<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996
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.
--------------------------------------------
(Name of Small Business Issuer in its Charter)
Nevada 34-1397328
------ ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
33 West Main Street
Elmsford, New York 10523
- -------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Issuer's Telephone Number, including Area Code: (914) 345-3339
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Class C Common Stock Purchase Warrants
--------------------------------------
(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 [ ]
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.
[ ]
EXHIBIT INDEX IS AT PAGE [ ]
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The issuer's revenues from continuing operations for 1996 were $21,509,751
On May 1, 1997, the price for the Registrant's Common Stock, $.01 par value,
on the over-the-counter market, was $3.00 per share. Based upon the price
quoted, the aggregate market value, as of May 1, 1997 of the shares of Common
Stock, $.01 par value, held by non-affiliates was $16,737,525. 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 May 1, 1997, there were 6,855,678 shares of Common Stock, $.01 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
Item 1 BUSINESS
- ------ --------
PROPOSED MERGER WITH PRECEPT INVESTORS, INC.
As of March 7, 1997 U.S. Transportation Systems, Inc. (the
"Company") signed a letter of intent to enter into a merger agreement with
Precept Investors, Inc., a Texas corporation ("Precept"), pursuant to which
Precept would be merged into the Company with the Precept shareholders receiving
an aggregate of 36,000,000 shares of common stock, $.01 par value, of the
Company. Precept is a leading distributor of business forms and product
management systems, and also has a limousine service business and a package
delivery business.
Negotiation of the merger documents and due diligence reviews
are presently ongoing. The merger will not be completed, however, unless a
number of conditions are satisfied, including, inter alia, negotiation and
execution of a binding merger agreement and other related agreements, documents
and instruments, satisfactory completion of due diligence reviews by both
Precept and the Company, receipt of a fairness opinion from the investment
banker for the Company, the expiration or termination of any applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and approval of the merger by the shareholders of the Company and of
Precept. Accordingly, this Annual Report has been prepared as if no merger will
take place. Readers should be aware, however, that completion of the merger, if
it occurs, will substantially change the nature of the Company's business,
management, and financial condition.
REVERSE STOCK SPLIT
On August 27, 1996 the Company's Common Stock was reverse
split on a one-for-six basis, such that shareholders received one share of
Common Stock for every six shares they previously held. All references in this
Annual Report to numbers of shares have been adjusted to take into effect the
one-for-six reverse split.
THE COMPANY TODAY
U.S. Transportation Systems, Inc., a Nevada corporation (the
"Company"), is currently engaged in the following business areas, which
primarily relate to transportation. The Company's transportation 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 Toledo, OH,
(iii) over-the-road package delivery services for common carriers, (iv)
operating five full-load tractor-trailer businesses,
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based in Syracuse, NY, Orlando, FL, Wisconsin Rapids, WI, Charleston, SC, and
Kansas City, MO, (v) operating a rental car broker in Scottsdale, AZ, and (vi)
manufacturing electrical harnesses for transportation vehicles in Sealy, TX.
Until recently, the Company was also engaged in certain custom
equipment manufacturing operations and in entertainment ticket brokerage. The
custom equipment manufacturing division, Automated Solutions, Inc. ("ASI"),
manufactured automobile airbag equipment. The entertainment business consisted
of five ticket brokers located in New York City and Chicago.
In November of 1996 the Company entered into a plan of
disposition of both ASI and the entertainment division. ASI was discontinued
because the Company determined that its prospects were not as propitious as had
been represented to the Company when ASI was purchased (See "Item 3: Legal
Proceedings" below) and that bringing ASI to profitability would place an
unreasonable demand on the Company's capital resources. Accordingly, in March
1997 the Company sold ASI, and received $100,000 cash and secured notes for
$5,160,868 and a deferred payment of $685,000.
The entertainment division was discontinued in November 1996
because the Company did not expect it to be profitable in the future. In
January, 1997, the Company sold its entertainment division to Packaging Plus
Services, Inc. ("PKGP"), a Nevada corporation whose common stock is
publicly-traded as a Bulletin Board Stock. In exchange for its entertainment
division the Company received 850,000 restricted shares in PKGP. The stock price
on May 12, 1997 was $1.125 per share with the last trade listed as 4,000 shares
sold at $1.125 per share. PKGP has the right to repurchase the shares prior to
December 31, 1998 at prices ranging from $977,500 prior to June 30, 1997 to
$1,300,000 prior to December 31, 1998.
In October 1996 the Company became aware that its contract
work with Stewart and Stevenson would be completed in 1997 and as such the
Company anticipates that in June 1997 American Trade-A-Bus, Inc. ("ATAB"), its
manufacturing subsidiary, will complete its remaining contract work with Stewart
and Stevenson, the only present customer of ATAB. ATAB is presently attempting
to secure other customers and other contract work with Stewart and Stevenson. If
ATAB is unsuccessful in this effort, the Company may be required to liquidate
the assets of ATAB, which decision has not yet been made by Management.
STRATEGIC ACQUISITIONS
During the past three years, the Company engaged in a strategy
to enhance its transportation operations and diversify through acquisitions of
other businesses. Such acquisitions included the following:
Early in 1997 U.S. Trucking, Inc. ("USTI"), a recently formed
subsidiary of the Company which owns the Company's two tractor-trailer
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operations, acquired 100% of the capital stock of Gulf Northern Transport Inc.
("GNTI") and 100% of the capital stock of Mencor Inc. ("Mencor"). GNTI and
Mencor are affiliated corporations which are engaged in full-load
tractor-trailer operations throughout the Eastern United States from a base in
Charleston, SC. In exchange for these corporations the Company gave 25% of the
capital stock of USTI, 37,500 shares of the Company's common stock, $300,000
cash and an indemnity of GNTI secured debt in the amount of $4,520,883. The
Company also gave employment or consulting agreements to the four principals of
GNTI and Mencor, (including the Employment Agreements described in Note 20 to
the Consolidated Financial Statements) which will require payment of $165,000
per annum, 18,750 shares of USTS Common Stock and options for 125,000 shares at
prices from $1.75 to $3.75.
The following unaudited pro forma statements do not purport to
be indicative of the results of operations that would have occurred if the
Company had acquired GNT and Mencor at the beginning of the periods presented.
