SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to ___________.
Commission file number: 0-29754
TARGET LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3309110
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
112 East 25th Street, Baltimore, Maryland 21218
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 338-0127
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 16, 1999 was $2,703,863.
The number of shares of common stock outstanding as of September 16, 1999 was
9,296,917.
DOCUMENTS INCORPORATED BY REFERENCE
To the extent specified, Part III of this Form 10-K incorporates information by
reference to the Registrant's definitive proxy statement for its 1999 Annual
Meeting of Shareholders (to be filed).
<PAGE>
TARGET LOGISTICS, INC.
1999 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
----
PART I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 16
2
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PART I
------
ITEM 1. BUSINESS
--------
Background
- - ----------
Target Logistics, Inc. (formerly, Amertranz Worldwide Holding Corp.)
("Company") provides freight forwarding services and logistics services, through
its wholly owned subsidiary, Target Logistic Services, Inc. (formerly, Target
Airfreight, Inc.) ("Target"). Prior to July 13, 1998, the Company also provided
services through its wholly-owned subsidiary, Caribbean Air Services, Inc.
("CAS"), and, until June 23, 1997, also provided services through its Amertranz
Worldwide, Inc. ("Amertranz") subsidiary. The Company has a network of offices
in 29 cities throughout the United States.
The Company was incorporated in Delaware in January 1996 as the
successor to operations commenced in 1970 as the "Wrangler Aviation" division of
Blue Bell, Inc., an apparel manufacturer. The Wrangler Aviation division
transported raw material to Blue Bell facilities in Puerto Rico and returned the
finished goods to its facilities in Greensboro, North Carolina. In 1988, new
owners of Blue Bell, Inc. separately incorporated the division in Delaware as
Wrangler Aviation, Inc. ("Wrangler"), and then sold Wrangler in October 1990. At
that time, Caribbean Freight System, Inc. ("CFS") was incorporated in Puerto
Rico to act as the marketing arm of Wrangler.
In December 1991, the owners of Wrangler engaged a new management team
following the discovery of certain improprieties performed under the old
management. As a result of investigations by the new management, it was
determined to reorganize both Wrangler and CFS under Chapter 11 of the United
States Bankruptcy Code. CFS and Wrangler both successfully emerged from the
Chapter 11 proceedings in November 1992 and June 1993, respectively. In January
1994, Wrangler changed its name to TIA, Inc. ("TIA"). Thereafter, TIA and CFS
continued to specialize in the movement of large freight shipments for
manufacturers, and maintained sales and/ or full offices in Philadelphia, New
York, Chicago, Los Angeles, Hartford, and Greensboro, North Carolina, as well as
a network of sales persons in Puerto Rico.
Amertranz and its predecessor began operations in June 1985 as an
independently owned exclusive agent of a domestic and international air freight
forwarder. During the next eight years, Amertranz opened nine offices under its
exclusive agency arrangement.
In January 1994, Amertranz acquired the domestic air freight forwarding
business (i.e., the transport of freight which has both its point of origin and
its point of destination within the United States) of the freight forwarder for
which Amertranz was acting as an exclusive agent, as a result of the settlement
of a lawsuit. Thereafter, Amertranz owned and operated 20 offices primarily
focusing on the movement of domestic freight and, in its original nine offices,
international air freight. As an independent freight operation, Amertranz
established an internal infrastructure, including accounting, data processing
and communications departments, to support its 20 office network.
In February 1996, the Company acquired all of the issued and
outstanding stock of Amertranz and received the freight forwarding business of
TIA and CFS, and contributed the TIA and CFS freight forwarding business to CAS.
As a result, Amertranz became a wholly-owned subsidiary of the Company
conducting Amertranz's freight forwarding and logistics services businesses, and
the freight forwarding business of TIA and CFS was transferred to the Company
and is conducted by CAS.
In October 1996, the Company acquired Consolidated Air Services, Inc.
("Consolidated"), a Phoenix based freight forwarder. As a result, Consolidated
became a wholly-owned subsidiary of the Company with Amertranz conducting
Consolidated's freight forwarding business. In May 1997, the Company acquired
(by merger into the Company's Target subsidiary) Target Air Freight, Inc., a Los
Angeles-based freight forwarder ("Air Freight"). Under the terms of the merger,
the Company (i) paid $400,000 to Air Freight's stockholders at the time of the
merger and an additional $77,000 on June 8, 1999, and (ii) issued to Air
Freight's stockholders 900,000 shares of Common
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Stock at the time of the merger and an additional 1,077,922 shares of Common
Stock on June 8, 1999, pursuant to Regulation D promulgated under the Securities
Act of 1933.
Since the business of the Company's Amertranz subsidiary incurred
operating losses for each of its operating periods, on June 23, 1997 the
Company's Amertranz subsidiary ceased operations and transferred its customer
accounts to the Company's Target subsidiary for fair consideration.
On July 13, 1998, CAS sold substantially all of the operating assets of
CAS to Geologistics Air Services, Inc. an indirect wholly owned subsidiary of
Geologistics Corporation ("Geologistics") for $27 million in cash (the "CAS
Sale"), in accordance with the terms of an Asset Purchase Agreement dated June
15, 1998 (the "Asset Purchase Agreement"). Under the terms of the Asset Purchase
Agreement, CAS retained its accounts receivable. CAS realized $2.7 million from
these accounts receivable after payment of liabilities during the twelve months
ended June 30, 1999.
Following the CAS Sale, the Company operates through its wholly-owned
subsidiary, Target. On November 30, 1998, the Company changed its name to
"Target Logistics, Inc."
Description of Business
- - -----------------------
The Company's freight forwarding services involve arranging for the
total transport of customers' freight from the shipper's location to the
designated recipients, including the preparation of shipping documents and the
providing of handling, packing and containerization services. The Company
concentrates on cargo shipments weighing more than 50 pounds and generally
requiring second-day delivery. The Company also assembles bulk cargo and
arranges for insurance. The Company has a network of offices in 29 cities
throughout the United States, including exclusive agency relationships in 18
cities. The Company has international freight forwarding operations consisting
of strategic relationships in over 20 countries including share ownership in its
exclusive agents in China, Hong Kong, Philippines and Singapore.
Operations
- - ----------
Movement of Freight. The Company does not own any airplanes or
significant trucking equipment and relies on independent contractors for the
movement of its cargo. The Company utilizes its expertise to provide forwarding
services that are tailored to meet customers' requirements. It arranges for
transportation of customers' shipments via commercial airlines, air cargo
carriers, steamship lines, and, if delivery schedules permit, the Company makes
use of lower cost inter-city truck transportation services. The Company selects
the carrier for particular shipments on the basis of cost, delivery time and
available cargo capacity. Through the Company's advanced data processing system,
it can provide, at no additional cost to the customer, value-added services such
as electronic data interchange, computer based shipping and tracking systems and
customized computer generated reports.
Additionally, the Company provides cargo assembly and warehousing services.
The rates charged by the Company to its customers are based on
destination, shipments weight and required delivery time. The Company offers
graduated discounts for shipments with later scheduled delivery times and rates
generally decrease in inverse proportion to the increasing weight of shipments.
Due to the high volume of freight controlled by the Company, it is able to
obtain favorable contract rates from carriers and is often able to book freight
space at times when available space is limited. When possible, the Company
consolidates different customers' shipments to reduce its cost of
transportation.
Information Systems. An important component of the Company's business
strategy is to provide accurate and timely information to its management and
customers. Accordingly, the Company has invested, and will continue to invest,
substantial management and financial resources in developing these information
systems.
The Company leases an HP 9000 mainframe computer and has a proprietary
freight forwarding software system which the Company has named "TRACS". TRACS is
an integrated freight forwarding and financial management data processing
system. It provides the Company with the information needed to manage its
sourcing
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and distribution activities through either printed or electronic medium.
Specifically, the TRACS system permits the Company to track the flow of a
particular shipment from the point of origin through the transportation process
to the point of delivery. The Company intends to continuously upgrade TRACS to
enhance its ability to maintain a competitive advantage.
International Operations. During the fiscal year ended June 30, 1999,
the Company's international freight forwarding accounted for 37.2% of the
Company's operating revenue. On a pro forma basis (assuming the CAS Sale closed
on July 1, 1998), after elimination of revenue from CAS, international freight
forwarding would account for 38.3% of the Company's operating revenue.
Customers and Marketing
- - -----------------------
The Company's principal customers include large manufacturers and
distributors of computers and other electronic and high-technology equipment,
computer software and wearing apparel. As of June 30, 1999, the Company had
approximately 3,200 accounts.
The Company markets its services through an organization of
approximately 20 full-time salespersons and 32 independent sales agents
supported by the sales efforts of senior management, and the operations staff in
the Company's offices. The Company strongly promotes team selling, wherein the
salesperson is able to utilize expertise from other departments in the Company
to provide value-added services to gain a specific account. The Company staffs
each office with operational employees to provide support for the sales team,
develop frequent contact with the customer's traffic department, and maintain
customer service. The Company believes that it is important to maintain frequent
contact with its customers to assure satisfaction and to immediately react to
resolve any problem as quickly as possible.
The Company's Fashion Services Division targets customers from
manufacturers to retail establishments and provides specific expertise in
handling fashion-related shipments. The Fashion Services Division specializes in
the movement of wearing apparel for manufacturing customers to their department
store customers located throughout the United States.
Many of the Company's customers utilize more than one transportation
provider. In soliciting new accounts, the Company uses a strategy of becoming an
approved carrier in order to demonstrate the quality and cost- effectiveness of
its services. Using this approach, the Company has advanced its relationships
with several of its major customers, from serving as a back-up freight services
provider to primary freight forwarder.
Competition
- - -----------
Although there are no weight restrictions on the Company's shipments,
the Company focuses primarily on cargo shipments weighing more than 50 pounds
and requiring second-day delivery. As a result, the Company does not directly
compete for most of its business with overnight couriers and integrated shippers
of principally small parcels, such as United Parcel Service of America, Inc.,
Federal Express Corporation, DHL Worldwide Express, Inc., Airborne Freight
Corporation and the United States Postal Service. However, some integrated
carriers, such as Emery Air Freight Corporation and Pittston BAX Group, Inc.,
primarily solicit the shipment of heavy cargo in competition with forwarders.
There is intense competition within the freight forwarding industry.
While the industry is highly fragmented, the Company most often competes with a
relatively small number of forwarders who have nationwide networks and the
capability to provide a full range of service similar to that offered by the
Company. These include Eagle USA Air Freight, Inc., Pilot Air Freight, Inc., and
Geologistics Americas, Inc. There is also competition from passenger and cargo
air carriers and trucking companies. On the international side of the business,
the Company competes with forwarders that have a predominantly international
focus, such as Fritz Companies, Inc., Air Express International Corporation and
Circle International Group, Inc. All of these companies, as well as many other
competitors, have substantially greater facilities, resources and financial
capabilities than those of the Company. The Company also faces competition from
regional and local air freight forwarders, cargo sales agents and brokers,
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surface freight forwarders and carriers and associations of shippers organized
for the purpose of consolidating their members' shipments to obtain lower
freight rates from carriers.
Employees
- - ---------
The Company and its subsidiaries had approximately 170 full-time
employees as of June 30, 1999. None of the Company's employees are currently
covered by a collective bargaining agreement. The Company has experienced no
work stoppages and considers its relations with its employees to be good.
Regulation
- - ----------
The Company's freight forwarding business as an indirect air cargo
carrier is subject to regulation by the United States Department of
Transportation under the Federal Aviation Act. However, air freight forwarders
(including the Company) are exempted from most of such Act's requirements by the
Economic Aviation Regulations promulgated thereunder. The Company's foreign air
freight forwarding operations are subject to regulation by the regulatory
authorities of the respective foreign jurisdictions. The air freight forwarding
industry is subject to regulatory and legislative changes which can affect the
economics of the industry by requiring changes in operating practices or
influencing the demand for, and the costs of providing, services to customers.
ITEM 2. PROPERTIES
----------
As of June 30, 1999, the Company leased terminal facilities consisting
of office and warehouse space in 11 cities located in the United States, and
also utilized 18 offices operated by exclusive agents. The Company's facilities
range in size from approximately 1,000 square feet to approximately 100,000
square feet and consist of offices and warehouses with loading bays. All of such
properties are leased from third parties. The Company's headquarters are located
in Baltimore, Maryland, and its principal warehouse facility is located in Los
Angeles, California, and consists of approximately 100,000 square feet of floor
space leased pursuant to the terms of a lease which expires in July 2002.
Management believes that its current facilities are underutilized and are more
than sufficient for its planned growth.
The Company has an additional 10 terminal facilities in the following locations:
Atlanta, Georgia Houston, Texas
Charlotte, North Carolina Miami, Florida
Chicago, Illinois Newark, New Jersey
Dallas, Texas New York, New York
Greensboro, North Carolina Seattle, Washington
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company had previously reported in its Annual Report on Form 10-K
for the fiscal year ended June 30, 1998, that on June 15, 1998, the Company was
served with a complaint filed in the United States District Court for the
Eastern District of New York (case number CV 98 3777), by Martin Hoffenberg, a
former consultant to the Company. The Company, its Amertranz, Target, and CAS
subsidiaries, Stuart Hettleman (president and a director of the Company), and
Richard A. Faieta, (a former officer and director of the Company), and two
principal shareholders of the Company, are named defendants in the lawsuit. The
complaint is based on events occurring prior to February 1996, when Mr.
Hoffenberg controlled the Amertranz subsidiary as its president and chairman,
and on events occurring subsequent thereto, when Mr. Hoffenberg served as a
consultant to the Company. The complaint alleges breach of contract, violations
of the federal anti-racketeering laws, fraud, and failure to pay wages and
benefits. The complaint seeks economic damages in excess of $5.6 million, and
punitive damages of $7.5 million. Upon motion filed on behalf of the Company,
the court dismissed the action, but permitted Mr. Hoffenberg to file an amended
complaint. The Company then served a motion to dismiss the amended complaint.
The parties
6
<PAGE>
then filed a stipulation pursuant to which Mr. Hoffenberg dismissed all claims
against all parties except claims for breach of contract and vacation pay
totalling $135,333 in the aggregate against the Company and its Amertranz
subsidiary. The Company intends to vigorously defend the action, which is now a
claim for $135,333. The Company believes that the complaint is without merit and
that any material recovery by Mr. Hoffenberg is unlikely.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
- - ------------------------------------
The following is a listing of the executive officers of the Company as
of June 30, 1999. There are no family relationships between any Directors and
Officers of the Company.
NAME AGE POSITION
Stuart Hettleman ............. 49 President and Chief Executive
Officer
Philip J. Dubato ............. 43 Vice President, Chief Financial
Officer and Secretary
Christopher Coppersmith ...... 49 President and Chief Executive
Officer, Target Logistic
Services, Inc.
STUART HETTLEMAN has been President, Chief Executive Officer and a director of
the Company and a director and Executive Vice President of each of Amertranz and
CAS, since February 7, 1996, and a director and Chairman of Target since May 8,
1997. Mr. Hettleman is also an executive officer of several of the Company's
predecessors. Specifically, he has been Vice President of TIA since 1990 and is
currently the Executive Vice President of TIA; and has been Vice President of
CFS since 1991 and is currently Executive Vice President of CFS.
PHILIP J. DUBATO has been Vice President, Chief Financial Officer and Secretary
of the Company since February 3, 1997 and a director of the Company since
September 18, 1998. From 1984 through 1996, Mr. Dubato was employed by LEP
Profit International, Inc., a domestic and international freight forwarder,
where he held successive positions as Controller, Chief Financial Officer and
Executive Vice President.
CHRISTOPHER COPPERSMITH has been President and Chief Executive Officer of Target
Logistic Services, Inc. (acquired by the Company in May 1997) since November
1996, and a director of the Company since May 1997. From 1974 through October
1996, Mr. Coppersmith was Executive Vice President and Chief Operating Officer
of Target Airfreight, Inc.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
-------------------------------------------------------------
Prior to February 25, 1998, the Company's common stock, $.01 par value
(the "Common Stock") and Redeemable Common Stock Purchase Warrants (the
"Warrants") were listed on the NASDAQ SmallCap Market under the symbols AMTZ and
AMTZW, respectively. From February 25, 1998 to December 3, 1998 both the Common
Stock and the Warrants were traded on the Over-The-Counter (OTC) market under
the same symbols (AMTZ and AMTZW). Since December 4, 1998, as a result of the
name change, both the Common Stock and the Warrants have been traded on the OTC
market under the symbols TARG and TARGW, respectively.
The following table shows the high and low sales prices of the Common
Stock and Warrants for each of the quarters during the fiscal years indicated,
as reported by NASDAQ and as available through the OTC market. The quotations
represent prices between dealers and do not reflect the retailer markups,
markdowns or commissions, and may not represent actual transactions. There have
been no dividends declared.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
Fiscal Year Ended June 30, 1998
<S> <C> <C> <C> <C>
First Quarter High - 1 3/4 High - 1/2
Low - 7/8 Low - 1/8
Second Quarter High - 2 1/4 High - 7/16
Low - 1 Low - 1/16
Third Quarter High - 2 1/4 High - 1/4
Low - 9/16 Low - 3/16
Fourth Quarter High - 1 9/16 High - 3/16
Low - 1 1/16 Low - 1/16
Fiscal Year Ended June 30, 1999
First Quarter High - 1 7/8 High - 1/8
Low - 11/16 Low - 3/100
Second Quarter High - 1 7/8 High - 2/25
Low - 1/2 Low - 1/100
Third Quarter High - 1 5/8 High - 1/10
Low - 9/16 Low - 1/100
Fourth Quarter High - 1 1/8 High - 1/16
Low - 35/50 Low - 1/50
</TABLE>
On September 16, 1999 there were 841 shareholders of record of the
Company's Common Stock and 718 holders of record of the Company's Warrants. The
closing price of the Common Stock on that date was $0.75 per share. The closing
price of the Warrants on that date was $0.0625 per Warrant.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
TARGET LOGISTICS, INC.
(in thousands, except per share data) (1)
Year Ended Six Months
December 31, Ended June 30, Year Ended June 30,
------------------------------------------------------------------
1995 1996 1997 1998 1999
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Operating revenue $38,211 $27,446 $75,352 $97,784 $51,720
Cost of transportation 30,300 20,961 56,884 73,599 34,790
------- ------- ------- ------- ------
Gross profit 7,911 6,485 18,468 24,185 16,930
Selling, general &
administrative
expenses 4,513 8,772 24,300 23,012 21,304
Restructuring charge - - (3,407) - -
Operating income (loss) $ 3,398 $(2,288) $(9,239) $ 1,173 $(4,374)
Gain on sale of subsidiary - - - - 24,832
Net income (loss) $ 2,366 $(6,397) (10,508) $ 7,404 $14,016
Net income (loss) per common share $ (1.84) $ (1.74) $ 0.90 $ 1.63
Balance Sheet Data:
Total assets $22,740 $29,821 $38,547 $34,932
Working capital (deficit) (13,937) (12,541) (2,340) 5,717
Current liabilities 22,470 27,158 26,085 15,251
Long-term indebtedness 8,018 4,094 4,138 24
Shareholders' equity (deficit) $(7,749) $(1,430) $ 8,324 $19,657
</TABLE>
(1) The amounts for the freight forwarding business of the Company represent the
historical operations associated with the freight forwarding business of TIA and
CFS contributed to the Company in the combination of these businesses. The
freight forwarding business of TIA and CFS did not operate as a separate legal
or reporting entity during the period presented. Management believes that if the
operations data were restated to exclude the operation of these aviation assets,
cost of transportation would be higher but would be more than offset by a
reduction in selling, general and administrative expenses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
This Annual Report on Form 10-K contains certain forward-looking
statements reflecting the Company's current expectations with respect to its
operations, performance, financial condition, and other developments. Such
statements are necessarily estimates reflecting the Company's best judgement
based upon current information and involve a number of risks and uncertainties.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from expectations are: (i) the Company's
historic losses and ability to achieve operating profitability following the CAS
Sale, (ii) the Company's ability to increase operating revenue, improve gross
profit margins and reduce selling, general and administrative costs, (iii)
competitive practices in the industries in which the Company competes, (iv) the
Company's dependence on current management, (v) the impact of current and future
laws and governmental regulations affecting the transportation industry in
general and the Company's operations in particular, (vi) general economic
conditions, and (vii) other factors which may be identified from time to time in
the Company's Securities and Exchange Commission filings and other public
announcements. There can be no assurance that these and other factors will not
affect the accuracy of such forward-looking statements. Forward-looking
statements are preceded by an asterisk (*).
