on hand. The Company believes that its current financial
resources will be sufficient to finance its operations and obligations (current
and long-term liabilities) for the long and short terms. However, the Company's
actual working capital needs for the long and short terms will depend upon
numerous factors, including the Company's operating results, the cost of
increasing the Company's sales and marketing activities, competition, and the
availability of a revolving credit facility, none of which can be predicted with
certainty.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and
Results of Operations discusses the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, intangible assets,
financing operations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of the Company's
financial statements include estimates as to the appropriate carrying value of
certain assets and liabilities which are not readily apparent from other
sources, primarily allowance for doubtful accounts, accruals for transportation
and other direct costs, accruals for cargo insurance, and the classification of
net operating loss and tax credit carryforwards between current and long-term
assets. These accounting policies are described at relevant sections in this
discussion and analysis and in the notes to the consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2003.
The Company's balance sheet includes an asset in the amount of
$11,239,917 for purchased goodwill. In accordance with accounting
pronouncements, the amount of this asset must be reviewed annually for
impairment, written down and charged to results of operations in the period(s)
in which the recorded value of goodwill is more than its fair value. The Company
12
obtained an independent valuation analysis completed during the second quarter
ending December 2003 and 2002, and based on the valuations, the Company
determined that the goodwill was not impaired. Had the determination been made
that the goodwill asset was impaired, the value of this asset would have been
reduced by an amount ranging from zero to $11,239,917, and the Company's
financial statements would reflect the reduction. For additional description,
please refer to Note 3 to the Company's Notes to the unaudited Consolidated
Financial Statements contained in this Quarterly Report.
During the Company's fiscal years ended June 30, 1997 through 2001,
the Company included reserves for accrued expenses, accounts payable and
contingencies relating to subsidiaries of the Company that were either closed or
sold. Following discussions with the Company's Audit Committee, independent
auditors and Company counsel, the Company determined that those reserves were no
longer necessary. As a result, during the quarter ending December 31, 2002 the
Company recognized $1,447,699 of other income. Had the Company not made the
adjustment during the quarter ended December 31, 2002, the Company would have
reported net income before taxes of $160,859 for the three month period, and a
net loss before taxes of $291,850 for the six month period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures
that is designed to provide reasonable assurance that information, which is
required to be disclosed by the Company in the reports that it files or submits
under the Securities and Exchange Act of 1934, as amended, is accumulated and
communicated to management in a timely manner. The Company's Chief Executive
Officer and Chief Financial Officer have evaluated this system of disclosure
controls and procedures as of the end of the period covered by this quarterly
report, and believe that the system is operating effectively to ensure
appropriate disclosure. There have been no changes in the Company's internal
control over financial reporting during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
13
PART II - OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 4, 2003, the Company held its Annual Meeting of
Shareholders. The only matter submitted to the shareholders for a vote was the
election of directors.
The nominees submitted for election as directors were Michael Barsa,
Christopher A. Coppersmith, Brian K. Coventry, Philip J. Dubato and Stuart
Hettleman. At least 10,947,727 shares were voted in favor of each director, and
no more than 254,803 shares were voted to withhold approval of any director. As
a result, Messrs, Barsa, Coppersmith, Coventry, Dubato and Hettleman were
elected to serve as directors until the next annual meeting of shareholders of
the Company and until their successors are duly elected and qualified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
Exhibit No.
- -----------
3.1 Certificate of Incorporation of Registrant, as amended (incorporated
by reference to Exhibit 3.1 to the Registrant's Current Report on Form
8-K dated November 30, 1998, File No. 0-29754)
3.2 By-Laws of Registrant, as amended (incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1998, File No. 0-29754)
4.1 Certificate of Designations with respect to the Registrant's Class A
Preferred Stock (contained in Exhibit 3.1)
4.2 Certificate of Designations with respect to the Registrant's Class B
Preferred Stock (contained in Exhibit 3.1)
4.3 Certificate of Designations with respect to the Registrant's Class C
Preferred Stock (contained in Exhibit 3.1)
4.4 Certificate of Designations with respect to the Registrant's Class D
Preferred Stock (contained in Exhibit 3.1)
4.5 Certificate of Designations with respect to the Registrant's Class E
Preferred Stock (contained in Exhibit 3.1)
10.1 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 2003, File No. 0-29754)
10.2 Restated and Amended Accounts Receivable Management and Security
Agreement, dated as of July 13, 1998 by and between GMAC Commercial
Credit LLC (successor by merger to BNY Financial Corp.), as Lender,
and Target Logistic Services, Inc., as Borrower, and guaranteed by the
Registrant ("GMAC Facility Agreement") (incorporated by reference to
Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the
Year Ended June 30, 1999, File No. 0-29754)
10.3 Letter amendment to GMAC Facility Agreement, dated January 25, 2001
(incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
2001, File No. 0-29754)
10.4 Amendment to GMAC Facility Agreement, dated September 20, 2002
(incorporated by reference to Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the Year Ended June 30, 2002, File No.