<TABLE>
<CAPTION>
UNAUDITED
-----------------------------------------------
U.S. Total Before
Transportation GNT and Pro Forma Pro Forma
Systems Mencor Adjustments Adjustments Total
-------------- ------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995
- -----------------
Revenue $13,670,000 $13,861,000 $27,531,000 $ - $27,531,000
Total expenses 12,280,000 13,258,000 25,538,000 40,000 25,578,000
Other income/(expense) (593,000) (642,000) (1,235,000) - (1,235,000)
Income tax benefit 364,000 - 364,000 - 364,000
----------- ----------- ----------- -------- -----------
Income/(loss) from
continuing operations 1,161,000 (39,000) 1,122,000 (40,000) 1,082,000
Loss from discontinued
operations (37,000) - (37,000) - (37,000)
----------- ----------- ----------- -------- -----------
Net income/(loss) $ 1,124,000 ($ 39,000) $ 1,085,000 ($ 40,000) $ 1,045,000
=========== =========== =========== ======== ===========
Earnings per share*
Income from continuing
operations $ 0.48
Loss from discontinued
operations (0.02)
------
$ 0.46
======
Year Ended
December 31, 1996
- -----------------
Revenue $21,510,000 $14,940,000 $36,450,000 $ - $36,450,000
Total expenses 24,326,000 14,500,000 38,826,000 40,000 38,866,000
Other income/(expense) (460,000) (545,000) (1,005,000) - (1,005,000)
Income tax expense (750,000) - (750,000) - (750,000)
----------- ----------- ----------- --------- -----------
Income/(loss) from
continuing operations (4,026,000) (105,000) (4,131,000) (40,000) (4,171,000)
Loss from discontinued
operations (2,668,000) - (2,668,000) - (2,668,000)
----------- ----------- ----------- --------- -----------
Net income/(loss) ($ 6,694,000) ($ 105,000) ($ 6,799,000) ($ 40,000) ($ 6,839,000)
=========== =========== =========== ========= ===========
Earnings per share*
Loss from continuing
operations ($ 1.07)
Loss from discontinued
operations (0.65)
------
($ 1.72)
======
</TABLE>
The proforma adjustment for the years ended December 31, 1996 and 1995 are as
follows:
1996 1995
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Amortization of goodwill $ 40,000 $ 40,000
======== ========
* Includes 37,500 shares issued in connection with the acquisition of Mencor.
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In October 1996, the Company acquired the intangible assets of
two pick-up and delivery companies located in West Palm Beach, Florida, U&M
Express and Eagle Air Express, which acquisitions were accounted for as
purchases. In 1996 the two companies had combined revenues in excess of $1
Million. The Company consolidated these two companies with its Armstrong Freight
Service division, which provides package delivery services from airport
terminals in three other Florida cities. In exchange for the assets of U&M
Express, the Company will pay U&M $63,000 comprised of an initial payment of
$3,000 (which was recorded as Goodwill) plus 3% of sales for 36 months, which
because of its contingent nature will be expensed as disbursed. In exchange for
Eagle Air Express, the Company paid $43,200, all of which was recorded as
goodwill.
In September 1996, the Company acquired the outstanding shares
of Bancpro-Transportation, Inc. ("Bancpro"), a corporation engaged in the
business of rental car brokerage from its headquarters in Scottsdale, Arizona.
For the remainder of 1996 Bancpro had revenues totalling $680,685 and operating
income of $106,470. The Company gave to Consolidated Financial Management Inc.
("CFMI"), the corporation which owned Bancpro, 300,000 shares of USTS Common
Stock and a promissory note for $1,150,000 due on September 11, 1998. CFMI
guaranteed the collectibility of $1,250,000 of Bancpro accounts receivable, and
any shortfall in collections from that amount may be offset against the
Company's note to CFMI. The Company also entered into a five year consulting
agreement with CFMI, pursuant to which the Company issued non-voting,
non-dividend-bearing Preferred Stock to CFMI. The Preferred Stock is convertible
into a maximum of 787,500 shares of Common Stock (less if at the time of
conversion the market price of the Common Stock exceeds $9.00), if in any 12
rolling month period prior to August 31, 2001 Bancpro's revenues exceed the
thresholds set forth below:
Cumulative
Bancpro Shares of Common
Revenues Stock Issuable
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$ 2,500,000 50,000
4,000,000 112,500
6,000,000 193,750
8,500,000 287,500
11,000,000 393,750
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14,000,000 512,500
18,000,000 643,750
22,000,000 787,500
In June 1996 the Company acquired certain assets of a
full-load tractor-trailer trucking operation in Syracuse, New York. The business
previously operated under the name of "Jackson & Johnson Transportation, Inc.,"
with trucking lanes in the Northeast. The Company paid $160,000 cash and assumed
approximately $2,860,000 in secured debt. These assets were thereafter
transferred to a wholly-owned subsidiary of the Company named "Jay & Jay
Transportation, Inc." Jay & Jay was subsequently transferred to the Company's
75%-owned subsidiary, USTI in 1997.
In February 1996, the Company acquired certain intangible
assets, primarily a customer list, from Krogel Air Freight of Tampa, Florida in
exchange for $150,000 cash and 18,333 shares of the Company's Common Stock. The
assets were utilized in connection with the operations of Armstrong Freight
Service.
In November 1995, the Company acquired all of the issued and
outstanding capital stock of ASI in exchange for 300,000 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. In March 1997 the Company sold ASI for $100,000 cash,
$5,160,868 in secured notes, and a deferred payment of $685,000.
In June 1995, the Company acquired the capital stock of Avanti
Delivery Services, Inc. and Priority Express Service, Inc. for an aggregate of
130,000 shares of Common Stock and the assets of Falcon Freight, Inc. for
$20,000. These Florida-based corporations collectively operate a package
delivery service under the name "Armstrong Freight Service." The Company also
acquired the capital stock of Trans Lynx Express, Inc., another Florida-based
company that provides ground transportation of containerized air cargo, in
exchange for 19,424 shares of Common Stock. Trans Lynx Express was subsequently
transferred to the Company's subsidiary, USTI in 1997.
In December 1994, the Company acquired the capital stock of
Camelot Consultants, Inc. ("Camelot"), which was primarily engaged in owning and
leasing of buses to third parties. Camelot was acquired from members of the
Margolies family, two of whom are directors of the Company, in exchange for
180,000 shares of the Company's Series C Preferred Stock. As of the acquisition
date, 54,500 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 independent appraisals, the property and
equipment and assets acquired were valued at $1,488,750. In November 1996 the
Margolies Family agreed to
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convert the dividend-bearing Series C Preferred Stock into non-dividend-bearing
Series M Preferred Stock convertible into common stock on a 9.5-for-1 basis.