Overview
The Company was incorporated in January 1996 to continue the freight
forwarding business of TIA and CFS and acquire Amertranz. The Company generated
operating revenues of $51.7 million, 97.8 million, and 75.4 million, and had a
net profit of $14.0 million and $7.4 million, and a net loss of $10.5 million,
for the fiscal years
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ended June 30, 1999, 1998 and 1997, respectively. The fiscal year 1999 profit
includes a $16.6 million gain (net of tax) arising from the CAS sale which
closed on July 13, 1998, the fiscal year 1998 profit includes a $7.6 million net
income tax benefit arising from the CAS Sale, and the fiscal year 1997 loss
included a charge of $3.4 million attributed to restructuring costs in
connection with the closing of the Company's Amertranz subsidiary. The Company
had consolidated earnings (losses) before interest, taxes, depreciation and
amortization (EBITDA) of approximately $22.0 million, $2.6 million, and ($8.3
million), for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
* Following the closing of the Amertranz subsidiary in June 1997, the
Company determined that it would be in the best interests of the Company and its
shareholders to deleverage the Company's balance sheet and create the cash
resources needed to grow the Company's freight forwarding and logistics
business. While the Company's CAS subsidiary has been historically profitable,
management determined that this strategy can best be accomplished by the sale of
the operations of its CAS subsidiary. On July 13, 1998, the Company's CAS
subsidiary sold substantially all of its operating assets to a subsidiary of
Geologistics Corporation for $27 million in cash pursuant to the terms of an
Asset Purchase Agreement dated June 15, 1998. As a result of the CAS Sale, the
Company deleveraged its balance sheet by repaying approximately $15 million in
outstanding liabilities and obtained required working capital to take advantage
of growth opportunities available to the Company's Target subsidiary. These
opportunities include improved vendor pricing and attracting quality personnel
and agents on a world-wide basis, which the Company believes will drive its
future profitability. In addition, the Company may consider strategic
acquisitions. There can be no assurance that this strategy to increase
profitability will be successful.
* Management believes that the results of the Company's operations for
the fiscal year ended June 30, 1999 (all but 12 days of which were following the
CAS Sale) indicate management's concentrated focus on Target's business together
with the Company's available resources following the CAS Sale will enable the
Company to achieve the intended growth. For the year ended June 30, 1999,
Target's revenue increased by 15.7% to $50,156,285, and its gross profit margin
(i.e., gross operating revenues less cost of transportation expressed as a
percentage of gross operating revenue) improved to 33.3% from 29.3%, from the
corresponding period of 1998, a 13.7% improvement. This increased margin
accounts for approximately $2,006,000 of Target's gross profit for the fiscal
year ended June 30, 1999. As a result, Target's actual gross profit increased by
31.9%, or $4,043,474, to $16,725,039 for the year ended June 30, 1999 from
$12,681,565 for the year June 30, 1998. Management intends to continue to work
on improving Target's gross profit margins while focusing on increasing
operating revenue by adding quality sales personnel and exclusive forwarders
(previously referred to as independent agents) and reducing fixed selling,
general and administrative costs to improve the Company's net income.
Results of Operations
- - ---------------------
Years Ended June 30, 1999 and 1998
Operating Revenue. Operating revenue decreased to $51.7 million for the
year ended June 30, 1999 from $97.9 million for the year ended June 30, 1998, a
47.1% decrease. This decrease resulted from the inclusion of CAS's operating
revenue for the full 1998 period but only for 12 days of the 1999 period due to
the CAS Sale on July 13, 1998. Within the operations of the Company's Target
subsidiary operating revenue increased by 15.7% to $50,156,285 for the year
ended June 30, 1999 from $43,351,754 for the year ended June 30, 1998, a
$6,804,531 increase, due to increased freight volume.
Cost of Transportation. Cost of transportation was 67.3% of operating
revenue for the year ended June 30, 1999, and 75.3% of operating revenue for the
year ended June 30, 1998. This decrease is due to (i) a reduction in the Target
subsidiary's cost of transportation as a percentage of sales (66.7% for the 1999
period, from 70.7% for the 1998 period), and (ii) the historically higher cost
of transportation for the Company's CAS subsidiary (the assets of which were
sold on July 13, 1998) than the Company's Target subsidiary.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit for the year ended June 30, 1999 increased to 32.7% of
operating revenue from 24.7% of operating revenue for the year ended June 30,
1998.
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Within the Company's Target subsidiary, gross profit margin increased
to 33.3% from 29.3% for the years ended June 30, 1999 and 1998, respectively.
This increase in gross profit margin accounts for approximately $2,006,000 of
Target's gross profit for the year ended June 30, 1999. Target's actual gross
profit increased by 31.9%, or $4,043,474, to $16,725,039 for the year ended June
30, 1999 from $12,681,565 for the year June 30, 1998.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were 41.2% of operating revenue (39.7% excluding
non-recurring expenses explained in (iii) and (iv), below) for the year ended
June 30, 1999, and 23.5% of operating revenue for the year ended June 30, 1998.
This increase was primarily due to (i) an increase in exclusive forwarder
commission expense due to the Company's addition of new exclusive forwarders;
(ii) the historically lower selling, general and administrative expenses as a
percentage of sales for the CAS subsidiary than the Target subsidiary; (iii)
non-recurring expenses of $244,943 incurred in the 1999 period to wind down the
Company's CAS subsidiary (primarily, the collection of accounts receivable and
payment of accounts payable); and (iv) the non-recurring accrual in the 1999
period (reflected within "Selling, general and administrative expenses -
Corporate") of executive bonus compensation of $537,820 primarily as a result of
the CAS Sale.
Within the Company's Target subsidiary, selling, general and
administrative expenses (excluding agent commission expense) were 24.8% of
operating revenue for the year ended June 30, 1999 and 26.4% for the year ended
June 30, 1998, a 6.1% decrease. Exclusive forwarder commission expense was 11.8%
of operating revenue for the year ended June 30, 1999 and 7.1% for the year
ended June 30, 1998. This increase is due to the Company's addition of new
exclusive forwarders.
Net Income. The Company realized net income of $14,016,436 for the year
ended June 30, 1999, compared to a net income of $7,403,643 for the year ended
June 30, 1998. This increase was due to the CAS Sale.
Years Ended June 30, 1998 and 1997
Operating Revenue. Operating revenue increased to $97.8 million for the
year ended June 30, 1998 from $75.4 million for the year ended June 30, 1997, a
29.8% increase. Of this increase, 61% resulted from growth in the Company's CAS
subsidiary and the balance was due to the operations of the Company's Target
subsidiary which the Company acquired in May 1997.
Cost of Transportation. Cost of transportation was 75.3% of operating
revenue for the year ended June 30, 1998, and 75.5% of operating revenue for the
year ended June 30, 1997. This increase is due to (i) the February 2, 1998 start
up of a new service between Indianapolis and Aquadilla, Puerto Rico by the
Company's CAS subsidiary, and (ii) the Company's Target subsidiary international
freight forwarding services, which historically reflect a higher cost of
transportation as a percentage of sales.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit for the year ended June 30, 1998 decreased to 24.7% of
operating revenue from 24.5% of operating revenue for the year ended June 30,
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 23.5% of operating revenue for the year ended June
30, 1998, and 32.3% (excluding restructuring charges in connection with the
closing of the Company's Amertranz subsidiary) of operating revenue for the year
ended June 30, 1997. This decrease was primarily due to (i) the closing of the
Amertranz subsidiary prior to beginning of the 1998 fiscal year (while the
Amertranz subsidiary was included for almost all of the 1997 fiscal year); and
(ii) the historically lower selling, general and administrative expenses as a
percentage of sales of the Company's Target subsidiary (acquired in May 1997),
and the inclusion of those results in the Company's consolidated results of
operations for the year ended June 30, 1998.
Net Income (Loss). The Company realized a net profit of $7,403,643 for
the year ended June 30, 1998, compared to a net loss of ($10,508,334) for the
year ended June 30, 1997. This increase was due to the $7,662,135 net income tax
benefit realized as the result of the CAS Sale on July 13, 1998, the increased
operating revenue from
11
<PAGE>
growth in the Company's CAS subsidiary, the operations of the Company's Target
subsidiary, the decrease in expenses as a result of the closing of the Company's
Amertranz subsidiary, the decrease in restructuring charges (which were recorded
in their entirety in the prior year) in connection with the closing of the
Amertranz subsidiary, and $187,129 of debt cancellation income (see "Liquidity
and Capital Resources", below).
Liquidity and Capital Resources
- - -------------------------------
General. During the year ended June 30, 1999, net cash used in
operating activities was $2,240,763. Cash provided by investing activities was
$25,080,305, which consisted of net proceeds in connection with the CAS Sale
totaling $25,762,000, less (i) capital expenditures of $605,000, and (ii)
$77,000 of additional costs incurred in connection with the Target acquisition.
Cash used in financing activities was $15,837,744, which primarily consisted of
the repayment of long and short term debt and the purchase of subsidiaries' long
and short term debt.
Following the closing of the Company's Amertranz subsidiary, the
Company entered into an Extension and Composition Agreement dated as of November
7, 1997 with certain general unsecured creditors of the Company's Amertranz
subsidiary, whereby $1,581,799 of trade debt of the Amertranz subsidiary was
acquired by the Company in exchange for the issuance of 158,180 shares of the
Company's Class E Preferred Stock. On September 24, 1998 the Company announced
the redemption of the Class E Preferred Shares. The Company has reserved
$1,581,799 for this redemption. As of June 30, 1999, approximately $1,142,000 of
this reserve has been paid.
Currently, approximately $1.7 million of the Company's outstanding
accounts payable represent unsecured trade payables of the Company's closed
Amertranz subsidiary.
Capital expenditures. Capital expenditures for the fiscal year ended
June 30, 1999 were $605,092.
GMAC Facility. During the year ended June 30, 1999, the Company's
Target subsidiary maintained a $10 million revolving credit facility ("GMAC
Facility") with GMAC Commercial Credit LLC (successor by merger to BNY Financial
Corp.) ("GMAC"), guaranteed by the Company. The GMAC Facility was originally
established in 1997 with all of the Company's subsidiaries as individual
borrowers thereunder. In connection with the CAS Sale, the outstanding
obligations then due from the Target and CAS subsidiaries under the GMAC
Facility were repaid on July 13, 1998 by CAS with the proceeds from the CAS
Sale, and CAS acquired the Amertranz subsidiary's portion of the debt. The
interest rate of the GMAC Facility is prime plus 2%. Under the terms of the GMAC
Facility, Target can borrow the lesser of $10 million or 85% of eligible
accounts receivable. The borrowings under the GMAC Facility are secured by a
first lien on all of the Company's and its subsidiaries' assets. As of June 30,
1999, there were outstanding borrowings of $1,349,978 under the GMAC Facility
which represented 27% of the amount available thereunder, and the amount
available for borrowing under the GMAC Facility was approximately $5,058,000.
Revolver Note. As part of the combination of Amertranz and the freight
forwarding business of TIA and CFS, TIA and CFS agreed to advance to CAS, on a
revolving loan basis, up to an aggregate maximum of $4,000,000 outstanding at
any time, pursuant to the terms of a Revolving Credit Promissory Note ("Revolver
Note"), bearing interest at the greater of (i) 1% per month, or (ii) a
fluctuating rate equal to the prime rate of interest as published in The Wall
Street Journal, plus 4%. All obligations under the Revolver Note were guaranteed
by the Company and its Amertranz subsidiary and secured by a first priority lien
on all of the issued and outstanding shares of CAS, a first priority lien on all
of the assets of the Company and CAS, and a lien on the accounts receivable of
Amertranz, subordinate only to the first priority lien granted in connection
with the GMAC Facility and the second position lien granted to TIA in connection
with the TIA Loan (described below). All obligations under the Revolver Note
were repaid on July 13, 1998 with the proceeds from the CAS Sale.
Exchange Note. As part of the combination of Amertranz and the freight
forwarding business of TIA and CFS, the Company issued to TIA and CFS a
promissory note in the original principal amount of $10,000,000, bearing
interest at the rate of 8% per annum ("Exchange Note"). In June 1996, TIA
exchanged $2,000,000 principal amount of the Exchange Note for 200,000 shares of
the Company's Class A Preferred Stock, and of the proceeds of the Company's
initial public offering, $2,000,000 was used to repay a portion of the Exchange
Note. The
12
<PAGE>
Company's indebtedness under the Exchange Note was subordinated to the Company's
obligations under the GMAC Facility. All obligations under the Exchange Note
were repaid on July 13, 1998 with the proceeds from the CAS Sale.
* Working Capital Requirements. Cash needs of the Company are currently
met by funds generated from operations, the Company's accounts receivable
financing facility, and funds remaining from the CAS Sale. As of June 30, 1999,
the Company had $3,915,000 available under its $10 million accounts receivable
financing facility and approximately $7,882,000 from operations and remaining
proceeds from the CAS Sale. The Company believes that its current financial
resources will be sufficient to finance its operations and obligations for the
long and short term. However, the Company's actual working capital needs for the
long and short terms will depend upon numerous factors, including the Company's
operating results, the cost of increasing the Company's sales and marketing
activities, and, competition, none of which can be predicted with certainty.
Year 2000
- - ---------
The Company is on schedule with a project that addresses the Year 2000
(Y2K) issue of computer systems and other equipment with embedded chips or
processors not being able to properly recognize and process date- sensitive
information after December 31, 1999. Many systems use only two digits rather
than four to define the year, and these systems will not be able to distinguish
between the year 1900 and the year 2000. This may lead to disruptions in the
operations of business and governmental entities resulting from miscalculations
or system failures. The Company's Y2K project is designed to ensure the
compliance of all of the Company's applications, operating system and hardware
platforms, and to address the compliance of key business partners. Key business
partners are those customers and vendors that have a material impact on the
Company's operations. All phases of the project should be completed by 1999 year
end, thus minimizing the impact of the Y2K problem on the Company's operations.
The total estimated cost of the required modifications to become Y2K compliant
should not be material to the Company's financial position. Failure to make all
internal business systems Y2K compliant could result in an interruption in, or a
failure of, some of the Company's business activities or operations. Y2K
disruptions in the operations of key vendors could impact the Company's ability
to obtain transportation services necessary for the Company's operations. If one
or more of these situations occur, the Company's results of operations,
liquidity and financial condition could be materially and adversely affected.
The Company is unable to determine the readiness of its key business partners at
this time and is therefore unable to determine whether the consequences of Y2K
failures will have a material impact on the Company's results of operations,
liquidity or financial condition. The Y2K project is expected to significantly
reduce the Company's level of uncertainty about the Y2K problem and reduce the
possibility of significant interruptions of normal business operations.
Impact of the CAS Sale
- - ----------------------
On July 13, 1998, in the CAS Sale, the Company's CAS subsidiary sold
substantially all of its operating assets to a subsidiary of Geologistics
Corporation for $27 million in cash pursuant to the terms of an Asset Purchase
Agreement dated June 15, 1998. Under the terms of the Asset Purchase Agreement,
CAS retained its accounts receivable, and CAS realized $2.7 million from these
accounts receivable after payment of its liabilities during the year ended June
30, 1999.
* While the Company's CAS subsidiary has been historically profitable,
the Company's strategy in entering into and concluding the CAS Sale was to
deleverage the Company's balance sheet by repaying approximately $15 million in
outstanding liabilities and provide required working capital to take advantage
of growth opportunities available to the Company's Target subsidiary. These
opportunities include improved vendor pricing and attracting quality personnel
and agents on a world-wide basis, which the Company believes will drive its
future profitability.
Inflation
- - ---------
The Company does not believe that the relatively moderate rates of
inflation in the United States in recent years have had a significant effect on
its operations.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data required by this Item 8
are included in the Company's Consolidated Financial Statements and set forth in
the pages indicated in Item 14(a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
---------------------------------------------------------------
None
14
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information with respect to the identity and business experience of the
directors of the Company and their remuneration in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction
with the 1999 Annual Meeting of Shareholders, is incorporated herein by
reference. The information with respect to the identity and business experience
of executive officers of the Company is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement to be issued in conjunction with the 1999
Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement to be issued in conjunction with the 1999
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement to be issued in conjunction with the 1999
Annual Meeting of Shareholders.
15
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
-----------------------------------------------------------------
<TABLE>
<CAPTION>
(a) 1. Financial Statements
TARGET LOGISTICS, INC. PAGE
----
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-2
Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Deficit for the Years Ended
June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
(a) 2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable, are not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
-----------------------------------------------------------
Exhibit No.
3.1 Certificate of Incorporation of Registrant, as amended (incorporated by reference to Exhibit 3.1
to the Registrant's Current Report on Form 8-K dated November 30, 1998, File No. 0-29754)
3.2 By-Laws of Registrant, as amended (incorporated by
reference to Exhibit 3.2 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended
December 31, 1998, File No. 0-29754)
4.1 Warrant Agent Agreement (incorporated by reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-03613)
4.2 Form of Amendment No. 1 to Warrant Agent Agreement
dated June 13, 1997 (incorporated by reference to
Exhibit 4.7 to the Registrant's Registration
Statement on Form S-1, Registration No.
333-30351)
4.3 Certificate of Designations with respect to the Registrant's Class A Preferred Stock (contained in
Exhibit 3.1)
4.4 Certificate of Designations with respect to the Registrant's Class B Preferred Stock (contained in
Exhibit 3.1)
4.5 Certificate of Designations with respect to the Registrant's Class C Preferred Stock (contained in
Exhibit 3.1)
4.6 Certificate of Designations with respect to the Registrant's Class D Preferred Stock (contained in
Exhibit 3.1)
4.7 Certificate of Designations with respect to the Registrant's Class E Preferred Stock (contained in
Exhibit 3.1)
10.1 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended December 31, 1997, File No. 0-29754)
10.2 Restated and Amended Accounts Receivable Management and Security Agreement, dated as of
July 13, 1998 by and between GMAC Commercial Credit LLC (successor by merger to BNY
Financial Corp.), as Lender, and Target Logistic Services, Inc., as Borrower, and guaranteed by
the Registrant ("GMAC Facility Agreement")
10.3 Shadow Warrant entered into in connection with the GMAC Facility Agreement (incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1997, File No. 0-29754)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.4 Loan and Security Agreement dated October 25, 1995 between Amertranz Worldwide, Inc. and
TIA, Inc., as amended January 24, 1996 (incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, Registration No. 333-03613)
10.5 Form of Amended and Restated Promissory Note of Amertranz Worldwide, Inc. payable to TIA,
Inc. in principal amount of $800,000 (incorporated by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-03613)
10.6 Revolving Credit Promissory Note dated February 7, 1996 of Caribbean Air Services, Inc. payable
to TIA, Inc. and Caribbean Freight System, Inc. in the principal amount of $4,000,000
(incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1,
Registration No. 333-03613)
10.7 Promissory Note dated February 7, 1996 of Amertranz Worldwide Holding Corp. payable to TIA,
Inc. and Caribbean Freight System, Inc. in the principal amount of $10,000,000 (incorporated by
reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, Registration No.
