UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-29754
TARGET LOGISTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3309110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
112 East 25th Street
Baltimore, Maryland 21218
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 338-0127
Inapplicable
(Former name, former address and former fiscal year
if changed from last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x/ No
At May 14, 1999, the number of shares outstanding of the registrant's common
stock was 8,275,445.
<PAGE>
TABLE OF CONTENTS
Part I - Financial Information Page
Item 1. Financial Statements:
Consolidated Balance Sheets,
March 31, 1999 (unaudited) and June 30, 1998
(audited) 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Operations
for the Six Months Ended
March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Shareholders'
Equity for the Year Ended June 30, 1998
(audited) and the Nine Months Ended March
31, 1999 (unaudited) 6
Consolidated Statements of Cash Flows
for the Nine Months Ended March 31,
1999 and 1998 (unaudited) 7
Notes to Unaudited Consolidated Financial
Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Part II - Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
-------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C> <C> <C>
March 31, 1999 June 30, 1998
-------------- -------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of
$2,000,000 and $0, respectively $ 7,247,125 $ 879,797
Accounts receivable, net of allowance for doubtful
accounts of $699,827 and $514,542, respectively 9,879,576 14,555,151
Deferred income taxes 673,725 7,705,092
Prepaid expenses and other current assets 251,449 604,588
------------ ------------
Total current assets 18,051,875 23,744,628
PROPERTY AND EQUIPMENT, net 480,593 755,822
OTHER ASSETS 279,427 238,904
DEFERRED INCOME TAXES 184,895 184,895
GOODWILL, net of accumulated amortization of
$1,778,537 and $1,305,445, respectively 13,176,487 13,622,579
------------ ------------
Total assets $ 32,173,277 $ 38,546,828
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,442,165 $ 8,542,850
Accrued expenses 2,424,746 1,990,880
Accrued transportation expenses 6,164,360 3,880,195
Taxes payable 265,758 110,000
Reserve for restructuring 61,499 264,143
Note payable to bank 67,031 6,745,853
Note payable to affiliate -- 905,913
Notes payable to creditors -- 53,835
Current portion of long-term debt due to affiliate -- 3,332,126
Current portion of long-term debt 23,000 50,000
Dividends payable 54,352 117,524
Lease obligation-current portion 100,342 91,735
------------ ------------
Total current liabilities 12,603,253 26,085,054
LONG-TERM DEBT DUE TO AFFILIATE -- 4,000,000
LONG TERM DEBT -- 10,500
LEASE OBLIGATION--LONG-TERM 51,132 127,506
------------ ------------
Total liabilities $ 12,654,385 $ 30,223,060
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
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,
8,275,445 and 8,419,094 shares issued and outstanding,
respectively 82,754 84,190
Paid-in capital 22,964,987 22,546,331
Accumulated deficit (7,200,961) (20,509,373)
Less: Treasury stock, 784,805 shares held at cost (599,959) (11,250)
------------ ------------
Total shareholders' equity 19,518,892 8,323,768
------------ ------------
Total liabilities and shareholders' equity $ 32,173,277 $ 38,546,828
============ ============
The accompanying notes are an integral part of this consolidated balance sheet.
</TABLE>
3
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<TABLE>
<CAPTION>
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<S> <C>
Three months ended March 31,
----------------------------
1999 1998
---- ----
Operating revenues:
Operating revenues - Target subsidiary $13,853,687 $10,202,525
Operating revenues - CAS subsidiary (3,347) 13,623,349
----------- ----------
Operating revenues 13,850,340 23,825,874
Cost of transportation:
Cost of transportation - Target subsidiary 9,294,695 7,330,024
Cost of transportation - CAS subsidiary --- 10,788,000
----------- ----------
Cost of transportation 9,294,695 18,118,024
Gross profit:
Gross profit - Target subsidiary 4,558,992 2,872,501
Gross profit - CAS subsidiary (3,347) 2,835,349
----------- ----------
Gross profit 4,555,645 5,707,850
Selling, general and administrative expenses ("SG&A"):
Exclusive Forwarder Commissions - Target subsidiary 1,891,584 667,497
SG&A - Target subsidiary 3,140,403 2,504,966
SG&A - CAS subsidiary 61,227 1,526,285
SG&A - Corporate 215,553 290,092
Depreciation and amortization 206,257 234,757
----------- ----------
Selling, general and administrative expenses 5,515,024 5,223,597
Other income (expense):
Interest income (expense) 75,883 (329,160)
Other income (expense) --- (20,282)
Gain on sale of subsidiary --- --
------------ ----------
(Loss) income before income taxes (883,496) 134,811
Provision (benefit) for income taxes (318,058) 30,000
------------ ----------
Net (loss) income $ (565,438) $ 104,811
============ ==========
Net loss per share:
Basic ($0.07) $0.00
====== =====
Diluted(1) --- $0.00
====== =====
Weighted average shares outstanding:
Basic 8,298,624 8,371,663
============ ==========
Diluted(1) --- 15,109,576
============ ==========
<FN>
(1)Diluted loss per share for the three months ended March 31, 1999 is
anti-dilutive.