In October 1994, the Company acquired the capital stock of
ATAB in exchange for a $200,000 promissory note. ATAB manufactures electrical
component parts for transportation vehicles. The Company anticipates that in
June 1997 ATAB will complete its remaining contract work with Stewart and
Stevenson, the only customer of ATAB.
TRANSPORTATION 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 governmental agencies and private
industry.
During the past 15 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, MI, Wisconsin Rapids,
WI, Kansas City, MO, Cincinnati, OH and Syracuse, NY. 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.
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
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of its expenditures from fees paid to it over the life of the contract.
The Company's largest transportation contract is with the Ford Motor
Company. Under this contract, the Company has operated an internal bus
transportation system for 16 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, 1998. Revenues from this contract provided
approximately 12% of the Company's gross revenue in 1996 and 17% of the
Company's gross revenues in 1995.
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 15 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. 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 1997, TMSI was
designated as the approved transporter in connection with the Outback Bowl and
also provided transportation to teams in both the men's and women's NCAA
Basketball Tournaments. TMSI will seek to obtain similar arrangements in
connection with other events.
Package Delivery Services. In recent years the Company has
-------------------------
acquired Armstrong Freight Service, Falcon Freight, Krogel, U&M Express and
Eagle Air Express, and consolidated these operations into its Armstrong
Division. These acquisitions have allowed the Company 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.
The primary business of the Armstrong Division is ground delivery
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of packages under contract from other common carriers. These overnight couriers
utilize the companies in the Armstrong Division because for certain packages and
in certain areas, Armstrong's truck delivery is more efficient than that which
the common carrier can provide.
Tractor-Trailer Operations. The most dramatic expansion of the
--------------------------
Company's operations in recent years has been its entry into tractor-trailer
operations. The Company owns 75% of U.S. Trucking, Inc., which: (i) operates a
full-load tractor-trailer business throughout the eastern United States from a
base in Charleston, SC; (ii) owns Jay and Jay Transportation, Inc., which runs a
tractor-trailer business throughout the northeast United States from a base in
Syracuse, NY; (iii) owns Trans Lynx, which provides containerized air cargo
tractor-trailer delivery services under contract from overnight couriers, and
(iv) owns Mencor, Inc., a tractor-trailer transportation logistics company. In
1996 the businesses now owned by U.S. Trucking, Inc. generated revenues
totalling $17,040,579.
Taxi Cab and Car Services. The Company's taxi operation is
-------------------------
located in Toledo, Ohio and is performed by Black & White Cab, Inc. ("Black &
White"), a wholly-owned subsidiary of the Company. Black & White maintains a
fleet of 56 cabs, of which 4 are Company-owned and the remainder are
driver-owned. In 1996, Black & White accounted for 1% of the Company's revenues
from continuing operations.
The Company's car service operations are located in New York
City and Westchester County, New York and are performed for the general public
by Transportation Systems Corp., a wholly-owned subsidiary of the Company.
Transportation Systems maintains a fleet of fifty-four vehicles, a mixture of
Town Cars, vans and stretch limousines, all of which are driver-owned or
driver-leased. In 1996, Transportation Systems Corporation accounted for 9% of
the Company's revenues from continuing operations.
Rental Car Brokerage. In 1996 the Company acquired
--------------------
BancPro-Transportation, Inc., a corporation which operates from headquarters in
Scottsdale, Arizona. BancPro is engaged in the business of providing rental
automobiles to businesses, primarily in Phoenix, AZ, Las Vegas, NV and Atlanta,
GA. During the last four months of 1996 the revenues of BancPro totalled
$680,685.
EQUIPMENT
The Company owns and maintains for operations a fleet of 458
vehicles, including 45 highway coaches, 14 transit buses, 14 school buses, 13
vans, 2 minibuses, 32 delivery trucks, 131 tractors, 195 trailers, and 12 cars
and service vehicles. 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.
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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 and package carrier.
Additionally, the cost of this insurance coverage, when available, has increased
dramatically. The cost of the Company's insurance for the 1996-1997 year will
be approximately $1,125,000. 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."
BUSINESS DEVELOPMENT
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. This 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.
GOVERNMENT REGULATION
The Company's transportation operations are subject to
regulation by various agencies including the New York State Department of
Transportation, the Port Authority of New York and New Jersey, the U.S.
Department of Transportation and the Federal Highway Administration, as well as
local authorities. Each of these agencies regulates various aspects of
licensing, permitting and operations of the Company's package delivery and bus
services. Although none of such regulations presently imposes great burden upon
the operation of the Company, such regulations are subject to change. Unforeseen
changes in such regulations may have a significant negative impact on the
Company, as they have in the past in connection with the deregulation of bus
services.
EMPLOYEES
The Company employs 484 people. Of these, the majority are
drivers, mechanics and other service personnel. 119 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 parcels of real property owned by USTS, all of which are
improved, 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 USTS operates under its arrangement with the City of
Cincinnati; (3) a parcel of less than one acre at 3740 E. LaSalle St., Phoenix,
Arizona; (4) a parcel of 9.627 acres at 2305 Pyka Road, Sealy, Texas, from which
ATAB conducts its operations, and (5) a parcel of approximately 2.4 acres in
Savannah, New York from which Jay and Jay Transportation operates.
The real property owned by USTS is subject to the following
liens: (1) the Savannah property is mortgaged to Savannah Bank, N.A. to secure a
debt of $136,893, payable in monthly payments of $1,879; (2) the Toledo property
is mortgaged to Mid-American Bank & Trust Co to secure a debt of $97,267 payable
in monthly payments of $5,310, and (3) the Phoenix property is mortgaged to
Sonoma Bank to secure a debt of $489,628, payable in monthly payments of
$4,500.00.
The table below sets forth and identifies the properties
leased by the Company and its subsidiaries for an annual rental of $50,000 or
more. The Company believes that these facilities are adequate for its operations
as presently structured.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Term and
Annual
Company Lessor Premises Rental
- ------- ------ -------- ------
Armstrong Ensign 6022 Benjamin 6/1/94 to
Freight Properties Tampa, FL 5/31/97
Service $55,013
Armstrong South Orlando 8870 Bossy Creek Road 11/1/96 to
Freight Industrial, Orlando, FL 10/31/01
Service L.P. $197,254
U.S. Bell, Brown 810 25th Ave. No. 1/1/97 to
Trucking & Romanski Wisconsin Rapids, WI 1/1/02
$148,200
</TABLE>
Item 3 LEGAL PROCEEDINGS
- ------ -----------------
Automated Solutions, Inc.
