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(Exact
name of registrant as specified in its charter)
Delaware
11-3309110
(State
or other jurisdiction of
(I.R.S.
Employer
incorporation
or organization
Identification
No.)
500
Harborview Drive, Third Floor
Baltimore,
Maryland
21230
(Address
of principal executive offices)
(Zip
Code)
Registrant’s
telephone number, including area code: (410)
332-1598
Inapplicable
(Former
name, former address and former fiscal year if changed from last
report.)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes þNo
o
Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer o Non-Accelerated
Filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)
Yes o No
þ
At
May 2,2007, the number of shares outstanding of the registrant’s common stock was
18,076,735.
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, 2007 and their consolidated results of operations and cash flows
for
the nine months ended March 31, 2007 have been included. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for the entire year. Reference should be made to the annual
financial statements, including footnotes thereto, included in the Target
Logistics, Inc. (the “Company”) Form 10-K for the year ended June 30, 2006.
Note
2 - Acquisitions
On
October 2, 2006, our Target subsidiary acquired certain assets of Capitaland
Express, Inc. (“Capitaland”), an Albany, New York based freight forwarder for a
combination of cash and an earn out structure over five years. The earnout
structure is strictly dependent on future profits achieved at the location
acquired, and the Company has no minimum commitment or obligation. The Company
does not expect that the earn out payments will have a material impact on its
overall financial results.
On
July14, 2006, our Target subsidiary acquired certain assets of Discovery Cargo,
Inc.
(“DCI”), a Queens, New York based freight forwarder for a cash payment. In
conjunction with the acquisition, our Target subsidiary entered into a
consulting agreement with the principals of DCI and advanced them $450,000
as a
loan repayable over three years beginning October 15, 2006 at an interest rate
equal to the prime plus one percent (1.0%). As of March 31, 2007, the $172,647
current portion of this loan is reflected in accounts receivable and the balance
of $256,906 is reflected in other assets.
On
March15, 2005the Company acquired the stock of Air Cargo International and Domestic,
Inc. (“ACI”) for a combination of (i) $1,000,000 cash payment on date of
closing, (ii) cash payment based on the ACI shareholder’s equity after winding
down the ACI balance sheet, and (iii) an earn-out structure based on certain
future gross profit achievements over the next five years (the “ACI
Acquisition”). In accordance with the terms of the ACI Acquisition, certain post
closing adjustments were made in September of the current fiscal year and
included below is the revised purchase price allocation. The adjusted balance
of
intangible assets will be amortized prospectively over its remaining useful
life
of approximately 5 years, 6 months. Any payments from the earn-out structure
will be considered an increase to the purchase price in the period such amount
is determinable. The Company has no minimum commitment or obligation under
the
earn-out or the wind down of the balance sheet. The Company does not expect
that
the earn-out payments will have a material impact on its liquidity.
The
revised purchase price allocation is as follows:
Purchase
Price:
Cash
paid on closing date
$
1,000,000
Estimated
additional cash payment to be paid based upon final ACI shareholder
equity
after wind down of balance sheet
757,840
Purchase
price adjustment
(400,000
)
Expenses
related to acquisition: legal and accounting
In
the
process of preparing our consolidated financial statements, management estimates
the appropriate carrying value of certain assets and liabilities which are
not
readily apparent from other sources. Management bases its estimates on
historical experience and on various assumptions which are believed to be
reasonable under the circumstances. The primary estimates underlying our
consolidated financial statements include allowance for doubtful accounts,
accruals for transportation and other direct costs, accruals for cargo
insurance, the determination of share based compensation expense, and the
classification of net operating loss and tax credit carry forwards between
current and long-term assets.
Note
4 - Goodwill
In
July
2001, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (SFAS) No. 142, “Goodwill
and Other Intangible Assets”,
which
requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. We adopted this statement on July 1, 2002.
Under the non-amortization approach, goodwill and certain intangibles are not
amortized into results of operations, but instead are reviewed for impairment,
written down and charged to results of operations only in periods in which
the
recorded value of goodwill and certain intangibles is more than its fair value.
The last annual independent valuation analysis was completed in January 2007,
and based on the valuation, we determined that the goodwill was not
impaired.