</FN>
The accompanying notes are an integral part of this consolidated statement.
</TABLE>
4
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<TABLE>
<CAPTION>
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<S> <C>
Nine months ended March 31,
---------------------------
1999 1998
---- ----
Operating revenues:
Operating revenues - Target subsidiary $ 34,038,634 $ 34,413,964
Operating revenues - CAS subsidiary 1,565,938 39,586,064
------------- -------------
Operating revenues 35,604,572 74,000,028
Cost of transportation:
Cost of transportation - Target subsidiary 22,563,954 24,424,258
Cost of transportation - CAS subsidiary 1,356,107 31,124,365
------------- -------------
Cost of transportation 23,920,061 55,548,623
Gross profit:
Gross profit - Target subsidiary 11,474,680 9,989,706
Gross profit - CAS subsidiary 209,831 8,461,699
------------- -------------
Gross profit 11,684,511 18,451,405
Selling, general and administrative expenses ("SG&A"):
Exclusive Forwarder Commissions -Target subsidiary 3,582,866 2,280,738
SG&A - Target subsidiary 8,974,466 8,511,627
SG&A - CAS subsidiary 575,340 4,624,038
SG&A - Corporate 1,247,195 715,281
Depreciation and amortization 612,219 678,675
------------- -------------
Selling, general and administrative expenses 14,992,086 16,810,359
Other income (expense):
Interest income (expense) 227,763 (1,066,256)
Other income (expense) 119,291 168,783
Gain on sale of subsidiary 24,832,353 --
------------- -------------
Income before income taxes 21,871,832 743,573
Provision for income taxes 8,281,847 95,000
------------- -------------
Net income $ 13,589,985 $ 648,573
============= =============
Net income per share:
Basic $1.60 $0.05
===== =====
Diluted $0.96 $0.03
===== =====
Weighted average shares outstanding:
Basic 8,335,381 7,793,813
============== =============
Diluted 13,793,230 13,212,070
============== =============
The accompanying notes are an integral part of this consolidated statement.
</TABLE>
5
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<TABLE>
<CAPTION>
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1998 AND THE
NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Additional
Preferred Stock Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
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 - - - 0
Stock options exercised - - 52,590 525 (525) - - - 0
Preferred stock issued for repay-
ment of secured long-term debt
of Amertranz Worldwide, Inc. 100,000 1,000,000 - - - - - - 1,000,000
Preferred stock issued for the pur-
chase 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 - - - 0
Common stock issued in connection
with the conversion of Class C
Preferred Stock (23,750) (237,500) 237,500 2,375 235,125 - - - 0
Preferred stock dividends associated
with the Class A Preferred Stock 12,696 126,960 (126,960) 0
Preferred Stock dividends associated
with the Class D Preferred Stock 6,511 65,110 (65,110) 0
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 Profit - - - - - - - 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 - - - 0
Stock Options exercised - - 174,852 1,749 62,256 - - - 64,005
Cash dividends associated with the
Class A, C and D Preferred Stock - - - - - - - (281,573) (281,573)
Redemption of Class E
Preferred Stock (158,180) (1,581,800) - - - - - - (1,581,800)
Purchase of Treasury Stock - - (678,501) (6,785) - 678,501 (588,709) - (595,494)
Net income - - - - - - - 13,589,985 13,589,985
------- ---------- --------- ------- ----------- ------- ------- ----------- -----------
Balance, March 31, 1999 427,207 $4,272,070 8,275,445 $82,754 $22,964,987 784,805 ($599,959) $7,200,961) 19,518,892
======= ========== ========= ======= =========== ======= ======== ========== ===========
The accompanying notes are an integral part of this consolidated statement.