333-03613)
10.8 Employment Agreement dated June 24, 1996 between Amertranz Worldwide Holding Corp. and
Stuart Hettleman (incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on
Form 10-K for the Fiscal Year Ended June 30, 1996, File No. 0-29754)
10.9 Asset Purchase Agreement dated as of June 15, 1998, by and among Amertranz Worldwide
Holding Corp., Caribbean Air Services, Inc., and Geologistics Corporation (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K, dated July 13, 1998, File
No. 0-29754)
10.10(P) Lease Agreement for Los Angeles Facility (incorporated by reference to Exhibit 10.17
to the Registrant's Annual Report on Form 10-K for the Year Ended June 30, 1997, File
No. 0-29754)
21 Subsidiaries of Amertranz Worldwide Holding Corp. (incorporated by reference to Exhibit 21 to
the Registrant's Annual Report on Form 10-K for the Year Ended June 30, 1997, File No. 0-
29754)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
</TABLE>
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
TARGET LOGISTICS, INC.
Date: September 28, 1999 By: /s/ Stuart Hettleman
----------------------------------
Stuart Hettleman
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ Stuart Hettleman President, Chief Executive September 28, 1999
- - --------------------------- Officer and Director
Stuart Hettleman
/s/ Michael Barsa Director September 28, 1999
- - ---------------------------
Michael Barsa
/s/ Brian K. Coventry Director September 28, 1999
- - ---------------------------
Brian K. Coventry
/s/ Christopher Coppersmith Director September 28, 1999
- - ---------------------------
Christopher Coppersmith
/s/ Philip J. Dubato Vice President, Chief September 28, 1999
- - --------------------------- Financial Officer,
Philip J. Dubato Principal Accounting Officer
and Director
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Target Logistics, Inc. (formerly Amertranz Worldwide Holding Corp.):
We have audited the accompanying consolidated balance sheets of Target
Logistics, Inc. (formerly Amertranz Worldwide Holding Corp.), a Delaware
corporation, as of June 30, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended June 30, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Target Logistics,
Inc. as of June 30, 1999 and 1998, and the results of its operations and cash
flows for the years ended June 30, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
September 24, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
TARGET LOGISTICS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 June 30, 1998
------------- -------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 7,881,595 $ 879,797
Accounts receivable, net of allowance for doubtful
accounts of $1,318,109 and, $514,542 respectively 10,853,316 14,555,151
Deferred income taxes (Note 9) 2,080,105 7,705,092
Prepaid expenses and other current assets 152,940 604,588
---------- ----------
Total current assets 20,967,956 23,744,628
PROPERTY AND EQUIPMENT, net (Note 4) 473,398 755,822
OTHER ASSETS 278,382 238,904
DEFERRED INCOME TAXES (Note 9) 184,895 184,895
GOODWILL, net of accumulated amortization of
$1,927,504 and $1,305,445, respectively (Notes 3 and 5) 13,027,520 13,622,579
---------- ----------
Total assets $34,932,151 $38,546,828
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,413,792 $ 8,542,850
Accrued expenses 2,360,211 1,990,880
Accrued transportation expenses 6,745,613 3,880,195
Reserve for restructuring 21,567 264,143
Note payable to bank (Note 6) 1,349,978 6,745,853
Note payable to affiliate (Note 6) --- 905,913
Note payable to creditors --- 53,835
Current portion of long-term debt due to affiliate (Note 6) --- 3,332,126
Current portion of long-term debt (Note 6) 10,500 50,000
Dividends payable 168,680 117,524
Taxes payable 77,245 110,000
Lease obligation-current portion (Note 8) 103,385 91,735
---------- ----------
Total current liabilities 15,250,971 26,085,054
LONG-TERM DEBT DUE TO AFFILIATE (Note 6) --- 4,000,000
LONG TERM DEBT (Note 6) --- 10,500
LEASE OBLIGATION--LONG-TERM (Note 8) 24,116 127,506
---------- ----------
Total liabilities $15,275,087 $30,223,060
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 7):
Preferred Stock, $10 par value; 2,500,000 shares authorized,
427,207 and 621,387 shares issued and outstanding, respectively 4,272,070 6,213,870
Common Stock, $.01 par value; 15,000,000 shares authorized,
10,031,868 and 8,419,094 shares issued and 9,192,013 and
8,312,790 shares outstanding, respectively 100,318 84,190
Paid-in capital 22,877,209 22,546,331
Accumulated deficit $(6,937,598) (20,509,373)
Less: Treasury stock, 839,855 and 106,304 shares held at cost,
respectively (654,935) (11,250)
---------- -----------
Total shareholders' equity 19,657,064 8,323,768
---------- -----------
Total liabilities and shareholders' equity $34,932,151 $38,546,828
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE>
<TABLE>
<CAPTION>
TARGET LOGISTICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
OPERATING REVENUES:
<S> <C> <C> <C>
Operating revenues - Target subsidiary $50,156,285 $43,351,754 $ 4,392,713
Operating revenues - Caribbean subsidiary 1,563,298 54,432,657 40,690,013
Operating revenues - Amertranz subsidiary - - 30,269,339
------------ ----------- -----------
Operating revenues 51,719,583 97,784,411 75,352,065
COST OF TRANSPORTATION:
Cost of transportation - Target subsidiary 33,431,246 30,670,189 3,186,175
Cost of transportation - Caribbean subsidiary 1,358,031 42,928,749 32,498,656
Cost of transportation - Amertranz subsidiary - - 21,199,576
----------- ----------- -----------
Cost of transportation 34,789,277 73,598,938 56,884,407
GROSS PROFIT:
Gross profit - Target subsidiary 16,725,039 12,681,565 1,206,538
Gross profit - Caribbean subsidiary 205,267 11,503,908 8,191,357
Gross profit - Amertranz subsidiary - - 9,069,763
----------- ----------- -----------
Gross profit 16,930,306 24,185,473 18,467,658
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ("SG&A"):
SG&A - Target subsidiary 12,454,287 11,444,841 1,284,996
SG&A - Target subsidiary
(Exclusive forwarder commissions) 5,929,533 3,078,945 314,390
SG&A - Caribbean subsidiary 595,338 6,270,882 4,882,073
SG&A - Amertranz subsidiary - - 16,083,199
SG&A - Corporate 1,491,598 1,085,513 864,832
Restructuring charge - - 3,407,482
Depreciation and amortization 833,268 1,131,994 870,123
----------- ---------- -----------
Selling, general and administrative expenses 21,304,024 23,012,175 27,707,095
OTHER INCOME (EXPENSE):
Interest income (expense) 291,510 (1,645,902) (1,335,833)
Other income 119,291 214,112 66,936
Gain on sale of subsidiary 24,832,353 - -
----------- ----------- -----------
Income (loss) before income taxes 20,869,436 (258,492) (10,508,334)
Provision (benefit) for income taxes (Note 9) 6,853,000 (7,662,135)
----------- ----------- ----------
Net income (loss) $14,016,436 $ 7,403,643 $(10,508,334)
=========== =========== ===========
Net income (loss) per share:
Basic $1.63 $0.90 ($1.74)
===== ===== ======
Diluted $0.99 $0.55 -
===== ===== ======
Weighted average shares outstanding:
Basic 8,351,386 7,949,705 6,048,148
=========== =========== ===========
Diluted 14,121,246 13,468,964 -
============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 - - 3,626,504 $36,265 $8,567,675 (106,304)($11,250)($16,341,341)($7,748,651)
Common stock issued in
connection with the IPO - - 2,300,000 $23,000 $11,013,288 - - - $11,036,288
Preferred stock issued in
exchange for a principal
reduction in the Exchange Note 200,000 2,000,000 - - - - - - 2,000,000
Common stock issued in connection
with the acquisition of Target - - 900,000 9,000 1,014,750 - - - 1,023,750
Acquisition of Consolidated 20,000 200,000 - - 371,000 - - - 571,000
Stock Options exercised - - - - 5,543 - - - 5,543
Preferred stock issued in
connection with the Private
Placement 257,500 2,575,000 - - - - - (372,145) 2,202,855
Cash dividends associated with the
Class C Preferred stock - - - - - - - (12,875) (12,875)
Preferred Stock dividends associated
with the Class A Preferred stock 20,500 205,000 - - - - - (205,000) -
Net loss - - - - - - - (10,508,334)(10,508,334)
-------- --------- ------- ----- ---------- -------- ------- ----------- ----------
Balance June 30, 1997 498,000 $4,980,000 6,826,504 $68,265 $20,972,256 (106,304)($11,250)($27,439,695)($1,430,424)
Additional costs associated with
the Private Placement - - - - - - - (34,908) (34,908)
Common stock issued in connection
with the conversion of Class A
Preferred Stock (110,250)(1,102,500) 1,102,500 11,025 1,091,475 - - - -
Stock options exercised - - 52,590 525 (525) - - - -
Preferred stock issued for repayment
of secured long-term debt of
Amertranz Worldwide, Inc. 100,000 1,000,000 - - - - - - 1,000,000
Preferred stock issued for purchase
of $1,581,800 of trade debt of
Amertranz Worldwide, Inc. 158,180 1,581,800 - - - - - - 1,581,800
Common stock issued in connection
with the conversion of Class B
Preferred Stock (20,000) (200,000) 200,000 2,000 198,000 - - - -
Common stock issued in connection
with the conversion of Class C
Preferred Stock (23,750) (237,500) 237,500 2,375 235,125 - - - -
Preferred stock dividends associated
with the Class A Preferred Stock 12,696 126,960 - - - - - (126,960) -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997-- (Continued)
Additional
Preferred Stock Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------ ------ ------ ------ ------- ------ ------ ------- -----
Preferred stock dividends associated
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
with the Class D Preferred Stock 6,511 65,110 - - - - - (65,110) -
Cash dividends associated with the
Class C Preferred Stock - - - - - - - (246,343) (246,343)
Warrants issued in connection with
the sale of the assets of CAS - - - - 50,000 - - - 50,000
Net income - - - - - - - 7,403,643 7,403,643
--------- ------- ------ --------- ------- ------- ------- --------- ---------
Balance, June 30, 1998 621,387 $6,213,870 8,419,094 $84,190 $22,546,331 (106,304) ($11,250)($20,509,373) $8,323,768
Common stock issued in connection
with the conversion of Class C
Preferred Stock (36,000) (360,000) 360,000 3,600 356,400 - - - -
Stock Options exercised - - 174,852 1,749 62,256 - - - 64,005
Cash dividends associated with the
Class A, C and D Preferred Stock - - - - - - - (444,661) (444,661)
Redemption of Class E
Preferred Stock (158,180)(1,581,800) - - - - - - (1,581,800)
Purchase of Treasury Stock, at cost - - - - - (733,551)(643,685) - (643,685)
Additional Common Stock issued
in connection with the acquisition
of Target - - 1,077,922 10,779 (87,778) - - - (76,999)
Net income - - - - - - - 14,016,436 14,016,436
--------- ---------- --------- --------- ---------- -------- ------- ---------- ----------
Balance, June 30, 1999 427,207 $4,272,070 10,031,868 $100,318 $22,877,209 (839,855)($654,935)($6,937,598) $19,657,064
========= ========== ========== ========= =========== ======== ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $14,016,436 $7,403,643 $(10,508,334)
Bad debt expense 803,567 (268,065) 411,285
Depreciation and amortization 833,268 1,196,480 870,123
Gain on sale of CAS (24,832,353) - -
Deferred income tax benefit 5,624,987 (7,889,987) -
Write off and write down of fixed assets - - 727,938
Decrease in debt issuance costs - - 103,466
Restructuring charge - - 3,407,482
Adjustments to reconcile net loss to net cash used in operating activities-
Decrease (increase) in accounts receivable 2,898,268 (1,796,390) (485,963)
Decrease (increase) in prepaid expenses and other current assets 245,395 138,981 (257,630)
(Increase) decrease in other assets (113,962) (15,136) 32,913
(Decrease) increase in accounts payable and accrued expenses (1,716,369) 204,052 (2,000,123)
---------- ------- ----------
Net cash used in operating activities (2,240,763) (1,026,422) (7,698,843)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (605,092) (556,557) (468,912)
Proceeds from sale of CAS, net of closing costs 25,762,397 - -
Acquisition of Consolidated - - 105,602
Acquisition of Target (77,000) - (452,032)
------------ --------- ----------
Net cash provided by (used in) investing activities 25,080,305 (556,557) (815,342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering ("IPO") - net of costs - - 12,190,682
Proceeds from Private Placement - net of costs - (34,908) 2,202,855
Issuance of common stock in connection with the IPO - - 23,000
Dividends paid (340,660) (128,819) -
Stock options exercised 64,005 - 5,543
Purchase of treasury stock (643,685) - -
Redemption of Class E Preferred Stock (1,141,750) - -
Net (repayments) borrowings from note payable to bank (5,395,875) 278,295 4,676,355
(Repayment) proceeds from long-term debt due to affiliates (7,332,126) 698,853 (6,104,227)
Repayment of long-term debt (50,000) (50,000) -
(Repayment) proceeds from revolving loan due to affiliate (905,913) 116,185 (3,454,235)
(Payment) proceeds of lease obligations (91,740) 200,927 (21,035)
--------- --------- ----------
Net cash (used in) provided by financing activities (15,837,744) 1,080,533 9,518,938
Net increase (decrease) in cash and cash equivalents 7,001,798 (502,446) 1,004,753
CASH AND CASH EQUIVALENTS, beginning of year 879,797 1,382,243 377,490
----------- --------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 7,881,595 $ 879,797 $ 1,382,243
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 105,157 $ 821,336 $ 468,588
Income taxes $ 1,243,022 $ 82,492 $ 46,396
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
TARGET LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C> <C>
Conversion of 36,000 and 23,750, respectively, Class C Preferred Shares $ (360,000) $ (237,500) -
Issuance of Common Stock for Conversion of 36,000 and 23,750, respectively,
Class C Preferred Shares $ 3,600 $ 2,375 -
Issuance of Common Stock for Stock Options exercised $ 1,749 $ 525 -
Issuance of Common Stock in connection with the acquisition of Target $ 10,779 - $ 9,000
TIA, Inc. conversion of 110,250 Class A Preferred Shares - $(1,102,500) -
Issuance of Common Stock for TIA, Inc. conversion of
110,250 Class A Preferred Shares - $ 11,025 -
Issuance of 100,000 Class D Preferred Stock for repayment
of secured long-term debt of Amertranz Worldwide, Inc. - $ 1,000,000 -
Issuance of 158,180 Class E Preferred Stock for the purchase
of $1,581,800 of trade debt of Amertranz Worldwide, Inc. - $ 1,581,800 -
Conversion of 20,000 Class B Preferred Shares - $ (200,000) -
Issuance of Common Stock for conversion of 20,000
of Class B Preferred Shares - $ 2,000 -
Issuance of preferred stock as partial repayment of long-term debt due to affiliates - - $2,000,000
Issuance of preferred stock for the Private Placement - - $2,575,000
Issuance of preferred stock for the acquisition of Consolidated - - $200,000
Issuance of preferred stock as dividends for the Class A preferred stock - - $205,000
Issuance of note payable to Consolidated stockholders - - $150,000
On October 10, 1996, Consolidated Air Services, Inc. ("Consolidated") merged
with and into the Company pursuant to the terms of a merger agreement dated as
of September 30, 1996. In conjunction with the acquisition, the resulting
goodwill is as follows:
Net assets assumed - $ (121,539) -
Purchase Price - 786,428 -
-------------
Goodwill - $ 664,889 -
=============
On May 8, 1997, Target merged with and into the Company pursuant to the terms of
a merger agreement dated as of April 17, 1997. In conjunction with the
acquisition, the resulting goodwill is as follows:
Net liabilities assumed - $ 709,157 -
Purchase Price - 1,488,782 -
-------------
Goodwill - $ 2,197,939 -
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND
In January 1996, Target Logistics, Inc. (formerly, Amertranz Worldwide Holding
Corp.) ("Holding" or the "Company") was incorporated in the state of Delaware.
Effective February 7, 1996, Holding concluded an Asset Exchange Agreement (the
"Agreement") with TIA, Inc. ("TIA"), Caribbean Freight System, Inc. ("CFS"),
Amertranz Worldwide, Inc. ("Amertranz") and the stockholders and convertible
note holders of Amertranz. As part of this transaction, Holding received (i) all
of the issued and outstanding stock of Amertranz, (ii) $1,379,110 in convertible
notes of Amertranz, and (iii) the air freight forwarding business of TIA and
CFS. Holding then contributed the air freight forwarding business of TIA and CFS
to Caribbean Air Services, Inc. ("CAS") in return for all of the issued and
outstanding shares of CAS. TIA and CFS received 2,100,000 shares of common stock
of the Company and a $10,000,000 promissory note, as discussed in Note 6, in
addition to stock in the Company.
The transactions between the Company, TIA, CFS and CAS described above have been
accounted for as a recapitalization of TIA and CFS, whereby the historical data
for their freight forwarding operations are being presented as that of Holdings
for all periods presented. The issuance of the $10,000,000 Promissory Note has
been reflected as a charge to retained earnings and the distribution of assets
and liabilities to TIA and CFS has been reflected as a net adjustment to equity,
at book value (which approximates fair value). The transaction with Amertranz
has been accounted for as an acquisition under purchase accounting.
On July 3, 1996, the Company completed an initial public offering ("IPO") of
2,300,000 shares of common stock and redeemable common stock purchase warrants
at an initial offering price of $6.10 per share. Prior to the IPO, there was no
public market for the Company's capital stock. The net proceeds to the Company
of $12,213,682 were used to pay down existing debt of $6,503,000 and the balance
was used for working capital purposes. Additionally, the Company issued 200,000
shares of Class A, non-voting, cumulative, convertible preferred stock with a
par value of $10.00 in exchange for payment of $2,000,000 of its promissory note
with TIA and CFS.
2. DISPOSITION OF ASSETS
On July 13, 1998, the Company's CAS subsidiary sold substantially all of the
operating assets of CAS to Geologistics Air Services, Inc., an indirect
wholly-owned subsidiary of Geologistics Corporation ("Geologistics"), for
approximately $26 million in cash, net of costs (the "CAS Sale"), in accordance
with the terms of the Asset Purchase Agreement dated June 15, 1998 (the "Asset
Purchase Agreement").
Under the terms of the Asset Purchase Agreement CAS retained its accounts
receivable. CAS realized $2.7 million from these accounts receivable after
payment of its liabilities during the fiscal year ended June 30, 1999.
Other than with respect to certain obligations pursuant to leases and other
agreements included in the assigned assets, Geologistics did not assume any
obligations of the Company or CAS.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Company, as summarized below, are in
conformity with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation
For the fiscal year ended June 30, 1999 and 1998, the consolidated financial
statements include the accounts of Holding, CAS, Target Logistic Services, Inc.
("Target"), Amertranz and Consolidated Air Services, Inc. ("Consolidated").
F-8
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the fiscal year ended June 30, 1997, the consolidated financial statements
include the accounts of Holding, CAS, Amertranz, Target (since May 1, 1997) and
Consolidated (since October 1, 1996).
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed under the
straight-line method over estimated useful lives ranging from 3 to 8 years.
Assets under capital leases are depreciated over the shorter of the estimated
useful life of the asset or the lease term. The Company utilizes a half-year
convention for assets in the year of acquisition and disposal.