The
independent valuation analysis is substantially dependent on three separate
analyses: (1) discounted seven-year cash flow analysis, (2) comparable public
company analysis, and (3) comparable transaction analysis.
The
discounted cash flow analysis is dependent on the Company’s Target Logistic
Services, Inc. (“Target”) subsidiary achieving certain future results. These
include the following major assumptions: (a) Revenue growth of 15.0% for fiscal
2007, 12.5% for fiscal 2008 through 2009, 10% for fiscal 2010 through 2011
and
7.5% for fiscal 2012 thru 2013; (b) Gross Profit percentage of 30.6% in
fiscal 2007 and 31.8% in fiscal 2008 and thereafter; (c) Operating expenses
(excluding forwarder commissions) reducing from 17.2% in fiscal 2006, to 17.1%
in fiscal 2008 and thereafter; and (d) a 15% discount rate. While
management believes that these are achievable, any downward variation in these
major assumptions or in any other portion of the discounted cash flow analysis
could negatively impact the overall valuation analysis.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
The
Company performs an annual valuation analysis. Based on the results of these
annual valuation analyses, our financial results could be impacted by impairment
of goodwill, which could result in periodic write-downs ranging from zero to
$11,351,402.
The
decrease in goodwill for the nine months ended December 31, 2007 is attributable
to the post closing adjustment under the ACI Acquisition. See Note
2.
Note
5 - Per Share Data
Basic
income per share is calculated by dividing net income attributable to common
shareholders less preferred stock dividends, by the weighted average number
of
shares of common stock outstanding during the period. Diluted income per share
is calculated by dividing net income attributable to common shareholders by
the
weighted average number of common shares outstanding, adjusted for potentially
dilutive securities.
There
were outstanding options to purchase 330,000 and 595,000 shares of common stock
for the nine months ended March 31, 2007 and 2006, respectively. Options to
purchase 75,000 shares were not included in the computation of diluted EPS
for
the nine months ended March 31, 2006, because the exercise prices of those
options were greater than the average market price of the common shares, and
thus are anti-dilutive.
Note
6 - Stock-Based Compensation
Effective
July 1, 2005, we adopted the fair value measurement provisions of Financial
Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004)
“Share-Based
Payment”,
and
accordingly have adopted the modified prospective application method. Under
the
provisions of FASB Statement No. 123(R) the compensation cost relating to
share-based payment transactions (in our case, the employee stock option plan)
is to be recognized in the financial statements. The Company will recognize
as
expense all outstanding, unvested employee stock options over the remaining
vesting period that remained on such options based on the fair value at the
date
the employee stock options were granted. For the nine months ended March 31,2007, there was no expense to be recognized in the financial statements.
However, for the nine months ended March 31, 2006, the total share based
employee compensation expense included in the determination of net income,
net
of tax effect was $7,958.
Prior
to
July 1, 2005, the Company accounted for its employee stock option plan
in
accordance with the provisions of Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting
for Stock Issued to Employees”,
and
related interpretations. Compensation expense relating to employee stock options
is recorded only if, on the date of grant, the fair value of the underlying
stock exceeds the exercise price. The Company adopted the disclosure-only
requirements of SFAS No. 123, “Accounting
for Stock-Based Compensation”,
and
SFAS No. 148, “Accounting
for Stock-Based Compensation - Transition and Disclosure”,
which
allows entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures for employee stock options as if the fair value
based method of accounting in SFAS No. 123 had been applied to these
transactions.
The
fair
value of options was estimated at the grant date using a Black-Scholes option
pricing model, which requires the input of subjective assumptions. No options
were granted during the nine months ended March 31, 2007 or 2006.
There
were 190,000 stock options exercised for $117,250 during the nine months ended
March 31, 2007.
Note
8 - Segment Information
The
Company’s revenue includes both domestic and international freight movements.