</TABLE>
6
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<TABLE>
<CAPTION>
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<S> <C>
Nine Months Ended March 31,
---------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,589,985 $ 648,573
Bad debt expense 185,285 (159,627)
Depreciation and amortization 612,218 660,671
Gain on CAS sale (24,832,353) --
Deferred income tax benefit 7,031,367 --
Adjustments to reconcile net income to net cash used in operating activities-
Decrease (increase) in accounts receivable 4,490,290 (3,731,978)
Decrease in prepaid expenses and other current assets 146,886 77,902
(Increase) decrease in other assets (115,007) 129,688
(Decrease) increase in accounts payable and accrued expenses (4,070,557) 1,712,490
------------ -----------
Net cash used in operating activities (2,961,886) (662,281)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (540,205) (403,994)
Purchase of treasury stock (595,494) --
Proceeds from CAS sale, net of closing costs 25,762,397 --
------------ -----------
Net cash provided by (used in) investing activities 24,626,698 (403,994)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional costs relating to the Private Placement -- (34,908)
Stock options exercised 64,005 --
Dividends paid (339,361) (128,819)
Net (repayment) borrowing from note payable to bank (6,678,822) (121,463)
(Repayment) proceeds of short-term debt (3,332,126) 413,594
Repayment of long-term debt (4,037,500) (37,500)
Repayment of revolving loan due to affiliate (905,913) --
Payment of lease obligations (67,767) --
------------ -----------
Net cash (used in) provided by financing activities: (15,297,484) 90,904
------------ -----------
Net increase (decrease) in cash and cash equivalents $ 6,367,328 ($975,371)
CASH AND CASH EQUIVALENTS, beginning of the period 879,797 1,382,243
------------ -----------
CASH AND CASH EQUIVALENTS, end of the period $ 7,247,125 $ 406,872
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest 73,758 648,629
Income taxes 1,208,429 136,937
The accompanying notes are an integral part of this consolidated statement.
</TABLE>
7
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<TABLE>
<CAPTION>
TARGET LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<S> <C>
Nine Months Ended March 31,
---------------------------
1999 1998
---- ----
Redemption of 158,180 Class E Preferred Shares $(1,581,800) --
Conversion of 36,000 anc 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
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
The accompanying notes are an integral part of this consolidated statement.
8
</TABLE>
<PAGE>
TARGET LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Notes to Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and Regulation S-X related to
interim period financial statements and, therefore, do not include all
information and footnotes required by generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments and accruals) considered necessary for a fair presentation
of the consolidated financial position of the Company and its subsidiaries at
March 31, 1999 and their consolidated results of operations and cash flows for
the three and nine months ended March 31, 1999 have been included. The results
of operations for the interim periods are not necessarily indicative of the
results that may be expected for the entire year. Reference should be made to
the annual financial statements, including footnotes thereto, included in the
Target Logistics, Inc. (formerly, Amertranz Worldwide Holding Corp.) (the
"Company") Form 10-K for the year ended June 30, 1998.
Note 2 - Disposition of Assets
On July 13, 1998, the Company's Caribbean Air Services, Inc. ("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 $27 million in cash (the "CAS Sale"), in accordance with
the terms of the Asset Purchase Agreement among the parties dated June 15, 1998
(the "Asset Purchase Agreement").
Under the terms of the Asset Purchase Agreement CAS retained its accounts
receivable. CAS realized $2.6 million from these accounts receivable after
payment of liabilities during the nine months ended March 31, 1999.
The Company realized a $24,832,353 pre-tax gain from the CAS Sale. This gain
resulted from sale proceeds of $27,000,000, reduced by (i) the sale of the CAS
assets at a book value of $930,044, and (ii) closing costs of $1,237,603.
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.
For the fiscal year ended June 30, 1998 revenues from the operations of CAS
contributed approximately $54 million to the Company's total revenues, and
income from the operations of CAS contributed approximately $4.5 to the
Company's operating income.
