SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB-A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1995
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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 No. 0-16140
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U.S. TRANSPORTATION SYSTEMS, INC.
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(Name of Small Business Issuer in its Charter)
Nevada 34-1397328
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
33 West Main Street
Elmsford, New York 10523
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(Address of Principal Executive Office) (Zip Code)
Issuer's Telephone Number, including Area Code: (914) 345-3339
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Series A Cumulative Convertible Preferred Stock, $.01 par value
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(Title of Class)
Class A Common Stock Purchase Warrants
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(Title of Class)
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
requirement for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B, and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]
EXHIBIT INDEX IS AT PAGE [ ]
<PAGE>
The issuer's revenues for 1995 were $17,350,973.
On March 29, 1996, the price for the Registrant's Common Stock, $.01 par value,
on the over-the-counter market, was $.75 per share. Based upon the price quoted,
the aggregate market value, as of March 29, 1996 of the shares of Common Stock,
$.01 par value, held by non-affiliates was $3,900,988. The prices referred to
represent prices between dealers and do not include retail mark-up, mark-down,
or commissions. They do not represent actual transactions. "Non-affiliates"
includes all shareholders of the Registrant other than its officers, directors
and owners of more than ten percent of its outstanding Common Stock.
As of March 29, 1996, there were 18,445,638 shares of Common Stock, $.01 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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<PAGE>
PART I
Item 1 BUSINESS
U.S. Transportation Systems, Inc., a Nevada corporation (the
"Company"), is currently engaged in three business areas: (i) providing
transportation related services; (ii) manufacturing transportation machinery and
equipment; and (iii) providing entertainment services.
The Company's transportation related services consist of (i)
providing bus and other motor vehicle transportation services to customers such
as businesses and municipalities on a contract basis, (ii) operating a fleet of
company-owned and privately-owned taxi cabs in Lima and Toledo, Ohio, and (iii)
over-the-road package delivery services for common carriers. The manufacturing
division includes (i) Automated Solutions, Inc. ("ASI"), which designs,
manufactures and markets machinery which folds and tests airbags and assembles
airbag modules, for installation in passenger and utility vehicles, and (ii)
American Trade-A-Bus of Texas, Inc. ("ATAB"), which manufactures certain
transportation vehicle components as a sub-contractor of a contractor of the
United States Department of Defense and provides related engineering services.
The Company's entertainment division consists of five ticket brokerage agencies
which sell tickets for theatrical, sports and other entertainment events, and a
travel agency that provides packaged tours of New York.
Strategic Acquisitions
During the past three years, the Company engaged in a strategy
to enhance its profitable operations and diversify through acquisitions of other
businesses. Such acquisitions include the following:
In November 1995, the Company acquired all of the issued and
outstanding capital stock of ASI in exchange for 1,800,000 shares of Common
Stock. ASI is engaged in designing, manufacturing and selling machinery which
folds and tests airbags and assembles airbag modules, for installation in
passenger and utility vehicles. ASI holds several design patents on automatic
bag folding machinery and the process through which these machines operate. To
the Company's knowledge, no other such patents exist. ASI's bag folding
machinery ranges from manual assist to fully automatic machines for both
driver-side and passenger-side airbags. ASI also manufactures airbag module
assembly equipment including ring, bag, and plate riveters; non-destructive flow
testers; driver's-side and passenger's-side airbag burst machines (destructive
test); screw and nut torque systems; and cover and inflator riveters. ASI's
sales are international in scope and the beneficiaries of its
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products include many of the largest automobile manufacturers in
the world. See "Airbag Folding and Module Assembling Machinery."
In May 1992, the Company acquired the assets of Advance
Entertainment of New York, and in July 1994, the Company acquired the assets of
Audience Projects, Inc. (now operating as Advance Entertainment - Chicago). Both
of these companies are entertainment and theater ticket agencies. The aggregate
purchase price for these businesses was $125,500. See "Entertainment Division,"
below.
The Company acquired the assets of Suncoast Transportation
("Suncoast"), a bus company located in Tampa, Florida that operates school buses
and provides transportation services under contract, particularly services in
connection with sporting events. On September 1, 1993, the Company issued a
$132,000 promissory note in exchange for a 50% interest in the business, and on
September 1, 1994, the Company acquired the other 50% interest in exchange for
375,000 shares of the Company's Common Stock. In March 1995, the Company sold a
substantial portion of the assets of Suncoast for $70,000 in cash and notes
totalling $592,000 to an unrelated third party. The previous owner of Suncoast
continues to be employed by the Company and will continue to pursue
transportation contracts relating to sporting events through the Company's
subsidiary, Transportation Management Services, Inc. See "-- Contract
Transportation Services," below.
In December 1994, the Company acquired the capital stock of
Camelot Consultants, Inc. ("Camelot"), which is engaged in owning and leasing
buses to third parties. Camelot was acquired from members of the Margolies
family, principal stockholders and directors of the Company, in exchange for
180,000 shares of the Company's Series C Preferred Stock. As of the acquisition
date, 327,000 shares of the Company's Common Stock were held by Camelot. The
shares, valued at December 31, 1994 at $286,125, were retired upon the
acquisition. Additionally, per appraisals, the property and equipment and assets
acquired were valued at $1,488,750.
In October 1994, the Company acquired the capital stock of
ATAB in exchange for a $200,000 promissory note. ATAB is engaged in providing
engineering services and manufacturing electrical component parts for
transportation vehicles. See "Contract Transportation Services -- Transportation
Component Manufacturing Services."
In June 1995, the Company acquired the capital stock of Avanti
Delivery Services, Inc. and Priority Express Service, Inc. for an aggregate of
780,000 shares of Common Stock and the assets of Falcon Freight, Inc. for
$20,000, Florida based corporations which collectively operate a package
delivery service under the name "Armstrong Freight Service," and acquired the
capital stock of Trans Lynx Express, Inc., another Florida based company that
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provides ground transportation of containerized air cargo for 116,529 shares of
Common Stock. See "Contract Transportation Services -- Package Delivery
Services."
Transportation Related Services
Contract Transportation Services. This segment of the
Company's business consists of supplying buses, vans or customized vehicles to
customers pursuant to written contracts which are generally awarded on a
competitive bid basis. Customers include municipalities and other governmental
agencies, schools, the armed forces and private industry.
During the past 14 years, the Company has developed an
extensive infrastructure to support its contract transportation activities. This
infrastructure consists of major garage facilities, repair shops, contiguous
parking areas and computerized dispatch and communications capacity, all staffed
by an experienced group of maintenance, operational and administrative
personnel. While such support structures exist for all localities from which the
Company operates each of its contract activities, the Company's strongest
infrastructure hubs are centered in the areas of Detroit, Michigan, Toledo and
Cincinnati, Ohio and Tampa, Florida. In all of its localities, the Company has
established sources for operational supplies and repair parts, with
round-the-clock dispatching, maintenance and road service. As the Company
pursues contract transportation opportunities, its objective is to exploit the
advantages of its infrastructure for efficient operations.
Most of the transportation contracts which the Company secures
are awarded on a competitive bid basis. A municipality, public authority or
private corporation sets forth the specifications for its transportation
requirements, and the Company and its competitors submit bids specifying prices
for the services and other terms requested in the solicitation of bids. The
contract is then awarded on the basis of price, financial reliability of the
bidder, and other considerations.
Upon the award of the contract (or, in cases where the Company
obtains a contract by private negotiation, upon the signing of the contract),
the Company may have to make a significant capital expenditure to establish the
facilities (including garage, tools, and personnel) and obtain the equipment
(generally buses and spare parts) necessary to carry out the Company's
obligations under the contract. While capital expenditures do not occur in every
case in which the Company contracts with a new party, the Company's experience
has been that such expenditures are usually necessary and are often significant.
The Company will then recover the cost of its expenditures from fees paid to it
over the life of the contract.
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One of the Company's largest transportation contracts is with the Ford
Motor Company. Under this contract, the Company has operated an internal bus
transportation system for 15 years for over 20,000 employees at Ford's River
Rouge plant in Dearborn, Michigan where employees are prohibited from parking.
Under the terms of the contract, Ford pays the Company on a per hour basis for
bus service, the service operates 24 hours a day, 365 days a year and the
contract expires on June 30, 1996. Revenues from this contract provided
approximately 14% of the Company's gross revenue in 1995 and 19% of the
Company's gross revenues in 1994.
Other contract transportation services offered by the Company
include its arrangement with the City of Cincinnati. Cincinnati has its main
airport located over the state border in Boone County, Kentucky. It is important
to the city officials and airport management that travelers have safe, reliable
and economical transportation between the airport and various city locations.
For the past 14 years, the Company has had an arrangement with the City of
Cincinnati which gives the Company the exclusive right to perform this service.
There is no guarantee of price or profitability, but the Company anticipates
the exclusive arrangement to be profitable. The Company also runs a shuttle
service at the airport under a contract with the City of Cincinnati. The Company
provides round-the-clock shuttle service between the various terminals and
parking lots, and is paid by the City on an hourly basis. The term of the
Company's arrangement with the City of Cincinnati continues through August 2000.
In 1994, the Company completed a package of one-month
contracts with several participants in the 1994 World Cup. Based upon the
success of the World Cup contracts, the Company has formed a subsidiary named
"Transportation Management Services, Inc." ("TMSI"). The business of TMSI is to
organize and manage transportation in connection with sporting events and other
large public events, using vehicles owned by the Company or vehicles operated by
other carriers with whom TMSI enters into subcontracts. During 1995, TMSI was
designated as an approved transporter in connection with the Hall of Fame Bowl
and the Super Bowl, and will seek to obtain similar arrangements in connection
with other events. The Company has also been awarded a sub-contract to provide
bus services during the 1996 Olympic Games in Atlanta.
Contract services such as these make up the fastest growing
segment of the Company's current transportation operations. It has been the
Company's experience that its expertise and reputation for reliable service in
the contract transportation business, as well as its imaginative approach to
creating a specialized market niche has resulted in new and profitable business.
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Package Delivery Services. The primary business of Armstrong
Freight Service is delivery of packages under contract from other common
carriers. The primary business of Trans Lynx is ground delivery, generally
between airports, of containerized air cargo under contract from other common
carriers. In both instances, these common carriers are generally well-known
overnight couriers. These overnight couriers utilize Armstrong Freight Service
and Trans Lynx because for certain packages, Armstrong's truck delivery is more
efficient than the air freight delivery which is central to the operations of
the overnight couriers. Armstrong Freight Service is also an alternative for
these carriers when they have more packages than their own transportation
equipment can handle. The Company's acquisition of Armstrong Delivery Service
and Trans Lynx, therefore, will allow it to participate in the growing package
delivery industry without making the immense capital investment necessary to
establish a package carrier which deals directly with the public.
Taxi Cab and Car Services. The Company's taxi operations are
located in Toledo and Lima, Ohio and are performed by Black & White Cab, Inc.
("Black & White"), a wholly-owned subsidiary of the Company. Black & White
maintains a fleet of 76 cabs, of which 21 are Company-owned and 55 of which are
driver-owned. In 1995, Black & White accounted for 4% of the Company's revenues.
The Company's car service operations are located in New York
City and Westchester County, New York and are performed by Transportation
Systems Corp., a wholly-owned subsidiary of the Company, for the general public.
Transportation Systems maintains a fleet of thirty-seven vehicles, a mixture of
Town Cars and vans, all of which are driver-owned or driver-leased. In 1995,
Transportation Systems Corporation accounted for 12% of the Company's revenues.
Transportation Component Manufacturing Services. The Company,
through ATAB, is engaged in the business of providing engineering services and
electrical components to vehicle manufacturers. Its facility in Sealy, Texas
houses two divisions: the Engineering Services Division and the Harness
Production Division. At the present time, both Divisions are performing services
exclusively for one customer: Stewart & Stephenson. The Engineering Services
Division provides drafting and other services in relation to the Family of
Medium Tactical Vehicles that Stewart & Stephenson produces for the U.S. Army.
The Harness Production Division employs 92 people to assemble the Enhanced
Electrical Systems wiring harness set components for that same military vehicle.
ATAB provides these services to Stewart & Stephenson pursuant to short-term
agreements which are renewed as they expire. ATAB's total revenues for 1995 were
approximately $4,112,000, of which approximately $3,800,000 were derived from
the manufacture of wire harnesses.
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Equipment
The Company owns and maintains for operations a fleet of 99
vehicles, including 6 highway coaches, 5 transit buses, 16 school buses, 14
vans, 3 minibuses, 11 delivery trucks, and 32 cabs, cars and service vehicles.
The Company also owns 2 highway coaches (reduced from 37 coaches at December 31,
1994) which it intends to resell.
To maintain its fleet, the Company operates a number of
vehicle repair centers staffed by mechanics and trained servicemen. These shops,
most of which operate around the clock, 365 days per year, service the Company's
vehicles exclusively.
Liability Insurance Coverage
The transportation industry has in the past decade encountered
severe problems in obtaining liability insurance to cover the risk of loss
arising from personal injury and property damage claims. This insurance is
mandatory to permit the Company to operate as a passenger carrier. Additionally,
the cost of this insurance coverage, when available, has increased dramatically.
The cost of the Company's insurance for the 1995-1996 year will be approximately
$365,000. The Company has always operated with full liability insurance
coverage, and in the absence of such coverage would not be permitted to operate
as a common carrier. See "Litigation."
Airbag Folding and Module Assembling Machinery
Automatic Cushion (Airbag) Folding Equipment. In 1987, ASI
began the development of cushion folding equipment for the General Motors
Corporation ("GM") and Ford Driver Side Air Bag Modules. This early equipment
was semi-automatic in nature, requiring operator intervention to produce the
required finished folding patterns. As cushion geometry and construction became
more complex, cushion folding patterns also became more complex, requiring a
greater need for more automated processes to produce the necessary folding
consistency required. Automated folding also greatly reduces the folding time.
ASI answered this challenge by producing what the Company believes is the first
fully automatic driver side airbag folding equipment, that requires minimum
operator intervention (operator simply loads the product into the machine, and
the machine produces the finished folded cushion within design specifications).
ASI has developed and patented numerous driver side folding machines used at
most major airbag manufacturers in the world. The Company is not aware of any
other company which currently produces automated folding equipment. Some of the
customers that receive cushions folded on ASI equipment include GM, Ford,
Chrysler, Nissan, Toyota, Honda, Volkswagen, Hyundi, BMW and Kia. Folding
equipment accounted for approximately 60% of ASI's revenues in 1995.