Domestic freight movements originate and terminate within the United States,
and
never leave the United States. International freight movements are either
exports from the United States or imports to the United States. A reconciliation
of the Company’s domestic and international segment revenues and gross profits
for the three and nine months ended March 31, 2007 and 2006 is as
follows:
On
March19, 2007, the Company’s Target subsidiary entered into a $20 million revolving
line of credit agreement with Wells Fargo Bank, National Association (“Wells
Fargo”). The new credit facility (the “Wells Fargo Facility”) replaces Target’s
previous $15 million line of credit with GMAC
Commercial Finance LLC. Under
the
Wells Fargo Facility, Target may borrow up to $20 million limited to 80% of
its
aggregate outstanding eligible accounts receivable. If borrowings do not exceed
$5 million, then the facility is not restricted by eligible accounts receivable.
Target may select a prime rate or LIBOR based interest rate. Interest on the
Wells Fargo Facility will be adjusted quarterly based on the ratio of Target’s
total liabilities to tangible net worth, and will range from 0.5% below Wells
Fargo’s prime rate to Wells Fargo’s prime rate, or from LIBOR plus 1.25% to
LIBOR plus 1.75%. Target’s obligations under the Wells Fargo Facility are
secured by all of the assets of Target, and are guaranteed by the Company.
The
Wells Fargo Facility will expire on March 1, 2010. As
of
March 31, 2007, there were outstanding borrowings of $3,600,458 under the Wells
Fargo Facility (which represented 24.2% of the amount available thereunder)
out
of a total amount available for borrowing under the Wells Fargo Facility of
approximately $14,901,454, net of a standby letter of credit issued by Wells
Fargo in the amount of $136,668.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
Note
10 - Recent Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting
for Uncertainty in Income Taxes”, an
interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model
for recognizing, measuring, presenting and disclosing in the financial
statements tax positions taken or expected to be taken on a tax return,
including a decision whether to file or not to file in a particular
jurisdiction. FIN 48 is effective for fiscal years beginning after December15,2006. If there are changes in net assets as a result of application of FIN
48,
these will be accounted for as an adjustment to retained earnings. The Company
is currently assessing the impact of FIN 48 on its consolidated financial
position and results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements”.
SFAS
No. 157 establishes a common definition for fair value to be applied to US
GAAP
guidance requiring use of fair value, establishes a framework for measuring
fair
value, and expands disclosure about such fair value measurements. SFAS No.
157
is effective for fiscal years beginning after November 15, 2007. The Company
is
currently assessing the impact of SFAS No. 157 on its consolidated financial
position and results of operations.
In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) 108
“Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”.
SAB
108 requires that public companies utilize a dual-approach to assessing the
quantitative effects of financial misstatements. This dual approach includes
both an income statement focused assessment and a balance sheet focused
assessment. The guidance in SAB 108 must be applied to annual financial
statements for fiscal years ending after November 15, 2006. The Company is
currently assessing the impact of adopting SAB 108 but does not expect that
it
will have an effect on our consolidated financial position or results of
operations.
-13-
ITEM
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As
used
throughout this Report, “we,”“our,”“the Company” and similar words refers to
Target Logistics, Inc.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains certain forward-looking statements
reflecting our current expectations with respect to our operations, performance,
financial condition, and other developments. These
forward-looking statements may generally be identified by the use of the words
“may”, “will”, “believes”, “should”, “expects”, “anticipates”, “estimates”, and
similar expressions. These
statements are necessarily estimates reflecting management’s best judgment based
upon current information and involve a number of risks and uncertainties.
We
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and readers are advised that
various factors could affect our financial performance and could cause our
actual results for future periods to differ materially from those anticipated
or
projected. While
it
is impossible to identify all such factors, such factors include,
but are not limited to, those risks identified in our periodic reports filed
with the Securities and Exchange Commission, including our most recent Annual
Report on Form 10-K.
OVERVIEW
We
generated operating revenues of $160.4 million, $138.4 million, and $126.1
million, and
had
net profits of $2.7 million, $1.6 million, and $0.5
million, for the fiscal years ended June 30, 2006, 2005 and 2004, respectively.
The
Company’s revenue includes both domestic and international freight movements.
Domestic freight movements originate and terminate within the United States,
and
never leave the United States. International freight movements are freight
movements that have a point of origin or destination outside of the United
States. International freight movements historically reflect a higher cost
of
transportation as a percentage of revenue than domestic freight movements.