Note 3 - Earnings Per Share
In accordance with the requirements of SFAS No. 128, 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.
Note 4 - Reclassifictaions
In the past, the Company reported exclusive forwarder commission expense
(previously referred to as agent commission expense) within cost of
transportation. Effective with this Form 10-Q, exclusive forwarder commission
expense is reported within selling, general and administrative expense. The
prior year has been reclassified to conform with the current year presentation.
9
<PAGE>
<TABLE>
<CAPTION>
TARGET LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings for the three and nine months ended
March 31, 1999 and 1998 is as follows:
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
March 31, 1999 March 31, 1999
------------------------------------ -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
Net earnings ($565,438) $13,589,985
Preferred stock dividends (48,760) (281,573)
-------- ----------
BASIC EPS
Net earnings attributable to
common stock ($614,198) 8,298,624 ($0.07) $13,308,412 8,335,381 $1.60
======= =====
EFFECT OF DILUTIVE SECURITIES(1)
Convertible Preferred Stock 4,562,255 5,304,886
Stock options 93,989 152,963
Stock warrants 0 0
--------- ---------
DILUTED EPS(1)
Net earnings attributable to common
stock and assumed preferred
conversions and option exercises ($614,198) 8,298,624 ($0.07) $13,308,412 13,793,230 $0.96
========= ========= ====== =========== ========== =====
Three Months Ended Nine Months Ended
March 31, 1998 March 31, 1998
------------------------------------ -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
Net earnings $104,811 $648,573
Preferred stock dividends (142,098) (270,917)
-------- --------
BASIC EPS
Net earnings attributable to
common stock ($37,287) 8,371,663 $0.00 $377,656 7,793,813 $0.05
===== =====
EFFECT OF DILUTIVE SECURITIES
Convertible Preferred Stock 6,556,104 5,223,818
Stock options 181,809 194,439
Stock warrants 0 0
--------- ---------
DILUTED EPS
Net earnings attributable to common
stock and assumed preferred
conversions and option exercises ($37,287) 15,109,576 $0.00 $377,656 13,212,070 $0.03
======= ========== ===== ======== ========== =====
Options to purchase 470,000 shares of common stock were not included in the
computation of diluted EPS because the exercise price of those options were
greater than the average market price of the common shares.
<FN>
(1)No diluted EPS is presented for the three months ended March 31, 1999, as the
effect of dilutive securities would be anti-dilutive on loss per common share.
</FN>
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements reflecting the Company's current expectations with respect to its
operations, performance, financial condition, and other developments. Such
statements are necessarily estimates reflecting the Company's best 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
historical operating losses and ability to sustain 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 as "Amertranz Worldwide
Holding Corp." to continue the freight forwarding business of TIA, Inc. ("TIA")
and Caribbean Freight System, Inc. and acquire Amertranz Worldwide, Inc.
("Amertranz"). On November 30, 1998, the Company changed its name to "Target
Logistics, Inc." The Company generated operating revenues of $97.8 million,
$75.4 million, and $27.4 million, and had a net profit of $7.4 million, and net
losses of $10.5 million, and $6.4 million, for the fiscal years ended June 30,
1998 and 1997 and the six months ended June 30, 1996, respectively. The fiscal
year 1998 profit includes a $7.6 million net income tax benefit arising from the
CAS Sale which closed on July 13, 1998, 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 $2.6 million, ($8.3 million), and ($2.0 million), for the
fiscal years ended June 30, 1998 and 1997 and the six months ended June 30,
1996, 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 Logistic Services,
Inc. subsidiary ("Target"). 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 nine months ended March 31, 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 three and nine months
ended March 31, 1999, Target's gross profit margin (i.e., gross operating
revenues less cost of transportation expressed as a percentage of gross
operating revenue) improved to 32.9% and 33.7% from 28.2% and 29.0%,
respectively, from the corresponding periods of 1998, a 16.7% and 16.2%
improvement, respectively. This increased margin accounts for approximately
$651,000 and $1,600,000 of Target's gross profit for the three and nine months
ending March 31, 1999, respectively. Management intends to continue to work on
improving Target's gross profit margins while focusing on increasing operating
revenue by
11
<PAGE>
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
The following discussion relates to the combined results of operation
of the Company for the three and nine month periods ended March 31, 1999,
compared to results of operation for the three and nine month periods ended
March 31, 1998.