In 1995 the Company purchased all of the outstanding shares of
Automated Solutions, Inc. ("ASI") from the three members of ASI's management in
exchange for 300,000 shares of the Company's
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common stock. ASI at that time had negative working capital in excess of $2.7
Million and was losing money. The Company subsequently made cash advances of
approximately $5,000,000 to ASI in order to fund its ongoing operations. During
1996 the Company realized a loss of $1,742,414 (including amortization of
goodwill) from the ASI operations. In November 1996 the Company decided to
discontinue the operations of ASI, and subsequently sold ASI in March 1997. In
March 1997 the Company commenced a lawsuit now pending in the United States
District Court for the Southern District of New York State against the three
former owners of ASI alleging that they made fraudulent misrepresentations to
the Company in connection with the sale of ASI to the Company. The Company
alleges damages of $4,469,000 plus the 300,000 shares issued for ASI. The
defendants have not taken any action with respect to the lawsuit to date.
In June 1996 the Company acquired certain trucking assets from Jackson
& Johnson Transportation, Inc. and agreed to certain other contracts with
William Orr, the principal of Jackson & Johnson. In April 1997 Mr. Orr and
Jackson & Johnson commenced legal action against the Company, its subsidiary Jay
& Jay Transportation, Inc. and Michael Margolies, the Company's Chairman. The
action alleged that the Company breached an agreement to purchase certain trucks
from Jackson & Johnson for $160,000, breached an employment agreement with
William Orr pursuant to which he would be paid $90,000 a year for three years,
and breached a restrictive covenant agreement pursuant to which Mr. Orr was to
receive certain percentages (from 3/4% to 2%) of the gross revenues of Jay & Jay
Transportation and other trucking operations subsequently acquired by the
Company. The Company has denied the allegations, and alleged that in connection
with the sale of the Jackson & Johnson assets Mr. Orr failed to disclose certain
liabilities which exceeded in magnitude the amounts which the Company had agreed
to pay Mr. Orr. In addition, the Company has paid for various items relating to
Jackson & Johnson which exceeds $160,000 and believes that such items will serve
as an offset to the $160,000 purchase price.
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, 1996 the total amount of the deductibles for which the
Company was responsible in connection with pending claims was approximately
$67,000. The Company has recorded a liability of $55,000, 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.
Item 4 SUBMISSION OF MATTERS TO A
- ------ VOTE OF SECURITY HOLDERS
--------------------------
None.
10
<PAGE>
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 August 27, 1996 take into account the one-for-six reverse stock
split on August 27, 1996.
High Low
Quarter Ending Bid Bid
- -------------- --- ---
1996
December 31 $2.25 $1.25
September 30 $6.75 $2.06
June 30 $9.42 $6.00
March 31 $6.38 $4.13
1995
December 31 $8.63 $5.25
September 30 $10.07 $4.88
June 30 $5.72 $3.00
March 31 $6.00 $3.56
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 May 1, 1997, the Company had 3,298 Common 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.
11
<PAGE>
Item 6 MANAGEMENT'S DISCUSSION AND
- ------ ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------------
Result of Operations
Year Ended December 31, 1996 vs.
Year Ended December 31, 1995
----------------------------
At the end of 1996 Management determined that the Company's
expansion from its traditional focus on transportation services into custom
equipment manufacturing and entertainment operations was not working well. The
Company's capital was subject to too many competing demands, and the energy of
the Company's management was being dissipated. Accordingly, in November, the
decision was made to discontinue the Company's entertainment operations as well
as the airbag manufacturing operations of its subsidiary, Automated Solutions,
Inc. ("ASI"). Shortly into 1997 the entertainment operations and ASI were sold.
Additionally, the Company anticipates completion of its remaining material
contract with ATAB's sole customer, Stewart and Stevenson, in June 1997. The
Company is attempting to secure other customers and other work with Stewart and
Stevenson, but continued operations at ATAB beyond June 1997 cannot be assured.
For the future, therefore, the Company has returned to its roots: a directed
focus on transportation operations, albeit in a wide variety of modes.
The effect of these changes on the results of operations for
1996 were not positive. The Company realized a loss of $2,668,216 from its
discontinued operations in 1996. At the same time the debt incurred by the
Company so that it could advance approximately $5,000,000 to fund the operations
of ASI continued to accrue interest, resulting in an 82% increase in total
interest and Bridge loan expense over 1995. Finally, corporate overhead
attributable to the now discontinued plan to be a multi-faceted operation
continued to produce expenses disproportionate to the Company's revenues.
As a result of these factors, the Company realized a
$4,206,232 reduction in Income from Operations, despite a $7,839,430 increase in
revenues attributable to the Company's transportation acquisitions in 1996 and
late 1995. Income from Continuing Operations fell $5,187,477, and the Company
realized a net loss of $6,694,451, compared to net income of $1,123,918 in 1995.
In April 1996, the Company completed a Bridge Financing,
issuing an aggregate of $1,200,000 principal amount of Bridge Notes. The Company
received net proceeds of $982,000, after deducting the placement agent's
discount and expense allowance and other expenses of the offering. Upon
repayment of the Bridge Notes, the Company recognized a charge to operations of
$441,038 based on the difference between the discounted amount of the note and
the principal repaid. Such charges are included in interest expense.
The Company incurred substantial losses in the 4th quarter of
1996, a net loss of $7,521,797 in the 4th quarter versus net income of $827,346
realized for the nine months ended September 30, 1996. This loss was
attributable to several factors. First, the Company sustained substantial losses
in the segments which the Company's management decided to discontinue, these
losses
12
<PAGE>
contributing materially to such decision to discontinue:
FOURTH QUARTER LOSS
The Company incurred a loss of $6,694,451 for the year ended
December 31, 1996, as compared to net income of $827,346 reported by the Company
for the nine months ended September 30, 1996, as shown in the table below.
U.S. Transportation Systems, Inc.