Goodwill
Goodwill represents the excess of cost over the net assets acquired and is
amortized on a straight-line basis over 25 years.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. Management has performed
a review of all long-lived assets and has determined that no impairment of the
respective carrying value has occurred as of June 30, 1999.
Stock Options
The Company grants stock options to certain officers and related parties.
Compensation expense is recognized based upon the aggregate difference between
the fair market value of the Company's stock at date of grant and the option
price. Compensation expense is recognized equally over the vesting period.
In October, 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes a fair
value based method of accounting for an employee stock option or similar equity
instrument but allows companies to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees". Companies
electing to continue using the accounting under APB Onion No. 25 must, however,
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in SFAS No. 123 had been applied (Note
7). These disclosure requirements are effective for fiscal years beginning after
December 16, 1995. The Company has elected to continue accounting for its
stock-based compensation awards to employees and directors under the accounting
prescribed by APB Opinion No. 25 and to provide the disclosures required by SFAS
No. 123.
Revenue Recognition
Revenue from freight forwarding is recognized upon delivery of goods, and direct
expenses associated with the cost of transportation are accrued concurrently.
Monthly provision is made for doubtful receivables, discounts, returns and
allowances.
F-9
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Cash and Cash Equivalents
Cash at June 30, 1999 and 1998 includes $274,000 and $323,000 of overnight
repurchase agreements.
Per Share Data
In accordance with the requirements of SFAS No. 128, "Earnings per Share", net
earnings per common share amounts ("basic EPS") were computed by dividing net
earnings after deducting preferred stock dividend requirements, by the weighted
average number of common shares outstanding and contingently issuable shares
(which satisfy certain conditions) and excluding any potential dilution. Net
earnings per common share amounts -
assuming dilution ("diluted EPS") were computed by reflecting potential
dilution from the exercise of stock options. SFAS No. 128 requires the
presentation of both basic EPS and diluted EPS on the face of the income
statement. Earnings per share amounts for the same prior-year periods have been
restated to conform with the provisions of SFAS No. 128.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings for the year ended June 30, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 1998
------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
<S> <C> <C> <C> <C> <C> <C>
Net earnings $14,016,436 $7,403,643
Preferred stock dividends (444,661) (246,343)
--------
BASIC EPS
Net earnings attributable to
common stock $13,571,775 8,351,386 $1.63 $7,157,300 7,949,705 $0.90
========== ========= ==== ========= ========= ====
EFFECT OF DILUTIVE SECURITIES
Convertible Preferred Stock 5,698,663 5,327,969
Stock Options 71,197 191,290
DILUTED EPS
Net earnings attributable to common stock
and assumed preferred conversions
and option exercises $14,016,436 14,121,246 $0.99 $7,403,643 13,468,964 $0.55
========== ========== ===== ========= ========== ====
</TABLE>
Options to purchase 440,000 and 225,800 shares of common stock for the years
ended June 30, 1999 and 1998, respectively, were not included in the computation
of diluted EPS because the exercise prices of those options were greater than
the average market price of the common shares, thus they are anti-dilutive. The
options were still outstanding at the end of the period.
Warrants to purchase 5,183,731 shares of common stock for the years ended June
30, 1999 and 1998 were not included in the computation of diluted EPS because
they were also anti-dilutive.
Adoption of SFAS No. 128 required that the Company's reported loss per share for
fiscal 1997 be restated. There are no material differences between the amounts
previously recorded and the restated amounts. For the year ended June 30, 1997
no diluted EPS is presented, as the effect of dilutive securities would be
anti-dilutive on loss per common share. A reconciliation between the numerators
and denominators of the basic EPS computation for net loss for the year ended
June 30, 1997 is as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Year Ended June 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amounts
<S> <C> <C> <C>
Net loss ($10,508,334)
Preferred stock dividends (12,875)
------------
BASIC EPS
Net loss attributable to common stock ($10,521,209) 6,048,148 ($1.74)
============= ========= =======
</TABLE>
For the year ended June 30, 1997, 2,008,889 shares of convertible preferred
stock were not included in the computation of diluted EPS due to their effect
being anti-dilutive.
Fair Value of Financial Instruments
Cash equivalents are reflected at cost which approximate their fair values. The
fair value of notes and loans payable outstanding is estimated by discounting
the future cash flows using the current rates offered by lenders for similar
borrowings with similar credit ratings. The carrying amounts of the accounts
receivable and debt approximate their fair value.
Foreign Currency Transactions
In the normal course of business the Company has accounts receivable and
accounts payable that are transacted in foreign currencies. The Company accounts
for transaction differences, in accordance with Statement of Financial
Accounting Standard Number 52, "Foreign Currency Translation", and accounts for
the gains or losses in operations. For all periods presented, these amounts were
immaterial to the Company's operations.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform with the 1999 presentation.
4. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Property and Equipment consists of the following:
Furniture and fixtures $ 614,530 $726,888
Computer equipment 471,683 658,617
Leasehold improvements 319,565 202,059
Vehicles 116,036 116,036
---------- ---------
1,521,814 1,703,600
Less: Accumulated depreciation and amortization 1,048,416 947,778
--------- --------
$ 473,398 $ 755,822
========== =========
</TABLE>
5. ACQUISITIONS
(a) On February 7, 1996, Holding acquired all of the issued and outstanding
stock of Amertranz and the former stockholders of Amertranz received 870,254
shares (which consist of the investment in Amertranz Worldwide of
F-11
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
518,056 shares, assigned notes of 280,888 shares and 71,310 shares associated
with the Interim Financing) of Holding's common stock and options to purchase
224,399 shares of Holding's common stock valued at $4,415,000 or approximately
$4.25 per share and option. The Amertranz transaction has been accounted for as
a purchase and resulted in goodwill of approximately $12.1 million which
represents the excess of the cost over the fair value of the assets acquired.
(b) On October 10, 1996, the Company acquired all of the issued and outstanding
stock of Consolidated Air Services, Inc. ("Consolidated") for 20,000 shares of
Holding's Class B Preferred Stock valued at $571,000 or approximately $28.55 per
share. The Consolidated transaction has been accounted for as a purchase and
resulted in goodwill of approximately $665,000 which represents the excess cost
over the fair value of the assets acquired.
(c) On May 8, 1997, the Company acquired all of the issued and outstanding stock
of Target Airfreight, Inc. ("Target Air") for $400,000 cash and 900,000 shares
of the Company's common stock valued at $1,023,750 or approximately $1.14 per
share. On June 8, 1999, pursuant to the terms of the Target Air acquisition, the
Company paid an additional $77,000 cash and issued an additional 1,077,922
shares of common stock valued at $0.77 per share to Target Air's former
shareholders. The transaction has been accounted for as a purchase and resulted
in goodwill of approximately $2.2 million which represents the excess cost over
the fair value of the assets acquired.
(d) The following unaudited pro forma financial information for the Company for
the year ended June 30, 1997, gives effect to the Consolidated and Target Air
acquisitions as if they occurred at the beginning of the fiscal period
presented. These pro forma results have been prepared for comparative purposes
only, and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions occurred on the date indicated
or which may result in the future:
<TABLE>
<CAPTION>
Pro Forma
Year Ended
June 30, 1997
<S> <C>
Operating revenue $ 100,026,271
Net loss ($ 10,545,825)
Net loss per share ($ 1.55)
</TABLE>
6. DEBT
As of June 30, 1999 and 1998, long-term and short-term debt consisted of the
following:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
<S> <C> <C>
Promissory note to TIA and CFS (a) $ -- $7,332,126
Revolving loan to TIA and CFS (b) -- 905,913
Asset-based financing (c) 1,349,978 6,745,853
Promissory note to
Consolidated Shareholders (d) 10,500 60,500
------------ ---------
Total debt 1,360,478 15,044,392
Less: Current portion (1,360,478 (11,033,892)
----------- -----------
Long-term debt $ -- $4,010,500
=============== ============
</TABLE>
F-12
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(a) On February 7, 1996, as part of the Agreement, Holding issued to TIA and CFS
a $10,000,000 promissory note which bears interest at the rate of 8.0% per
annum. On July 3, 1996, Holding repaid $2,000,000 of this debt from the proceeds
of the IPO and converted $2,000,000 of the note into Class A, non-voting,
cumulative, convertible preferred stock. As of June 30, 1998, $7,332,126
(includes $1,332,126 of accrued interest), was outstanding under this note. All
obligations under this note were repaid on July 13, 1998 with the proceeds from
the CAS Sale.
(b) As part of the Agreement, TIA and CFS agreed to lend to CAS on a revolving
loan basis, an amount up to the net cash collections of TIA and CFS's accounts
receivable as of February 7, 1996 and additional amounts at the discretion of
TIA and CFS, up to an aggregate maximum of $4,000,000 outstanding at any time,
pursuant to the terms of a Revolving Credit Promissory Note. Only funds advanced
at the discretion of TIA and CFS bear interest, at the greater of (i) 1% per
month or (ii) at a rate of 4% over prime. The note was secured by all of the
assets of CAS and was guaranteed by the Company and Amertranz. Furthermore, the
note discussed here and in (a) above were subordinated to the Company's
revolving credit obligations under the GMAC Facility (see below). On January 16,
1997, upon the closing of the GMAC Facility, the Company repaid $3,570,768 of
this note. As of June 30, 1998 and 1997, $905,913 and $789,728, respectively,
was outstanding under this facility. All obligations under this note were repaid
on July 13, 1998 with the proceeds from the CAS Sale.
(c) During the year ended June 30, 1999, the Company's Target subsidiary
("Borrower") maintained an Accounts Receivable Management and Security Agreement
with GMAC Commercial Credit LLC (successor by merger to BNY Financial Corp.)
("GMAC") whereby the Borrower can receive advances of up to 85% of the net
amounts of eligible accounts receivable outstanding to a maximum of $10,000,000.
The credit line ("GMAC Facility") is subject to interest at a rate of 2.0% per
annum over the prevailing prime rate as defined by GMAC (7.75% as of June 30,
1999). At June 30, 1999, the outstanding balance on the GMAC Facility was
$1,349,978 which represented 27% of the approximate $5,058,000 available
thereunder. GMAC has a security interest in all present and future accounts
receivable, machinery and equipment and other assets of the Borrower and the
GMAC Facility is guaranteed by the Company. The GMAC Facility was originally
established in 1997 with all of the Company's subsidiaries as individual
borrowers thereunder. In connection with the CAS Sale, the outstanding
obligations then due from the Target and CAS subsidiaries under the GMAC
Facility were repaid on July 13, 1998 by CAS with the proceeds from the CAS
Sale, and CAS acquired the Amertranz subsidiary's portion of the debt.
(d) In connection with the acquisition of Consolidated, the Company issued a
promissory note to the Consolidated stockholders in the aggregate principal
amount of $150,000. During fiscal year 1998, this note was reduced by $27,000 as
a result of a net worth reconciliation, pursuant to the terms of the acquisition
agreement. At June 30, 1999, the amount outstanding under this note was $10,500.
This note bears interest at the rate of 8% per annum and matured July 1, 1999.
F-13
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. SHAREHOLDERS' EQUITY
Preferred Stock
As of June 30, 1999, the authorized preferred stock of the Company is 2,500,000
shares. As of June 30, 1999, 427,207 shares of preferred stock are outstanding
as follows:
<TABLE>
<CAPTION>
Number of Shares Outstanding
Class A (a) Class C (b) Class D (c) Class E (d) Total
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 122,946 233,750 106,511 158,180 621,387
Issuances -- -- -- -- --
Conversions -- (36,000) -- 158,180 (194,180)
--------- --------- ------- --------- ---------
Balance at June 30, 1999 122,946 197,750 106,511 -- 427,207
======== ========= ======= ========= =========
</TABLE>
(a) Class A Preferred Stock. On July 3, 1996, the Company issued 200,000 shares
of Class A, non-voting, cumulative, convertible preferred stock with a par value
of $10.00 in exchange for a paydown of $2,000,000 on the $10,000,000 promissory
note.
The Class A Preferred Stock will pay cumulative cash dividends at an annual rate
of $1.00 per share in cash or, at the option of the Company, in shares of Class
A Preferred Stock, at the rate of $10.00 per share. The Company is prohibited
from paying any cash dividends on common stock unless all required Class A
Preferred Stock dividends have been paid. Each share of Class A Preferred Stock
may be converted at any time, at the option of the holder, into common stock at
a conversion price (subject to adjustment) of the lower of (i) $6.00 per share,
or (ii) 80% of the average of the closing bid and asked price per share of
Common Stock on the day prior to the conversion date. Class A Preferred Stock
holders are entitled to a liquidation preference of $10.00 per share plus all
accrued and unpaid dividends.
On December 31, 1996, June 30, 1997, December 31, 1997 and June 30, 1998, the
Company issued 10,000, 10,500, 6,887 and 5,809 respectively, shares of Class A,
non-voting, cumulative, convertible preferred stock with a par value of $10.00
representing the semi-annual dividend due the Class A preferred shareholders.
On September 23, 1997, 110,250 shares of Class A Preferred Stock were converted
into 1,102,500 shares of the Company's Common Stock.
(b) Class C Preferred Stock. On June 13, 1997, the Company issued 257,500 shares
of Class C, non-voting, cumulative, convertible preferred stock with a par value
of $10.00 upon completion of a $2,575,000 private placement of equity securities
to individual investors (the "Private Placement").
The Class C Preferred Stock will pay cumulative cash dividends at an annual rate
of $1.00 per share payable the last day of each calendar quarter in cash or, at
the option of the Company, in shares of common stock provided a registration
statement with respect to the underling shares of common stock is in effect. The
Company is prohibited from paying any dividends on common stock or Class A
Preferred Stock unless all required Class C Preferred Stock dividends have been
paid. Each share of Class C Preferred Stock may be converted at any time, at the
option of the holder, into 10 shares of common stock. Prior to June 13, 1998,
resales of shares of Class C Preferred Stock acquired in the Private Placement
and all shares of Common Stock underlying such securities were prohibited
without the approval of GKN Securities Corp. ("GKN"), the placement agent for
the Private Placement.
F-14
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
During fiscal year ending June 30, 1999, 36,000 shares of Class C Preferred
Stock were converted into 360,000 shares of the Company's common stock.
(c) Class D Preferred Stock. On November 28, 1997, the Company acquired from
TIA, Inc. $1,000,000 of secured debt of the Amertranz subsidiary in exchange for
the issuance of 100,000 shares of the Company's non-voting, cumulative,
convertible Class D Preferred Stock, par value $10.00 per share.
The Class D Preferred Stock will pay cumulative cash dividends at an annual rate
of $1.00 per share in cash or, at the option of the Company, in shares of Class
D Preferred Stock, at the rate of $10.00 per share. The Company is prohibited
from paying any cash dividends on common stock and other junior securities
unless all required Class D Preferred Stock dividends have been paid. Each share
of Class D Preferred Stock may be converted at any time, at the option of the
holder, into common stock at a conversion price (subject to adjustment) of the
lower of (i) $6.00 per share, or (ii) 80% of the average of the closing bid and
asked price per share of Common Stock on the day prior to the conversion date.
Class D Preferred Stock holders are entitled to a liquidation preference of
$10.00 per share plus all accrued and unpaid dividends.
On December 31, 1997 and June 30, 1998, the Company issued 1,479 and 5,032
respectively, shares of Class D, non-voting, cumulative, convertible preferred
stock with a par value of $10.00 representing the semi-annual dividend due the
Class D Preferred shareholders.
(d) Class E Preferred Stock. The Company entered into an Extension and
Composition Agreement dated as of November 7, 1997 (the "Composition Agreement")
with certain general unsecured trade creditors of the Company's Amertranz
subsidiary, whereby $1,581,799 of trade debt of the Amertranz subsidiary was
acquired by the Company in exchange for the issuance of 158,180 shares of the
Company's non-voting Class E Preferred Stock, par value $10.00 per share. On
September 24, 1998 the Company announced the redemption of the Class E Preferred
Shares. The Company has reserved $1,581,799 for this redemption. As of June 30,
1999, approximately $1,142,000 of this reserve has been paid.
Warrants
As of June 30, 1999, the Company had 5,074,283 warrants outstanding to purchase
5,074,283 shares of common stock at $6.00 per share and a warrant outstanding to
purchase 109,448 shares of common stock at $1.56 per share.
In connection with the Company's February 1996 and May 1996 bridge financings,
the Company issued warrants to purchase 1,386,783 shares of common stock at an
exercise price and on terms identical to the warrants issued in the IPO.
In connection with the IPO of July 3, 1996, the Company issued 2,300,000 shares
of common stock and 2,300,000 warrants. Each warrant entitles the holder thereof
to purchase one share of common stock for $6.00 during the four-year period
commencing June 28, 1997.
In connection with the Private Placement of June 13, 1997, the Company issued
257,500 shares of Class C Preferred Stock and 1,387,500 warrants. Each warrant
entitles the holder thereof to purchase one share of common stock for $6.00
during the four-year period commencing June 28, 1997.
The Company may redeem the warrants at a price of $.01 per warrant at any time
after they become exercisable upon not less than 30 days' prior written notice
if the last sale price of the common stock has been at least $10.00 for each of
the 20 consecutive trading days ending on the third day prior to the date on
which the notice of redemption is given.
F-15
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In connection with the CAS Sale, the Company engaged an investment banking firm
to market the sale and issued to the investment banking firm a warrant to
purchase 109,448 shares of common stock for $1.56 per share, at any time until
January 21, 2002.
Stock Option Plan
In June 1996, the Board of Directors of the Company adopted the Amertranz
Worldwide Holding Corp. 1996 Stock Option Plan ("1996 Plan"), which was
subsequently approved by shareholders. The 1996 Plan authorizes the granting of
awards, the exercise of which would allow up to an aggregate of 1,000,000 shares
of the Company's common stock to be acquired by the holders of said awards. The
awards can take the form of incentive stock options ("ISOs") or nonqualified
stock options ("NSOs") and may be granted to key employees, officers, directors
and consultants. Any plan participant who is granted an Incentive Stock Option
and possesses more than 10% of the voting rights of the Company's outstanding
common stock must be granted an option price at least 110% of the fair market
value on the date of grant and the option must be exercised within five years
from the date of grant. Under the 1996 Plan, stock options have been granted to
employees and directors for terms of up to 10 years at exercise prices ranging
from $.10 to $6.00 and are exercisable in whole or in part at stated times from
the date of grant up to four years from the date of grant. At June 30, 1999,
81,957 stock options granted to employees and directors were exercisable. The
Company accounts for equity-based awards granted to employees and directors
under APB Opinion No. 25 under which no compensation cost has been recognized
for stock options granted at market value (Note 3). Had compensation cost for
these stock options been determined consistent with SFAS No. 123, the Company's
net income (loss) and net income (loss) per share would have been increased to
the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income
(loss): As Reported $14,016,436 $7,403,643 ($10,508,334)
Pro Forma $13,463,612 $6,978,972 ($10,833,762)
Basic EPS: As Reported $1.63 $0.90 ($1.74)
Pro Forma $1.61 $0.86 ($1.79)
Diluted EPS: As Reported $0.99 $0.55 -
Pro Forma $0.98 $0.54 -
</TABLE>
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated.
Prior to the adoption of the 1996 Plan, there were 224,399 options granted to
purchase common stock at exercise prices ranging from $0.048 to $0.408. These
options were granted to the stockholders of Amertranz and the holders of certain
convertible promissory notes of Amertranz pursuant to the terms of the Asset
Exchange Agreement. At each of June 30, 1999 and 1998, 6,957 and 181,809 of
these options were outstanding and 6,957 and 181,809 were exercisable,
respectively.