Three Months ended March 31, 1999 and 1998
Operating Revenue. Operating revenue decreased to $13.9 million for the
three months ended March 31, 1999 from $23.8 million for the three months ended
March 31, 1998, a 41.9% decrease. This decrease resulted from the inclusion of
CAS's operating revenue for the full 1998 period while there are no CAS
operating revenues in the corresponding 1999 period due to the CAS Sale on July
13, 1998. Within the operations of the Company's Target subsidiary operating
revenue increased by 35.8% to $13,853,687 for the three months ended March 31,
1999 from $10,202,525 for the corresponding 1998 period, a $3,651,162 increase,
due to increased freight volume.
Cost of Transportation. Cost of transportation was 67.1% of operating
revenue for the three months ended March 31, 1999, and 76.0% of operating
revenue for the three months ended March 31, 1998. This decrease is due to (i) a
reduction in the Target subsidiary's cost of transportation as a percentage of
sales (67.1% for the 1999 period, from 71.8% for the 1998 period), and (ii) the
historically higher cost of transportation for the Company's CAS subsidiary (the
assets of which were sold prior to this period) than the Company's Target
subsidiary.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit for the three months ended March 31, 1999 increased to
32.9% of operating revenue from 24.0% of operating revenue for the three months
ended March 31, 1998.
Within the Company's Target subsidiary, gross profit margin increased
to 32.9% from 28.2% for the three months ended March 31, 1999 and 1998,
respectively. This increase in gross profit margin accounts for approximately
$651,000 of Target's gross profit for the three months ended March 31, 1999.
Target's actual gross profit increased by $1,686,491, to $4,558,992 for the
three months ended March 31, 1999 from $2,872,501 for the three months ended
March 31, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 39.8% of operating revenue for the three months
ended March 31, 1999, and 21.9% of operating revenue for the three months ended
March 31, 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; and (iii) non-recurring expenses of $61,227 incurred in the 1999
period to wind down the Company's CAS subsidiary (primarily, the collection of
accounts receivable and payment of accounts payable).
Within the Company's Target subsidiary, selling, general and administrative
expenses (excluding exclusive forwarder commission expense) were 22.7% of
operating revenue for the three months ended March 31, 1999 and 24.6% for the
period ended March 31, 1998, a 7.8% decrease. Exclusive forwarder commission
expense was 13.7% of operating revenue for the three months ended March 31, 1999
and 6.5% for the period ended March 31, 1998. This increase is due to the
Company's addition of new exclusive forwarders.
Net Income. The Company realized a net loss of ($565,438) for the three
months ended March 31, 1999, compared to a net income of $104,811 for the three
months ended March 31, 1998. This decrease is primarily the result of the
inclusion of the CAS operating results for the three months ended March 31, 1998
period while, as a result of the CAS sale on July 13, 1998, the CAS operations
for the three months ended March 31, 1999 only include costs and expenses
necessary to wind down the CAS subsidiary.
12
<PAGE>
Nine Months ended March 31, 1999 and 1998
Operating Revenue. Operating revenue decreased to $35.6 million for the
nine months ended March 31, 1999 from $74.0 million for the nine months ended
March 31, 1998, a 51.9% decrease. Of this decrease, 99% 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. The balance of
this decrease occurred within the operations of the Company's Target subsidiary
where operating revenue decreased to $34,038,634 for the nine months ended March
31, 1999 from $34,413,964 for the corresponding 1998 period, a 1.0% decrease.
This decrease in Target's operating revenue is primarily the result of the
elimination of unprofitable sources of revenue in order to improve Target's
operating results.
Cost of Transportation. Cost of transportation was 67.2% of operating
revenue for the nine months ended March 31, 1999, and 75.1% of operating revenue
for the nine months ended March 31, 1999. This decrease is due to (i) a
reduction in the Target subsidiary's cost of transportation as a percentage of
sales (66.3% for the 1999 period, from 71.0% for the 1998 period), and (ii) the
historically higher cost of transportation for the Company's CAS subsidiary (the
assets of which were sold prior to this period) than the Company's Target
subsidiary.