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In 1990, ASI was approached by its existing customer base to
produce equipment to fold passenger side cushions for module assembly. The
passenger side products were significantly more complex than driver side,
however, similar to driver, initial automation approaches embarked upon were
semi-automatic in nature. ASI again, was, to the Company's knowledge, the first
company to produce fully automatic passenger side cushion folding equipment, and
Management of the Company believes that it is the largest producer of this type
of equipment in the world.
Automatic and Semi-Automatic Pull Rivet Equipment. In
expanding ASI's product offering for producing airbag module assemblies, ASI
began producing custom pull rivet workstations for attaching the cushion to the
product housing in 1988. Similar to many automation integrators, ASI's initial
approach to entry in this market was to purchase existing rivet feed and pull
technology from the large pull rivet supply companies (Pop and Cherry Textron).
Though proficient at producing pull rivets, these companies produced rivet feed
systems that did not meet the system uptime requirement needed for necessary
production levels. ASI established its own rivet feed system that significantly
increased the reliability of this process. This rivet technology is used today
for cushion attachment as well as for attaching the gas generator (inflator) to
the module assembly, and for attaching the decorative cover, matched to the
automobile's interior, to the final assembly.
Automatic and Semi-Automatic Screw and Nut Torque Equipment.
In further expanding ASI product offerings to the automotive safety components
marketplace, ASI began building both screw and nut torque systems in 1992. The
addition of this expertise has allowed ASI to be a full solution supplier to the
major airbag module manufacturers such as TRW Safety Systems (North America and
Europe), Morton Automotive Products Division (North America and Europe), Delphi
Interior and Lighting Systems - GMC (previously Inland Fisher Guide Division of
General Motors), Allied Signal Bendix (North America and Asia), and Takata
International. Products produced for this marketplace include passenger side
inflatable restraint end plate screw torque systems, decorative cover nut torque
attach systems, and gas generator (inflator) attach systems for both driver and
passenger side products.
Gas Generator (Inflator) Subassembly Workstations. In 1993,
ASI expanded into a new market arena of the automotive safety restraints
producers by supplying custom workstations for manufacturing and assembling gas
generators (inflators). This arena has been dominated by major automation
players since its inception. ASI was asked to produce equipment for this area as
a subcontractor to the major established players, such as BDM, and FANUC
Robotics North America. ASI has successfully produced
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passenger side inflatable restraint filter assembly and weld workstations,
driver side inflator assembly workstations for handling and loading graphite
seals, slag filters, final filters, gas shields, combustion chambers, and laser
welding load/unload workcells. As this time, equipment end users have been
contacting ASI directly for these types of equipment. These include Breed
Automotive of Florida, Memtec Corporation of America, Morton Automotive Safety
Products and TRW Safety Systems.
Automated Test Equipment. Management believes that ASI's flow
test (leak test) equipment for the drivers' side airbag is used by all airbag
manufacturers in the United States. Currently, ASI enjoys the position of being
the strong market share leader (over 80% of the market for the driver side flow
test equipment). Additionally, ASI recently began its penetration of this test
equipment into the international market with sales of this equipment to Europe
and Asia.
ASI has developed a passenger filter permeability test device
to verify airflow through finished passenger inflator filters. This device was
an adaption of ASI's standard flow test machine, and has enjoyed significant
success. End users currently using this technology include Breed Automotive of
Florida, TRW Safety Systems, Morton Automotive Products Division, and Memtec
Corporation of America.
In 1990, ASI developed a driver and passenger side Cushion
Over Pressurization machine ("Bag Burst") used for collecting data during the
destructive test of airbags. This machine incorporated many new technical
achievements for burst test equipment. To the knowledge of Management, it (i) is
the only machine capable of bursting a passenger side airbag without a liner,
and (ii) is the only burst test machine capable of inflating the driver side and
passenger side bag to shape before bursting it. This technology also is
adaptable for testing side impact bags, by the addition of tooling into ASI's
unique "universal fixture."
To complete the product offering for module assembly, ASI has
developed electrical test machines to verify the performance of the electrical
initiator adaptor used for triggering the airbag deployment on both driver and
passenger airbags. This equipment is currently in use at Delphi Interior and
Lighting Systems, TRW Safety Systems, and Morton Automotive Products Division.
ASI has designed and built test workstations for verifying the
hermetic seal on airbag propellant holding containers located in the gas
generation (inflator) device. These systems include helium fill stations and
helium leak detection systems utilizing a mass spectrometer for sensing helium
presence.
ASI is committed to maintain its leadership in the field
of manufacturing and test equipment for the airbag industry. ASI
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intends to continue its efforts to expand its market segment in providing test
and process equipment to other industries. Recently, ASI has developed Index
Drive Systems for the mining industry. These systems were sold in the United
States, Chile and Australia. In addition, ASI has manufactured various automated
systems for the semiconductor and medical industry. These systems are primarily
utilized in the manufacturing facilities of these industries to provide for
higher production efficiency with consistent high quality.
ASI sees a tremendous opportunity for growth in both the
medical and semiconductor marketplaces. ASI's expansion philosophy has been to
capitalize on current expertise, and adapt it for the new marketplace. This
philosophy has proven to be successful, in that ASI has entered into the medical
arena, supplying test equipment for liquid filter testing and helium leak
testing of endotracheal and tracheostomy products using technology and expertise
that was gained in the automotive safety restraint markets.
Entertainment Division
The Entertainment Division of the Company is comprised of six
corporate divisions: Downtown Theater Ticket Agency, Inc. ("Downtown"), Premier
Box Office, Inc. ("Premier"), Broadway Theatours, Inc. ("Theatours"), Advance
Entertainment ("Advance - New York"), a division of Downtown, Advance
Entertainment - Chicago, Inc. ("Advance - Chicago").
Downtown, Premier and Advance - New York are licensed theater agencies
that specialize in the retail sale of tickets for theater, sports and various
entertainment events in the New York metropoli tan area. Advance - Chicago
specializes in the same business in Chicago. The firms purchase tickets at their
retail price or at a discount from retail and resell them at the retail price
plus a brokerage charge and a handling charge. These firms have been in business
for over 33 years, servicing corporate and individual clients throughout the
fifty United States and the remainder of North America. The companies' toll free
number (800) THE-SHOW, is promoted nationwide as a prime source for tickets to
events in the New York area.
Theatours, which also utilizes the toll free number, provides
prepackaged New York tours which incorporate entertainment events with lodging,
meals and other amenities, and which are sold primarily through travel agents in
the United States and Canada. Broadway shows and the U.S. Open Tennis Tournament
are examples of events being prepackaged.
Business Development
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The Company maintains an in-house Department of Business Development
which is continually seeking new business opportunities in transit management,
transit operations, airport ground transportation and other related fields. The
business development staff reviews requests for proposals and invitations for
bids, prepares formal proposals and bid submittals, negotiates awarded contract
terms, and participates in the initial start-up activities of newly awarded
contracts. The business development staff also provides technical assistance to
presently managed systems and operations.
The Company believes that its most promising avenue for profitable
expansion is the acquisition of currently operating transportation entities in
the geographic areas where the Company's existing support infrastructure is
strongest and where it can assume expanded responsibilities without significant
increases in capital plant or personnel. In addition to the efforts of the
Company's Department of Business Development, the Company's senior management
are continuously engaged in identifying selected targets for acquisition as may
be found in such areas (Detroit, Michigan, Toledo, Ohio, and Tampa, Florida).
See "Contract Transportation Services" above.
Employees
The Company employs approximately 415 people. Of these, the majority
are drivers, mechanics and other service personnel. Approximately 50 employees
perform office and administrative functions.
The Company has contracts with a number of unions, however, less than
20% of the Company's employees belong to a union. The Company believes its
present relations with its unions and other employees are good.
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Item 2 PROPERTY
The only parcels of real property owned by the Company are: (1) a
parcel of 4.25 acres at One Keeshin Drive, Toledo, Ohio; (2) a parcel of less
than one acre at 822 East Service Road, Boone County, Kentucky, from which the
Company operates under its arrangement with the City of Cincinnati; (3) a parcel
of less than one acre at 420 West Elm Street in Lima, Ohio, from which the
Company operates its Lima-based taxi service; and (4) a parcel of less than one
acre at 3740 E. LaSalle St., Phoenix, Arizona, from which ASI conducts its
operations. The table below sets forth below identifies the properties leased by
the Company and its subsidiaries for an annual rental of $10,000 or more. The
Company believes that these facilities are adequate for its operations as
presently structured.
<TABLE>
<CAPTION>
Term and
Annual
Company Lessor Premises Rental
- ------- ------ -------- --------
<S> <C> <C> <C>
U.S. Trans- Delcon 33 West Main St. 11/1/95 to
portation Realty Elmsford, NY 10/31/00
Systems, Inc. $27,600
Shortway Harriet 661 S. Dix 7/1/92 to
River Friedman Detroit, MI 6/30/97
Rouge, Inc. $24,600
Transpor- Delcon 33 West Main 9/1/94 to
tation Realty Elmsford, NY 9/1/99
Systems Corp. $22,500
Advance JBRC 261 W. 35th St Month to
Entertain- Suite 800 Month
ment - NY New York, NY $25,200
Advance Dan Develop- 3340 N. Clark 7/15/95 to
Entertain- ment Ltd. Chicago, Il. 7/30/97
ment-Chicago $15,600
ATAB of Anoka 2305 Pyka Rd. 11/1/94 to
Texas Sealy, TX 8/1/98
$26,400
Armstrong Ensign 6022 Benjamin 6/1/94 to
Freight Properties Tampa, FL 5/31/97
Service $40,257
Armstrong EVV Florida 9025 Boggy Creek 1/31/93 to
Freight Investments, Orlando, FL 11/30/96
Service Ltd. $37,094
</TABLE>
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Item 3 LEGAL PROCEEDINGS
Mountainview Coach Lines Bankruptcy.
In 1987, Mountainview Coach Lines, Inc. ("Mountainview"), a
wholly-owned subsidiary filed for bankruptcy protection. In 1989, the
Mountainview proceedings were converted to a Chapter 7 liquidation proceeding.
The assets of Mountainview have been liquidated, and early in 1994 the final
judicial proceedings were completed. It is expected that payment will be made by
Mountainview's Trustee in Bankruptcy to creditors by June 30, 1996. When payment
is made, the Company will receive $325,000 by reason of a priority claim which
was settled by the Bankruptcy Court on March 28, 1994. That amount was recorded
as a receivable on the Company's balance sheet since December 31, 1993.
Accident Claims
The Company is subject to a number of claims arising over the years
from accidents involving the Company's transportation vehicles. The Company's
liability insurance covers each of these claims. The Company is responsible,
however, for the amount of the deductibles from insurance coverage as to these
claims. At December 31, 1995 the total amount of the deductibles for which the
Company was responsible in connection with pending claims was approximately
$100,000. The Company has recorded a liability of $75,000, which the Company
believes is a reasonable estimate of the loss it will incur in connection with
settlement of these claims, based on the advice of the Company's insurance
carriers as to the likelihood that an adverse result will occur.
The Company is party to various matters in litigation. As to
any of them which involve material claims against the Company, Management
believes that the Company's insurance coverage is adequate to protect the
Company from material adverse effects. See "Risk Factors - Liability Insurance
Coverage."
Item 4 SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5 MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The following table sets forth the high and low bid information for the
Company's Common Stock as quoted on the NASDAQ SmallCap Market. The prices for
periods before January 26, 1994 take into account the one-for-five reverse
stock split on January 26, 1994.
Bid
---
Quarter Ending High Low
-------------- ---- ---
1995
December 31 $1.4375 $ .8750
September 30 $1.6785 $ .8125
June 30 $.9531 $ .50
March 31 $1.00 $ .5937
1994
December 31 $ .9375 $ .375
September 30 $1.25 $ .375
June 30 $2.00 $ .50
March 31 $5.3125 $2.00
The foregoing quotations represent prices between dealers and
do not include retail mark-up, mark-down, or commissions, and may not
necessarily represent actual transactions.
As of March 29, 1996, the Company had approximately 3,250
shareholders of record.
Dividends. Holders of Common Stock are entitled to receive
such dividends as may be declared by the Board of Directors of the Company. To
date, the Company has neither declared nor paid any dividends on its Common
Stock nor does the Company anticipate that such dividends will be paid in the
foreseeable future. Rather, the Company intends to reinvest any earnings to the
expansion and development of its business. Any payment of cash dividends on its
Common Stock in the future will be dependent upon the prior payment of required
dividends on Preferred Stock, the Company's earnings, financial condition,
capital requirements and other factors which the Board of Directors deems
relevant.
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Item 6 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Result of Operations
Year Ended December 31, 1995 vs.
Year Ended December 31, 1994
The Company's revenue from its transportation operations for
1995 increased from $9,225,391 in 1994 to $9,455,622 in 1995. The increase in
transportation revenue is primarily attributable to the Company's acquisition in
July of 1995 of Armstrong Freight Service, and in July 1995 of Trans Lynx
Express, which contributed approximately $1.4 million in revenue offset by a
decrease in revenue at TMSI of approximately $800,000 resulting from the fact
that there was a World Cup event in 1994 for which there was nothing comparable
in 1995. During the same period, revenue for the Company's entertainment
operating segment increased from $2,592,934 to $2,775,481, an increase of 7%, an
increase in line with management's expectation of growth in 1995. The Company's
newly acquired segment, manufacturing operations provided $5,119,871 of revenues
in 1995. Each of the Company's segments operated profitably for the year ended
1995, compared to a loss of $161,180 generated by the entertainment segment in
1994.
On October 31, 1995, the Company's contract with Delta
Airlines was terminated. The Company had provided employee shuttle services for
Delta at the Cincinnati Airport. Additionally, the Company's contract with
AMTRAK was assigned to the purchaser pursuant to the sale of the Company's
Toldeo, Ohio based charter operations. These contracts together generated
revenue of approximately $550,000 per year and annual net income of
approximately $70,000. As the Company anticipates annual revenue and income from
its recently acquired subsidiaries, Armstrong and ASI, to exceed the revenue and
earnings from the aforementioned lost contracts, the Company does not expect the
decreased revenue and earnings to represent a continuing trend.
Because the Company, at the end of 1993, entered into a plan
of discontinuance for its charter operations, revenue and net losses from the
charter operations have been eliminated from the Statements of Operations.
During the years ended December 31, 1995 and 1994, net losses from charter
operations totalled $410,431 and $1,334,569, respectively.
At December 31, 1995, the Company held for sale remaining net
assets of the discontinued charter bus segment with a book value of $152,500.
These assets consisted solely of three highway motor coaches with fair market
values approximating carrying costs. As such, the Company anticipates no future
material impact upon net
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income from continued operations. The Company's adjustment to the reserve for
discontinued operations was $167,199 (net of tax benefit of $86,000) in 1995.