F-16
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table reflects activity under the plan for the three-year period
ended June 30, 1999:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 407,609 3.16 431,207 3.08 526,399 2.76
Granted 415,000 1.22 - - - -
Exercised (174,852) 0.37 (14,198) 0.16 (38,392) 0.68
Forfeited (200,800) 4.16 (7,050) 4.25 (56,800) 2.06
Cancelled - - (2,850) 4.25 - -
Outstanding at end of year 446,957 $2.00 407,609 $3.16 431,207 $3.08
Exercisable at end of year 81,957 $5.49 332,209 $2.71 278,109 $2.18
</TABLE>
The weighted average fair value and exercise price for options granted at an
exercise price equal to fair market is $3.51 and $5.49, respectively. The
weighted average fair value and exercise price for options granted at an
exercise price below fair market is $0.94 and $1.22, respectively.
The fair value of each stock option grant is estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
1999 1998
---- ----
Risk-Free Interest Rates 4.67% 6.05%
Expected Lives 5 5
Expected Volatility 77.60% 64.00%
Expected Dividend Yields 0.00% 0.00%
The following table summarizes information about stock options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- --------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at Exercise
Exercise Prices 6/30/99 Contractual Life Price 6/30/99 Price
- - --------------- ------- ---------------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
$0.04 - $1.25 371,957 9.35 $1.20 6,957 $0.05
$4.00 - $6.00 75,000 1.93 $6.00 75,000 $6.00
------- --------
$0.04 - $6.00 446,957 8.11 $2.00 81,957 $5.49
======= ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Leases
As of June 30, 1999, future minimum lease payments for capital leases and
operating leases relating to equipment and rental premises are as follows:
F-17
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEAR ENDING CAPITAL LEASES OPERATING LEASES
----------- -------------- ----------------
2000 113,130 743,624
2001 24,610 638,705
2002 - 117,573
2003 - 27,000
--------- ---------
Total minimum lease payments 137,740 $1,526,902
==========
Less--Amount representing interest (10,239)
-------
$127,501
========
Employment Agreements
The Company has employment agreements with certain employees expiring at various
times through July 2002. Such agreements provide for minimum salary levels and
for incentive bonuses which are payable if specified management goals are
attained. The aggregate commitment for future salaries at June 30, 1999,
excluding bonuses, was approximately $440,000.
Litigation
On June 15, 1998 the Company was served with a complaint by a former consultant
to the Company. The Company, three officers of the Company and two principal
shareholders of the Company are named defendants in the lawsuit. The complaint
alleges breach of contract, violations of the federal anti-racketeering laws,
fraud and failure to pay wages and benefits. The complaint seeks economic
damages in excess of $5.6 million, and punitive damages of $7.5 million. Upon
motion filed on behalf of the Company, the court dismissed the action, but
permitted Mr. Hoffenberg to file an amended complaint. The Company then served a
motion to dismiss the amended complaint. The parties then filed a stipulation
pursuant to which Mr. Hoffenberg dismissed all claims against all parties except
claims for breach of contract and vacation pay totalling $135,333 in the
aggregate against the Company and its Amertranz subsidiary. The Company intends
to vigorously defend the action, which is now a claim for $135,333. The Company
believes that the complaint is without merit and that any material recovery by
Mr. Hoffenberg is unlikely.
9. INCOME TAXES
The Company will utilize approximately $13,500,000 of net operating losses to
offset its regular taxable income for the year ended June 30, 1999. The Company
will be subject to the alternative minimum tax ("AMT") for the year. Any AMT
paid will generate an AMT credit, which may be carried forward indefinitely to
offset the Company's regular tax liability. The Company has a tax net operating
loss carryforward of approximately $10,400,000, available to offset future
regular taxable income, which expires from 2011 through 2013 and which are
limited to annual maximum amounts, due to ownership changes, as defined in
regulations under Section 382 of the Internal Revenue Code. In 1998, the Company
reduced the recorded valuation allowance by approximately $6,309,000. The
determination that the net tax asset was realizable was based on the CAS Sale
subsequent to year-end, which resulted in a taxable gain of approximately
$16,443,000. The Company's reversal of the valuation allowance against its net
deferred tax assets and realization of net operating loss carryforwards resulted
in a realization of net income tax benefits of approximately $7,662,000 in the
fiscal year ended June 30, 1998.
F-18
<PAGE>
TARGET LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The components of current and deferred income tax expense for the year ended
June 30, 1999 are as follows:
(In thousands)
Current:
State $ 791
Federal 269
Deferred:
State -
Federal 5,793
------
Net income tax expense $ 6,853
======
A reconciliation of income taxes between the statutory and effective tax rates
on income before income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------- --------------
<S> <C> <C>
(In thousands)
Income tax expense (benefit) at U.S. statutory rate $ 7,100 $ (88)
Tax deductible goodwill (2,730) 2,158)
Non-deductible goodwill 211 -
State and local income taxes 522 228
(net of federal benefit)
Valuation Allowance 1,730 (5,688)
Non deductible expenses 20 44
-------- ---------
$ 6,853 $ (7,662)
======== =========
The components of deferred income taxes are as follows:
Year Ended Year Ended
(In thousands) June 30, 1999 June 30, 1999
------------- -------------
NOLs 3,536 7,328
Tax credits 269 -
Accrued amounts and other 759 1,131
-------- ---------
4,564 8,459
Depreciation and amortization 185 185
-------- ---------
4,749 8,644
Valuation allowance (2,484) (754)
-------- ---------
2,265 7,890
======== =========
</TABLE>
C79117.198
F-19
<PAGE>
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended June 30, 1997
Allowance for doubtful accounts $ 371 $ 783 $ - $ (367) $ 787
====== ====== ======= ======== ======
Accumulated depreciation and amortization
of property and equipment $ 210 $ 352 $ 469 $ (172) $ 859
====== ====== ======= ======== ======
Accumulated amortization of debt
issuance cost $3,264 $ 104 $ - $ - $3,368
====== ====== ======= ======== ======
Accumulated amortization of goodwill $ 191 $ 518 $ - $ - $ 709
====== ====== ======= ======== ======
Reserve for restructuring $ - $3,408 $ - $ (726) $2,682
====== ====== ======= ======== ======
For the fiscal year ended June 30, 1998
Allowance for doubtful accounts $ 787 $ 207 $ - $ (479) $ 515
====== ====== ======= ======== ======
Accumulated depreciation and amortization
of property and equipment $ 859 $ 536 $ (447) $ - $ 948
====== ====== ======= ======== ======
Accumulated amortization of debt
issuance cost $3,368 $ - $ - $ - $3,368
====== ====== ======= ======== ======
Accumulated amortization of goodwill $ 709 $ 596 $ - $ - $1,305
====== ====== ======= ======== ======
Reserve for restructuring $2,682 $ - $ - $(2,418) $ 264
====== ====== ======= ======== ======
For the fiscal year ended June 30, 1999
Allowance for doubtful accounts $ 515 $ 957 $ - $ (154) $1,318
====== ====== ======= ======== ======
Accumulated depreciation and amortization
of property and equipment $ 948 $ 238 $ - $ (138) $1,048
====== ====== ======= ======== ======
Accumulated amortization of debt
issuance cost $3,368 $ - $ - $ - $3,368
====== ====== ======= ======== ======
Accumulated amortization of goodwill $1,305 $ 623 $ - $ - $1,928
====== ====== ======= ======== ======
Reserve for restructuring $ 264 $ - $ - $ (242) $ 22
====== ====== ======= ======== ======
</TABLE>
S-1
<PAGE>
EXHIBIT 10.2
RESTATED AND AMENDED ACCOUNTS RECEIVABLE
MANAGEMENT AND SECURITY AGREEMENT
This Accounts Receivable Management and Security Agreement is made as
of July 13, 1998 by and between BNY FINANCIAL CORPORATION ("Lender"), having
offices at 1290 Avenue of the Americas, New York, New York 10104 and Target
Logistic Services, Inc. f/k/a Target Air Freight, Inc., 201 West Carob Street,
Compton, CA 90220 (the "Borrower"), and restates and amends in its entirety the
Accounts Receivable Management and Security Agreement dated January 14, 1997.
WHEREAS, the Borrower has requested that Lender make loans and
advances available to Borrower; and
WHEREAS, Lender has agreed to make such loans and advances to
Borrower, on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the parties hereto
agree as follows:
1. (A) General Definitions. When used in this Agreement, the following
terms shall have the following meanings:
"Advance Rates" means the Receivables Advance Rate.
"Affiliate" of any Person means (a) any Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with
such Person, or (b) any Person who is a director or officer (i) of such Person,
(ii) of any Subsidiary of such Person or (iii) of any Person described in clause
(a) above. For purposes of this definition, control of a Person shall mean the
power, direct or indirect, (i) to vote 5% or more of the securities having
ordinary voting power for the election of directors of such Person, or (ii) to
direct or cause the direction of the management and policies of such Person
whether by contract or otherwise.
"Alternate Base Rate" means, for any day, a rate per annum equal to
the higher of (i) the Prime Rate in effect on such day and (ii) the Federal
Funds Rate in effect on such day plus 1/2 of 1%.
"Ancillary Agreements" means all agreements, instruments, and
documents including, without limitation, mortgages, pledges, powers of attorney,
consents, assignments, contracts, notices, security agreements, trust agreements
whether heretofore, concurrently, or hereafter executed by or on behalf of
Borrower or delivered to Lender, relating to this Agreement or to the
transactions contemplated by this Agreement.
"Bank" means The Bank of New York.
"BNYFC Interest Coverage Ratio" the ratio of (a) earnings before
interest, taxes, depreciation and amortization of Amertranz Worldwide Holding
Corp. on a consolidated basis, as determined in accordance with GAAP as in
effect on the Closing Date, to (b) interest expense with respect to the
Obligations.
"Borrowing Base Certificate" shall have the meaning set forth in
Section 9.
"Business Day" means any day other than a day on which commercial
banks in New York are authorized or required by law to close.
"Change of Ownership" means any merger, consolidation or sale of
substantially all of the property or assets of Borrower.
<PAGE>
"Closing Date" means the date set forth in the first paragraph above
or such other date as may be agreed upon by the parties hereto.
"Collateral" means and includes:
(A) all Inventory;
(B) all Equipment;
(C) all General Intangibles;
(D) all Receivables;
(E) all books, records, ledgercards, files, correspondence,
computer programs, tapes, disks and related data processing software (owned by
Borrower or in which it has an interest) which at any time evidence or contain
information relating to (A), (B), (C) and (D) above or are otherwise necessary
or helpful in the collection thereof or realization thereupon;
(F) documents of title, policies and certificates of insurance,
securities, chattel paper, other documents or instruments evidencing or
pertaining to (A), (B), (C), (D) and (E) above;
(G) all guaranties, liens on real or personal property, leases,
and other agreements and property which in any way secure or relate to (A), (B),
(C), (D), (E) and (F) above, or are acquired for the purpose of securing and
enforcing any item thereof;
(H) (i) all cash held as cash collateral to the extent not
otherwise constituting Collateral, all other cash or property at any time on
deposit with or held by Lender for the account of Borrower (whether for
safekeeping, custody, pledge, transmission or otherwise), (ii) all present or
future deposit accounts (whether time or demand or interest or non-interest
bearing) of Borrower with Lender or any other Person including those to which
any such cash may at any time and from time to time be credited, (iii) all
investments and reinvestments (however evidenced) of amounts from time to time
credited to such accounts, and (iv) all interest, dividends, distributions and
other proceeds payable on or with respect to (x) such investments and
reinvestments and (y) such accounts; and
(I) all products and proceeds of (A), (B), (C), (D), (E), (F),
(G) and (H) above (including, but not limited to, all claims to items referred
to in (A), (B), (C), (D), (E), (F), (G) and (H) above) and all claims of
Borrower against third parties (x) for (i) loss of, damage to, or destruction
of, and (ii) payments due or to become due under leases, rentals and hires of,
any or all of (A), (B), (C), (D), (E), (F), (G) and (H) above and (y) proceeds
payable under, or unearned premiums with respect to policies of insurance in
whatever form.
"Contract Rate" means an interest rate per annum equal to (i)
Alternate Base Rate plus (ii) two percent (2%) provided, however, the Contract
Rate shall not at any time be less than 6%.
"Credit Risk" means the risk of loss resulting solely and exclusively
from a Customer's financial inability to pay at maturity with respect to any
Receivable purchased hereunder.
"Customer" means and includes the account debtor with respect to any
Receivable and/or the prospective purchaser of goods, services or both with
respect to any contract or contract right, and/or any party who enters into or
proposes to enter into any contract or other arrangement with Borrower, pursuant
to which Borrower is to deliver any personal property or perform any services.
"Default Rate" means a rate equal to two (2%) percent per annum in
excess of the Contract Rate or the Overadvance Rate, as the case may be
whichever is in effect.
- 2 -
<PAGE>
"Dispute" means any cause asserted for nonpayment of Receivables,
including, without limitation, any alleged defense, counterclaim, offset,
dispute or other claim (real or merely asserted) whether arising from or
relating to the sale of goods or rendition of services or arising from or
relating to any other transaction or occurrence.
"Eligible Receivables" means and includes each Receivable which
conforms to the following criteria: (a) shipment of the merchandise or the
rendition of services has been completed; (b) no return, rejection or
repossession of the merchandise has occurred; (c) merchandise or services shall
not have been rejected or disputed by the Customer and there shall not have been
asserted any offset, defense, counterclaim, or Dispute; (d) continues to be in
full conformity with the representations and warranties made by Borrower to
Lender with respect thereto; (e) Lender is, and continues to be, satisfied with
the credit standing of the Customer in relation to the amount of credit
extended; (f) is documented by an invoice in a form approved by Lender and shall
not be unpaid more than 90 days from invoice date nor more than 60 days from due
date; (g) less than 50% of the unpaid amount of invoices due from such Customer
remain unpaid more than 90 days from invoice date or more than 60 days past due
date; (h) is not evidenced by chattel paper or an instrument of any kind with
respect to or in payment of the Receivable unless such instrument is duly
endorsed to and in possession of Lender or represents a check in payment of a
Receivable; (i) if the Customer is located outside of the United States, the
goods which gave rise to such Receivable were shipped after receipt by Borrower
from or on behalf of the Customer of an irrevocable letter of credit, assigned
and delivered to Lender and confirmed by a financial institution acceptable to
Lender and is in form and substance acceptable to Lender, payable in the full
amount of the Receivable in United States dollars at a place of payment located
within the United States; (j) such Receivable is not subject to any lien, other
than Permitted liens; (k) does not arise out of transactions with any employee,
officer, agent, director, stockholder or Affiliate of Borrower; (l) is payable
to Borrower; (m) does not arise out of a bill and hold sale prior to shipment
and, if the Receivable arises out of a sale to any Person to which Borrower is
indebted, the amount of such indebtedness, and any anticipated indebtedness, is
deducted in determining the face amount of such Receivable; (n) is net of any
returns, discounts, claims, credits and allowances; (o) if the Receivable arises
out of contracts between Borrower and the United States, any state, or any
department, agency or instrumentality of any of them, Borrower has so notified
Lender, in writing, prior to the creation of such Receivable, and, if Lender so
requests, there has been compliance with any governmental notice or approval
requirements, including without limitation, compliance with the Federal
Assignment of Claims Act; (p) is a good and valid account representing an
undisputed bona fide indebtedness incurred by the Customer therein named, for a
fixed sum as set forth in the invoice relating thereto with respect to an
unconditional sale and delivery upon the stated terms of goods sold by Borrower,
or work, labor and/or services rendered by Borrower; and (q) is otherwise
satisfactory to Lender as determined in good faith by Lender in the reasonable
exercise of its discretion.
"Equipment" means and includes all of Borrower's now owned or
hereafter acquired equipment, machinery and goods (excluding Inventory), whether
or not constituting fixtures, including, without limitation: plant and office
equipment, tools, dies, parts, data processing equipment, furniture and trade
fixtures, trucks, trailers, loaders and other vehicles and all replacements and
substitutions therefore and all accessions thereto.
"Event of Default" means the occurrence of any of the events set forth
in paragraph 18.
"Federal Funds Rate" means, for any day, the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or if such rate is not so published for any
day which is a Business Day, the average of quotations for such day on such
transactions received by The Bank of New York from three Federal funds brokers
of recognized standing selected by The Bank of New York.
"Formula Amount" shall have the meaning set forth in paragraph 2(d).
"GAAP" means generally accepted accounting principles, practices and
procedures in effect from time to time.
"General Intangibles" means and includes all of Borrower's now owned
or hereafter acquired general intangibles as said term is defined in the Uniform
Commercial Code in effect in the State of New York including,
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without limitation, trademarks, tradenames, tradestyles, trade secrets,
equipment formulation, manufacturing procedures, quality control procedures,
product specifications, patents, patent applications, copyrights, registrations,
contract rights, choses in action, causes of action, corporate or other business
records, inventions, designs, goodwill, claims under guarantees, licenses,
franchises, tax refunds, tax refund claims, computer programs, computer data
bases, computer program flow diagrams, source codes, object codes and all other
intangible property of every kind and nature.
"Guarantor" means individually, Amertranz Worldwide Holding Corp. and
any other Person who may hereafter guarantee payment or performance of the whole
or any part of the Obligations and "Guarantors" means collectively all such
Persons.
"Guarantor Security Agreements" means collectively, the Security
Agreements which are executed by each Guarantor in favor of Lender.
"Guaranty Agreements" means collectively the Guaranties which are
executed by each Guarantor in favor of Lender.
"Hazardous Substance" means, without limitation, any flammable
explosives, radon, radioactive materials, asbestos, urea formaldehyde foam
insulation, polychlorinated byphenyls, petroleum and petroleum products,
methane, hazardous materials, hazardous wastes, hazardous or toxic substances or
related materials as defined in CERCLA, the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Sections 1801, et seq.), RCRA, Articles 15 and 27 of
the New York State Environmental Conservation Law or any other applicable
Environmental Law and in the regulations adopted pursuant thereto.
"Holding" means Amertranz Worldwide Holding Corp.
"Incipient Event of Default" means any act or event which, with the
giving of notice or passage of time or both, would constitute an Event of
Default.
"Inventory" means and includes all of Borrower's now owned or
hereafter acquired goods, merchandise and other personal property, wherever
located, to be furnished under any contract of service or held for sale or
lease, all raw materials, work in process, finished goods and materials and
supplies of any kind, nature or description which are or might be used or
consumed in Borrower's business or used in selling or furnishing such goods,
merchandise and other personal property, and all documents of title or other
documents representing them.
"Loans" means the Revolving Credit Advances and all other extensions
of credit hereunder.
"Matured Funds Rate" means the rate of interest, announced by Lender
from time to time, as the rate applicable to matured funds, such rate to be
adjusted automatically on the effective date of any change in such rate as
announced by Lender.
"Maximum Revolving Amount" means $10,000,000.00
"Net Face Amount" of Receivables means the gross face invoice amount
thereof, less returns, discounts (the calculation of which shall be determined
by Lender where optional terms are given), anticipation or any other unilateral
deductions taken by Customers, and credits and allowances to Customers of any
nature.
"Obligations" means and includes all Loans, all advances, debts,
liabilities, obligations, covenants and duties owing by Borrower to Lender (or
any corporation that directly or indirectly controls or is controlled by or is
under common control with Lender) of every kind and description (whether or not
evidenced by any note or other instrument and whether or not for the payment of
money or the performance or non-performance of any act), direct or indirect,
absolute or contingent, due or to become due, contractual or tortious,
liquidated or unliquidated, whether existing by operation of law or otherwise
now existing or hereafter arising including, without limitation, any debt,
liability or obligation owing from Borrower to others which Lender may have
obtained by assignment or otherwise
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and further including, without limitation, all interest, charges or any other
payments Borrower is required to make by law or otherwise arising under or as a
result of this Agreement and the Ancillary Agreements, together with all
reasonable expenses and reasonable attorneys' fees chargeable to Borrower's
account or incurred by Lender in connection with Borrower's account whether
provided for herein or in any Ancillary Agreement.