Gross Profit. As a result of the factors described in the previous
paragraph, gross profit for the nine months ended March 31, 1999 increased to
32.8% of operating revenue from 24.9% of operating revenue for the nine months
ended March 31, 1998.
Within the Company's Target subsidiary, gross profit margin increased
to 33.7% from 29.0% for the nine months ended March 31, 1999 and 1998,
respectively. This increase in gross profit margin accounts for approximately
$1,600,000 of Target's gross profit for the nine months ended March 31, 1999.
Target's actual gross profit decreased by $1,484,974, to $11,474,680 for the
nine months ended March 31, 1999 from $9,989,706 for the nine months ended March
31, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 42.1% of operating revenue (39.9% excluding
non-recurring expenses explained in (iii) and (iv), below) for the nine months
ended March 31, 1999, and 22.7% of operating revenue for the nine months ended
March 31, 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 $224,945 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 $560,040 primarily a
result of the CAS Sale.
Within the Company's Target subsidiary, selling, general and
administrative expenses were (excluding agent commission expense) 26.4% for the
nine months ended March 31, 1999 and 24.7% for the period ended March 31, 1998,
a 6.9% increase. Exclusive forwarder commission expense was 10.5% of operating
revenue for the nine months ended March 31, 1999 and 6.6% for the period ended
March 31, 1998. This increase is due to the Company's addition of new exclusive
forwarders.
Net Income. The Company realized net income of $13,589,985 for the nine
months ended March 31, 1999, compared to a net income of $648,573 for the nine
months ended March 31, 1998. This increase was due to the CAS Sale.
LIQUIDITY AND CAPITAL RESOURCES
General. During the nine months ended March 31, 1999, net cash used in
operating activities was $2,962,000. Cash provided by investing activities was
$24,627,000, which consisted of net proceeds in connection with the CAS Sale
totaling $25,762,000, less capital expenditures of $540,000 and the purchase of
678,501 shares of the Company's common stock, now Treasury stock, for $595,494.
Cash used in financing activities was
13
<PAGE>
$15,297,000, 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 March 31, 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 nine months ended
March 31, 1999 were $540,205.
* 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 March 31, 1999,
the Company had $3,757,000 available under its $10 million accounts receivable
financing facility and approximately $7,247,000 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 datesensitive
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 mid 1999
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.
14
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company has 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),
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. The Company intends to vigorously defend the
action. The Company believes that the complaint is without merit and that any
material recovery by Mr. Hoffenberg is unlikely. No material developments have
occurred in this litigation since first reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
Exhibit No.
- - -----------
3.1 Certificate of Incorporation of Registrant, as amended (incorporated by
reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K
dated November 30, 1998, File No. 0-29754)
3.2 By-Laws of Registrant, as amended (incorporated by reference to Exhibit
3.2 to the Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended 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 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 Accounts Receivable Management and Security Agreement, dated January
16, 1997 by and between BNY Financial Corp., as Lender, and Amertranz
Worldwide, Inc., Caribbean Air Services, Inc., and Consolidated Air
Services, Inc., as Borrowers, and guaranteed by Amertranz Worldwide
Holding Corp. ("BNY Facility Agreement") (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1997, File No. 0-29754)
10.3 Letter Amendment to BNY Facility Agreement, dated April 16, 1997 ("BNY
Letter Amendment") (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended March
31, 1997, File No. 0-29754)
15
<PAGE>
10.4 Shadow Warrant entered into in connection with the BNY Letter Amendment
(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)
10.5 Letter Amendment to BNY Facility Agreement, dated September 25, 1997
(incorporated by reference to Exhibit 10.5 to the Registrant's Annual
Report on Form 10-K for the Year Ended June 30, 1997, File No.
0-29754)
10.6 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)
10.7(P) Lease Agreement for Los Angeles Facility (incorporated by reference to
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the
Year Ended June 30, 1997, File No. 0-29754)
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1999 TARGET LOGISTICS, INC.
Registrant
/s/ Stuart Hettleman
--------------------------------------
President, Chief Executive Officer
/s/ Philip J. Dubato
--------------------------------------
Vice President, Chief Financial Officer
C77378.sec E:1
17
<PAGE>
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements as of and for the period ended March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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