Net interest (i.e., interest expense netted against interest
income) increased marginally for 1995 as compared to 1994 from a net expense of
$85,851 for 1994 to a net expense of $73,967 for 1995. This results in part from
the interest earned on the proceeds of the public offering which was completed
on February 28, 1995 and in part from the increase in the Company's net
investment in sales-type leases. As the Company expects to dispose of the
remaining assets of the discontinued operation, via a financing lease
instrument, the Company's net investment in sales-type leases as well as the
Company's interest income would be expected to increase slightly in the coming
months. Moreover, as proceeds are received in the disposal of the assets of the
discontinued segment, such proceeds will be chiefly utilized to reduce line of
credit debt, thereby decreasing future interest expense.
Revenue in 1995 was 47% greater than during 1994 and income
from operations increased by 106%, resulting in net income of $1,123,918 for
1995, compared with a loss of $94,995 for 1994. The primary reasons for this
increase were the acquisitions of ATAB during the last quarter of 1994 and ASI
during the last quarter of 1995, as well as the discontinuance of unprofitable
operations. Selling, general and administrative expenses increased by 39%, from
$3,456,278 in 1994 to $4,804,429 in 1995, reflecting the acquisitions of
Armstrong and ASI during 1995, selling general and administrative expense
representing 29% of revenue in 1994 and 28% in 1995. Depreciation and
amortization expense increased by $319,594 from 1994 to 1995, from 4% to 5% as a
percentage of revenue, the increase resulting from the aforementioned
acquisition and the associated increases in goodwill. In connection with the
acquisition of ATAB, the Company incurred cost of goods sold expense of
$2,268,418 against revenue approximating $4,112,000 in 1995. Operating expenses,
as would be expected, also increased, from $6,971,440 in 1994 to $7,451,749 in
1995; however, operating expenses as a percentage of revenue decreased from 59%
to 43%, a trend the Company expects to continue as it intends to aggressively
pursue acquisition opportunities with higher profit margins. Rent expense
increased both in dollar amount from $134,684 in 1994 to $463,660 in 1995, and
as a percentage of revenue, from 1.1% to 2.5%; this resulted from the fact that
Armstrong operates equipment held pursuant to operating leases for a significant
portion of its delivery service. As a net result of all of the aforementioned,
the Company's income from operations increased from $743,540 to $1,530,745, or,
rather, from 6% of revenue to 9% of revenue.
At December 31, 1995, for United States federal income tax
purposes, the Company had consolidated net operating loss ("NOL") carryforwards
of approximately $11,700,000 due to expire commencing in 2002. The Company also
had tax credit carryforwards
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of approximately $647,000 due to expire commencing in 1996. The availability of
these NOL and tax credit carryforwards to reduce or offset future taxable income
and tax liability of the Company is subject to various limitations under the
Internal Revenue Code of 1986, as amended (the "Code"). Because the substantial
portion of the tax credits expire in the next five years, and as the Company is
required to first utilize its NOL carryforward to offset future earnings, the
Company does not anticipate realizing any benefit from its tax credits. Further,
the Company's ability to utilize the NOL carryforward is restricted upon the
occurrence of an "ownership change" within the meaning of section 382 of the
Code. Although the determination of whether an ownership change has occurred is
subject to factual and legal uncertainties, the Company believes that an
ownership change has occurred as a result of various stock transactions in which
it engaged during 1995. As a result of the ownership change, the Company will
generally be permitted to utilize NOL carryforwards (available on the date of
such change) in any year thereafter to reduce its income to the extent that the
amount of such income does not exceed the product of (the "Section 382 Limit")
(i) the fair market value of the Company's outstanding equity at the time of the
ownership change and (ii) a long-term tax-exempt rate published by the Internal
Revenue Service. As a result, the Company believes it may not utilize its full
NOL carryforwards.
Year Ended December 31, 1994 vs.
Year Ended December 31, 1993
The Company's revenue for 1994 decreased significantly from
revenues in 1993 for the Company's transportation operating segments (14%
decline). During the same period, revenue increased by 15% for the Company's
entertainment operating segments. The decrease of 20% in transportation revenue
is primarily attributable to the Company's losing several contracts at its
Sterling Coach Line subsidiary as well as losing its St. Bernard Parish and
Richland Transit contracts.
On February 28, 1994, the Company's contract with the Richland
County Transit System expired and was not renewed, and on January 31, 1994, the
Company's contract with St. Bernard Parish was terminated. In recent years those
contracts together generated revenues of approximately $1,170,000 per year and
annual net income of approximately $190,000. The Sterling contracts were only
minimally profitable; however, the terminated contracts generated approximately
$2,300,000 in revenues. The loss of those contracts, accordingly, represent a
loss of approximately $3,500,000 in annual revenue and $290,000 in annual net
income. The Company does not expect the decreased revenues to represent a
continuing trend.
Because the Company, at the end of 1993, entered into a plan
of discontinuance for its charter operations, revenue and net losses from the
charter operations have been eliminated from the
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Statements of Operations. During the years ended December 31, 1994 and 1993, net
losses from charter operations totalled $1,334,569 and $1,217,467, respectively.
At December 31, 1994 the Company held for sale net assets of the discontinued
charter segment with a book value of $3,053,629, increased from $2,422,647 at
December 31, 1993. This increase was due substantially to the Company
transferring buses to Assets Held for Sale which it originally planned to
transfer to other aspects of its operations.
Despite the decrease in revenues from $13,830,783 in 1993 to
$11,818,325 in 1994, income from operations increased by $40,429, from $703,111
to $743,540. This resulted from: decreased rents, substantially achieved as a
result of an agreement reached with Camelot Consultants, Inc. (an entity
subsequently acquired by the Company; see Certain Transactions), and profits
achieved on special events contracts for the World Cup, Hall of Fame Bowl, Super
Bowl and the NCAA Final Four Basketball Championships, which contracts contained
profit margins significantly higher than other aspects of the Company's
operations. Because the Company intends to continue to aggressively pursue
transportation opportunities with higher profit margins, the Company expects the
increase in income from operations as a percentage of revenue to represent a
material trend.
Despite the conditions discussed in the previous paragraph,
the Company's income from continuing operations before income taxes materially
decreased from $1,160,143 to $694,674. The decrease resulted from gain incidents
in 1993 -- i.e., gain on Mountain View Settlement of $325,000; gain on
liquidation of debt of $58,054; and gain on sales of assets of $180,707 -- which
the Company considers to be unusual. If these unusual gains were eliminated from
1993 operational results, the Company would have had income from continuing
operations before income taxes of less than $600,000.
Interest income from continuing operations increased by
$36,815 for the year ending December 31, 1994 as compared to the year ending
December 31, 1993. This results from the increase in the Company's net
investment in sales-type leases. As the Company continues to dispose of the
assets of the discontinued operation, it is likely that some buses will be sold
via a financing lease instrument. As such, the Company's net investment in
sales-type leases as well as the Company's interest income would be expected to
increase in the coming months. Interest expense allocated to continuing
operations increased by $27,635 for 1994 as compared to 1993; however, total
interest expense, including that amount allocated to discontinued operations,
decreased in 1994, to $582,000, compared to $606,000 in 1993. As proceeds are
received in the disposal of the assets of the discontinued segment, such
proceeds will be chiefly utilized to reduce line of credit debt, thereby
decreasing future interest expense.
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Liquidity
Cash flow from operations (not including the operations of
Armstrong Freight Service) was negative during 1994. However, cash flow from
continuing operations, excluding the discontinued Guardian Tours operation and
the discontinued charter operations, was positive during 1994. As a result of
the discontinuation of those operations, and financing activities, primarily the
preferred stock unit offering in February 1995 and the convertible debenture
issue in November 1995, cash flow for 1995 was positive in the amount of
$1,727,789, which included a use from operations of $621,694, $1,047,756 from
the sale of assets and $1,555,933 from the sale of Preferred Stock.
On December 26, 1994 the Company entered into an agreement
with certain members of the Margolies Family. See "Certain Relationships and
Related Transactions." Under the terms of the agreement, the Company on December
31, 1994 acquired all of the outstanding capital stock of Camelot Consultants
Inc. ("Camelot"). The principal business of Camelot was leasing of buses to
unrelated parties and leasing to the Company of the premises in Toledo from
which its operations are conducted. The acquisition is expected to increase the
Company's revenue (attributable to lease payments on buses owned by Camelot),
and increase operating expenses (attributable to increased depreciation of
buses, offset in part by elimination of rental payments by the Company to
Camelot). Net income should also increase as a result of this acquisition.
In September of 1993 the Company refinanced its line of credit
with a different financial institution. The new agreement, which has a maximum
borrowing balance of $4,500,000, includes both term loan and accounts receivable
factoring components. The receivables line of credit, capped at $1,000,000, is
secured by accounts receivable, the borrowing base being computed at 80% of the
Company's eligible receivables. The term loan, capped at $3,500,000, is secured
by equipment, primarily buses, and is payable monthly at a rate of 1/84th of the
borrowing base balance, computed at 70% of the equipment's appraised net
realizable value. The borrowings are further secured by property belonging to an
officer of the Company. The agreement contains no covenants regarding
operational performance, capital expenditures or liquidity. The interest rate on
the new agreement is 3 1/2 percent over prime on a minimum borrowing base of
$1,500,000 (reduced from $2,500,000 per an agreement reached with the financial
institution in April 1995) and is payable monthly as is a 1% facility fee of
$3,750 per month. The agreement terminates on September 1, 1996.
On February 28, 1995 the Company completed a public offering
of 170,000 Units of securities, each "Unit" consisting of one share of Series A
Cumulative Convertible Preferred Stock and
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one Common Stock Purchase Warrant. The net proceeds obtained by the Company from
the offering totalled $1,802,000 before allocating "deferred offering costs" to
the net proceeds. The use of the net proceeds is primarily to fund the 1996
Olympics tour and transportation projects and to fund the operations of ATAB.
In January 1996, holders of 8% debentures totalling 1,766,288
converted such debentures into 4,522,000 shares of common stock.
The Company has no significant commitments at this time which
would require that it expend capital and believes its current facilities and
capital equipment are adequate for the Company as currently structured. The
aforementioned refinancing of the Company's line of credit and the Company's
debt due to related party significantly increased the Company's credit
availability and, combined with the proceeds of the recent public offering of
securities, significantly improved the Company's working capital balance,
creating a positive balance of $1,762,059 at December 31, 1995. In addition to
its cash flow and its working capital, the Company has entered into a letter of
intent for a public offering of approximately $7,500,000. It is anticipated that
such offering will be completed during the middle of 1996, although there can be
no assurance as to when or if such offering will be completed.
At December 31, 1995, the Company had $126,000 of irrevocable
standby letters of credit, $50,000 of which is to cover the Company's liability
with respect to pending accident claims, and the remainder of which
collateralize various operational bonds. As of December 31, 1995, the Company
has recorded a liability of $75,000 with respect to pending accident claims,
which amount is included in Other Current Liabilities. The Company has recorded
all contingent liabilities which it believes are likely and measurable and does
not anticipate actual losses in these matters to exceed what has been accrued or
to have a material effect on the Company's liquidity.
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Item 7 FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA
Response to this Item is contained in Item 13.
Item 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 9, 1996, the Company, by action of the Board of
Directors, dismissed Mortenson and Associates, P.C. from its engagement as the
Registrant's principal accountant to audit the Registrant's financial statements
for the year ended December 31, 1995.
The report of Mortenson and Associates on the Company's
financial statements for the years ended December 31, 1994 and 1993 did not
contain an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
The Company and Mortenson and Associates have not, in
connection with the audit of the Company's financial statements for the 1994 and
1993 fiscal years or any subsequent period, had any disagreement on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to Mortenson
and Associates' satisfaction, would have caused Mortenson and Associates to make
reference in connection with its reports to the subject matter of the
disagreement.
At no time during the past two fiscal years and subsequent
period did Mortenson and Associates advise the Company:
(a) that internal controls necessary for the Company to
develop reliable financial statements do not exist;
(b) that information had come to the attention of Mortenson
and Associates which led it to be no longer able to rely on management's
representations or that has made it unwilling to be associated with the
financial statements prepared by management;
(c) that there is a need to expand significantly the scope of
its audit or that information has come to the attention of Mortenson and
Associates which, if investigated further, might have (i) materially impacted
the fairness or reliability of either a previously issued audit report or the
underlying financial statements of the financial statements to be issued
covering the fiscal year ended December 31, 1995 (including information that
might have prevented Mortenson and Associates from rendering an
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unqualified audit report on those financial statements), or (ii) caused
Mortenson and Associates to be unwilling to rely on management's representations
or to be associated with the Company's financial statements; or
(d) that information had come to the attention of Mortenson
and Associates which materially impacts the fairness or reliability of either
(i) a previously issued audit report or the underlying financial statements or
(ii) the financial statements for the fiscal year ended December 31, 1995
(including information that, unless resolved to the satisfaction of Mortenson
and Associates, would prevent it from rendering an unqualified audit report on
those financial statements).
On January 9, 1996, the Company retained the firm of Mahoney
Cohen Rashba & Pokart, CPA, PC to audit the Company's financial statements for
the year ended December 31, 1995. At no time during the past two fiscal years or
any subsequent period did the Company consult with Mahoney Cohen Rashba &
Pokart, CPA, PC regarding either the application of accounting principles to a
specified transaction or the type of audit opinion which might be rendered on
the Company's financial statements or any matter of the sort described above
with reference to Mortenson and Associates.
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PART III
Item 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information regarding
the officers and directors of the Company as of March 29, 1996:
Name Age Position
---- --- --------
Michael Margolies 68 Chairman of the Board,
Chief Executive Officer,
Secretary
Jay Owen Margolies 45 Director
K. Thomas Wegerbauer 58 Director
Terry A. Watkins 45 Executive Vice President
Chief Financial Officer
Directors hold office until the annual meeting of the
Company's shareholders and the election and qualification of their successors.
Accordingly, if the Company fails to hold an annual meeting of its shareholders,
the term of office of directors will be indefinite. The Company may hold annual
meetings of shareholders or other meetings for the election of directors in the
future, but has not yet determined if or when it will do so. See "Prospectus
Summary - Limited Shareholder Control of Management." Officers hold office,
subject to removal at any time by the Board, until the meeting of directors
immediately following the annual meeting of shareholders and until their
successors are appointed and qualified.
Michael Margolies has been a director of the Company since
1975. He has been the Chairman of the Board and Chief Executive Officer of the
Company since 1978. Mr. Margolies is the father of Jay Owen Margolies, the past
President and one of the Company's Directors.