Consolidated Statement of Operations
Nine Months Three Months Year
Ending Ending Ended
09-30-96 12-31-96 12-31-96
(Unaudited) (Unaudited) (Audited)
----------- ---------- -----------
Revenue $15,403,166 $6,106,585 $21,509,751
Operating Expenses 13,420,885 10,905,162 24,326,047
----------- ---------- -----------
Operating Income/(Loss) 1,982,281 (4,798,577) (2,816,296)
Other Income/(Expense) (557,814) 97,875 (459,939)
----------- ---------- -----------
Income/(Loss) from Continuing
Operations Before Income Taxes 1,424,467 (4,700,702) (3,276,235)
Income Tax Expense 0 750,000 750,000
----------- ---------- -----------
Income/(Loss) from Continuing
Operations 1,424,467 (5,450,702) (4,026,235)
Losses from Discontinued Operations (597,121) (2,071,095) (2,668,216)
----------- ---------- -----------
Net Income/(Loss) $827,346 ($7,521,797) ($6,694,451)
----------- ---------- -----------
Substantial losses were incurred by the discontinued segments,
a fact which contributed to management's decision to discontinue such segments:
ASI incurred an operating loss of $1,565,927 in the fourth quarter, primarily
due to a substantial downturn in business and the discontinued entertainment
segment incurred a fourth quarter loss of $308,325, primarily related to a
continuing erosion of profit margins. Additionally, at December 31, 1996, the
Company recorded $196,843 for estimated losses by ASI during the phase-out
period. The fourth quarter loss is also attributable to a number of factors
impacting continuing operations, as listed below.
Loss on settlement of Mountain View receivable $215,500
Write-off of notes and other receivables due to a year-
end assessment of the associated collectibility 339,969
Expense related to valuation differential resulting from
change in features of preferred stock held by the
Company's Chairman or by persons or entities related
to the Chairman 680,000
Expense related to obligations to issue 1,000,000 common shares
in regards to a long-term employemnt agreement entered
into with the Company's Chairman 1,562,500
Expense of consulting fees 594,659
Increase in corporate wages, resulting from management staff
being increased in line with the Company's strategic
growth plan 200,000
Operating loss incurred at ATAB, resulting from work with
substantially lower profit margins 171,052
Write-off of certain assets as a result of management
determination of a permanent impairment in the ATAB's
future profitability 782,410
Losses incurred by the Company's trucking divisions:
Write-down of previously capitalized expenses, determined
at year-end to possess no tangible future benefit 161,800
Costs incurred eastablishing a more profitable routing
structure 320,000
Increase in deferred tax valuation allowance, resulting in a
write-off of previously recorded deferred tax asset 750,000
-------
Total $5,777,890
----------
As most of the factors impacting upon fourth quarter
operations are non-recurring items, the Company anticipates substantial
improvement in results from continuing operations in 1997 as compared to the
fourth quarter of 1996. However, while the Company adjusts to its new focus and
recent large acquisitions, little, if any, income is expected to be generated
through at last the first two quarters of 1997. The loss of ATAB's
aforementioned contract with Stewart and Stevenson, alone, represents a loss of
approximately $900,000 in net income for 1996 prior to certain asset realization
adjustments noted above, and none of the Company's recent acquisitions is
expected to generate an equivalent amount of income in 1997.
13
<PAGE>
At December 31, 1996, for United States federal income tax
purposes, the Company had consolidated net operating loss ("NOL") carryforwards
of approximately $12,100,000 due to expire commencing in 2002. The Company also
had tax credit carryforwards of approximately $470,000 due to expire commencing
in 1997. 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
material 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 1996. 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.
The Company's use of its accumulated NOL will be thereby limited to
approximately $605,000 per year. As a result, the Company believes that it may
not utilize its full NOL carryforwards.
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. The Company's newly acquired segment, manufacturing operations provided
$5,119,871 of revenues in 1995 which includes $905,172 of revenue from the
operations of ASI, which was subsequently discontinued. Each of the Company's
segments operated profitably for the year ended 1995.
14
<PAGE>
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
Toledo, 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 USTI, 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 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) decreased marginally for 1995 as compared to 1994 from a net expense of
$85,851 for 1994 to a net expense of $62,988 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.
Because the Company, near the end of 1996, entered into a plan
of discontinuance for its custom equipment manufacturing segment (ASI) and its
entertainment business segment, the results of operations of these segments have
been removed from continuing operations in the Statement of Operations for the
year ended December 31, 1996. In 1995, from the time it was acquired in November
1995, ASI had revenues of $905,172 and net income of $94,545. The entertainment
business segment had revenues of $2,775,480 and $2,592,934 in 1995 and 1994,
respectively, and net income of $35,330 in 1995 versus a net loss of $161,180 in
1994.
Revenues from continuing operations in 1995 was 48% greater
than during 1994 and income from continuing operations increased by 26%, from
$919,665 in 1994 to $1,161,242 in 1995, income from continuing operations being
9% of revenue in 1995 and 10% in 1994.
15
<PAGE>
The primary reasons for this increase were the acquisition of ATAB during
the last quarter of 1994 and the discontinuance of the operations noted above.
Selling, general and administrative expenses increased by 26%, from $2,502,076
in 1994 to $3,149,187 in 1995, primarily reflecting the acquisition of
Armstrong, selling, general and administrative expense representing 27% of
revenue in 1994 and 23% in 1995. Depreciation and amortization expense increased
from $495,591 to $731,956, 1994 as compared to 1995, or 5% in both years as a
percentage of revenue. In connection with the acquisition of ATAB, the Company
incurred cost of goods sold expense of $2,180,195 against revenues of $4,214,699
in 1995; ATAB had only minimal revenues in 1994 as it was in a start-up mode the
first four months following its being acquired in October 1994. Operating
expenses, as would be expected, also increased, from $5,104,527 in 1994 to
$5,814,900 in 1995; however, operating expenses, when combined with cost of
goods sold, as a percentage of revenue increased from 55% to 58%, a trend the
Company expects to continue as it intends to aggressively pursue acquisition
opportunities in full-load tractor-trailer and local package delivery, areas
which tend to have somewhat lower profit margins. Rent expense increased both in
dollar amount from $84,476 in 1994 to $404,147 in 1995, and as a percentage of
revenue, from 1% to 3%; this resulted chiefly from the fact that Armstrong
operated equipment held pursuant to operating leases for a significant portion
of its delivery service. As a net result of all of the aforementioned and taking
into account the results of discontinued operations, the Company's results from
operations increased from a net loss of $94,995 in 1994 to a net income of
$1,123,918.
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Company completed the Bridge Financing,
issuing an aggregate of $1,200,000 principal amount of Bridge Notes. The Company
received net proceeds of $982,000, after deducting the placement agent's
discount and expense allowance and other expenses of the offering. As a result
of the repayment of the Bridge Notes from the proceeds of the public offering,
the Company issued to the investors in the Bridge Financing an aggregate of
69,136 Bridge Units identical to the units which were sold in the Offering.