"Overadvance Rate" means a rate equal to one-half of one (1/2%)
percent per annum in excess of the Contract Rate.
"Permitted Liens" means (i) liens of carriers, warehousemen, mechanics
and materialmen incurred in the ordinary course of business securing sums not
overdue; (ii) liens incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (a) not
overdue or (b) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of Borrower in
conformity with GAAP, (iii) liens in favor of Lender, (iv) liens for taxes (a)
not yet due or (b) being diligently contested in good faith, provided that
adequate reserves with respect thereto are maintained on the books of Borrower
in conformity with GAAP and (v) liens specified on Schedule 1(A) hereto.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Prime Rate" means the prime commercial lending rate of The Bank of
New York as publicly announced in New York, New York to be in effect from time
to time, such rate to be adjusted automatically, without notice, on the
effective date of any change in such rate. This rate of interest is determined
from time to time and is neither tied to any external rate of interest or index
nor does it necessarily reflect the lowest rate of interest actually charged to
any particular class or category of customers.
"Receivables" means and includes all of Borrower's now owned or
hereafter acquired accounts and contract rights, instruments, insurance
proceeds, documents, chattel paper, letters of credit and Borrower's rights to
receive payment thereunder, any and all rights to the payment or receipt of
money or other forms of consideration of any kind at any time now or hereafter
owing or to be owing to Borrower, all proceeds thereof and all files in which
Borrower has any interest whatsoever containing information identifying or
pertaining to any of Borrower's Receivables, together with all of Borrower's
rights to any merchandise which is represented thereby, and all Borrower's
right, title, security and guaranties with respect to each Receivable,
including, without limitation, all rights of stoppage in transit, replevin and
reclamation and all rights as an unpaid vendor.
"Receivables Advance Rate" shall have the meaning set forth in the
definition of Receivables Availability.
"Receivables Availability" means the amount of Revolving Credit
Advances against Eligible Receivables Lender may from time to time during the
term of this Agreement make available to Borrower up to 85% ("Receivables
Advance Rate") of the net face amount of Borrower's Eligible Receivables.
"Reports" shall have the meaning set forth in Section 14.
"Retained Goods" shall have the meaning set forth in Section 8(h).
"Revolving Credit Advances" shall have the meaning set forth in
paragraph 2(d).
"Settlement Date" means two (2)days after the day on which the
applicable Receivable is actually collected by Lender.
"Subordinated Debt" means any debt subordinated to Lender upon terms
and conditions satisfactory to Lender in its sole discretion.
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"Subsidiary" of any Person means a corporation or other entity of
whose shares of stock or other ownership interests having ordinary voting power
(other than stock or other ownership interests having such power only by reason
of the happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, are
owned, directly or indirectly, by such Person.
"Term" means the Closing Date through January 14, 2000, subject to
acceleration upon the occurrence of an Event of Default hereunder or other
termination hereunder.
"Total Liabilities" at a particular date means all Indebtedness of
Borrower as at such date.
"Working Capital" at a particular date means the excess, if any, of
Current Assets over Current Liabilities at such date.
(B) Accounting Terms. Any accounting terms used in this Agreement
which are not specifically defined shall have the meanings customarily given
them in accordance with GAAP.
(C) Other Terms. All other terms used in this Agreement and defined in
the Uniform Commercial Code as adopted in the State of New York, shall have the
meaning given therein unless otherwise defined herein.
2. Loans.
(a) Lender shall not assume the Credit Risk on any Receivables.
(b) Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, and provided there does not exist an Event of Default or
an Incipient Event of Default, Lender shall make revolving credit advances (the
"Revolving Credit Advances") to Borrower from time to time during the Term
which, in the aggregate at any time outstanding, will not exceed the lesser of
(x) the Maximum Revolving Amount or (y) an amount equal to the Receivables
Availability, less such reserves as Lender may reasonably deem proper and
necessary from time to time:
The result of the calculation under Subsection 2(b)(y) above shall be
referred to as the "Formula Amount". In this regard, Borrower agrees that it
shall submit a Borrowing Base Certificate to Lender, in form and substance and
with such frequency, as more fully described in Section 9 below, to include such
calculations, in each instance that Lender may deem necessary or desirable in
order to verify whether Borrower is in compliance with the preceding limitations
pertaining to Revolving Credit Advances.
(c) Notwithstanding the limitations set forth above or below, Lender
retains the right to lend Borrower from time to time such amounts in excess of
such limitations as Lender may determine in its sole discretion.
(d) Borrower acknowledges that the exercise of Lender's discretionary
rights hereunder may result during the term of this Agreement in one or more
increases or decreases in the Advance Rates and Borrower hereby consents to any
such increases or decreases which may limit or restrict advances requested by
Borrower.
(e) If Borrower does not pay any interest, fees, costs, or charges to
Lender when due, Borrower shall thereby be deemed to have requested, and Lender
is hereby authorized at its discretion to make and charge to Borrower's account,
a Revolving Credit Advance to Borrower as of such date in an amount equal to
such unpaid interest, fees, costs, or charges.
(f) Any sums expended by Lender due to Borrower's failure to
perform or comply with its obligations under this Agreement, including but not
limited to the payment of taxes, insurance premiums or leasehold obligations,
shall be charged to Borrower's account as a Revolving Credit Advance and added
to the Obligations.
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<PAGE>
(g) Lender will account to Borrower monthly with a statement of all
Loans and other advances, charges and payments made pursuant to this Agreement,
and such account rendered by Lender shall be deemed final, binding and
conclusive unless Lender is notified by Borrower in writing to the contrary
within thirty (30) days of the date each account was rendered specifying the
item or items to which objection is made.
(h) During the Term, Borrower may borrow, prepay and reborrow
Revolving Credit Advances, all in accordance with the terms and conditions
hereof.
(i) The aggregate balance of Revolving Credit Advances outstanding at
any time shall not exceed the Formula Amount.
3. Repayment of Loans.
Borrower shall be required to (i) make a mandatory prepayment
hereunder at any time that the aggregate outstanding principal balance of the
Loans made by Lender to Borrower hereunder is in excess of the Formula Amount in
an amount equal to such excess, and (ii) repay on the expiration of the Term (x)
the then aggregate outstanding principal balance of Revolving Credit Advances
made by Lender to Borrower hereunder together with accrued and unpaid interest,
fees, and charges and (y) all other amounts owed Lender under this Agreement and
the Ancillary Agreements.
4. Procedure for Revolving Credit Advances. The Borrower may by written
notice request a borrowing of Revolving Credit Advances prior to 1:00 P.M. New
York time on the Business Day of its request to incur, on that day, a Revolving
Credit Advance. All Revolving Credit Advances shall be disbursed from whichever
office or other place Lender may designate from time to time and, together with
any and all other Obligations of Borrower to Lender, shall be charged to the
Borrower's account on Lender's books. The proceeds of each Revolving Credit
Advance made by the Lender shall be made available to the Borrower on the day so
requested by way of credit to the Borrower's operating account maintained with
such bank as Borrower designated to Lender. Any and all Obligations due and
owing hereunder may be charged to Borrower's account and shall constitute
Revolving Credit Advances.
5. Interest; Fees
(a) Interest.
(i) Except as modified by paragraph 5(a)(iii) below, interest on
Revolving Credit Advances shall be payable in arrears on the last day of each
month. Interest payments hereunder may, at Lender's option be charged by Lender
to Borrower's account. Interest charges shall be computed on the unpaid balance
of the Revolving Credit Advances for each day they are outstanding at a rate per
annum equal to with respect to Revolving Credit Advances, the Contract Rate. In
the event the aggregate amount of Revolving Credit Advances exceeds the Formula
Amount for five (5) or more days in any month during the Term, the average daily
balance of Revolving Credit Advances in that month shall bear interest at the
Overadvance Rate.
(ii) Interest shall be computed on the basis of actual days elapsed
over a 360-day year.
(iii) Upon the occurrence and during the continuance of an Event of
Default, interest shall be payable at the Default Rate.
(iv) Notwithstanding the foregoing, in no event shall interest exceed
the maximum rate permitted under any applicable law or regulation, and if any
provision of this Agreement or an Ancillary Agreement is in contravention of any
such law or regulation, such provision shall be deemed amended to provide for
interest at said maximum rate and any excess amount shall either be applied, at
Lender's option, to the outstanding Loans in such order as Lender shall
determine or refunded by Lender to Borrower.
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<PAGE>
(v) Borrower shall pay principal, interest and all other amounts
payable hereunder, or under any Ancillary Agreement, without any deduction
whatsoever, including, but not limited to, any deduction for any set-off or
counterclaim.
(b) Fees.
(i) Unused Line Fee. In the event the average closing daily unpaid
balances of all Revolving Credit Advances hereunder during any calendar month is
less than the Maximum Revolving Amount, Borrower shall pay to Lender a fee at a
rate per annum equal to one half of one percent (1/2%) on the amount by which
the Maximum Revolving Amount exceeds such average daily unpaid balance. Such fee
shall be calculated on the basis of a year of 360 days and actual days elapsed,
and shall be charged to Borrower's account on the first day of each month with
respect to the prior month.
(ii) Collateral Monitoring Fee. Upon Lender's performance of any
collateral monitoring namely any field examination, collateral analysis or other
business analysis, the need for which is to be determined by Lender and which
monitoring is undertaken by Lender or for Lender's benefit, a per diem amount
equal to Lender's then standard rate per person, for each person employed to
perform such monitoring together with all costs, disbursements and expenses
incurred by the Lender and the person performing such collateral monitoring
shall be charged to Borrower's account. In addition to the foregoing the
Borrower shall in addition pay to Lender a monthly Collateral Monitoring Fee of
$2,000.00 per month, through the Term of this Agreement and through any renewal
Term (provided however, if there exists an Event of Default under this Agreement
the Collateral Monitoring Fee shall be increased and shall thereupon continue at
$5,000 per month through the end of the Term and any renewal Term) and in the
event of any termination of the Agreement, prior to the end of the Term or
renewal Term pursuant to Section 17 of the Agreement or otherwise, the then
remaining monthly payments through the balance of the Term or renewal Term (as
the case may be) shall be payable in full.
(c) Increased Costs. In the event that any applicable law, treaty or
governmental regulation, or any change therein or in the interpretation or
application thereof, or compliance by Lender (for purposes of this Section 5(c),
the term "Lender" shall include Lender and any corporation or bank controlling
Lender) with any request or directive (whether or not having the force of law)
from any central bank or other financial, monetary or other authority, shall:
(i) subject Lender to any tax of any kind whatsoever with respect to
this Agreement or change the basis of taxation of payments to Lender of
principal, fees, interest or any other amount payable hereunder or under any
Ancillary Agreements (except for changes in the rate of tax on the overall net
income of Lender by the jurisdiction in which it maintains its principal
office);
(ii) impose, modify or hold applicable any reserve, special deposit,
assessment or similar requirement against assets held by, or deposits in or for
the account of, advances or loans by, or other credit extended by, any office of
Lender, including (without limitation) pursuant to Regulation D of the Board of
Governors of the Federal Reserve System; or
(iii) impose on Lender any other condition with respect to this
Agreement or any Ancillary Agreements;
and the result of any of the foregoing is to increase the cost to Lender of
making, renewing or maintaining its Loans hereunder by an amount that Lender
deems to be material or to reduce the amount of any payment (whether of
principal, interest or otherwise) in respect of any of the Loans by an amount
that Lender deems to be material, then, in any case Borrower shall promptly pay
Lender, upon its demand, such additional amount as will compensate Lender for
such additional cost or such reduction, as the case may be. Lender shall certify
the amount of such additional cost or reduced amount to Borrower, and such
certification shall be conclusive absent manifest error.
(d) Capital Adequacy.
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<PAGE>
(i) In the event that Lender shall have determined that any applicable
law, rule, regulation or guideline regarding capital adequacy, or any change
therein, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Lender (for purposes
of this Section 5(d), the term "Lender" shall include Lender and any corporation
or bank controlling Lender) with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on Lender's capital as a consequence of its obligations hereunder to a
level below that which Lender could have achieved but for such adoption, change
or compliance (taking into consideration Lender's policies with respect to
capital adequacy) by an amount deemed by Lender to be material, then, from time
to time, Borrower shall pay upon demand to Lender such additional amount or
amounts as will compensate Lender for such reduction. In determining such amount
or amounts, Lender may use any reasonable averaging or attribution methods. The
protection of this Section shall be available to Lender regardless of any
possible contention of invalidity or inapplicability with respect to the
applicable law, regulation or condition.
(ii) A certificate of Lender setting forth such amount or amounts as
shall be necessary to compensate Lender with respect to Section 5(d) hereof when
delivered to Borrower shall be conclusive absent manifest error.
(e) Matured Funds. On the last day of each month during the Term,
Lender shall credit Borrower's account with interest at the Matured Funds Rate
in effect during such month on the average daily balance during such month of
any amounts payable by Lender to Borrower hereunder which are not drawn by
Borrower on the Settlement Date.
6. Security Interest.
(a) To secure the prompt payment to Lender of the Obligations,
Borrower hereby assigns, pledges and grants to Lender a continuing security
interest in and to the Collateral, whether now owned or existing or hereafter
acquired or arising and wheresoever located (whether or not the same is subject
to Article 9 of the Uniform Commercial Code). All of the Borrower's ledger
sheets, files, records, books of account, business papers and documents relating
to the Collateral shall, until delivered to or removed by Lender, be kept by
Borrower in trust for Lender until all Obligations have been paid in full. Each
confirmatory assignment schedule or other form of assignment hereafter executed
by Borrower shall be deemed to include the foregoing grant, whether or not the
same appears therein.
(b) Lender may file one or more financing statements disclosing
Lender's security interest in the Collateral without Borrower's signature
appearing thereon or Lender may sign on Borrower's behalf as provided in
paragraph 13 hereof. The parties agree that a carbon, photographic or other
reproduction of this Agreement shall be sufficient as a financing statement. If
any Receivable becomes evidenced by a promissory note or any other instrument
for the payment of money, Borrower will immediately deliver such instrument to
Lender appropriately endorsed.
7. Representations Concerning the Collateral. Borrower represents and
warrants (each of which such representations and warranties shall be deemed
repeated upon the making of each request for a Revolving Credit Advance and made
as of the time of each and every Revolving Credit Advance hereunder):
(a) all the Collateral (i) is owned by Borrower free and clear of all
claims, liens, security interests and encumbrances (including without limitation
any claims of infringement) except (A) those in Lender's favor and (B) Permitted
Liens and (ii) is not subject to any agreement prohibiting the granting of a
security interest or requiring notice of or consent to the granting of a
security interest;
(b) all Receivables (i) represent complete bona fide transactions
which require no further act under any circumstances on Borrower's part to make
such Receivables payable by Customers, (ii) unless they do not exceed $500 in
any one instance or $5,000 in the aggregate to the best of Borrower's knowledge,
are not subject to any present, future or contingent Disputes; (iii) unless they
do not exceed $500 in any one instance or $5,000 in the aggregate do not
represent bill and hold sales, consignment sales, guaranteed sales, sale or
return or other similar
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<PAGE>
understandings or obligations of any Affiliate or Subsidiary of Borrower; (iv)
included in any Borrowing Base Certificate as an Eligible Receivable meets all
criteria specified in the definition of Eligible Receivables, except as may
otherwise be specifically disclosed in such Borrowing Base Certificate or as
otherwise theretofore disclosed in writing to Lender; and (v) Borrower has no
knowledge of any fact or circumstance not disclosed to Lender in the pertinent
Borrowing Base Certificate or otherwise in writing, which would impair the
validity or collectibility of any Eligible Receivable and that all documents in
connection with each Receivable are genuine.
(c) in the event any amounts due and owing from any account debtor to
Borrower on any Eligible Receivable shall become subject to any Dispute, or to
any other adjustment otherwise permitted to be made in accordance with the terms
and provisions hereof in the ordinary course of business and prior to the
occurrence of an Event of Default hereunder, Borrower agrees that it shall, at
the time of the submission of the next Borrowing Base Certificate required to be
delivered to Lender immediately following the date on which Borrower learns
thereof, provide Lender with notice thereof. Borrower further agrees that it
shall also notify Lender promptly of all returns and credits in excess of $500
in any one instance or and which in the aggregate do not exceed $5,000 at any
time outstanding in respect of any Receivables included within a Borrowing Base
Certificate, which notice shall specify the Receivables affected.
8. Covenants Concerning the Collateral. During the Term, Borrower
covenants that it shall:
(a) not dispose of any of the Collateral whether by sale, lease or
otherwise except for (i) the sale of Inventory in the ordinary course of
business, and (ii) the disposition or transfer of obsolete and wornout Equipment
in the ordinary course of business during any fiscal year having an aggregate
fair market value of not more than $250,000.00 and only to the extent that (x)
the proceeds of any such disposition are used to acquire replacement Equipment
which is subject to Lender's first priority security interest or (y) the
proceeds of which are remitted to Lender in reduction of the Obligations;
(b) not encumber, mortgage, pledge, assign or grant any security
interest in any Collateral or any of Borrower's other assets to anyone other
than Lender except Permitted Liens;
(c) place notations upon Borrower's books of account and any financial
statement prepared by Borrower to disclose Lender's security interest in the
Collateral;
(d) defend the Collateral against the claims and demands of
all parties.
(e) keep and maintain the Equipment in good operating condition,
except for ordinary wear and tear, and shall make all necessary repairs and
replacements thereof so that the value and operating efficiency shall at all
times be maintained and preserved. Borrower shall not permit any such items,
other than those which were specifically intended to be leasehold improvements,
to become a fixture to real estate or accessions to other personal property;
(f) not extend the payment terms of any Receivable without prompt
notice thereof to Lender;
(g) perform all other steps requested by Lender to create and maintain
in Lender's favor a valid perfected first security interest in all Collateral;
and
(h) Should Lender so elect, upon the occurrence of any Event of
Default, Lender may at any time in its discretion (i) withdraw Borrower's
authority to issue credits to its Customers without Lender's prior written
consent; or (ii) litigate Disputes or settle them directly with Customers on
terms acceptable to Lender.
9. Collection and Maintenance of Collateral and Records. Lender may at any
time verify Borrower's Receivables utilizing an audit control company or any
other agent of Lender. Lender or Lender's designee may notify Customers, at any
time at Lender's sole discretion, of Lender's security interest in Receivables,
collect them directly and charge the collection costs and expenses to Borrower's
account, but, unless and until Lender does so or gives Borrower other
instructions, Borrower shall instruct
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<PAGE>
all of its Customers to make payments on account of Receivables to an account
under Lender's dominion and control at such bank as Lender may designate, as
provided by the terms of Section 23. To the extent Borrower receives any
payments on account of Receivables, it shall hold such payments for Lender's
benefit in trust as Lender's trustee and immediately deliver them to Lender in
their original form with all necessary endorsements or, as directed by Lender,
deposit such payments as directed by Lender pursuant to Section 22 hereof.