0-29754)
10.5 Amendment to GMAC Facility Agreement, dated February 12, 2003
(incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2003,
File No. 0-29754)
10.6 Employment Agreement dated June 24, 1996 between the Registrant and
Stuart Hettleman, as amended (incorporated by reference to Exhibits
10.5, 10.6 and 10.7 of the Registrant's Annual Report on Form 10-K for
the Fiscal Year Ended June 30, 2002, and Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the Fiscal Year Ended June
30, 2003, File No. 0-29754)
10.7(P) Lease Agreement for Los Angeles Facility (incorporated by reference to
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the
Year Ended June 30, 1997, File No. 0-29754)
10.8 Amendment to Lease Agreement for Los Angeles Facility (incorporated by
reference to Exhibit 10.9 to the Registrant's Annual Report on Form
10-K for the Year Ended June 30, 2002, File No. 0-29754)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
99.1 Press Release dated February 11, 2004
(b) Reports on Form 8-K:
None.
14
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: February 11, 2004 TARGET LOGISTICS, INC.
Registrant
/s/ Stuart Hettleman
---------------------------------------
President, Chief Executive Officer
/s/ Philip J. Dubato
---------------------------------------
Vice President, Chief Financial Officer
15
Exhibit 31.1
------------
CERTIFICATION
I, Stuart Hettleman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Target
Logistics, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the
Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of Registrant's
board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: February 11, 2004 /s/ Stuart Hettleman
------------------------------------
Stuart Hettleman
Chief Executive Officer
Exhibit 31.2
------------
CERTIFICATION
I, Philip J. Dubato, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Target
Logistics, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the
Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of Registrant's
board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: February 11, 2004 /s/ Philip J. Dubato
------------------------------------
Philip J. Dubato
Chief Financial Officer
Exhibit 32.1
------------
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of Target Logistics, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission and to which this Certification is an
exhibit (the "Report"), the undersigned hereby certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company for the periods reflected therein.
Date: February 11, 2004 /s/ Stuart Hettleman
------------------------------------
Stuart Hettleman
Chief Executive Officer
/s/ Philip J. Dubato
------------------------------------
Philip J. Dubato
Chief Financial Officer
Exhibit 99.1
------------
FOR: TARGET LOGISTICS, INC.
CONTACT: Stuart Hettleman
(410) 338-0127
KCSA Joseph A. Mansi/Robert Greenberrg
CONTACT: (212) 896-1205/(212) 896-1265
[email protected]/[email protected]
---------------
FOR IMMEDIATE RELEASE
TARGET LOGISTICS, INC. ANNOUNCES
FISCAL SECOND QUARTER AND SIX MONTHS RESULTS
BALTIMORE, Md., February 11, 2004-- Target Logistics, Inc. (OTC BB: TARG)
announced today results for the second fiscal quarter and six months ended
December 31, 2003.
Operating revenues for the second quarter were $33,033,922, compared
with operating revenues of $32,319,371 reported in the second quarter of fiscal
2003. The Company reported net income for the fiscal second quarter of $153,902,
or $0.0l per diluted share, compared with a net income of $1,179,124, or $0.09
per basic and $0.05 diluted share reported for the second quarter of fiscal
2003.
For the fiscal six-month period ended December 31, 2003, operating
revenues were $61,622,078 compared with operating revenues of $58,402,056,
reported for the same period in fiscal 2003. Net income for the six months ended
December 31, 2003 was $202,263, or $0.01 per diluted share, compared with a net
income of $726,415, or $0.05 per basic and $0.03 per diluted share for the
period ended December 31, 2002.