Jay Owen Margolies has been a director of the Company since
1979. He is currently employed as Senior Advisor by the Company on a part-time
basis, advising the Company regarding operations management. From 1988 until
June 1995 he was the President and Chief Operating Officer of the Company. Prior
to becoming President, Mr. Margolies served as a Vice President of the Company
from 1983 to 1987. Jay Owen Margolies is the son of Michael Margolies, the
Company's Chief Executive Officer.
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K. Thomas Wegerbauer has been a director of the Company since
1976. He served as the President and Chief Operating Officer of the Company from
1976 to 1987. He now serves as a consultant to the Company on a part-time basis,
primarily advising the Company regarding contract bidding and labor relations.
Terry A. Watkins, CPA, has served as the Chief Financial
Officer of the Company since May 1993. From 1992 until he joined the Company,
Mr. Watkins worked as a consultant on financial accounting matters. For six
years prior to that, Mr. Watkins had been the Chief Operating Officer of
Tem-Cole, Inc., a multi-state food produce business. Within two years after the
date on which Mr. Watkins terminated his employment with Tem-Cole, Inc., a
petition under the federal bankruptcy laws was filed against that company. Prior
to his employment by Tem-Cole, Inc., Mr. Watkins worked for the accounting firm
of Deloitte Haskins & Sells for five years.
Compliance With Section 16(a) of the Exchange Act
None of the directors, officers or beneficial owners of more
than 10 percent of the Company's common stock failed to file on a timely basis
reports required during the 1995 fiscal year by Section 16(a) of the Exchange
Act.
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Item 10 EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to,
earned by, or paid by the Company to the following persons for services rendered
in all capacities to the Company during each of the fiscal years ended December
31, 1995, 1994 and 1993: (1) the Company's Chief Executive Officer, and (2) each
of the other executive officers whose total salary and bonus for the fiscal year
ended December 31, 1995 exceeded $100,000.
Summary Compensation Table
--------------------------
(a) (d)
Name and (b) (c) Restricted (e)
Principal Position Year Salary Stock Award(1) Other(2)
- ------------------ ---- ------ -------------- --------
Michael Margolies 1995 $230,000
Chairman of the 1994 $230,000 $600,000
Board, Chief Executive 1993 $230,000
Officer
Jay Owen Margolies 1995 $ 62,500 $30,000
Former President 1994 $150,000 $183,000
1993 $150,000
- ------------------------
(1) Represents the market value of shares granted under the Restricted
Stock Grant Program. Aggregate Restricted Stock Grants were 1,100,000
shares at December 31, 1995, with a value on that date of $825,000.
None of the stock grants vest prior to August 31, 1998. They then vest
in 25% increments until August 31, 2001. No dividends are to be paid
with respect to unvested shares. The named executive officers held
1,044,000 restricted shares as follows: Michael Margolies (800,000
shares - $600,000 value at December 31, 1995), Jay Owen Margolies
(244,000 shares - $183,000 at December 31, 1995).
(2) Represents salary earned for part-time employment services.
Employment Agreements
In connection with the acquisition of ASI, on November 13,
1995 (the closing date for that transaction), the Company entered into
employment agreements (the "Employment Agreements") with each of the former ASI
shareholders as well as Miller B. Lee, who had been ASI's Chief Financial
Officer. The Employment Agreements provide the following:
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<PAGE>
Employee Office Salary
- -------- ------ ------
William F. Baker President of ASI $120,000
Pierre J. Metivier V.P. of ASI $120,000
Jamal H. Saklou V.P. of ASI $115,000
Miller B. Lee C.F.O. of ASI $100,000
The Employment Agreements provide that the four employees will
share in a bonus pool at the end of each of 1996, 1997 and 1998. The amount of
such bonus pool will be ten percent of ASI's pre-tax income during the
respective year in excess of the following bases:
Base
Year Income
---- ------
1996 $ 750,000
1997 1,500,000
1998 2,500,000
Each Employment Agreement also provides for a grant of stock
options to the employee. Messrs. Baker, Metivier and Saklou were awarded options
to purchase 20,000 shares at $1.25, 20,000 shares at $1.50 and 20,000 shares at
$2.00. Mr. Lee was awarded options to purchase 50,000 shares at $1.25, 50,000
shares at $1.50 and 50,000 shares at $2.00.
The Employment Agreements contain a covenant which restricts
the employee from entering into competition with ASI until the later of (a) two
years after his employment by ASI terminates or (b) December 31, 2000.
Remuneration of Directors
The Directors of the Company receive no compensation for their
services, but are reimbursed for out-of-pocket expenses incurred on the
Company's behalf.
Restricted Stock Grant Programs
On January 18, 1994, the Board of Directors of the Company
adopted a Restricted Stock Grant Program (the "Program") pursuant to which
1,100,000 shares of Common Stock were reserved for issuance. The Program
provided that if the Company recorded more than $12,000,000 in sales during the
twelve months ending on June 30, 1994, the shares would be issued to each of the
Company's three officers (the "Grantees") who remained employed by the Company
on that date. Those conditions were satisfied, and the shares were issued as
follows:
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Michael Margolies - 800,000 shares
Jay Owen Margolies - 244,000 shares
Terry A. Watkins - 56,000 shares
The terms of the Program were amended in April 1995. Under the
amended terms, the shares issued under the Program are subject to the following
restrictions:
1. After each of the five fiscal years from 1994 through 1998,
one-fifth of the shares granted (220,000 associated with each year) are subject
to forfeiture. In 1994, in the event the Company's total sales were less than
$15,000,000, the 220,000 shares associated with 1994 were to be forfeited on a
pro rata basis using $12,000,000 as a sales base. As the Company recorded sales
of $16,129,616 in 1994, including sales by discontinued operations, the Grantees
did not forfeit or otherwise surrender any of the 220,000 shares associated with
1994 or 1995. The 220,000 shares associated with each of the years 1995 through
1998 are subject to forfeiture as follows:
- 73,333 will be forfeited if the Company's sales in that year
are less than $15,000,000.
- 73,333 will be forfeited if the Company's income from
continuing operations before income tax fails to exceed a "income standard." The
"income standards" will be: 1995 - $900,000; 1996 -$990,000; 1997 - $1,089,000;
and 1998 - $1,197,900.
- 73,333 will be forfeited if the Company's earnings per share
fail to exceed an "earnings standard." The "earnings standards" (based on
7,333,190 shares of Common Stock outstanding) will be: 1995 - $.12; 1996 - $.13;
1997 - $.14; and 1998 - $.16. For 1995 and 1996 the earnings per share standards
refer to income after taxes; for 1997 and 1998, the earnings per share standards
refer to income before taxes.
If, however, shares are subject to forfeiture in any one year due to failure to
meet the standards, but the average of that year and the other three years would
exceed the standard in that year, then the shares will not be forfeited.
2. All shares held by a Grantee shall be forfeited if his
employment by the Company terminates prior to the date the restrictions lapse.
3. The shares granted under the Program cannot be sold,
assigned, pledged, transferred or hypothecated in any manner, by operation of
law or otherwise, other than by writ or the laws of descent and distribution,
and will not be subject to execution, attachment or similar process. This
restriction will lapse, with respect to 25% of the number of shares granted
under the Program, and those shares will become unrestricted stock, on August
15,
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<PAGE>
1998. The restriction will lapse with respect to each additional 25% of such
number of shares on August 15 of each successive year.
4. The restriction will also lapse as to all shares granted to
a Grantee on the first to occur of (i) the termination of that Grantee's
employment with the Company by reason of his disability, (ii) the Grantee's
death, (iii) termination of the Grantee's employment by the Company without good
reason, or (iv) a change of control of the Company. The Program defines "Change
of Control" as an acquisition by a person or group of more than 50% of the
Company's outstanding shares, a transfer of the Company's property to an entity
of which the Company does not own at least 50%, or the election of directors
constituting a majority of the Board who have not been approved by the existing
Board.
During any tax year in which a Grantee realizes taxable income
by reason of the lapse of the restrictions on the shares granted under the
Program, the Company will pay to such Grantee a "Gross-Up Bonus" in cash equal
to the aggregate of (i) the additional federal, state and local income taxes
incurred by Grantee as a result of realization of such taxable income, and (ii)
the federal, state and local income tax incurred by the Grantee as a result of
the Gross-Up Bonus. In no event will the Gross-Up Bonus exceed the aggregate of
(i) the amount of the tax deduction for which the Company receives a benefit for
the tax year of the Company beginning during the tax year of the Grantee in
which he realizes taxable income by virtue of the lapse of the restrictions
referred to above, and (ii) the amount of the tax deduction for which the
Company receives a benefit for such tax year of the Company by virtue of the
Gross-Up Bonus.
In addition to the Employment Agreements entered into with the
former ASI shareholders, on November 13, 1995, the Company adopted a Contingent
Stock Grant Program (the "ASI Program") pursuant to which 999,999 shares of
Common Stock were reserved for issuance to them. The ASI Program provides that
333,333 of the shares will be issued to each of the ASI Shareholders (the
"Grantees") who remain employed by ASI on January 1, 1996. The shares issued
under the ASI Program will be subject to the following restrictions:
1. After each of the three fiscal years from 1996 through
1998, one-third the shares granted (111,111 per Grantee per year) are subject to
forfeiture. 33,333 of the shares will be forfeited if the Grantee is not an
employee of ASI on the last day of the fiscal year. The other 77,778 shares will
be forfeited if ASI's pre-tax income for the year does not exceed the threshold
stated below:
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<PAGE>
Year Threshold
---- ---------
1996 $ 750,000
1997 1,500,000
1998 2,500,000
2. The shares granted under the ASI Program cannot be sold,
assigned, pledged, transferred or hypothecated in any manner, by operation of
law or otherwise, other than by writ or the laws of descent and distribution,
and will not be subject to execution, attachment or similar process. This
restriction will lapse, with respect to 33 1/3% of the number of shares granted
under the ASI Program, and those shares will become unrestricted stock, on April
15, 1997. The restriction will lapse with respect to each additional 33 1/3% of
such number of shares on April 15 of each successive year.
3. The restriction will also lapse as to all shares granted to
a Grantee on the first to occur of (i) the termination of that Grantee's
employment with the Company by reason of his disability, (ii) the Grantee's
death, (iii) termination of the Grantee's employment by the Company without good
reason, or (iv) a change of control of the Company.
There is no requirement under law for the Company's Board of
Directors to obtain shareholder approval of the Program or the ASI Program
(collectively, the "Programs"). Accordingly, the Board did not seek such
approval. The failure to obtain shareholder approval will adversely affect the
Company only if in any year the total compensation paid by the Company to any of
its officers (including taxable "compensation" occurring by reason of the lapse
of restrictions on shares granted under the Programs) exceeded $1,000,000. In
that case, the Company would not be able to take a deduction on its tax return
for the excess compensation by reason of its failure to obtain shareholder
approval of the Programs. The Board of Directors decided, however, that the
likelihood of total compensation to any officer exceeding $1,000,000 is
sufficiently small that it did not warrant obtaining shareholder approval for
the Programs.
Incentive Stock Option Plan
The Company's Board of Directors and its shareholders in
August 1985 adopted a 1985 Incentive Stock Option Plan ("Incentive Plan"). The
Incentive Plan was intended to afford a proprietary interest in the Company to
certain key employees of the Company and officers and directors who are
employees of the Company. The Incentive Plan, which terminated on September 1,
1995, was administered by the Board of Directors, which had the authority to
determine the persons to whom options shall be granted, the number of shares of
Common Stock to be covered by each option, the time or times at which options
will be granted or exercised and the terms
30
<PAGE>
and provisions of the options. The Incentive Plan provided that (i) the exercise
price of options granted under the Incentive Plan shall not be less than 100%
(or 110% if the optionee owns 10% or more of the outstanding voting securities
of the Company) of the fair market value of such shares on the date of grant, as
determined by the Board, and (ii) no option may be exercised within 12 months
after the date of grant. Each option granted under the Incentive Plan expires no
later than five years from the date of grant. Options for a total of 33,000
shares were granted. Of those options for 28,000 shares have been exercised,
options for 5,000 shares have been canceled.
Profit Sharing Plan
The Company's Board of Directors adopted, in August 1985, a
Profit Sharing Plan and Trust (the "Plan") which is open generally to Company
employees, including its officers. The Plan provides that the Company may make
contributions in amounts up to 15% of total eligible participants' compensation.
Employees may also elect to contribute up to 10% of compensation paid during the
period of participation in the Plan, subject to certain conditions.
Participants' interests become fully vested upon their retirement, death or
disability. Upon termination of employment for any other reason, a vested
interest of a participant is based upon the schedule contained in the Plan. The
Plan is intended to qualify as a tax-exempt plan and trust under Sections 401
and 501 of the Internal Revenue Code. To date no contributions have been made
under the Plan.
Item 11 SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the equity securities of the
Company beneficially owned by any person who, to the knowledge of the Company,
owned beneficially more than 5% of either class of voting stock as of March ,
1996, by all directors of the Company, and by the directors and officers of the
Company as a group. The table also indicates the number of votes to which each
person would be entitled in the event of a shareholders meeting and the
percentage of the total voting power represented thereby. None of the persons
identified below owns any securities of the Company other than the Common Stock
and the Series C Preferred Stock listed below.
31
<PAGE>
<TABLE>
<CAPTION>
Amount and Percent-
Nature of age of
Beneficial Percentage Voting
Title of Class Beneficial Owner Ownership of Class Votes Power
- -------------- ---------------- ---------- ---------- ----- --------
<S> <C> <C> <C> <C> <C>
Common Stock Michael Margolies(2) 1,214,498 10.7% 1,214,498 8.1%
$.01 par value shares of
record (1)
Series C Michael Margolies 156,600 87.0% 3,132,000 20.9%
Preferred Stock shares of
$.01 par value record (3)
Common Stock Jay Owen Margolies(2) 382,528 3.4% 382,528 2.6%
$.01 par value shares of
record (1)
Series C Jay Owen Margolies 23,400 13.0% 468,000 3.1%
Preferred Stock shares of
$.01 par value record
Common Stock K. Thomas Wegerbauer 6,000 0.05% 6,000 0.04%
$.01 par value shares of
record
Common Stock All officers and 1,659,026 14.6% 1,659,026 11.1%
$.01 par value directors as a shares of
group (4 persons) record (1)
Series C All officers and 180,000 100.0% 3,600,000 24.1%
Preferred Stock directors as a shares of
$.01 par value group (4 persons) record (3)
Series C Margolies Family 90,000 50.0% 1,800,000 12.0%
Preferred Stock Trust (4) shares of
$.01 par value record
</TABLE>
- ----------------
(1) Include shares of Common Stock issued pursuant to the Restricted Stock
Grant Program as follows: Michael Margolies - 800,000 shares, Jay Owen
Margolies - 244,000 shares, Terry A. Watkins - 56,000 shares. See:
"Management - Restricted Stock Grant Programs."