This
is due to the higher cost of transportation associated with the movement of
international freight including handling and other fees paid to overseas agents.
As a result, international freight movements historically produce a lower gross
profit margin than domestic freight movements.
For
the
nine months ended March 31, 2007, the revenue of our Target subsidiary increased
by 17.7%, when compared to the prior year’s corresponding period. Target’s gross
profit margin (i.e.,
gross
operating revenues less cost of transportation expressed as a percentage of
gross operating revenue) for the nine months ended March 31, 2007 decreased
to
30.2% from 31.6% for the nine months ended March 31, 2006. The decrease is
primarily due to a reduction in domestic gross profit margins due to (i) the
handling of lower gross profit margin domestic shipments at our New York station
resulting from the DCI acquisition, and (ii) the movement of less domestic
premium services during the nine months ended March 31, 2007 than the nine
months ended March 31, 2006. Since
the
July 2006 DCI acquisition, our New York station’s profitability has been
negatively impacted, and management has been working with the station to improve
its performance. As a result of the continuing losses at the New York station
during the third quarter, management has initiated a major restructuring of
the
New York station and expects the station to return to profitability in the
near
future. Management
continues to believe that we must focus on increasing revenues and must increase
gross profit margin to maintain profitability. Management intends to continue
to
work on growing revenue by increasing sales through expanding our sales force,
increasing sales generated by the Company’s employed sales personnel and sales
generated by exclusive forwarders, and strategic acquisitions. Management also
intends to continue to work on improving Target’s gross profit margins by
reducing transportation costs.
Operating
Revenue. Operating
revenue increased to $43.7 million for the three months ended March 31, 2007
from $37.1 million for the three months ended March 31, 2006, a 17.7% increase.
The Company’s operating revenue consists of domestic freight revenue and
international freight revenue. Domestic revenue increased by 17.8% to
$29,473,373 from $25,031,494 for the three months ended March 31, 2006. This
increase is due to the DCI and Capitaland acquisitions and internal sales
growth. International revenue increased by 18.0% to $14,254,383 for the three
months ended March 31, 2007 from $12,082,650 for the three months ended March31, 2006, primarily due to the Capitaland acquisition.
-14-
Cost
of Transportation. Cost
of
transportation increased to 69.9% of operating revenue for the three months
ended March 31, 2007 from 68.4% of operating revenue for the three months ended
March 31, 2006. This increase was primarily due to an increase in domestic
transportation costs as a percentage of sale due to (i) the handling of higher
cost domestic shipments, as a percentage of sales, as a result of the DCI
acquisition, and (ii) the movement of less domestic premium services during
the
three months ended March 31, 2007 than in the three months ended March 31,2006.
Gross
Profit Margin.
As a
result of the factors described above, gross profit margin for the three months
ended March 31, 2007 decreased to 30.1% from 31.6% of operating revenue for
the
three months ended March 31, 2006, a 4.4% decrease.
Selling,
General and Administrative Expenses.
Selling, general and administrative expenses increased to 28.7% of operating
revenue for the three months ended March 31, 2007 from 28.6% of operating
revenue for the three months ended March 31, 2006. Within our Target subsidiary,
selling, general and administration expenses (excluding exclusive forwarder
commission expenses) were 19.4% of operating revenue for the three months ended
March 31, 2007 and 18.3% for the three months ended March 31, 2006, a 6.0%
increase primarily a result of the DCI and Capitaland acquisitions. Exclusive
forwarder commission expenses (which are primarily commissions to our agents
and
earn-out expenses from our acquisitions) were 8.3% and 8.9% of operating revenue
for the three months ended March 31, 2007 and 2006, respectively, a 6.7%
decrease resulting from a reduction in forwarder agent freight volume as a
percentage of Target’s overall freight volume.
Effective
Tax Rate. The
effective income tax rate for the three months ended March 31, 2007 was 41.3%
compared to 42.8% for the three months ended March 31, 2006. The change in
the
effective tax rate is due to changes in the components of the deferred income
tax provision when compared to the prior year.