Lender will credit (conditional upon final collection) all such payments to
Borrower's account on the Settlement Date. Promptly after the creation of any
Receivables, Borrower shall provide Lender with schedules describing all
Receivables created or acquired by Borrower and shall execute and deliver
confirmatory written assignments of such Receivables to Lender, but Borrower's
failure to execute and deliver such schedules or written confirmatory
assignments of such Receivables shall not affect or limit Lender's security
interest or other rights in and to the Receivables. Borrower shall furnish, at
Lender's request, copies of contracts, invoices or the equivalent, and any
original shipping and delivery receipts for all merchandise sold or services
rendered and such other documents and information as Lender may require. All of
Borrower's invoices shall bear the terms stated on the applicable customer
order, and no change from the original terms of such customer order shall be
made without the prior written consent of Lender. Borrower shall provide Lender
on a monthly (within ten (10) days after the end of each month), or more
frequent basis, as requested by Lender, a summary report of Borrower's current
Inventory, certified as true and accurate by Borrower's President or Chief
Financial Officer, as well as an aged trial balance of Borrower's existing
accounts payable. Borrower shall provide Lender, as requested by Lender, such
other schedules, documents and/or information regarding the Collateral as Lender
may require. Without limiting the foregoing, Borrower shall provide to Lender a
borrowing base certificate at least once daily ("Borrowing Base Certificate"),
which must be in form and substance acceptable to Lender and which Borrowing
Base Certificate shall certify to Lender, and shall contain sufficient
information and calculations as Lender may deem necessary or desirable, in order
to verify any Receivables Availability, the applicable Formula Amount and
whether or not Receivables included therein are Eligible Receivables. Without
limiting the foregoing, a Borrowing Base Certificate must be executed and
delivered by Borrower to Lender at the time of or prior to each request for
Revolving Credit Advances pursuant to Section 4. Each such Borrowing Base
Certificate shall be delivered to Lender at its office described in Section 25
below, on each relevant Business Day.
10. Inspections. At all times during normal business hours, Lender shall
have the right to (a) visit and inspect Borrower's properties and the
Collateral, (b) inspect, audit and make extracts from Borrower's relevant books
and records, including, but not limited to, management letters prepared by
independent accountants, and (c) discuss with Borrower's principal officers, and
independent accountants, Borrower's business, assets, liabilities, financial
condition, results of operations and business prospects. Borrower will deliver
to Lender any instrument necessary for Lender to obtain records from any service
bureau maintaining records for Borrower.
11. Financial Information. Borrower shall provide Lender (a) as soon as
available, but in any event within ninety (90) days after the end of each of
Borrower's fiscal years, Borrower's and Holding, consolidated and consolidating
balance sheet as at the end of such fiscal year and the related statements of
income, retained earnings and statement of cash flow for such fiscal year,
setting forth in comparative form the figures as at the end of and for the
previous fiscal year, which with respect to Holding shall have been reported on
by independent certified public accountants who shall be satisfactory to Lender
and shall be accompanied by an unqualified audit report issued by such
independent certified public accountants; (b) as soon as available, drafts of
Borrower's balance sheet as at the end of each of Borrower's fiscal years and
the related statements of income, retained earnings and statement of cash flow
for such fiscal year, which have been internally prepared by Borrower; (c) as
soon as available, but in any event within thirty (30) days after the close of
each month and quarter, the balance sheet with respect to Borrower and the
related statements of income, retained earnings and changes in statement of cash
flow for such month and quarter, which have been internally prepared by
Borrower. All financial statements required under (a), (b) and (c) above shall
be prepared in accordance with GAAP (except that monthly and quarterly financial
statements need not provide the footnotes customarily required by GAAP but shall
in all other regards be prepared in a manner consistent with GAAP), subject to
year end adjustments in the case of monthly and quarterly statements. Together
with the financial statements furnished pursuant to (a) above, Borrower shall
deliver a certificate of Borrower's certified public accountants addressed to
Lender stating that (i) they have caused this Agreement and the Ancillary
Agreements to be reviewed and (ii) in making the examination necessary for the
issuance of such financial statements, nothing has come to their attention to
lead them to believe that any Event of Default or Incipient Event of Default
exists and, in particular, they have no knowledge of any Event of Default or
Incipient Event of Default or, if such is not the case,
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<PAGE>
specifying such Event of Default or Incipient Event of Default and its nature,
when it occurred and whether it is continuing. At the times the financial
statements are furnished pursuant to (a), (b) and (c) above, a certificate of
Borrower's President or Chief Financial Officer shall be delivered to Lender
stating that, based on an examination sufficient to enable him to make an
informed statement, no Event of Default or Incipient Event of Default exists,
or, if such is not the case, specifying such Event of Default or Incipient Event
of Default and its nature, when it occurred, whether it is continuing and the
steps being taken by Borrower with respect to such event. If any internally
prepared financial information, including that required under this paragraph, is
unsatisfactory in any manner to Lender, Lender may request that Borrower's
independent certified public accountants review same.
In addition to the foregoing financial statements, Borrower shall furnish
Lender no less than thirty (30) days prior to the beginning of each fiscal year
commencing with fiscal year 1998, a month by month projected operating budget
and cash flow for such fiscal year (including an income statement for each month
and a balance sheet as at the end of the last month in each fiscal quarter),
such projections to be accompanied by a certificate signed by Borrower's
President or Chief Financial Officer to the effect that such projections have
been prepared on the basis of sound financial planning practice consistent with
past budgets and financial statements and that such officer has no reason to
question the reasonableness of any material assumptions on which such
projections were prepared.
12. Additional Representations, Warranties and Covenants. Borrower
represents and warrants (each of which such representations and warranties shall
be deemed repeated upon the making of a request for a Revolving Credit Advance
and made as of the time of each Revolving Credit Advance made hereunder), and
covenants that:
(a) Borrower is a corporation duly organized and validly existing
under the laws of the State of Delaware and is duly qualified and in good
standing in every other state or jurisdiction in which the nature of its
business requires such qualification;
(b) the execution, delivery and performance of this Agreement and the
Ancillary Agreements (i) have been duly authorized, (ii) are not in
contravention of Borrower's certificate of incorporation, by-laws or of any
indenture, agreement or undertaking to which Borrower is a party or by which
Borrower is bound and (iii) are within Borrower's corporate powers;
(c) this Agreement and the Ancillary Agreements executed and delivered
by Borrower are Borrower's legal, valid and binding obligations, enforceable in
accordance with their terms;
(d) it keeps and will continue to keep all of its books and records
concerning the Collateral at Borrowers' executive offices located at the
respective addresses set forth in the introductory paragraph of this Agreement
and will not move such books and records without giving Lender at least thirty
(30) days prior written notice;
(e) (i) the operation of Borrower's business is and will continue to
be in compliance in all material respects with all applicable federal, state and
local laws, including but not limited to all applicable environmental laws and
regulations.
(ii) Borrower will establish and maintain a system to assure and
monitor continued compliance with all applicable environmental laws, which
system shall include periodic reviews of such compliance.
(iii) in the event the Borrower obtains, gives or receives notice
of any release or threat of release of a reportable quantity of any Hazardous
Substances on its property (any such event being hereinafter referred to as a
"Hazardous Discharge") or receives any notice of violation, request for
information or notification that it is potentially responsible for investigation
or cleanup of environmental conditions on its property, demand letter or
complaint, order, citation, or other written notice with regard to any Hazardous
Discharge or violation of any environmental laws affecting its property or
Borrower's interest therein (any of the foregoing is referred to herein as an
"Environmental Complaint") from any Person or entity, including any state agency
responsible in whole or in part for environmental matters in the state in which
such property is located or the United States Environmental Protection Agency
(any such person or entity hereinafter the "Authority"), then the Borrower
shall, within five (5) Business
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Days, give written notice of same to the Lender detailing facts and
circumstances of which the Borrower is aware giving rise to the Hazardous
Discharge or Environmental Complaint and periodically inform Lender of the
status of the matter. Such information is to be provided to allow the Lender to
protect its security interest in the Collateral and is not intended to create
nor shall it create any obligation upon the Lender with respect thereto.
(iv) Borrower shall respond promptly to any Hazardous Discharge
or Environmental Complaint and take all necessary action in order to safeguard
the health of any Person and to avoid subjecting the Collateral to any lien,
charge, claim or encumbrance. If Borrower shall fail to respond promptly to any
Hazardous Discharge or Environmental Complaint or Borrower shall fail to comply
with any of the requirements of any environmental laws, the Lender may, but
without the obligation to do so, for the sole purpose of protecting the Lender's
interest in Collateral: (A) give such notices or (B) enter onto Borrower's
property (or authorize third parties to enter onto such property) and take such
actions as the Lender (or such third parties as directed by the Lender) deem
reasonably necessary or advisable, to clean up, remove, mitigate or otherwise
deal with any such Hazardous Discharge or Environmental Complaint. All
reasonable costs and expenses incurred by the Lender (or such third parties) in
the exercise of any such rights, including any sums paid in connection with any
judicial or administrative investigation or proceedings, fines and penalties,
together with interest thereon from the date expended at the Default Rate for
Revolving Credit Advances shall be paid upon demand by the Borrower, and until
paid shall be added to and become a part of the Obligations secured by the Liens
created by the terms of this Agreement or any other agreement between Lender and
Borrower. (v) Borrower shall defend and indemnify the Lender and hold the Lender
harmless from and against all loss, liability, damage and expense, claims,
costs, fines and penalties, including attorney's fees, suffered or incurred by
the Lender under or on account of any environmental laws, including, without
limitation, the assertion of any lien thereunder, with respect to any Hazardous
Discharge, the presence of any hazardous substances affecting Borrower's
property, whether or not the same originates or emerges from Borrower's property
or any contiguous real estate, including any loss of value of the Collateral as
a result of the foregoing except to the extent such loss, liability, damage and
expense is attributable to any Hazardous Discharge resulting from actions on the
part of the Lender. The Borrower's obligations under this paragraph 12(e) shall
arise upon the discovery of the presence of any Hazardous Substances on the
Borrower's property, whether or not any federal, state, or local environmental
agency has taken or threatened any action in connection with the presence of any
hazardous substances. The Borrower's obligation and the indemnifications
hereunder shall survive the termination of this Agreement.
(vi) For purposes of paragraph 12(e) all references to Borrower's
property shall be deemed to include all of Borrower's right, title and interest
in and to all owned and/or leased premises;
(f) based upon the Employee Retirement Income Security Act of 1974
("ERISA"), and the regulations and published interpretations thereunder: (i)
Borrower has not engaged in any Prohibited Transactions as defined in paragraph
406 of ERISA and paragraph 4975 of the Internal Revenue Code, as amended; (ii)
Borrower has met all applicable minimum funding requirements under paragraph 302
of ERISA in respect of its plans; (iii) Borrower has no knowledge of any event
or occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) Borrower has no fiduciary responsibility for investments with
respect to any plan existing for the benefit of persons other than Borrower's
employees; and (v) Borrower has not withdrawn, completely or partially, from any
multiemployer pension plan so as to incur liability under the Multiemployer
Pension Plan Amendments Act of 1980;
(g) it is solvent, able to pay its debts as they mature, has capital
sufficient to carry on its business and all businesses in which it is about to
engage and the fair saleable value of its assets (calculated on a going concern
basis) is in excess of the amount of its liabilities;
(h) there is no pending or threatened litigation, actions or
proceeding which involve the possibility of materially and adversely affecting
the Borrower's business, assets, operations, condition or prospects, financial
or otherwise, or the Collateral or the ability of Borrower to perform this
Agreement;
(i) all balance sheets and income statements which have been delivered
to Lender fairly, accurately and properly state Borrower's financial condition
on a basis consistent with that of previous financial
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<PAGE>
statements and except as otherwise disclosed to Lender in writing prior to the
date hereof with respect to operating losses during the fiscal quarter ending
December 31, 1996, there has been no material adverse change in Borrower's
financial condition as reflected in such statements since the date thereof and
such statements do not fail to disclose any fact or facts which might materially
and adversely affect Borrower's financial condition;
(j) (x) it possesses all of the licenses, patents, copyrights,
trademarks, tradenames and permits necessary to conduct its business, (y) there
has been no assertion or claim of violation or infringement with respect thereof
and (z) all such licenses, patents, copyrights, trademarks, tradenames and
permits are listed on Schedule 12(j);
(k) it will pay or discharge when due all taxes, assessments and
governmental charges or levies imposed upon it;
(l) it will promptly inform Lender in writing of: (i) the commencement
of all proceedings and investigations by or before and/or the receipt of any
notices from, any governmental or nongovernmental body and all actions and
proceedings in any court or before any arbitrator against or in any way
concerning any of Borrower's properties, assets or business, which might singly
or in the aggregate, have a materially adverse effect on Borrower; (ii) any
amendment of Borrower's certificate of incorporation or by-laws; (iii) any
change in Borrower's business, assets, liabilities, condition (financial or
otherwise), results of operations or business prospects which has had or might
have a materially adverse effect on Borrower; (iv) any Event of Default or
Incipient Event of Default; (v) any default or any event which with the passage
of time or giving of notice or both would constitute a default under any
agreement for the payment of money to which Borrower is a party or by which
Borrower or any of Borrower's properties may be bound which would have a
material adverse effect on Borrower's business, operations, property or
condition (financial or otherwise) or the Collateral; (vi) any change in the
location of Borrower's executive offices; (vii) any change in the location of
Borrower's Inventory or Equipment which in the aggregate have a value in excess
of $20,000.00 from the locations listed on Schedule 12(l) attached hereto,
(viii) any change in Borrower's corporate name; (ix) any material delay in
Borrower's performance of any of its obligations to any Customer and of any
assertion of any material claims, offsets, counterclaims or Disputes by any
Customer and of any allowances, credits and/or other monies granted by it to any
Customer; (x) furnish to and inform Lender of all material adverse information
relating to the financial condition of any account debtor; and (xi) any material
return of goods;
(m) it will not without the express prior written consent of Lender
(i) create, incur, assume or suffer to exist any indebtedness (exclusive of
trade debt) whether secured or unsecured other than Borrower's indebtedness to
Lender and as set forth on Schedule 12(m) attached hereto and made a part
hereof; (ii) declare, pay or make any dividend or distribution on any shares of
the common stock or preferred stock of Borrower or apply any of its funds,
property or assets to the purchase, redemption or other retirement of any common
or preferred stock of Borrower; (iii) directly or indirectly, prepay any
indebtedness (other than to Lender), or repurchase, redeem, retire or otherwise
acquire any indebtedness of Borrower; (iv) makes advances, loans or extensions
of credit to any Person; (v) become either directly or contingently liable upon
the obligations of any Person by assumption, endorsement or guaranty thereof or
otherwise; (vi) enter into any merger, consolidation or other reorganization
with or into any other Person or acquire all or a portion of the assets or stock
of any Person or permit any other Person to consolidate with or merge with it;
(vii) form any Subsidiary or enter into any partnership, joint venture or
similar arrangement; (viii) materially change the nature of the business in
which it is presently engaged; (ix) change its fiscal year or make any changes
in accounting treatment and reporting practices without prior written notice to
Lender except as required by GAAP or in the tax reporting treatment or except as
required by law; (x) enter into any transaction with any Affiliate, except in
ordinary course on arms length terms; or (xi) bill Receivables under any name
except the present name of the Borrower; (xii) sell, transfer or lease or
otherwise dispose of any of its properties or assets, except in the ordinary
course of its business;
(n) it shall not permit consolidated Net Worth of Target Logistics,
Inc., determined in accordance with GAAP as of the end of any fiscal quarter to
be less than the amount set forth below (in thousands) for each respective
measurement date:
Quarter Ended 1998 1999
-----------------------------------------------------------------------
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<PAGE>
March 31 $18,750
June 30 $18,000
September 30 $17,500
December 31 $19,800 $17,000
and at all time thereafter $17,000
To the extent that Target Logistics, Inc. pays any dividends to the
holders of any preferred stock issued in its settlement with trade creditors and
to the extent Target Logistics, Inc. pays any dividends to the holders of any
holders of other classes of preferred stock (which dividends shall not exceed an
aggregate amount of $450,000 during any year to such holders of other classes of
preferred stock), then in such event the dollar amounts set forth above shall be
decreased by an amount equal to the aggregate amount of the dividends paid.
(o) it shall not permit the consolidated net profit (loss) of Target
Logistics, Inc., determined in accordance with GAAP to fall below the amount set
forth below (in thousands) for each respective measurement date:
Quarter Ended 1998 1999
--------------------------------------------------------------------------
March 31 ($1,200)
June 30 ($1,000)
September 30 ($ 750)
December 31 ($1,300) ($ 750)
(p) At the end of any month the sum of Borrower's (i) unrestricted
cash plus (ii) the Formula Amount less Revolving Credit Advances, shall not be
less than $1,200,000.00.
(q) it will not make capital expenditures in any fiscal year in an
amount in excess of $500,000.
(r) none of the proceeds of the Loans hereunder will be used directly
or indirectly to "purchase" or "carry" "margin stock" or to repay indebtedness
incurred to "purchase" or "carry" "margin stock" within the respective meanings
of each of the quoted terms under Regulation G of the Board of Governors of the
Federal Reserve System as now and from time to time hereafter in effect; and
(s) it will bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral. At its own cost and expense in
amounts and with carriers acceptable to Lender, it shall (i) keep all its
insurable properties and properties in which it has an interest insured against
the hazards of fire, flood, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies engaged in businesses similar to Borrower's including,
without limitation, business interruption insurance; (ii) maintain a bond in
such amounts as is customary in the case of companies engaged in businesses
similar to Borrower's insuring against larceny, embezzlement or other criminal
misappropriation of insured's officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of Borrower
either directly or through authority to draw upon such funds or to direct
generally the disposition of such assets; (iii) maintain public and product
liability insurance against claims for personal injury, death or property damage
suffered by others; (iv) maintain all such workmen's compensation or similar
insurance as may be required under the laws of any state or jurisdiction in
which Borrower is engaged in business; (v) furnish Lender with (x) copies of all
policies and evidence of the maintenance of such policies at least thirty (30)
days before any expiration date, and (y) appropriate loss payable endorsements
in form and substance satisfactory to Lender, naming Lender as loss payee and
providing that as to Lender the insurance coverage shall not be impaired or
invalidated by any act or neglect of Borrower and the insurer will provide
Lender with at least thirty (30) days notice prior to cancellation. Borrower
shall instruct the insurance carriers that in the event of any loss thereunder,
the carriers shall make payment for such loss to Lender and not to Borrower and
Lender jointly. If any insurance losses are paid by check, draft or other
instrument payable to Borrower and Lender jointly, Lender may endorse Borrower's
name thereon and do such
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<PAGE>
other things as Lender may deem advisable to reduce the same to cash. Lender is
hereby authorized to adjust and compromise claims. All loss recoveries received
by Lender upon any such insurance may be applied to the Obligations, in such
order as Lender in its sole discretion shall determine. Any surplus shall be
paid by Lender to Borrower or applied as may be otherwise required by law. Any
deficiency thereon shall be paid by Borrower to Lender, on demand.
(t) it shall not purchase or acquire obligations or stock of, or any
other interest in, or make any investment in any entity, without the express
written consent of Lender, except (A) obligations issued or guaranteed by the
United States of America or any agency thereof, (B) commercial paper with
maturities of not more than 180 days and a published rating of not less than A-1
or P-1 (or the equivalent rating), (C) certificates of time deposit and bankers'
acceptances having maturities of not more than 180 days and repurchase
agreements backed by United States government securities of a commercial bank if
(x) such bank has a combined capital and surplus of at least $500,000,000, or
(y) its debt obligations, or those of a holding company of which it is a
subsidiary, are rated not less than A (or the equivalent rating) by a nationally
recognized investment rating agency and (D) U.S. money market funds that invest
solely in obligations issued or guaranteed by the United States of America or an
Agency thereof, and (E) Eurodollar time deposits with financial institutions
with a published rating of not less than A-1 or P-1 (or the equivalent rating).