(2) Michael Margolies and Jay Owen Margolies are father and son. Each,
however, specifically disclaims any present ownership interest in the
securities of the Company owned by the other.
(3) Includes 90,000 shares of Series C Preferred Stock owned by the
Margolies Family Trust. Michael Margolies disclaims beneficial
ownership of said shares.
32
<PAGE>
(4) The trustee of the Margolies Family Trust is Elaine Margolies, wife of
Michael Margolies. The beneficiaries of the Margolies Family Trust are
Mrs. Margolies and children of Michael Margolies.
Item 12 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Camelot is a corporation which was organized in 1979 by
Michael Margolies, Jay Owen Margolies and other members of their families. As of
December 31, 1993, after taking all the transactions between the Company and
Camelot into account, the Company owed Camelot $920,190, of which $164,209
related to the obligations assumed by the Company upon the acquisition of
Transportation Systems Corp., the remaining balance of $755,981 being the result
of loans made by Camelot to the Company from time to time. The amount relating
to Transportation Systems Corp. bears interest at 10% per annum and is being
repaid at $4,650 per month, such amount including interest and principal. The
remaining balance (i.e. $755,981 at December 31, 1993) was refinanced with a
promissory note bearing interest at 10.8% per annum and calling for thirty-six
(36) monthly payments of $25,000. In 1994, Camelot transferred the notes payable
to it by the Company to its shareholders. The outstanding balance at December
31, 1994, i.e. $707,676, was consolidated into one loan obligation bearing
interest at 15% requiring weekly payments of $6,313, including interest. The
remaining balance at December 31, 1995 was $602,295.
On December 26, 1994, the Company entered into an agreement to
purchase all of the outstanding capital stock of Camelot from the Margolies
family. Independent appraisals of the net assets of Camelot valued Camelot at
between $1,800,000 and $1,900,000. The Company acquired Camelot in order to take
advantage of Camelot's stream of lease revenues and to eliminate rental payments
to Camelot, the combination of which is expected to increase the Company's cash
flow by approximately $300,000 annually.
The purchase of Camelot by the Company was completed on
December 31, 1994, at which time the Company issued 180,000 shares of its Series
C Preferred Stock in payment for Camelot. The Series C Preferred Stock pays a
dividend of 10.65% per annum and has a liquidation preference of $10 per share,
which will be pari passu with the Series A Preferred Stock. Each share of Series
C Preferred Stock has voting rights equal to 20 shares of the Common Stock.
After January 1, 2000, the Company may redeem the Series C Preferred Stock at
$10 per share.
On September 1, 1993 the Company's wholly-owned subsidiary,
Suncoast Holdings, Inc., entered into a joint venture with Suncoast School
Transportation Corporation to operate a
33
<PAGE>
business called Suncoast Transportation in Tampa, Florida. Suncoast School
Transportation Corporation is wholly-owned by Thomas Hastings, who was at that
time a Vice President of the Company. The Company gave Suncoast School
Transportation Corporation a promissory note for $132,000 as consideration for
its interest in the joint venture. On September 1, 1994 the Company purchased
from Suncoast School Transportation Corporation its interest in the other 50% of
Suncoast Transportation, and agreed to issue as consideration 375,000 shares of
the Company's Common Stock.
As part of the agreement between the Company and Suncoast
School Transportation Corporation, the Company agreed that if Mr. Hastings
remains employed by the Company on September 1, 1995, the Company would on that
date lend to Mr. Hastings $100,000 without interest. Mr. Hastings must repay
one-half of the loan on October 1, 1996 and one-half on November 1, 1996. The
debt will be secured by the 375,000 shares issued to Mr. Hastings. In the event
that on September 1, 1996 the market price of the 375,000 shares is less than
$100,000, then Mr. Hastings may surrender the 375,000 shares to the Company in
lieu of repaying the loan.
The holders of the Series C Preferred Stock (i.e. members of
the Margolies Family) have guaranteed that if the Company realizes a loss on the
resale of any assets acquired by the Company as a result of its acquisitions of
Camelot and Suncoast Transportation, they will surrender shares of the Series C
Preferred Stock with a face value equal to the amount of the loss.
In March 1995, the Company sold a substantial portion of the
assets (including bases) of Suncoast Transportation for $70,000 in cash and
notes in the principal amount of $592,000.
In October 1995, the Company sold a substantial portion of the
assets (including bases) of its Toledo, Ohio based charter operations for
various notes totalling approximately $1,250,000.
The Company believes that the terms of all of the transactions
discussed in this section were no less favorable to the Company than those which
could have been obtained from non-affiliated parties.
34
<PAGE>
Item 13 EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial statements and financial statement schedules
(i) The Financial Statements of U.S. Transportation Systems, Inc. and
the Independent Auditors' Report of Mahoney Cohen Rashba & Pokart,
CPA, PC and Mortenson and Associates are attached hereto.
(b) 8-K Reports - Form 8-K dated November 13, 1995 with respect to the
acquisition by the Registrant of Automated Solutions, Inc.
(c) Exhibits:
3-a. Articles of Incorporation, as amended to January 13, 1986. (1)
3-a(1) Certificate of Amendment of Certificate of Incorporation - filed as
an exhibit to Quarterly Report on Form 10-Q for Quarter Ended
September 30, 1990 and incorporated herein by reference.
3-a(2) Certificate of Amendment of Certificate of Incorporation dated
March 7, 1994. (3)
3-a(3) Form of Certificate of Designation of Series A Preferred Stock. (3)
3-a(4) Certificate of Designation of Series C Preferred Stock. (3)
3-b. By-laws. (1)
4-a. Specimen of Common Stock Certificate. (1)
4-b Specimen of Preferred Stock Certificate. (3)
4-c. Specimen of Class A Warrant; Specimen of Class B Warrant. (3)
4-d. Form of Warrant Agreement. (3)
10-a. Employee Stock Option Plan. (1)
10-b. Employee Profit Sharing Plan. (1)
10-c. Loan and Security Agreement with CIT Group dated September 2, 1993
- filed as an exhibit to the Company's
35
<PAGE>
registration statement on Form S-1 (33-42894) and incorporated
herein by reference.
10-d. Restricted Stock Grant Program. (2)
10-e. Plan of Reorganization - filed as an exhibit to the Company's
Current Report on Form 8-K dated September 21, 1989 and
incorporated herein by reference.
10-f. Agreement dated April 6, 1987 between the Company and Ford Motor
Company - filed as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1986 and incorporated
herein by reference.
10-g. Amendment to the Company's Agreement with Ford Motor Company dated
July 1, 1991. Confidential treatment has been requested for certain
portions of this exhibit, and these portions have been omitted. (2)
10-h(1) Stock Purchase Agreement dated December 26, 1994 related to
acquisition of Camelot Consultants, Inc. (3)
10-h(2) Exchange Agreement dated January 20, 1995 related to acquisition of
Camelot Consultants, Inc. (3)
10-i Stock Purchase Agreement dated October 8, 1994 between the Company
and American Trade-A-Bus, Inc. (3)
10-j(1) Letter of Agreement between the Company and Argent Securities, Inc.
dated December 1, 1994. (3)
10-j(3) Warrant to Purchase Shares issued by the Company to Argent
Securities, Inc. dated December 1, 1994. (3)
10-k(1) Asset Purchase Agreement dated August 31, 1994 among Suncoast
Holdings, Inc., Suncoast School Transportation Corporation, and
U.S. Transportation Systems, Inc. (3)
10-k(2) Amendment to Asset Purchase Agreement dated January 20, 1995 among
Suncoast Holdings, Inc., Suncoast School Transportation
Corporation, and U.S. Transportation Systems, Inc. (3)
11. Statement re: computation of per share earnings for period ended
December 31, 1995 - filed herewith.
22. Subsidiaries -
Shortway River Rouge, Inc.
Black & White Cab Company, Inc.
36
<PAGE>
Downtown Theater Ticket Agency, Inc.
Premier Box Office, Inc.
Broadway Theatours, Inc.
Sterling Coach Lines, Inc.
Gray Line Tours of Atlantic City, Inc.
Transportation Systems Corp.
Camelot Consultants, Inc.
American Trade-A-Bus of Texas, Inc.
Suncoast Holdings, Inc.
Automated Solutions, Inc.
Trans Lynx Express, Inc.
Priority Express Service, Inc.
- -------------------
(1) Previously filed with the Securities and Exchange
Commission as an exhibit to the Company's S-1 registration statement (File
Number 33-1071).
(2) Previously filed with the Securities and Exchange
Commission as an exhibit to the Company's SB-2 registration statement (File
Number 33-70862).
(3) Previously filed with the Securities and Exchange
Commission as an exhibit to the Company's SB-2 registration statement (File
Number 33-79738).
37
<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, thereunto duly authorized.
U.S. TRANSPORTATION SYSTEMS, INC.
By: /s/ Michael Margolies
------------------------------
Michael Margolies, Chief
Executive Officer
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 August 7, 1996.
/s/ Michael Magolies Chief Executive Officer and
- -------------------------------- Chairman of the Board
Michael Margolies
/s/ Jay Owen Margolies Director
- --------------------------------
Jay Owen Margolies
/s/ K. Thomas Wegerbauer Director
- --------------------------------
K. Thomas Wegerbauer
/s/ Terry A. Watkins Chief Financial Officer
- -------------------------------- (Principal Accounting Officer)
Terry A. Watkins
<PAGE>
U. S. TRANSPORTATION SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 and 1994
Pages
-----
Independent Auditors' Report F-1
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
U.S. Transportation Systems, Inc.
We have audited the accompanying consolidated balance sheet of U.S.
Transportation Systems, Inc. and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
U.S. Transportation Systems, Inc. and subsidiaries as of December 31, 1995, and
the consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
MAHONEY COHEN RASHBA & POKART, CPA, PC
New York, New York
March 30, 1996
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
U.S. Transportation Systems, Inc.
New York, New York
We have audited the accompanying statements of operations,
stockholders' equity, and cash flows of U.S. Transportation Systems, Inc. and
subsidiaries for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of U.S. Transportation Systems, Inc. and subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
MORTENSON AND ASSOCIATES, P.C.
Certified Public Accountants
Cranford, New Jersey
March 29, 1995
F-2
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
ASSETS (Note 3)
CURRENT ASSETS:
Cash and cash equivalents $ 1,727,789
Cash - restricted 165,753
Accounts receivable, net allowance for doubtful
accounts of $321,000 (Note 3) 2,850,858
Notes receivables 368,367
Net investment in sales-type leases (Note 2) 572,214
Inventories (Note 1) 976,903
Costs and estimated earnings in excess of billings (Note 17) 243,295
Prepaid and other assets 873,749
-----------
TOTAL CURRENT ASSETS 7,778,928
-----------
PROPERTY, PLANT AND EQUIPMENT:
Revenue equipment (Notes 3 and 4) 3,064,587
Other 3,179,675
-----------
Total - at cost 6,244,262
Less: Accumulated depreciation (2,693,604)
-----------
PROPERTY, PLANT AND EQUIPMENT- NET 3,550,658
-----------
ASSETS HELD FOR RESALE (Note 14) 152,500
-----------
OTHER ASSETS:
Net investment in sales-type leases (Note 2) 2,021,326
Goodwill, net of accumulated amortization
of $264,452 (Note 1) 5,039,692
Other intangible assets, net of accumulated
amortization of $65,800 (Note 1) 326,767
Notes receivable 413,105
Deferred taxes (Note 6) 750,000
Other assets 853,515
-----------
TOTAL OTHER ASSETS 9,404,405
-----------
TOTAL ASSETS $20,886,491
===========
See notes to consolidated financial statements.
F-3
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Notes 3 and 4) 3,230,336
Accounts payable 1,873,362
Accrued liabilities 650,407
Billings in excess of costs and estimated earnings (Note 17) 354,512
Due to related party (Note 9) 254,050
------------
TOTAL CURRENT LIABILITIES 6,362,667
------------
LONG-TERM OBLIGATIONS, NET OF CURRENT
MATURITIES:
Notes payable (Note 4) 1,121,034
Convertible debentures (Note 18) 1,776,288
Due to related party (Note 9) 348,245
------------
TOTAL LONG-TERM OBLIGATIONS, NET OF
CURRENT MATURITIES 3,245,567
------------
COMMITMENTS AND CONTINGENCIES
(NOTES 5, 10, 11, 19)
STOCKHOLDERS' EQUITY (Notes 11 and 20):
Preferred stock - par value $.01 per share,
redemption value $10.00 per share:
Authorized - 10,000,000 shares
Issued and outstanding - 180,000 shares 1,800,000
Common stock - par value $.01 per share:
Authorized - 20,000,000 shares
Issued and outstanding - 13,392,209 shares 133,922
Additional paid-in capital 16,944,909
Stock subscription receivable (290,285)
Deferred compensation (Note 12) (658,504)
Retained earnings (deficit) (6,651,785)
------------
TOTAL STOCKHOLDERS' EQUITY 11,278,257
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 20,886,491
============
See notes to consolidated financial statements.
F-4
<PAGE>
U. S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- -----------
REVENUES $17,350,973 $11,818,325
----------- -----------
EXPENSES:
Cost of goods sold 2,268,418 -
Operating expenses 7,451,745 6,971,440
Selling, general and administrative 4,804,429 3,456,278
Depreciation and amortization 638,101 437,483
Rent expens 463,660 134,684
Amortization of intangible assets 193,875 74,900
----------- -----------
TOTAL EXPENSES 15,820,228 11,074,785
----------- -----------
INCOME FROM OPERATIONS 1,530,745 743,540
----------- -----------
OTHER INCOME (EXPENSES):
Interest expense (350,024) (211,510)
Interest income 276,057 125,659
Loss on sales of assets (419,775) (25,750)
Write off of notes receivable (75,796) -
Other expense (34,090) 62,735
----------- -----------
Total other income (expense), net (603,628) (48,866)
----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 927,117 694,674
INCOME TAX EXPENSE (BENEFIT) (364,000) (63,811)
----------- -----------
INCOME FROM CONTINUING OPERATIONS
(CARRIED FORWARD) $ 1,291,117 $ 758,485
----------- -----------
See notes to consolidated financial statements.