Net
Profit. For
the
three months ended March 31, 2007, we realized a net profit of $340,150,
compared to a net profit of $609,642 for the three months ended March 31, 2006,
a 44.2% decrease.
Operating
Revenue. Operating
revenue increased to $134.7 million
for the nine months ended March 31, 2007 from $120.0 million for the nine months
ended March 31, 2006, a 12.3% increase. The Company’s operating revenue consists
of domestic freight revenue and international freight revenue. Domestic revenue
increased by 13.3% to $91,175,368 for the nine months ended March 31, 2007
from
$80,496,150 for the nine months ended March 31, 2006. This increase is due
to
the DCI and Capitaland acquisitions and internal sales growth. International
revenue increased by 10.3% to $43,551,017 for the nine months ended March 31,2007 from $39,467,919 for the nine months ended March 31, 2006, primarily due
to
the Capitaland acquisition.
Cost
of Transportation. Cost
of
transportation increased to 70.3% of operating revenue for the nine month period
ended March 31, 2007, from 68.5% of operating revenue for the nine month period
ended March 31, 2006. This increase was primarily due to an increase in domestic
transportation costs as a percentage of sales due to (i) the handling of higher
cost domestic shipments, as a percentage of sale, as a result of the DCI
acquisition, and (ii) the movement of less domestic premium services during
the
six months ended March 31, 2007 than the six months ended March 31,2006.
Gross
Profit.
As a
result of the factors described above, gross profit margin for the nine month
period ended March 31, 2007 decreased to 29.7% from 31.5% of operating revenue
for the corresponding 2006 period, a 5.7% decrease.
Selling,
General and Administrative Expenses.
Selling, general and administrative expenses decreased to 28.0% of operating
revenue for the nine months ended March 31, 2007 from 28.4% of operating revenue
for the nine months ended March 31, 2006. Within our Target subsidiary, selling,
general and administration expenses (excluding exclusive forwarder commission
expenses) were 17.9% of operating revenue for the nine months ended March 31,2007 and 17.1% for the nine months ended March 31, 2006, a 4.7% increase
primarily as a result of the DCI and Capitaland acquisitions. Exclusive
forwarder commission expenses (which are primarily commissions to our agents
and
earn-out expenses from our acquisitions) were 9.0% and 10.1% of operating
revenue for the nine months ended March 31, 2007 and 2006, respectively, a
10.9%
decrease resulting from a reduction in forwarder agent freight volume as a
percentage of Target’s overall freight volume.
Effective
Tax Rate.
The effective income tax rate for the nine months ended March 31, 2007 was
44.7%
compared to 43.3% for the nine months ended March 31,2006. The change in the effective tax
rate is due to changes in the components of
the deferred income tax provision when compared to the prior
year.
-15-
Net
Profit. For
the
nine months ended March 31, 2007, the Company realized a net profit of
$1,206,606, compared to a net profit of $2,063,034 for the nine months ended
March 31, 2006, a 41.5% decrease.
LIQUIDITY
AND CAPITAL RESOURCES
General.
Our
ability to satisfy our debt obligations, fund working capital and make capital
expenditures depends upon future performance, which is subject to general
economic conditions, competition and other factors, some of which are beyond
our
control. If we achieve significant near-term revenue growth, we may experience
a
need for increased working capital financing as a result of the difference
between our collection cycles and the timing of our payments to vendors. Also,
as a non-asset based freight forwarder, we do not have a need for significant
capital expenditure.
Cash
flows from operating activities.
During
the nine months ended March 31, 2007, net cash used in operating activities
was
$1,780,289. For the corresponding period of the 2006 fiscal year, net cash
provided by operating activities was $2,283,449. When compared to the prior
year
the decrease in cash flows from operating activities is primarily due to an
increase in accounts receivable and a decrease in net income.
Cash
flows from investing activities.
Cash
used for investing activities was $1,446,135 representing capital expenditures
for the purchase of property, equipment and leasehold improvements, and payments
made pursuant to the terms of the Capitaland and DCI asset purchase
acquisitions.
Cash
flows from financing activities.
Cash
provided by financing activities was $993,408, which primarily consisted of
$1,106,671 of net borrowings under our line of credit and $117,250 from the
exercise of stock options less $122,946 of dividends associated with the Class
F
Preferred Stock and $107,567 of payments under lease obligations.