In August, 1996 the Company completed a public offering of
1,815,000 Units of securities, each "Unit" consisting of one share of Common
Stock and one Common Stock Purchase Warrant. The net proceeds obtained by the
Company from the offering totalled $5,013,056. In addition, early in 1996
convertible debentures issued by the Company in the principal amount of
$3,450,000 and convertible preferred stock issued for net proceeds of $256,728
were converted into a total of 842,556 shares of Common Stock, further
increasing the Company's liquidity. The intended use of the net proceeds of
these financings will be to expand current operations, such as Armstrong Freight
Service and the USTI tractor-trailer operations, and to finance acquisitions.
In October of 1996 the Company refinanced its line of credit
by entering into a three year agreement with Israel Discount Bank. The new
agreement has a maximum borrowing balance of $3,500,000 secured by accounts
receivable and sales-type leases receivable, and an additional maximum borrowing
balance of $1,500,000 secured by equipment. The borrowings are further secured
by property belonging to Michael Margolies, Chairman of the Company. The
agreement contains no covenants regarding operational performance, capital
expenditures or liquidity. The interest rate on the new agreement is 1 1/2
percent over prime. The agreement terminates on September 1, 1999.
16
<PAGE>
The Company's decision to discontinue the operations of ASI
and the entertainment division near the end of 1996 should have a positive
effect on cash flow for the future. During 1996 the Company's continuing
operations provided $718,628 in net cash to the Company. The discontinued
operations, however, used a total of $3,561,579 in cash during 1996. The sale of
both ASI and the entertainment division in early 1997 will eliminate that burden
on cash flow. On the other hand, cash flow may be burdened for the early part of
1997 by the Company's efforts to reorganize its recently-acquired USTI
tractor-trailer operations.
In March 1997 the Company sold ASI and received $100,000 cash
and secured notes for $5,160,868 and a deferred payment of $685,000 which is due
April 1, 1999. The note which accrues interest is paid at approximately at the
rate of $80,000 per month for a two year period with a balloon payment of the
unpaid principal on April 1, 1999.
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 significantly
increased the Company's credit availability and, combined with the proceeds of
the recent public and private offerings of securities, significantly improved
the Company's working capital balance, creating a positive balance of $5,348,239
at December 31, 1996. The Company believes that this capital is sufficient to
fund the Company's operations for the coming year.
At December 31, 1996 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, 1996 the Company has
recorded a liability of $55,000 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.
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
---------------------------------------------
(See Annual Report on Form 10KSB for the year ended December
31, 1995.)
17
<PAGE>
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 May 1, 1997:
Name Age Position
---- --- --------
Michael Margolies ... 69 Chairman of the Board, Chief
Executive Officer and President
Terry A. Watkins .... 46 Executive Vice President, Chief
Financial Officer and Secretary
Jay Owen Margolies .. 46 Director
K. Thomas Wegerbauer . 59 Director
Stanley Chason ...... 68 Director
Robert I. Blackman .. 68 Director
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. 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.
Terry A. Watkins, CPA, has served as the Chief Financial
----------------
Officer of the Company since May 1993. Prior to joining the Company, Mr. Watkins
worked as a consultant on financial accounting matters.
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. Jay
Owen Margolies is the son of Michael Margolies, the Company's Chief Executive
Officer.
18
<PAGE>
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.
Stanley Chason has been a director of the Company since July
--------------
1996. From 1962 until his retirement in 1984, Mr. Chason held various positions
with Gelco Corporation ("Gelco"), a company listed on the New York Stock
Exchange which is engaged in all aspects of vehicle leasing. His last position
with Gelco was as Executive Vice President and a member of the Board of
Directors. Mr. Chason was also Chairman and Chief Executive Officer of the Fleet
and Management Services Division of Gelco.
Robert I. Blackman has been a director of the Company since
------------------
July 1996. For more than the past five years, Mr. Blackman has been the
President and Chief Executive Officer of the Best of Brooklyn Properties, Inc.,
a private real estate investment firm.
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.
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, 1996, 1995 and 1994: (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, 1996 exceeded $100,000.
Summary Compensation Table
--------------------------
(a) (d) (e)
Name and (b) (c) Restricted
Principal Position Year Salary Stock Award(1) Other
- ------------------ ---- ------ -------------- ----------
Michael Margolies 1996 $230,000 *$2,292,500
Chairman of the 1995 $230,000 $ 50,000
Board, Chief Executive 1994 $230,000 $600,000 $ 50,000
Officer
Terry A. Watkins 1996 $112,000
Chief Financial Officer
- ------------------------
*A change in the features of the preferred stock resulted in additional
compensation of $680,000 plus the required issuance pursuant to the terms of
Michael Margolies' long term Employment Agreement resulted in additional
compensation of $1,562,500. Included in above compensation is a $50,000
premium for life insurance which is paid by the Company on behalf of Michael
Margolies.
19
<PAGE>
(1) Represents the market value of shares granted under the
Restricted Stock Grant Program. Aggregate Restricted Stock Grants
were 183,333 shares at December 31, 1996, with a value on that date
of $297,916. 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 shares as follows at May 1, 1997:
Michael Margolies - 133,333 shares, $374,999; Terry Watkins - 9,333
shares, $26,249 value.
EMPLOYMENT AGREEMENTS
Michael Margolies, Chairman of the Company, has an employment
agreement with the Company dated November 18, 1996. Pursuant to the Agreement,
Mr. Margolies will serve as Chief Executive Officer through December 31, 2007.
The Company will pay him a salary of $250,000 per annum plus annual increases at
least equal to the CPI. The Company will also pay him a bonus equal to eight
percent of the Company's pre-tax income. At the time of the Agreement, the
Company awarded Mr. Margolies the right to receive one million shares of Common
Stock, which he exercised in February, 1997, when the market price of the Common
Stock was $1.5625 per share. The Agreement further provides that in the event
of a change in control of the Company the Company must (i) repurchase all shares
of capital stock owned by Mr. Margolies or members of his family, (ii) pay Mr.
Margolies ten times his last annual salary, (iii) issue to Mr. Margolies 25% of
the Common Stock of the Company, and (iv) repay all loans by the Margolies
family to the Company. Mr. Margolies has agreed to waive these "change of
control" provisions in connection with the proposed merger with Precept
Investors, Inc.
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.
INCENTIVE STOCK OPTION PLAN
The Company formerly had in place a stock option plan which terminated
on September 1, 1995. Options for a total of 5,500 shares were granted under
such plan, of which 4,666 were exercised and 834 were cancelled.