F-5
<PAGE>
U. S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- -----------
INCOME FROM CONTINUING OPERATIONS
(BROUGHT FORWARD) $ 1,291,117 $ 758,485
DISCONTINUED OPERATIONS - adjustment
of estimated loss on disposal of segment,
net of income tax benefit of $86,000
in 1995 and $236,189 in 1994 (Note 14) (167,199) (853,480)
----------- -----------
NET INCOME (LOSS) 1,123,918 (94,995)
LESS: PREFERRED DIVIDEND 191,700 -
----------- -----------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 932,218 $ (94,995)
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Income from continuing operations $ .10 $ .11
Discontinued operations (.01) (.12)
----------- -----------
EARNINGS (LOSS) PER COMMON SHARE $ .09 $ (.01)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,941,525 6,989,933
=========== ===========
See notes to consolidated financial statements.
F6
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------- --------------------
Shares Amount Shares Amount
--------- -------- ------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 6,153,240 $ 61,532 - $ -
- -------------------------- --------- -------- ------- ----------
Net proceeds from exercise of warrants 17,950 180 - -
Common stock issued in connection with
purchase of Suncoast Transportation 375,000 3,750 - -
Preferred stock issued in connection with
purchase of Camelot Consultants, Inc. (327,000) (3,270) 180,000 1,800,000
Restricted stock grant issuance 1,100,000 11,000 - -
Stock options issued - - - -
Other 14,000 140 - -
Net loss - - - -
--------- ---------- ------- ----------
Balance, December 31, 1994 (carried forward) 7,333,190 $ 73,332 180,000 $1,800,000
--------- ---------- ------- ----------
</TABLE>
<TABLE>
<CAPTION>
Additional Stock Sub- Deferred Retained
Paid-In scription Compen- Earnings
Capital Receivable sation (Deficit) Total
---------- ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $13,610,693 $ - $ - $(7,460,268) $6,211,957
- -------------------------- ----------- ------ -------- ----------- ----------
Net proceeds from exercise of warrants 44,695 - - - 44,875
Common stock issued in connection with
purchase of Suncoast Transportation 114,632 - - - 118,382
Preferred stock issued in connection with
purchase of Camelot Consultants, Inc. (1,116,273) - - - 680,457
Restricted stock grant issuance 814,000 - (780,803) - 44,197
Stock options issued 34,376 - (30,556) - 3,820
Other 6,860 - - - 7,000
Net loss - - - (94,995) (94,995)
----------- ------ --------- ----------- ----------
Balance, December 31, 1994 (carried forward) $13,508,983 $ - $(811,359) $(7,555,263) $7,015,693
----------- ------ --------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------- -----------------------
Shares Amount Shares Amount
---------- ------- --------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994
(brought forward) 7,333,190 $ 73,332 180,000 $1,800,000
- -------------------- ---------- -------- -------- ----------
Preferred stock issuance - - 170,000 2,040,000
Preferred stock conversion 2,550,000 25,500 (170,000) (2,040,000)
Restricted stock grant issuance - - - -
Stock options issued - - - -
Preferred dividends 57,480 575 - -
Common stock issued in connection with purchase
of Armstrong Freight Express 780,000 7,800 - -
Common stock issued in connection with purchase
of Trans-Lynx Express 116,539 1,165 - -
Common stock issued in connection with purchase
of Automated Solutions 1,800,000 18,000 - -
Common stock issued in exchange for
consulting services 335,000 3,350 - -
Common stock issued in exchange for
contract settlement 50,000 500 - -
Stock options exercised 370,000 3,700 - -
Net income - - - -
---------- -------- --------- ----------
Balance, December 31, 1995 13,392,209 $133,922 180,000 $1,800,000
========== ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Additional Stock Sub- Deferred Retained
Paid-In scription Compen- Earnings
Capital Receivable sation (Deficit) Total
---------- ---------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994
(brought forward) $13,508,983 $ - $(811,359) $(7,555,263) $ 7,015,693
- -------------------- ----------- --------- ---------- ----------- -----------
Preferred stock issuance (1,073,524) - - - 966,476
Preferred stock conversion 2,014,500 - - - -
Restricted stock grant issuance - - 135,667 - 135,667
Stock options issued - - 17,188 - 17,188
Preferred dividends (575) - - (220,440) (220,440)
Common stock issued in connection with purchase
of Armstrong Freight Express 557,700 - - - 565,500
Common stock issued in connection with purchase
of Trans-Lynx Express 83,325 - - - 84,490
Common stock issued in connection with purchase
of Automated Solutions 1,332,000 - - - 1,350,000
Common stock issued in exchange for
consulting services 239,275 - - - 242,625
Common stock issued in connection with
contract settlement 35,750 (36,250) - - -
Stock options exercised 247,475 (254,035) - - (2,860)
Net income - - - 1,123,918 1,123,918
----------- --------- --------- ----------- -----------
Balance, December 31, 1995 $16,944,909 $(290,285) $(658,504) $(6,651,785) $11,278,257
=========== ========= ========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---------- --------
OPERATING ACTIVITIES:
Income from continuing operations $1,291,117 $ 758,485
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 831,976 512,383
Amortization of deferred compensation 152,855 -
Deferred tax benefit (450,000) (300,000)
Provision for losses on accounts receivable - 151,500
Write off of notes receivable 75,796 -
Loss on sales of assets 419,775 25,750
Change in assets and liabilities:
Accounts receivable (453,941) (546,548)
Inventories (358,305) (11,776)
Other receivables (14,980) 8,170
Prepaid and other assets (272,272) 142,936
Costs and estimated earnings in
excess of billings (221,615) -
Accounts payable (762,358) (88,696)
Accrued liabilities (280,481) (212,574)
Billings in excess of costs and estimated
earnings (579,261) -
---------- ---------
Net cash provided by (used in) continuing
operations (621,694) 439,630
---------- ---------
Loss from discontinued operations (167,199) (853,480)
Adjustments to reconcile loss to net cash
used in discontinued operations:
Depreciation and amortization 208,992 521,932
Change in net assets and liabilities and
losses of discontinued operations (248,504) 177,798
----------- ---------
Net cash used in discontinued operations (206,711) (153,750)
----------- ---------
NET CASH PROVIDED BY (USED IN)-
OPERATING ACTIVITIES
(CARRIED FORWARD) $ (828,405) $ 285,880
----------- ---------
See notes to consolidated financial statements.
F-9
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
NET CASH PROVIDED BY (USED IN) -
OPERATING ACTIVITIES
(BROUGHT FORWARD) $ (828,405) $ 285,880
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (786,891) (339,369)
Acquisition of intangible assets - (64,032)
Proceeds from sales of assets 1,047,756 675,202
Transfers from cash - restricted 16,726 161,107
Advances on notes receivable (160,552) (74,000)
Collection of notes and leases receivable 813,431 440,601
Other (246,796) 35,115
----------- -----------
NET CASH PROVIDED BY-INVESTING
ACTIVITIES 683,674 834,624
----------- -----------
FINANCING ACTIVITIES:
Bank overdraft (35,570) 35,570
Cash received from related parties 295,465 250,000
Cash paid to related parties (400,946) (470,405)
Cash obtained through business
acquisitions 75,266 -
Proceeds from issuance of preferred stock 1,555,933 -
Payment of preferred dividends (220,439) -
Principal payments on debt (10,949,935) (10,061,606)
Borrowings on debt 9,776,459 8,927,485
Deferred offering costs - (589,457)
Proceeds from issuance of convertible
debentures 1,776,287 -
Proceeds from options and warrants
exercised - 44,875
----------- -----------
NET CASH PROVIDED BY (USED IN)-
FINANCING ACTIVITIES 1,872,520 (1,863,538)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,727,789 (743,034)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR - 743,034
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 1,727,789 $ -
=========== ===========
See notes to consolidated financial statements.
F-10
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1995 1994
---- ----
Cash paid during the year for:
Interest $484,600 $578,815
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
The Company acquired revenue equipment in 1995 and 1994 utilizing
long-term debt of $554,907 and $375,947, respectively.
During 1995 and 1994 the Company sold buses in exchange for
$2,151,630 and $1,230,418, respectively, of sales type financing lease
receivables.
In October 1994 the Company issued a $200,000 note in exchange for
100% of the outstanding common stock of American Trade-A-Bus of Texas, Inc.
In December 1994 the Company issued 180,000 shares of preferred stock
in exchange for 100% of the outstanding common stock of Camelot Consultants,
Inc.
In August 1994, the Company issued 375,000 shares of common stock to
complete the acquisition of Suncoast Transportation, a partnership the Company
jointly formed in September 1993.
During 1995, the Company issued 335,000 shares of common stock in
exchange for consulting services.
During 1995, the Company sold various assets, including the
discontinued charter operations, in exchange for notes receivable aggregating to
$403,500 and the assignment of $58,579 of debt held by the Company.
In June 1995, the Company issued 780,000 shares of common stock in
exchange for 100% of the outstanding common stock of Avanti Delivery Services,
Inc. and Priority Express, Inc.
See notes to consolidated financial statements.
F-11
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
In July 1995, the Company issued 116,539 shares of common stock in
exchange for 100% of the outstanding common stock of Trans-Lynx Express, Inc.
In November 1995, the Company issued 1,800,000 shares of common stock
in exchange for 100% of the outstanding common stock of Automated Solutions,
Inc.
See notes to consolidated financial statements.
F-12
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
U.S. Transportation Systems, Inc. and Subsidiaries (the
"Company's") are currently engaged in three business areas: (i) providing
transportation related services; (ii) manufacturing transportation machinery and
equipment; and (iii) providing entertainment services. The Company's operations
are conducted in selected cities throughout the United States and
internationally.
As more fully discussed in Note 13, during 1995 the Company
purchased Avanti Delivery Services, Inc., Priority Express Services, Inc. and
Trans Lynx Express, Inc. which operate a package delivery and container air
cargo service The Company also purchased Automated Solutions, Inc. ("ASI") which
is engaged in designing and manufacturing machinery which folds and tests
airbags.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Uses of Estimates
The preparation of consolidated financial statements 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 consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue when services are performed. The
Company recognizes contract revenue using the percentage-of-completion method of
contract accounting. Contract revenues earned are recorded using the percentage
of contract costs incurred to date to total estimated contract costs.
Anticipated losses on contracts are charged to earnings as soon as
such losses can be estimated. Changes in estimated profits on contracts are
recognized during the period in which the change in estimate is known.
F-13
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Inventories were comprised of:
Parts $175,947
Raw materials 686,043
Sundry 114,913
--------
$976,903
========
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company
records depreciation utilizing the straight-line method over estimated useful
lives of 10 to 17 years for highway coaches and 3 to 7 years for school buses
and other revenue equipment with no residual value. Other depreciable assets
have estimated useful lives of 3 to 30 years, with no assumed residual value.
Overhauls of major highway coach components are capitalized and written off
utilizing the straight-line method over a period of thirty months.
When an asset is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the respective accounts, and
any resulting gain or loss is reflected in income.
Investment Tax Credit
The Company accounts for investment and other tax credits (when
available) by the flow-through method.
Cash Restricted
The Company maintains cash balances in certificates of deposit
which secure letters of credit for various insurance policies and bonds. It is
the Company's policy to classify the restricted cash consistent with the
liabilities to which they relate. Therefore, the Company treats restricted cash
securing letters of credit as a current asset; all restricted cash securing
bonds is treated as long-term.
F-14
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
The Company considers all highly liquid instruments purchased with
a maturity of three months or less to be cash equivalents.
Goodwill
Goodwill and other intangible assets are amortized by the
straight-line method over lives ranging from 5 to 20 years. The Company
periodically evaluates the carrying value and the periods of amortization of
goodwill based on the current and expected future non-discounted income from
operations of the entities giving rise to the goodwill to determine whether
events and circumstances warrant revised estimates of carrying value or useful
lives. Goodwill identifiable to a particular segment or group of assets is
charged to earnings upon disposition of the particular segment or group of
assets.
Earnings (Loss) Per Share
Earnings (loss) per share are computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the periods presented. Common stock equivalents include
shares issuable upon conversion of the Company's convertible debentures and
exercise of certain of the Company's options and warrants. All share and per
share amounts have been retroactively adjusted for the one-for-five reverse
stock split declared on January 6, 1994.
Reclassification
The December 31, 1994 financial statements have been restated to
conform to the current year's presentation.
[2] NET INVESTMENT IN SALES-TYPE LEASES
The Company's leasing activities consist entirely of revenue
equipment. These leases expire at various times through November 1999. There
were no initial or executory costs with respect to these leases.
F-15
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[2] NET INVESTMENT IN SALES-TYPE LEASES (Continued)
The following is a summary of the components of the Company's net
investment in these sales-type leases at December 31, 1995:
Total Minimum Lease Payments Receivable $3,376,000
Less: Unearned Income 782,460
----------
NET INVESTMENT IN SALES-TYPE LEASES $2,593,540
==========
Minimum lease payments to be received as of December 31, 1995 are
as follows:
1996 $ 864,000
1997 797,000
1998 711,000
1999 492,000
2000 283,000
Thereafter 229,000
----------
TOTAL $3,376,000
==========
[3] SECURED LINE OF CREDIT
The Company has two financing agreements. The first contains a term
loan component and an accounts receivable financing component with an aggregate
maximum borrowing balance of $4,500,000. The accounts receivable component of
the line of credit is secured by accounts receivable and has a maximum borrowing
limit of $1,000,000. The borrowing base is computed at 80% of eligible
receivables. The term loan component is secured by equipment, primarily buses,
and is payable at 1/84 of the borrowing base balance plus interest per month.
The remaining balance is due September 3, 1996, the termination date of the
agreement. The borrowings are further secured by property belonging to an
officer of the Company. Borrowings under the finance agreement bear interest at
prime plus 3.5 percent (12% at December 31, 1995). At December 31, 1995, the
amount borrowed and outstanding under the line of credit agreement was
$2,226,254 and is included on the balance sheet in Notes Payable (See Note 4).
The second is secured by all business assets and accounts
receivable of ASI. Borrowings bear interest at prime plus 2% (10.5% at December
31, 1995). At December 31, 1995, the amount outstanding was $82,630 and is
included on the balance sheet in notes payable (see Note 4). Subsequent to
December 31, 1995, the agreement was terminated and all remaining balances were
paid.