Net income for the second quarter and six months ended December 31,
2002 includes $1,447,699 of "other income" which consists of non-recurring
reversals of accruals for expenses, accruals for contingencies and accruals for
accounts payable of previously closed and sold subsidiaries.
Stuart Hettleman, President and Chief Executive Officer, said, "We are
pleased with our performance and our continued improvement in revenue, gross
profits margins and operating income for the first half of fiscal 2004.
Operating income for the six months ended December 31, 2003 is $668,352 ahead of
last year's fiscal six months and we have now had five consecutive profitable
quarters. We expect that this trend will continue."
Mr. Hettleman continued, "We will continue our strategy of containing
expenses while working to increase revenue growth and gross profit margins. We
have successfully integrated the acquisitions we have made and expect to seek
additional acquisitions as we move forward. Our balance sheet is strong and will
allow us the resources to continue our planned growth."
About Target Logistics, Inc.:
Target Logistics, Inc. provides freight forwarding and logistics
services through its wholly-owned subsidiary, Target Logistic Services, Inc.
(Tables Follow)
Statements contained in this press release that are not historical facts are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Although Target Logistics believes that the
expectations reflected in such forward-looking statements are reasonable, the
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projections. This release
and prior releases are available on the KCSA Public Relations Worldwide website
at www.kcsa.com.
Target Logistics, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended December 31,
-------------------------------
2003 2002
---- ----
Operating revenues $33,033,922 $32,319,371
Cost of transportation 22,102,596 21,534,361
----------- -----------
Gross profit 10,931,326 10,785,010
Selling, general and administrative
expenses ("SG&A"):
SG&A - Target subsidiary (exclusive
forwarder commissions) 5,150,733 4,979,403
SG&A - Target subsidiary 5,128,943 5,252,007
SG&A Corporate 174,426 184,963
Depreciation and amortization 105,844 113,694
----------- -----------
Selling, general and administrative expenses 10,559,946 10,530,067
Operating income 371,380 254,943
Other income (expense):
Interest (expense) (92,332) (94,084)
Other income - 1,447,699
----------- -----------
Income before taxes 279,048 1,608,558
Provision for income taxes 125,146 429,434
----------- -----------
Net income $ 153,902 $1,179,124
=========== ==========
Net Income per share attributable
to common shareholders
Basic $ - $ 0.09
=========== ==========
Diluted $ 0.01 $ 0.05
=========== ==========
Weighted average shares outstanding:
Basic 12,179,002 12,179,002
========== ==========
Diluted 19,717,041 21,845,657
========== ==========
Target Logistics, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Six Months Ended December 31,
-----------------------------
2003 2002
---- ----
Operating revenues $61,622,078 $58,402,056
Cost of transportation 40,934,884 39,363,383
----------- -----------
Gross profit 20,687,194 19,038,673
Selling, general and administrative expenses ("SG&A"):
SG&A - Target subsidiary (Exclusive
forwarder commissions) 9,315,530 8,664,640
SG&A - Target subsidiary 10,268,089 9,913,648
SG&A Corporate 339,439 362,319
Depreciation and amortization 209,985 212,267
----------- -----------
Selling, general and administrative expenses 20,133,043 19,152,874
Operating income 554,151 (114,201)
Other income (expense):
Interest ( expense) (182,416) (177,649)
Other income - 1,447,699
----------- -----------
Income before taxes 371,735 1,155,849
Provision for income taxes 169,472 429,434
----------- -----------
Net income $ 202,263 $ 726,415
=========== ===========
Net Income per share attributable
to common shareholders
Basic $ - $ 0.05
=========== ===========
Diluted $ 0.01 $ 0.03
=========== ===========
Weighted average shares outstanding:
Basic 12,179,002 12,179,002
=========== ===========
Diluted 18,929,966 23,242,771
=========== ===========
Target Logistics, Inc. and Subsidiaries
Selected Balance Sheet Data
December 31, June 30,
2003 2003
---- ----
Cash and Cash Equivalents $ 3,032,446 $ 3,999,045
Total Current Assets $25,608,634 $22,414,096
Total Assets $40,246,874 $37,191,252
Current Liabilities $24,522,886 $21,550,790
Long Term Indebtedness $ 104,059 $ 61,130
Working Capital $ 1,085,748 $ 863,306
Shareholders' Equity $15,619,929 $15,579,332
# # #