PROFIT SHARING PLAN
In August 1985, the Company's Board of Directors adopted 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.
Emplolyees 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 Code. To date, no contributions have been made under the Plan.
EMPLOYEE STOCK AND STOCK OPTION PLAN
In September 1996 the Company established the U.S. Transportation
Systems, Inc. Employee Stock and Stock Option Plan. On October 16, 1996, the
Company registered 2,000,000 common shares pursuant to a Form S-8 filing with
the Securities and Exchange Commission. The stock is reserved for issuance to
the Company's Employees, Directors, Officers, or in consideration for bona fide
services provided to the Company by consultants or advisors. The Company's Board
has the sole discretion in determining when to issue such shares. As of December
31, 1996, the Company had issued 326,000 Common Shares so registered under such
Form S-8 filing. The Company had no commitment at December 31, 1996 to issue any
additional shares.
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 183,333 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:
Michael Margolies - 133,333 shares
Jay Owen Margolies - 40,667 shares
Terry A. Watkins - 9,333 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:
20
<PAGE>
After each of the fiscal years from 1996 through 1998, one-fifth of
the shares granted (36,666 associated with each year) are subject to forfeiture,
as follows:
- 12,222 will be forfeited if the Company's sales in that year are less than
$15,000,000.
- 12,222 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: 1996 - $990,000; 1997 - $1,089,000; and 1998 - $1,197,900.
- 12,222 will be forfeited if the Company's earnings per share fail to exceed
an "earnings standard." The "earnings standards" (based on 1,222,198 shares of
Common Stock outstanding) will be: 1996 - $.78; 1997 - $.84; and 1998 - $.96.
For 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 any shares are subject to forfeiture in any one year due to failure to
meet the standards set forth above, 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.
All shares held by a grantee shall be forfeited if his employment by the
Company terminates prior to the date the restrictions lapse. Further, the shares
are restricted from transfer, provided that with respect to 25% of the number of
shares granted under the Program, such shares will become unrestricted stock on
August 15, 1998. The restriction will lapse with respect to each additional 25%
of such number of shares on August 15 of each successive year. 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.
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.
Contingent Stock Grant Program for ASI Stockholders
In addition to the Employment Agreements entered into with the former
ASI stockholders, on November 13, 1995, the Company adopted a Contingent Stock
Grant Program ("ASI Program") pursuant to which 166,667 shares of Common Stock
were reserved for issuance to them. The ASI Program provides that 55,556 of the
shares will be issued to each of the ASI Stockholders (the "Grantees"). The
shares issued under the ASI Program are subject to the following restrictions:
After each of the three fiscal years from 1996 through 1998, one-third
of the shares granted (18,519 per Grantee per year) are subject to forfeiture.
5,556 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 12,963 shares will be forfeited if
ASI's pre-tax income for the year does not exceed the threshold stated below:
Year Threshold
---- -----------
1996 ............ $ 750,000
1997 ............ 1,500,000
1998 ............ 2,500,000
The shares granted under the ASI Program are restricted from transfer,
which restriction will lapse, with respect to 33% of such shares on April 15,
1997. The restriction will lapse with respect to each additional 33% of such
number of shares on April 15 of each successive year. 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 stockholder approval of the Program or the ASI Program (collectively,
the "Programs"). Accordingly, the Board did not seek such approval. The failure
to obtain stockholder 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 stockholder approval
of the Programs. The Board of Directors decided, however, that the likelihood of
total compensation to any offer exceeding $1,000,000 is sufficiently small that
it did not warrant obtaining stockholder approval for the Programs. In March
1997, the Company sold ASI.
21
<PAGE>
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 May 1, 1997, 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 M Preferred Stock listed below.
Amount and Percent-
Nature of age of
Beneficial Percentage Voting
Title of Class Beneficial Owner Ownership of Class Votes Power(8)
- -------------- ---------------- --------- -------- ----- --------
Common Stock Michael Margolies(1) 2,690,116 32.2% 2,690,116 32.2%
$.01 par value shares bene-
ficially (2)(3)(4)
Series M Michael Margolies 156,600 87.0% - -
Preferred Stock shares bene-
$.01 par value ficially (4)
Common Stock Jay Owen Margolies(1) 286,054 4.0% 286,054 4.0%
$.01 par value shares bene-
ficially (2)(5)
Series M Jay Owen Margolies 23,400 13.0% - -
Preferred Stock shares of
$.01 par value record
Common Stock K. Thomas Wegerbauer 1,000 0.1% 1,000 0.1%
$.01 par value shares of
record
Common Stock All officers and 2,986,803 34.9% 2,986,803 34.9%
$.01 par value directors as a shares benefi-
group (4 persons) cially (2)(3)(5)
Series M All officers and 180,000 100.0% - -
Preferred Stock directors as a shares of
$.01 par value group (4 persons) record (3)
Common Stock Margolies Family 855,000 11.1% 855,000 11.1%
$.01 par value Trust (6) shares bene-
$.01 par value ficially (7)
22
<PAGE>
(1) 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.
(2) Include shares of Common Stock issued pursuant to the Restricted
Stock Grant Program as follows: Michael Margolies - 133,333 shares,
Jay Owen Margolies - 40,666 shares, Terry A. Watkins - 9,333 shares.
See: "Management - Restricted Stock Grant Programs."
(3) Includes 1,487,700 shares of Common Stock issuable upon conversion
of 156,600 shares of Series M Preferred Stock beneficially owned by
Mr. Margolies. The Series M Preferred Stock is not convertible
until after December 31, 1997.
(4) Includes 90,000 shares of Series M Preferred Stock owned by the
Margolies Family Trust, or 855,000 shares of Common Stock issuable upon
conversion of the Series M Preferred Stock. Michael Margolies disclaims
beneficial ownership of said shares.
(5) Includes 222,300 shares of Common Stock issuable upon conversion of
23,400 shares of Series M Preferred Stock beneficially owned by Mr.
Margolies. The Series M Preferred Stock is not convertible until
after December 31, 1997.
(6) 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.
(7) Includes 855,000 shares of Common Stock issuable upon conversion of
90,000 shares of Series M Preferred Stock beneficially owned by The
Margolies Family Trust. The Series M Preferred Stock is not convertible
until after December 31, 1997.
(8) In determining percentage of voting power of Common Stock, all shares
of Series M Preferred Stock owned by the shareholder are deemed to have
been converted into Common Stock and are included in total outstanding.