F-16
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[4] NOTES PAYABLE
Notes payable consist of the following at December 31, 1995:
Secured line of credit (Note 3). $2,308,884
Notes payable and capitalized leases, col-
lateralized by equipment, payable monthly
and maturing through March 1998, interest
rates ranging from 8% to 14% (including
certain notes with interest based upon the
prime rate, average interest rate
approximating 10%) 880,459
Notes payable, unsecured, resulting from
acquisitions, payable monthly and maturing
through June 1997 with interest rates
ranging from 9% to 10% 350,393
Mortgage notes payable, collateralized by
real property, payable in monthly install-
ments of $5,310 and $4,637 through August
1998 and February 2020, respectively,
(average interest rate approximately 11%)
Property with a carrying value approximating
$875,000 secures the mortgages 642,919
Other 168,715
----------
Total Notes Payable 4,351,370
Less: Current Maturities 3,230,336
----------
NON-CURRENT NOTES PAYABLE $1,121,034
==========
F-17
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[4] NOTES PAYABLE (Continued)
Annual maturities of notes payable, as of December 31, 1995, are as
follows:
1996 $3,230,336
1997 291,000
1998 194,000
1999 118,000
2000 50,000
Thereafter 468,034
----------
TOTAL $4,351,370
==========
[5] LONG-TERM LEASES
The Company leases real property under operating leases expiring in
2005. These leases generally require that the Company pay all costs of
maintenance, insurance and licenses. Future minimum payments, on non-cancelable
operating leases with initial or remaining terms of one year or more, are as
follows at December 31, 1995:
Operating
Leases
(Non-Related)
-------------
1996 $139,000
1997 92,000
1998 43.000
1999 18,000
--------
TOTAL MINIMUM LEASE PAYMENTS $292,000
========
[6] INCOME TAX EXPENSE
The Company accounts for its income taxes under the liability
method. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. Differences between financial
reporting and tax basis arise most frequently from differences in timing of
income and expense recognition and as a result of business acquisitions.
F-18
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[6] INCOME TAX EXPENSE (Continued)
At December 31, 1995, the Company has recorded a deferred tax asset
of $750,000, consisting of a deferred tax asset of $4,511,000 offset by a
deferred tax liability of $784,000 and a valuation allowance of $2,977,000. The
valuation allowance represents a decrease of $8,000 from the December 31,1994
valuation allowance balance of $2,985,000. The decision to record a deferred tax
asset of $750,000 was based upon management's evaluation that, with the
acquisitions of American Trade-A-Bus of Texas, Inc. ("ATAB") and ASI and the
discontinuation of unprofitable operations, future profits are certain enough to
substantiate the recording of an asset. At December 31, 1995, the Company had
available for tax purposes net operating loss ("NOL") carryforwards of
approximately $11,200,000 and general business credits of approximately
$647,000, (exclusive of those available to ASI which are discussed below). NOL
carryforwards will expire commencing in 2002 and ending in 2009, as follows:
$4,060,000 expiring in 2002; $1,440,000 expiring in 2007; $5,310,000 expiring in
2008; and the remainder expiring in 2009. Tax credit carryforwards will expire
commencing in 1996 and ending in 2000; because of the timing of the tax credits,
and as ("IRS") rules require the NOL to be first utilized to offset future
earnings, the Company does not anticipate realizing any benefit from its tax
credits.
ASI, a wholly-owned subsidiary acquired in November 1995, has
available NOL carryforward of approximately $2,000,000, expiring in 2010. This
amount was not included in the computation of the of the deferred tax asset
noted above as it can only be utilized against future taxable earnings generated
by ASI.
Although the Company does anticipate realizing benefit from the
substantial portion of its NOL carryforward, the Company has reserved $2,977,000
against these expected benefits. This is due to the relative uncertainty
regarding long-term future earnings and the NOL annual limitations resulting
from an "ownership change" in 1995, within the meaning of section 382 of the IRS
Code. Although the determination of whether an ownership change has occurred is
subject to factual and legal uncertainties, the Company believes that an
ownership change occurred in 1995 from the issuance of preferred stock and the
subsequent conversion of the convertible debentures into common stock. Under an
ownership change, the Company will be permitted to utilize NOL carryforwards
(available on the date of such change) in any year thereafter to reduce its
income to the extent that the amount of such income does not exceed the product
of (the "Section 382 limit") the fair market value of the Company's outstanding
equity at the time of the ownership change and long term tax exempt rate
published by the IRS; the Company's Section 382 limits in 1997 and beyond will
be approximately $800,000 per year, and accordingly, the Company will not be
able to utilize its full NOL benefits.
F-19
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[6] INCOME TAX EXPENSE (Continued)
A reconciliation of the total income taxes computed by applying the
statutory federal rate and the effective tax rate follows:
Income Income
Taxes % Taxes %
--------- --- --------- ---
Federal Statutory Tax Rate $ 439,000 34% $ 236,189 34%
Use of NOL to offset tax (803,000) (62) (300,000) (43)
--------- --- --------- ---
Total Federal Income Tax
Benefit $(364,000) (28)% $ (63,811) (9)%
========= === ========= ===
The components of deferred taxes are as follows as of December 31,
1995:
Assets Liabilities
------ -----------
Accelerated Depreciation $284,000
35,000
Installment Sales 465,000
Bad Debts $ 56,000
Tax Credits 647,000
Net Operating Loss 3,808,000
---------- --------
Total 4,511,000 784,000
Valuation Allowance (2,977,000)
---------- --------
TOTAL $1,534,000 $784,000
========== ========
F-20
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[7] SEGMENT INFORMATION
In 1995, the Company's operations are classified into three
principal industry segments: transportation, manufacturing and entertainment and
in 1994 into two principal industry segments; transportation and entertainment.
The following is a summary of segment information.
1995 1994
----------- -----------
Net Sales to Unaffiliated Companies:
Transportation $ 9,455,622 $ 9,225,391
Manufacturing 5,119,871 -
Entertainment 2,775,480 2,592,934
----------- -----------
Totals $17,350,973 $11,818,325
=========== ===========
Income (Loss) from Operations:
Transportation $ 264,188 $ 904,720
Manufacturing 1,225,799 -
Entertainment 40,758 (161,180)
----------- -----------
Totals 1,530,745 743,540
Other expense, net (603,628) (48,866)
----------- -----------
Income Before Income Taxes and Discontinued
Operations as Reported in the Accompanying
Statement of Operations $ 927,117 $ 694,674
=========== ===========
Identifiable Assets from Continuing Operations:
Transportation $11,694,520 $ 8,731,349
Manufacturing 3,949,368 -
Entertainment 298,756 338,635
----------- -----------
Totals $15,942,644 $ 9,069,984
=========== ===========
Depreciation and Amortization:
Transportation $ 553,771 $ 495,591
Manufacturing 258,417
Entertainment 19,788 16,792
----------- -----------
Totals $ 831,976 $ 512,383
=========== ===========
F-21
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[7] SEGMENT INFORMATION (Continued)
1995 1994
---------- ----------
Capital Expenditures:
Transportation $1,080,292 $ 914,218
Manufacturing 198,084 -
Entertainment 14,427 55,130
---------- ----------
Totals $1,292,803 $ 969,348
========== ==========
[8] MAJOR CUSTOMERS
Revenues from a single transportation contract with Ford Motor
Company approximated 14% and 19% of the Company's total revenues in 1995 and
1994, respectively. Revenues received in 1995 approximated $2,364,000 and their
receivables at year end approximated $252,000.
ATAB, a wholly-owned subsidiary, derives 100% of its revenue from
Stewart and Stevenson. Revenues received in 1995 approximated $4,112,000 and
their receivable at year end approximated $839,700.
[9] RELATED PARTY TRANSACTIONS
At December 31, 1995, the Company owed its Chairman and related
family entities $602,295 which consists of the following:
Balance due at December 31, 1994 $ 707,676
Accrued preferred stock dividends 191,700
Accrued interest charged to operations 103,865
Repayments (400,946)
---------
Balance due at December 31, 1995 $ 602,295
=========
Annual maturities as of December 31, 1995 are as follows:
1996 $ 254,050
1997 294,890
1998 53,355
---------
Total $ 602,295
=========
F-22
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[9] RELATED PARTY TRANSACTIONS (Continued)
The above loan bears interest at 15% per annum, with weekly
payments including interest of $6,313.
The Company maintains an account with a brokerage firm. The broker
is the Chairman's son.
[10] PROFIT-SHARING PLAN
One of the company's adopted a voluntary profit-sharing plan for
the benefit of its employees. Contributions are at the discretion of the
company. No contributions were accrued or paid during the years ended December
31, 1995 and 1994. Another company maintains a non-contributory 401(k) plan.
[11] STOCK
STOCK OPTIONS:
The Company has the following stock options plans:
- In August 1995, the Company adopted an incentive stock option plan
for the benefit of its key officers, directors and employees. The
Company reserved 120,000 shares of its common stock for issuance
under the Plan, which expired on September 1, 1995.
- On April 11, 1995, as part of an agreement with Argent Securities,
Inc. ("Argent") Argent gave up its right to first refusal to
underwrite future equity offerings of the Company, and its right
to nominate two members to the Company's Board of Directors; in
exchange the Company reserved and issued to Argent options to
purchase 200,000 shares of the Company's common stock as follows:
100,000 shares at $ .75 per share through April 11, 1998
50,000 shares at $1.00 per share through April 11, 1998
50,000 shares at $1.25 per share through April 11, 1997
F-23
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[11] STOCK (Continued)
STOCK OPTION (Continued)
- In October 1994 the Company issued stock options, pursuant to a
consulting agreement in connection with the acquisition of ATAB,
for 110,000 shares of common stock in 1994 and 300,000 shares of
common stock in 1995, of which 355,000 options were exercised in
1995 at $.50 and $.75 per share. The Company recorded a deferred
compensation amount of $34,375 in relation to this plan for the
amount the shares under option, valued at the market price at time
of the grant, exceeded the aggregate exercise price of the stock
option, which amount is being amortized over two years.
- In November 1995, the Company, pursuant to the acquisition of ASI,
reserved and issued options to certain principals and/or employees
to purchase 330,000 shares of common stock as follows:
110,000 shares at $1.25 per share between December 1, 1996 through
December 31, 1998
110,000 shares at $1.50 per share between December 1, 1997 through
December 31, 1998
110,000 shares at $2.00 per share between December 1, 1998 through
December 31, 1998
F-24
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[11] STOCK (Continued)
A summary of the plans are as follows:
<TABLE>
<CAPTION>
Stock Option Incentive
Plan for Stock Other
Non Employee Options; Options;
Directors, Shares Shares
Consultants & Exercise Under Exercise Under Exercise
Advisors Price Option Price Option Price
------------- -------- --------- -------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1993 - $ - 5,000 $.06 - $ -
- ------------------
Granted - - - - 110,000 .50
Exercised - - - - - -
Expired - - - - - -
Cancelled - - - - - -
------- ----- -------- ----
Outstanding at
December 31, 1994 - - 5,000 - 110,000 -
- ----------------- ------- ----- --------
Granted 200,000 .75-1.25 - - 640,000 .75 -2.00
Exercised - - 5,000 (.06) (365,000) .50 - .75
Expired - - - - - -
Cancelled - - - - - -
------- ----- --------
Outstanding at
December 31, 1995 200,000 - - - 385,000 -
- ----------------- ======= ===== ========
</TABLE>
F-25
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[11] STOCK (Continued)
STOCK GRANT
On January 18, 1994, the Board of Directors of the Company adopted
a Restricted Stock Grant Program (the "Program") pursuant to which 1,100,000
shares of Common Stock were reserved for issuance. The Program provides that if
the Company met certain sales and income goals for the twelve months ended June
30, 1994, the shares would be granted to each of the Company's executive
officers (the "Grantees") who remain employed by the Company on that date. These
1,100,000 shares of restricted common stock were issued to the Company's
Executive Officers on August 15, 1994 and may be voted by Grantees. Originally,
the restricted Common Stock shares issued were subject to forfeiture each year
on May 1 of 1995 through 1998 if total Company sales for the preceding fiscal
year did not meet certain goals, and it was the Company's opinion that
attainment of the specified sales goals was probable. The Plan was amended in
April 1995. Subsequent to the amendment, 20% of the restricted Common Stock
shares issued shall be subject to forfeiture each year on May 1 of 1995 through
1999 if the Company does not meet certain sales, profit and income per share
goals for the preceding fiscal year. The amendment divides the grant into three
sections; one third of the grant is based on obtaining a minimum sales goal, one
third is based on a specified amount of income from operations and one third
based on earnings per share. If the second and third goal are not met in any one
year, they can be carried over to the subsequent year. All items were met in
1994 and items one and two were met in 1995. Additionally, on August 15, 1998
and August 15 of each successive year through August 15, 2001, restrictions
shall lapse on 25% of the restricted Common Stock shares issued (and not
forfeited due to the Company's failure to meet the specified goals); however,
all shares on which restrictions have not lapsed shall be forfeited by the
grantee upon the grantee's termination of employment with the Company. The
shares were valued at $.75 per share, the price of the Common Stock at time of
issuance and a deferred compensation contra equity account, amortized over the
84 month period restrictions and forfeiture provisions lapse, was recorded at
time of issuance. The balance of the deferred compensation at December 31, 1995
was $658,504. Deferred compensation expense in connection with this grant was
$135,667 and $33,197, respectively, for the years ended December 31, 1995 and
1994, respectively. When and if the restrictions lapse on the restricted Common
Stock shares, the Company, under certain conditions, will indemnify the Grantees
of the income tax consequences accruing to the Grantees by virtue of the lapse
of restrictions.
F-26
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[11] STOCK (Continued)
STOCK SPLIT
On January 6, 1994, the Company's Board of Directors declared a
one-for-five reverse stock split of its common stock, effective January 26,
1994. The par value of the common stock remains at $.01 per share. All share
data have been adjusted for the effects of the split.
STOCK WARRANTS
In connection with its 1991 public offering, the Company had
outstanding 2,012,500 of each of its Class A, Class B and Class C common stock
purchase warrants with original exercise prices of $.75, $1.00 and $1.25,
respectively. In August 1993, the Company's board of directors approved a
reduction in the exercise price of its Class A, B and C common stock purchase
warrants to $.50 per warrant, or $2.50 per share purchase to the aforementioned
stock split. During 1994, 89,750 warrants were exercised, generating cash of
$44,875. The Class A warrant and Class B warrant expired on June 9, 1994. The
Class C warrant expired on December 9, 1994.
On December 1, 1994, Argent and the Company entered into a Letter
of Agreement, pursuant to which Argent Securities, Inc. agreed to provide
investor relations and corporate communications services to the Company for a
period of one year. In consideration of those services, the Company agreed to
pay an annual fee of $20,000 and to issue to Argent warrants to purchase 400,000
shares of the Company's Common Stock at $.375 per share. On April 11, 1995 the
Company and Argent entered into a second Letter Agreement. Among the terms of
the new agreement were a reduction to 200,000 of the shares which Argent could
purchase under the warrants issued to it in 1994.
Argent was the underwriter of an offering of securities which the
Company completed on February 28, 1995. Argent received commissions and a
non-accountable expense allowance in compensation for those services. In
connection with that offering, the Company sold to Argent an Underwriter's
Warrant for a nominal price. The Underwriter's Warrant will permit Argent to
purchase 17,000 shares of Series A Preferred Stock and 17,000 Class A Common
Stock Purchase Warrants between February 21, 1996 and February 20, 1999.