13. Power of Attorney. Borrower hereby appoints Lender or any other Person
whom Lender may designate as Borrower's attorney, with power to: (i) endorse
Borrower's name on any checks, notes, acceptances, money orders, drafts or other
forms of payment or security that may come into Lender's possession; (ii) sign
Borrower's name on any invoice or bill of lading relating to any Receivables,
drafts against Customers, schedules and assignments of Receivables, notices of
assignment, financing statements and other public records, verifications of
account and notices to or from Customers; (iii) verify the validity, amount or
any other matter relating to any Receivable by mail, telephone, telegraph or
otherwise with Customers; (iv) execute customs declarations and such other
documents as may be required to clear Inventory through Customs; (v) do all
things necessary to carry out this Agreement, any Ancillary Agreement and all
related documents; and (vi) on or after the occurrence and continuation of an
Event of Default, notify the post office authorities to change the address for
delivery of Borrower's mail to an address designated by Lender, and to receive,
open and dispose of all mail addressed to Borrower. Borrower hereby ratifies and
approves all acts of the attorney. Neither Lender nor the attorney will be
liable for any acts or omissions or for any error of judgment or mistake of fact
or law except those arising from their actual willful misconduct. This power,
being coupled with an interest, is irrevocable so long as any Receivable which
is assigned to Lender or in which Lender has a security interest remains unpaid
and until the Obligations have been fully satisfied.
14. Expenses. Borrower shall pay all of Lender's out-of-pocket costs and
expenses, including without limitation reasonable fees and disbursements of
counsel retained or employed by Lender and appraisers, in connection with the
preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary Agreement.
Borrower shall also pay all of Lender's out-of-pocket costs and expenses,
including without limitation reasonable fees and disbursements of counsel
retained or employed by Lender, in connection with (a) the preparation,
execution and delivery of any waiver, any amendment thereto or consent proposed
or executed in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements, (b) Lender's obtaining performance of the
Obligations under this Agreement and any Ancillary Agreements, including, but
not limited to, the enforcement or defense of Lender's security interests,
assignments of rights and liens hereunder as valid perfected security interests,
(c) any attempt to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral, and (d) any consultations in connection
with any of the foregoing. Borrower shall also pay Lender's then standard price
for furnishing Borrower or its designees copies of any statements, records,
files or other data (collectively, "Reports") requested by Borrower or its
designees, other than reports of the kind furnished to Borrower and Lender's
other borrowers on a regular, periodic basis in the ordinary course of Lender's
business. Borrower shall also pay Lender's customary bank charges, including,
without limitation, all wire transfer fees incurred by Lender, for all bank
services performed or caused to be performed by Lender for Borrower at
Borrower's request. All such costs and expenses together with all filing,
recording and search fees,
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<PAGE>
taxes and interest payable by Borrower to Lender shall be payable on demand and
shall be secured by the Collateral. If any tax (other than taxes on Lender's
general income, or gross receipt taxes) by any governmental authority is or may
be imposed on or as a result of any transaction between Borrower and Lender
which Lender is or may be required to withhold or pay, Borrower agrees to
indemnify and hold Lender harmless in respect of such taxes, and Borrower will
repay to Lender the amount of any such taxes which shall be charged to
Borrower's account; and until Borrower shall furnish Lender with indemnity
therefor (or supply Lender with evidence satisfactory to it that due provision
for the payment thereof has been made), Lender may hold without interest any
balance standing to Borrower's credit and Lender shall retain its security
interests in any and all Collateral. Borrower hereby acknowledges that Lender
shall not be liable in any manner whatsoever for any selling expenses, orders,
purchases or contracts of any kind resulting from any transaction between
Borrower and any other Person and Borrower hereby indemnifies and holds Lender
harmless with respect thereto, which indemnity shall survive termination of this
Agreement.
15. Assignment. Lender may assign any or all of the Obligations together
with any or all of the security therefor and any transferee shall succeed to all
of Lender's rights with respect thereto provided that such transferee accepts
Lenders duties hereunder if Lender in such assignment divests itself of such
duties. Upon such transfer, Lender shall be released from all responsibility for
the Collateral to the extent same is assigned to any transferee. Lender may from
time to time sell or otherwise grant participations in any of the Obligations
and the holder of any such participation shall, subject to the terms of any
agreement between Lender and such holder, be entitled to the same benefits as
Lender with respect to any security for the Obligations in which such holder is
a participant. Borrower agrees that each such holder may exercise any and all
rights of banker's lien, set-off and counterclaim with respect to its
participation in the Obligations as fully as though Borrower were directly
indebted to such holder in the amount of such participation. Borrower may not
assign or transfer any of its rights or obligations under this Agreement without
the prior written consent of Lender, and no such assignment or transfer of any
such obligation shall relieve Borrower thereof unless Lender shall have
consented to such release in a writing specifically referring to the obligation
from which Borrower is to be released.
16. Waivers. Borrower waives presentment and protest of any instrument and
notice thereof, notice of default and all other notices to which Borrower might
otherwise be entitled.
17. Term of Agreement. This Agreement shall continue in full force and
effect until the expiration of the Term. The Term shall be automatically
extended for successive periods of one (1) year each unless either party shall
have provided the other with a written notice of termination, at least ninety
(90) days prior to the expiration of the initial Term or any renewal Term. The
Borrower may terminate this Agreement at any time upon sixty (60) days' prior
written notice ("Termination Date") upon payment in full of the Obligations
provided, that, if such termination takes place more than 90 days prior to the
end of the initial Term or any renewal Term, Borrower pays an early termination
fee in an amount equal to the the Required Percentage of the Maximum Revolving
Advance Amount. For the purposes hereof, Required Percentage shall mean (a) 2%
from the Closing Date to the first anniversary thereof, 1-1/2% from the first
anniversary of the Closing Date to the second anniversary thereof, and 1% from
the second anniversary of the Closing Date to the third anniversary thereof or
during any renewal term thereafter
18. Events of Default. The occurrence of any of the following shall
constitute an Event of Default:
(a) failure to make payment of any of the Obligations when required
hereunder;
(b) failure to pay any taxes when due unless such taxes are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been provided on Borrower's books which failure is not
cured within 10 days of its occurrence;
(c) failure to perform under and/or committing any breach of this
Agreement or any Ancillary Agreement or any other agreement between Borrower and
Lender which if not described in any other paragraphs of this Section 18 and
which if subject to cure is not cured with 10 days of its occurrence;
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<PAGE>
(d) occurrence of a default which failure is not cured within 10 days
of its occurrence under any agreement to which Borrower is a party with third
parties which has a material adverse affect upon Borrower's business,
operations, property or condition (financial or otherwise) including all leases
for any premises where Inventory or Equipment is located;
(e) any representation, warranty or statement made by Borrower
hereunder, in any Ancillary Agreement, any certificate, statement or document
delivered pursuant to the terms hereof, or in connection with the transactions
contemplated by this Agreement should at any time be false or misleading in any
material respect and which if subject to cure, and as to which Lender has not
relied to its detriment, is not cured with 10 days of the delivery of any such
certificate, statement or document to Lender;
(f) an attachment or levy is made upon any of Borrower's assets having
an aggregate value in excess of $10,000, or a judgment is rendered against
Borrower or any of Borrower's property involving a liability of more than
$10,000, which shall not have been vacated, discharged, stayed or bonded pending
appeal within thirty (30) days from the entry thereof;
(g) any change in Borrower's condition or affairs (financial or
otherwise) which in Lender's opinion impairs the Collateral or the ability of
Borrower to perform its Obligations;
(h) any lien created hereunder or under any Ancillary Agreement for
any reason ceases to be or is not a valid and perfected lien having a first
priority interest;
(i) if Borrower shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of creditors, (iii) commence a voluntary case under
the federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated
a bankrupt or insolvent, (v) file a petition seeking to take advantage of any
other law providing for the relief of debtors, (vi) acquiesce to, or fail to
have dismissed, within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (vii) take any action for the
purpose of effecting any of the foregoing;
(j) Borrower shall admit in writing its inability, or be generally
unable to pay its debts as they become due or cease operations of its present
business;
(k) any Affiliate or any Subsidiary or any Guarantor shall (i) apply
for or consent to the appointment of, or the taking possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property, (ii) admit in writing its inability, or be generally unable, to
pay its debts as they become due or cease operations of its present business,
(iii) make a general assignment for the benefit of creditors, (iv) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vii) acquiesce to, or fail to have dismissed, within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws,
(viii) take any action for the purpose of effecting any of the foregoing;
(l) Borrower directly or indirectly sells, assigns, transfers,
conveys, or suffers or permits to occur any sale, assignment, transfer or
conveyance of any assets of Borrower or any interest therein, except as
permitted herein;
(m) Borrower fails to operate in the ordinary course of business which
failure is not cured within 10 days of its occurrence;
(n) Lender shall in good faith deem itself insecure or unsafe or shall
fear diminution in value, removal or waste of the Collateral;
- 18 -
<PAGE>
(o) a default by Borrower which failure is not cured within 10 days of
its occurrence in the payment, when due, of any principal of or interest on any
indebtedness for money borrowed in excess of $100,000.00;
(p) if any Guarantor attempts to terminate, challenges the validity
of, or its liability under any Guaranty Agreement or Guarantor Security
Agreement;
(q) should any Guarantor default in its obligations under any Guaranty
Agreement or any Guarantor Security Agreement or if any proceeding shall be
brought to challenge the validity, binding effect of any Guaranty Agreement or
any Guarantor Security Agreement, or should any Guarantor breach any
representation, warranty or covenant contained in any Guaranty Agreement or any
Guarantor Security Agreement or should any Guaranty Agreement or Guarantor
Security Agreement cease to be a valid, binding and enforceable obligation; or
(r) any Change of Ownership.
19. Remedies. (a) Upon the occurrence of an Event of Default pursuant to
paragraph 18 (i) herein, all Obligations shall be immediately due and payable
and this Agreement shall be deemed terminated; upon the occurrence and
continuation of any other of the Events of Default, Lender shall have the right
to demand repayment in full of all Obligations, whether or not otherwise due
and/or to terminate this Agreement without advance notice. Until all Obligations
have been fully satisfied, Lender shall retain its security interest in all
Collateral. Lender shall have, in addition to all other rights provided herein,
the rights and remedies of a secured party under the Uniform Commercial Code,
and under other applicable law, all other legal and equitable rights to which
Lender may be entitled, including without limitation, the right to take
immediate possession of the Collateral, to require Borrower to assemble the
Collateral, at Borrower's expense, and to make it available to Lender at a place
designated by Lender which is reasonably convenient to both parties and to enter
any of the premises of Borrower or wherever the Collateral shall be located,
with or without force or process of law, and to keep and store the same on said
premises until sold (and if said premises be the property of Borrower, Borrower
agrees not to charge Lender for storage thereof for a period up to at least
sixty (60) days after sale or disposition of said Collateral). Further, Lender
may, at any time or times after default by Borrower, sell and deliver all
Collateral held by or for Lender at public or private sale for cash, upon credit
or otherwise, at such prices and upon such terms as Lender, in Lender's sole
discretion, deems advisable or Lender may otherwise recover upon the Collateral
in any commercially reasonable manner as Lender, in its sole discretion, deems
advisable. Except as to that part of the Collateral which is perishable or
threatens to decline speedily in nature or is of a type customarily sold on a
recognized market, the requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Borrower at Borrower's address as shown in
Lender's records, at least ten (10) days before the time of the event of which
notice is being given. Lender may be the purchaser at any sale, if it is public.
In connection with the exercise of the foregoing remedies, Lender is granted
permission to use all of Borrower's trademarks, tradenames, tradestyles,
patents, patent applications, licenses, franchises and other proprietary rights
which are used in connection with (a) Inventory for the purpose of disposing of
such Inventory and (b) Equipment for the purpose of completing the manufacture
of unfinished goods. The proceeds of sale shall be applied first to all costs
and expenses of sale, including attorneys' fees, and second to the payment (in
whatever order Lender elects) of all Obligations. Lender will return any excess
to Borrower and Borrower shall remain liable to Lender for any deficiency.
20. Waiver; Cumulative Remedies. Failure by Lender to exercise any right,
remedy or option under this Agreement or any supplement hereto or any other
agreement between Borrower and Lender or delay by Lender in exercising the same,
will not operate as a waiver; no waiver by Lender will be effective unless it is
in writing and then only to the extent specifically stated. Lender's rights and
remedies under this Agreement will be cumulative and not exclusive of any other
right or remedy which Lender may have.
21. Application of Payments. Borrower irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
received by Lender from or on Borrower's behalf and Borrower hereby irrevocably
agrees that Lender shall have the continuing exclusive right to apply and
reapply any and all payments received at any time or times hereafter against
Borrower's Obligations hereunder in such
- 19 -
<PAGE>
manner as Lender may deem advisable notwithstanding any entry by Lender upon any
of Lender's books and records.
22. Depository Accounts. Any payment received by Borrower on account of any
Collateral shall be held by Borrower in trust for Lender and Borrower shall
promptly deliver same in kind to Lender or deposit all such payments into a cash
collateral account at such bank as Lender may designate for application to
payment of the Obligations. Borrower shall also execute such further documents
as Lender may deem necessary to establish such an account and all funds
deposited in such account shall immediately be deemed Lender's property.
23. Lock Box Accounts. Borrower shall, at Lender's request, instruct all of
its Customers to make such payments on account of Receivables to an account
under Lender's dominion and control at such bank as Lender may designate.
Borrower shall also execute such further documents as Lender may deem necessary
to establish such an account and all funds deposited in such account shall
immediately be deemed Lender's property.
24. Revival. Borrower further agrees that to the extent Borrower makes a
payment or payments to Lender, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy act, state or federal law, common law or equitable cause, then, to
the extent of such payment or repayment, the obligation or part thereof intended
to be satisfied shall be revived and continued in full force and effect as if
said payment had not been made.
25. Notices. Any notice or request hereunder may be given to Borrower or
Lender at the respective addresses set forth below or as may hereafter be
specified in a notice designated as a change of address under this paragraph.
Any notice or request hereunder shall be given by registered or certified mail,
return receipt requested, or by overnight mail or by telecopy (confirmed by
mail). Notices and requests shall be, in the case of those by mail or overnight
mail, deemed to have been given when deposited in the mail or with the overnight
mail carrier, and, in the case of a telecopy, when confirmed.
Notices shall be provided as follows:
If to the Lender: BNY Financial Corporation
1290 Avenue of the Americas
New York, New York 10104
Attention: Frank Imperato, V.P.
Telephone: (212) 408-7026
Telecopy: (212) 408-7162
If to the Borrower:
Target Logistic Services, Inc.
c/o Target Logistics, Inc.
112 East 25th Street
Baltimore, MD 21218
Attention: Stuart Hettleman
Telephone: 410-338-0127
Telecopy: 410-330-1105
With a copy to: Hillel Tendler, Esq.
Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC
- 20 -
<PAGE>
233 E. Redwood Street
Baltimore, MD 21202
Telephone: 410-576-4071
Telecopy: 410-576-4246
26. Governing Law and Waiver of Jury Trial. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK. LENDER SHALL HAVE THE RIGHTS AND REMEDIES OF A SECURED PARTY UNDER
APPLICABLE LAW INCLUDING, BUT NOT LIMITED TO, THE UNIFORM COMMERCIAL CODE OF NEW
YORK. BORROWER AGREES THAT ALL ACTIONS AND PROCEEDINGS RELATING DIRECTLY OR
INDIRECTLY TO THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR ANY OTHER OBLIGATIONS
SHALL BE LITIGATED IN THE FEDERAL DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW
YORK OR, AT LENDER'S OPTION, IN ANY OTHER COURTS LOCATED IN NEW YORK STATE OR
ELSEWHERE AS LENDER MAY SELECT AND THAT SUCH COURTS ARE CONVENIENT FORUMS AND
BORROWER SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS. BORROWER WAIVES
PERSONAL SERVICE OF PROCESS AND CONSENTS THAT SERVICE OF PROCESS UPON BORROWER
MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED
TO BORROWER AT BORROWER'S ADDRESS APPEARING ON LENDER'S RECORDS, AND SERVICE SO
MADE SHALL BE DEEMED COMPLETED TWO (2) DAYS AFTER THE SAME SHALL HAVE BEEN SO
MAILED. BOTH PARTIES HERETO WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BETWEEN BORROWER AND LENDER AND BORROWER WAIVES THE RIGHT TO ASSERT
IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER WITH REGARD TO THIS AGREEMENT
OR ANY OF THE OBLIGATIONS ANY OFFSETS OR COUNTERCLAIMS WHICH IT MAY HAVE.
27. Limitation of Liability. Borrower acknowledges and understands that in
order to assure repayment of the Obligations hereunder Lender may be required to
exercise any and all of Lender's rights and remedies hereunder and agrees that
neither Lender nor any of Lender's agents shall be liable for acts taken or
omissions made in connection herewith or therewith except for actual bad faith.
28. Entire Understanding. This Agreement and the Ancillary Agreements
contain the entire understanding between Borrower and Lender and any promises,
representations, warranties or guarantees not herein contained shall have no
force and effect unless in writing, signed by the Borrower's and Lender's
respective officers. Neither this Agreement, the Ancillary Agreements, nor any
portion or provisions thereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged.
29. Modification. This Agreement and the Ancillary Agreements constitute
the complete agreement between the parties with respect to the subject matter
hereof and thereof and may not be modified, altered or amended except by an
agreement in writing signed by the parties hereto and thereto.
30. Severability. Wherever possible each provision of this Agreement or the
Ancillary Agreements shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement or the
Ancillary Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
thereof.
31. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
32. Counterparts. This Agreement may be executed in one or more
counterparts, each of which taken together shall constitute one and the same
instrument.
- 21 -
<PAGE>
33. Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and
year first above written.
TARGET LOGISTIC SERVICES, INC.
ATTEST: f/k/a TARGET AIR FREIGHT, INC.
/s/ By: /s/
- - ---------------------------- ---------------------------------------
Secretary Title: Executive Vice President
BNY FINANCIAL CORPORATION
By: /s/
---------------------------------------
Title: Senior Vice President
- 22 -
<PAGE>
SCHEDULES
Schedule 1(A) - Permitted Liens
Schedule 12(j) - Licenses, Patents, Trademarks and Copyrights
Schedule 12(l) - Inventory Locations
Schedule 12(m) - Permitted Indebtedness
- 23 -
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-3, File No. 333-30351 and File No. 333-03613.
ARTHUR ANDERSEN LLP
New York, New York
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements as of and for the perior ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001009480
<NAME> Target Logistics, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-02-1998
<PERIOD-END> JUN-30-1999
<CASH> 7,882
<SECURITIES> 0
<RECEIVABLES> 12,171
<ALLOWANCES> 1,318
<INVENTORY> 0
<CURRENT-ASSETS> 20,968
<PP&E> 1,530
<DEPRECIATION> 1,048
<TOTAL-ASSETS> 34,932
<CURRENT-LIABILITIES> 15,251
<BONDS> 0
0
4,272
<COMMON> 100
<OTHER-SE> 15,285
<TOTAL-LIABILITY-AND-EQUITY> 34,932
<SALES> 51,720
<TOTAL-REVENUES> 51,720
<CGS> 34,789
<TOTAL-COSTS> 56,093
<OTHER-EXPENSES> (24,951)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (292)
<INCOME-PRETAX> 20,869
<INCOME-TAX> 6,853
<INCOME-CONTINUING> (2,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 16,553
<CHANGES> 0
<NET-INCOME> 14,016
<EPS-BASIC> 1.63
<EPS-DILUTED> 0.99
</TABLE>