Capital
expenditures.
Capital
expenditures for the nine months ended March 31, 2007 were $1,446,135,
representing capital expenditures of (i) $363,495 primarily for property,
equipment, and leasehold improvements, and (ii) $1,082,640 for the Capitaland
and DCI asset purchase acquisitions.
Wells
Fargo Facility. On
March19, 2007, the Company’s Target subsidiary entered into a $20 million revolving
line of credit agreement with Wells Fargo Bank, National Association (“Wells
Fargo”). The new credit facility (the “Wells Fargo Facility”) replaces Target’s
previous $15 million line of credit with GMAC
Commercial Finance LLC. Under
the
Wells Fargo Facility, Target may borrow up to $20 million limited to 80% of
its
aggregate outstanding eligible accounts receivable. If borrowings do not exceed
$5 million, then the facility is not restricted by eligible accounts receivable.
Target may select a prime rate or LIBOR based interest rate. Interest on the
Wells Fargo Facility will be adjusted quarterly based on the ratio of Target’s
total liabilities to tangible net worth, and will range from 0.5% below Wells
Fargo’s prime rate to Wells Fargo’s prime rate, or from LIBOR plus 1.25% to
LIBOR plus 1.75%. Target’s obligations under the Wells Fargo Facility are
secured by all of the assets of Target, and are guaranteed by the Company.
The
Wells Fargo Facility will expire on March 1, 2010. As
of
March 31, 2007, there were outstanding borrowings of $3,600,458 under the Wells
Fargo Facility (which represented 24.2% of the amount available thereunder)
out
of a total amount available for borrowing under the Wells Fargo Facility of
approximately $14,901,454, net of a standby letter of credit issued by Wells
Fargo in the amount of $136,668.
Working
Capital Requirements. The
Company’s and Target’s cash needs are currently met by the Wells Fargo Facility
and cash on hand. As of March 31, 2007, the Company had $11,300,996 available
under its $20 million Wells Fargo Facility and $4,785,140 in cash from
operations, cash on hand, and cash balances associated with the stock purchase
acquisition. We believe that our current financial resources will be sufficient
to finance our operations and obligations (current and long-term liabilities)
for the long and short terms. However, our actual working capital needs for
the
long and short terms will depend upon numerous factors, including our operating
results, the cost of increasing the Company’s sales and marketing activities,
competition, and the availability of a revolving credit facility, none of which
can be predicted with certainty.
CRITICAL
ACCOUNTING
POLICIES
AND ESTIMATES
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions about future events that affect
the
amounts reported in the financial statements and accompanying notes. Since
future events and their effects cannot be determined with absolute certainty,
the determination of estimates requires the exercise of judgment. Actual results
could differ from those estimates, and such difference may be material to the
financial statements. The most significant accounting estimates inherent in
the
preparation of our financial statements include estimates as to the appropriate
carrying value of certain assets and liabilities which are not readily apparent
from other sources, primarily allowance for doubtful accounts, accruals for
transportation and other direct costs, accruals for cargo insurance, the
determination of share based compensation expense, and the classification of
net
operating loss and tax credit carryforwards between current and long-term
assets. Management bases its estimates on historical experience and on various
assumptions which are believed to be reasonable under the circumstances. We
reevaluate these significant factors as facts and circumstances change.
Historically, actual results have not differed significantly from our estimates.
These accounting policies are described at relevant sections in this discussion
and analysis and in the notes to the consolidated financial statements included
in our Annual Report on Form 10-K for the fiscal year ended June 30,2006.
-16-
Our
balance sheet includes an asset in the amount of $11,351,402 for purchased
goodwill. In accordance with accounting pronouncements, the amount of this
asset
must be reviewed annually for impairment, written down and charged to results
of
operations in the period(s) in which the recorded value of goodwill is more
than
its fair value. The last independent annual valuation analysis was completed
in
January 2007, and based on the valuation, we determined that the goodwill was
not impaired. Had the determination been made that the goodwill asset was
impaired, the value of this asset would have been reduced by an amount ranging
from zero to $11,351,402, and our financial statements would reflect the
reduction. For additional description, please refer to Note 3 to the Company’s
Notes to the unaudited Consolidated Financial Statements contained in this
Quarterly Report.