F-27
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[11] STOCK (Continued)
STOCK WARRANTS (Continued)
There are currently outstanding 170,000 Class A Common Stock
Purchase Warrants, each of which allows the holders to purchase a share of
Common Stock and a Class B Common Stock Purchase Warrant for $1.35. Each Class B
Warrant permits the purchase of a share of Common Stock at $1.65. The Class A
Warrants will expire on August 20, 1996; the Class B Warrants, if issued, would
expire on February 28, 1997.
STOCK AUTHORIZATION
On February 11, 1994, the Company's Board of Directors approved an
increase in the authorized common stock shares from 10,000,000 to 20,000,000 and
approved the authorization of 10,000,000 $.01 par value preferred stock shares
with such distinguishing designations as may be determined by the Company's
Board of Directors. Effective February 21, 1996, the Board of Directors approved
an increase in the authorized common stock shares from 20,000,000 to 50,000,000
shares.
[12] MOUNTAIN VIEW SETTLEMENT
In 1993 the pending litigation between Mountain View Coach Lines,
Inc. (which is in Chapter 7 bankruptcy proceeding) and the State of New York was
settled for $376,000. This settlement, which was approved by the bankruptcy
court on March 28, 1994, insures Mountain View sufficient assets to pay all of
its administrative expenses and priority claims. The Company's approved priority
claims against Mountain View's assets aggregate $325,000. These claims were not
recorded previous to December 31, 1993 by the Company as this receivable was not
considered realizable until the aforementioned settlement. The bankruptcy estate
could not be concluded until payment of the settlement with the State of New
York cleared administrative procedures, which process took longer than
originally anticipated. On January 25, 1995, the New York State Court of Claims
signed the judgement for $376,000 in favor of Mountain View Coach Lines, Inc.
Per advice of counsel, the Company presently anticipates collection of the
Mountain View claim by June 30, 1996.
[13] ACQUISITIONS
On July 11, 1994, the Company purchased the trade name, customer
list and all other assets of Audience Projects Inc. of Chicago, a theater ticket
subscription agency. The acquisition was completed with a cash payment of
$33,000 and was accounted for as a purchase. Goodwill of $14,000 arose from the
transaction and is being amortized over five years.
F-28
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[13] ACQUISITIONS (Continued)
In October 1994 the Company acquired all of the capital stock of
ATAB of Texas, Inc., a corporation engaged in providing engineering services and
manufacturing electrical components for transportation vehicles, in exchange for
a non-interest bearing $200,000 note payable in ten equal monthly payments. The
acquisition was accounted for as a purchase. Goodwill of $190,000 arose from the
transaction and is being amortized over five years.
On December 31, 1994 the Company purchased 100% of the outstanding
shares of Camelot Consultants, Inc., a company engaged in owning and leasing
buses to third parties and leasing to the Company the premises in Toledo, Ohio
and a corporation owned by officers of the Company and their family, for 180,000
shares of preferred stock with the following features: dividends cumulative and
payable annually on December 31 at a rate of $1.065 per share; redeemable at the
option of the Issuer after January 1, 2000, at a price of $10.00 per share;
voting rights at the rate of twenty common stock voting shares per each
preferred share. The acquisition was accounted for as a purchase due to the
preferred stock issued by the Company. Due to the relationship of the entities,
no "step-up in basis" was performed on the assets acquired; the assets were
recorded at the net book value on the acquires books, or $680,457 after
retirement of the 327,000 shares of the Company's common stock held by the
acquiree at the time of the acquisition.
In June 1995, the Company acquired the capital stock of Avanti
Delivery Services, Inc. and Priority Express Service, Inc. for an aggregate of
780,000 shares of Common Stock and, in July 1995, the assets of Falcon Freight,
Inc. for $20,000. The acquired companies were all Florida based corporations
which collectively operate a package delivery service under the name "Armstrong
Freight Service" ("Armstrong"). Further, in July 1995, the Company acquired the
capital stock of Trans Lynx Express Inc. ("TLE"), another Florida based company
that provides ground transportation of containerized air cargo, for 116,539
shares of common stock. These acquisitions were accounted for as purchases,
which resulted in aggregate recorded goodwill of $449,483 for the excess of the
purchase price over the fair value of the assets acquired, less liabilities
assumed. Goodwill is being amortized over eight years.
In November 1995, the Company acquired all of the issued and
outstanding capital stock of ASI in exchange for 1,800,000 shares of Common
Stock. ASI is engaged in designing, manufacturing and selling machinery which
folds and tests airbags and assembles airbag modules, for installation in
passenger and utility vehicles. ASI holds several design patents on automatic
bag folding machinery and the process through which these machines operate. This
acquisition was also accounted for as a purchase, which resulted in recorded
goodwill of $3,970,072 for the excess of the purchase price over the fair value
of the assets acquired, less liabilities assumed. Goodwill is being amortized
over eight years.
F-29
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[13] ACQUISITIONS (Continued)
The purchase price for all acquisitions in 1995 was allocated as
follows:
Property and equipment $ 953,800
Intangible assets 4,464,300
Working capital, net 3,395,700)
----------
$2,022,400
==========
The following unaudited pro forma statements does not proport to
be indicative of the results of operations that would have occurred if U.S.
Transportation Systems, Inc. had acquired ASI and Armstrong at the beginning of
the periods presented.
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------------------------------------------------------------------
Armstrong
Freight
U.S Systems and Total Before
Transportation Automated Trans Lynx Pro Forma Pro Forma
Systems Solutions, Inc. Express Before Adjustments Total
-------------- --------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994
- -----------------
Revenue $11,818,000 $ 8,766,000 $1,064,000 $21,648,000 $ - $ 21,648,000
----------- ----------- ---------- ----------- --------- ------------
Cost of sales - 7,197,000 - 7,197,000 - 7,197,000
----------- ----------- ---------- ----------- --------- ------------
Operating expense 11,913,000 1,686,000 1,067,000 14,666,000 - 15,211,000
----------- ----------- ---------- ----------- --------- ------------
Net income (loss) $ (95,000) $ (117,000) $ (3,000) $ (215,000) $(545,000)(1) $ (760,000)
=========== =========== ========== =========== ========= ============
Loss per share (.08)
============
Year Ended
December 31, 1995
- -----------------
Revenue $15,331,000 $ 6,927,000 $2,053,000 $24,311,000 $ - $ 24,311,000
----------- ----------- ---------- ----------- ----------- ------------
Cost of sales 1,873,000 6,539,000 - 8,412,000 - 8,412,000
Operating expenses 12,432,000 2,549,000 2,047,000 17,028,000 (1,355,000) 15,673,000
----------- ----------- ---------- ----------- ----------- ------------
Net income (loss) $ 1,026,000 $(2,161,000) $ 6,000 $(1,129,000) $1,355,000(2) $ 226,000
=========== =========== ========== =========== ========== ============
Earnings per share .02
============
</TABLE>
F-30
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[13] ACQUISITIONS (Continued)
(1) The only proforma adjustment for the year ended December 31,
1994 relates to amortization of goodwill.
(2) The proforma adjustments for the year ended December 31, 1995
consists of the following:
Amortization of goodwill $ (545,000)
Productive efficiency obtained through
adequate capitalization 1,600,000
Elimination of duplicative administrative
functions 300,000
----------
$1,355,000
==========
[14] DISCONTINUED OPERATIONS
On December 31, 1993, the Company adopted a formal plan to
discontinue its charter bus operations. The Company's charter operations were
primarily located in New York, Atlantic City and Toledo. The Company's charter
operations had minimal gross profit margins which continued to decrease over the
last few years and, in fact, were profitable only when used in conjunction with
contract operations. The decision to discontinue the charter segment was, thus,
precipitated by management's belief that charter operations no longer
represented a profitable segment and that the Company's assets could best be
utilized elsewhere.
During 1994, the Company disposed of its charter operations in New
York and New Jersey by selling off assets and transferring assets to other
Company locations. Additionally, in 1995 the Company disposed of its charter
operations in Florida and Ohio as continuing operations. Assets held for sale at
December 31, 1995, is $152,500, representing three highway motorcoaches which
the Company anticipates selling for an aggregate amount approximating the
balance at December 31, 1995.
The Company has reclassified the segment's assets (which consist
primarily of revenue equipment) which it plans to sell to "Assets Held for
Sale". The remainder of the segment's assets will be incorporated into other
aspects of the Company's business. Liabilities of the segment can be satisfied
utilizing funds generated by the segment during the phase-out period. During the
years ended December 31, 1995 and 1994, respectively, the Company increased its
reserve for estimated loss on disposal of discontinued operations by $167,199
and $853,480 (net of income tax benefit of $86,000 and $236,189, respectively)
F-31
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[14] DISCONTINUED OPERATIONS (Continued)
as a result of losses from discontinued operations exceeding the Company's
previous provision for such losses. The company generated $3,091,000 and
$1,452,000 from the sale of assets of the discontinued segment during the years
ended December 31, 1995 and 1994, respectively; $2,123,000 and $777,000 in the
form of sale-type leases in 1995 and 1994; and $375,000 in two promissory notes.
Cash flow from the discontinued segment for the years ended December 31, 1995
and 1994 is as follows:
1995 1994
---- ----
Losses from discontinued operations $ (410,431) $(1,334,569)
Add: Depreciation on assets being used in
discontinued operations 208,992 521,932
Cash proceeds from sale of assets of
discontinued operations(including
$410,120 and $246,787 from
collection of lease receivables) 1,003,620 921,787
---------- -----------
Total Cash Provided from Discontinued
Operations $ 802,181 $ 109,150
========== ===========
Operating results of the Company's charter segment for the twelve
months ended December 31, 1995 and 1994 are shown separately in the accompanying
statement of operations. Net sales of the Company's charter segment were
$1,275,182 and $4,311,291 for the years ended December 31, 1995 and 1994,
respectively. Such amounts are not included in net sales in the accompanying
"Statements of Operations".
Interest expense has been allocated to discontinued operations.
Interest expense allocated to discontinued operations totals $129,000 and
$371,000 in 1995 and 1994, respectively, and is comprised of: 1) interest
directly attributed to the discontinued operations; and 2) interest not directly
attributed to any operating segment, which amount has been allocated based upon
the ratio of net assets of the discontinued operation to the sum of the
Company's total net assets.
[15] FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of trade
receivables and payables, notes receivable and payable, investments in
sales-type leases, convertible debentures and related party debt. The book
values of trade receivables and payables are considered to be representative of
their respective fair values. It was not practicable to estimate the fair value
of notes receivable and payable, investments in sales-type leases, convertible
debentures and related party debt.
F-32
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[16] CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Companies have cash deposits with various financial
institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation up to $100,000.
The Companies maintain cash funds with a brokerage house. These
accounts are insured up to $100,000 by Securities Investor Protection
Corporation.
[17] UNCOMPLETED CONTRACTS
Costs, estimated earnings and billings on estimated contracts
consist of:
Costs incurred on uncompleted contracts $2,002,975
Estimated earnings 939,517
----------
2,942,492
Billings on uncompleted contracts (3,053,709)
----------
Total $ (111,217)
==========
Included in the accompanying balance sheet under the following
captions:
Costs and estimated earnings in
excess of billings $ 243,295
Billings in excess of costs and estimated
earnings (354,512)
----------
Total $ (111,217)
==========
[18] CONVERTIBLE DEBENTURES AND CONVERTIBLE PREFERRED
STOCK
In November 1995, the Company sold an aggregate of $3,150,000
principal amount of 8% convertible debentures for approximately $1,776,000 and
in February 1996, the Company sold $300,000 of convertible preferred stock. Each
of these transactions were made in reliance upon Regulation S of the Securities
Act. The Securities and Exchange Commission (the "Commission"), has taken the
position that certain sales of securities pursuant to Regulation S, effected in
a manner similar to the sales made by the Company (which includes the sale of a
substantial number of shares at a significant discount to the then market price,
which shares were resold soon after the 40 day holding period expired), were in
fact not made in compliance with such Regulation. Although management believes
that its transactions were in compliance with the requirements of Regulation S,
there can be no assurance that the Commission will not review such transactions
F-33
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[18] CONVERTIBLE DEBENTURES AND CONVERTIBLE PREFERRED
STOCK (Continued)
and determine that securities laws have been violated. If this were to occur,
the Company could become subject to actions by the Commission which could result
in an injunction against the Company from future violations of the federal
securities laws and/or fines against the Company. Any such actions by the
Commission could have an adverse impact on the Company for which no reserve has
been established. In January 1996, the debentures were converted by the holders
into 4,522,000 shares of common stock.
[19] COMMITMENTS AND CONTINGENCIES
The Company is a party to various matters in litigation. These
matters are subject to many uncertainties and the outcome of all individual
matters is not predictable. Although the amount of liability at December 31,
1995 with respect to these matters cannot be currently determined, management
believes, based upon the advice of legal counsel, that the outcome of such
litigation will not have a material adverse affect on the consolidated financial
position, operations, cash flow or liquidity of the Company.
The Company is primarily regulated by the Department of
Transportation ("DOT") which sets certain safety standards which must be met by
the Company's revenue equipment and sets certain driver requirements.
Substantially all of the Company's transportation segment is subject to these
regulations.
At December 31, 1995, the Company has $126,000 of irrevocable
standby letters of credit, $50,000 of which is to cover the Company's liability
with respect to pending accident claims and $76,000 of which is to collateralize
various operational bonds. At December 31, 1995, the Company has recorded a
liability of approximately $75,000 with respect to pending accident claims,
which amount is included in "Accrued Liabilities", in the accompanying balance
sheet. The Company has recorded all contingent liabilities which it believes are
likely and measurable and does not anticipate actual losses in these matters to
exceed what has been accrued.
The Company maintains a self-insurance program for that portion of
health care costs not covered by insurance. The Company is liable for claims up
to $25,000 per family annually, and aggregate claims up to $500,000 annually.
Self insurance costs are accrued based upon the aggregate of the liability for
reported claims. The company recorded expense in connection with the insurance
plan of $480,000 and $297,000 for 1995 and 1994, respectively.
F-34
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[20] SUBSEQUENT EVENTS
On February 23, 1996, the Company purchased certain personal
property, intangible assets and contract rights from Krogel Air Freight, Inc.
and Krogel Freight Systems of Tampa, Inc. for $150,000 in cash and 110,000
shares of common stock. This acquisition will be accounted for as a purchase.
The Company has entered into a letter of intent for a public
offering of approximately $7,500,000 of common stock. It is anticipated that
such offering will be completed during the middle of 1996, although there can be
no assurance as to when or if such offering will be completed.
F-35