We
maintain a system of disclosure controls and procedures that is designed to
provide reasonable assurance that information, which is required to be disclosed
by the Company in the reports that it files or submits under the Securities
and
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and is accumulated and communicated to
management in a timely manner. Our Chief Executive Officer and Chief Financial
Officer have evaluated this system of disclosure controls and procedures as
of
the end of the period covered by this quarterly report, and believe that the
system is effective. There have been no changes in our internal control over
financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
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PART
II - OTHER INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
In
connection with the DCI acquisition, our Target subsidiary entered into an
Independent Contractor Agreement with Cowboy Consulting, LLC, a company owned
by
DCI’s principals, Craig Catalano and Bernard Quandt, and advanced $450,000 as a
loan to Messrs. Catalano and Quandt pursuant to the terms of a promissory note.
On March 16, 2007, Target called the loan due to default. On March 19, 2007,
Messrs. Catalano and Quandt, and their company, Cowboy Consulting, filed a
civil
suit against Target in New York State Supreme Court for Nassau County (Case
No.
04790/2007) alleging that: (i) Cowboy Consulting is entitled to an additional
$387,000 under the terms of the Independent Contractor Agreement; and (ii)
Target violated the terms of the Independent Contractor Agreement, which
resulted in damages to the plaintiffs in an undetermined amount. On April 11,2007, Target served its answer denying the allegations and all liability, and
counterclaiming that as a result of fraud and breaches by Messrs. Catalano
and
Quandt of their representations and warranties made in the DCI Asset Purchase
Agreement, Target has been damaged in an amount to be proven at trial but no
less than $50,000. We and our counsel believe that the claims against us are
completely without merit. In the event of an unfavorable outcome, the amount
of
any potential loss to us is not yet determinable. On April 10, 2007, Target
sued
Messrs. Catalano and Quandt to enforce collection of all amounts due under
the
promissory note, by filing a motion for summary judgment on the promissory
note
in New York State Supreme Court for Nassau County (Case No. 05926/2007).
We believe that Messrs. Catalano and Quandt do not have any defenses to
enforcement of the promissory note.
Restated
and Amended Accounts Receivable Management and Security Agreement,
dated
as of July 13, 1998 by and between GMAC Commercial Credit LLC, as
Lender,
and Target Logistic Services, Inc., as Borrower, and guaranteed by
the
Registrant (“GMAC Facility Agreement”) (incorporated by reference to
Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the Fiscal
Year Ended June 30, 1999, File No. 0-29754)
10.3
Letter
amendment to GMAC Facility Agreement, dated January 25, 2001 (incorporated
by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
10-Q for the Quarter Ended December 31, 2000, File No.
0-29754)
10.4
Amendment
to GMAC Facility Agreement, dated September 20, 2002 (incorporated
by
reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K
for the Fiscal Year Ended June 30, 2002, File No.
0-29754)
10.5
Amendment
to GMAC Facility Agreement, dated February 12, 2003 (incorporated
by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
10-Q for the Quarter Ended March 31, 2003, File No.
0-29754)
Credit
Agreement, dated as of March 19, 2007 by and between Wells Fargo
Bank,
National Association, as Lender, and Target Logistic Services, Inc.,
as
Borrower (“Wells Fargo Credit Agreement”)
10.8
Revolving
Line of Credit Note, dated March 19, 2007, made by Target Logistic
Services, Inc. with respect to the Wells Fargo Credit
Agreement
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10.9
Continuing
Security Agreement: Rights to Payment, dated March 19, 2007, entered
into
by Target Logistic Services, Inc. with respect to the Wells Fargo
Credit
Agreement
10.10
Security
Agreement: Equipment, dated March 19, 2007, entered into by Target
Logistic Services, Inc. with respect to the Wells Fargo Credit
Agreement
10.11
Continuing
Guaranty, dated March 19, 2007, entered into by the Registrant with
respect to the Wells Fargo Credit Agreement
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.