Item 12 CERTAIN RELATIONSHIPS AND
- ------- RELATED TRANSACTIONS
-------------------------
Throughout the life of the Company, Michael Margolies and
members of his family have provided loans to finance the Company's operations
when needed. In 1994 the outstanding balance of these loans, $707,676 at that
time, was consolidated into a promissory note bearing interest at 15% per annum.
Since that time additional amounts have been added to the note, as the Company
has borrowed from the Margolies Family. As a result, at December 31, 1996 the
Company had a balance due on the note of $1,105,114.
On December 26, 1994, the Company entered into an agreement to
purchase all of the outstanding capital stock of Camelot Consultants,
Inc. ("Camelot") from the Margolies family. The principal assets of
23
<PAGE>
Camelot were buses leased to the Company and to third parties and certain real
estate used by the Company at that time. 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
increased 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 paid a dividend of 10.65% per
annum and had a liquidation preference of $10 per share. Each share of Series C
Preferred Stock had voting rights equal to 20 shares of the Common Stock.
On April 12, 1996 the Company purchased two buses from a corporation
controlled by Michael Margolies for the sum of $240,000. The $240,000 is
included in the balance due Mr. Margolies in the amount of $1,105,114 as of
December 31, 1996.
On November 18, 1996, the Company and the holders of the Series C
Preferred Stock agreed to exchange the Series C Preferred Stock for an equal
number of shares of Series M Preferred Stock. The terms of each share of the
Series M Preferred Stock are that it has no dividend rights, no voting rights, a
liquidation preference of $10 per share, and is convertible into 9.5 shares of
Common Stock. The Company entered into an eleven year employment agreement,
starting January 1, 1997, with Michael Margolies, which agreement, among other
things, grants Mr. Margolies an issuance of 1,000,000 shares of the Company's
Common Stock. This issuance, took place in February 1997. The 1,000,000
shares on November 18, 1996 had a market value of $1,562,000 and the Company
expensed this amount to its consolidated statement of operations for the year
ended December 31, 1996.
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.
24
<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 & Company CPA, P.C., is attached
hereto.
(b) 8-K Reports - none.
(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-a(5) Certificate of Designation of Series E through L Preferred
Stock - filed herewith.
3-a(6) Certificate of Designation of Series M Preferred Stock - filed
herewith.
3-b. By-laws. (1)
4-a. Specimen of Common Stock Certificate. (1)
4-b. Specimen of Class C Warrant (4)
4-c. Form of Class C Warrant Agreement. (4)
10-a. Employee Stock Option Plan. (1)
10-b. Employment Agreement between the Company and Michael Margolies
dated November 18, 1996 - filed herewith.
10-c. Restricted Stock Grant Program. (2)
25
<PAGE>
10-d. Stock Purchase Agreement between the Company and Packaging
Plus Services, Inc. dated December 31, 1996 relating to sale
of USTS Entertainment Division - filed herewith.
10-e. 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-f. 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-g(1) Stock Sale Agreement between the Company and Consolidated
Financial Management, Inc. dated September 11, 1996 related to
the acquisition of BancPro Transportation Inc. - filed
herewith.
10-g(2) Consulting Agreement among the Company, Consolidated Financial
Management, Inc., and BancPro Transportation Inc. dated
September 11, 1996 - filed herewith.
10-h Stock Purchase Agreement dated October 8, 1994 between
the Company and American Trade-A-Bus, Inc. (3)
10-i(1) Letter of Agreement between the Company and Argent
Securities, Inc. dated December 1, 1994. (3)
10-i(2) Warrant to Purchase Shares issued by the Company to Argent
Securities, Inc. dated December 1, 1994. (3)
10-j Stock Purchase Agreement between U.S. Trucking, Inc. and
Logistics Management L.L.C. dated January 30, 1997 related to
the acquisition of Gulf Northern Transport, Inc. - filed
herewith.
10-k Agreement of Sale between the Company and KAC, Inc. dated
March 27, 1997 related to the sale of Automated Solutions,
Inc. - filed herewith.
10-l(1) Employment Agreement between the Company and Ronald P. Sorci
dated July 10, 1996 - filed herewith.
10-l(2) Agreement in satisfaction between the Company and Ronald P.
Sorci dated November 22, 1996 - filed herewith.
11. Statement re: computation of per share earnings for period
ended December 31, 1996 - filed herewith.
22. Subsidiaries -
Jetport, Inc.
Shortway River Rouge, Inc.
Black & White Cab Company, Inc.
Transportation Systems Corp.
Trans Lynx Express, Inc.
Priority Express Service, Inc.
Advance Technologies For American Business, Inc.
BancPro Transportation, Inc.
Bus Properties, Inc.
26
<PAGE>
Transportation Management Services, Inc.
U.S. Trucking, Inc.
Jay & Jay Transportation, Inc.
Mencor, Inc.
Gulf Northern Transportation, 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).
(4) Previously filed with the Securities and Exchange
Commission as an exhibit to the Company's SB-2 registration statement (File
Number 333-4104).
27
<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 May , 1997.
/s/ Michael Margolies 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/ Stanley Chason Director
- ----------------------------
Stanley Chason
/s/ Robert I. Blackman Director
- ----------------------------
Robert I. Blackman
/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, 1996 and 1995
Pages
Independent Auditor's Report F- 1
Consolidated Balance Sheet F- 2
Consolidated Statements of Operations F- 4
Consolidated Statements of Stockholders' Equity F- 6
Consolidated Statements of Cash Flows F- 8
Notes to Consolidated Financial Statements F-11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
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, 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
U.S. Transportation Systems, Inc. and subsidiaries as of December 31, 1996 and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 26, 1997
F-1
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 3,392,629
Cash - restricted 159,747
Accounts receivable, net of allowance for doubtful
accounts of $546,000 (Note 3) 4,995,999
Notes receivable 930,584
Net investment in sales-type leases (Note 2) 840,263
Inventories (Note 1) 594,275
Prepaid and other current assets 653,521
----------
TOTAL CURRENT ASSETS 11,567,018
----------
PROPERTY, PLANT AND EQUIPMENT:
Revenue equipment (Notes 3 and 4) 7,714,168
Land and buildings 1,020,770
Other 1,897,346
----------
Total - at cost 10,632,284
Less: Accumulated depreciation and amortization (3,188,342)
----------
PROPERTY, PLANT AND EQUIPMENT- NET 7,443,942
----------
NET ASSETS HELD FOR SALE (Note 14) 4,591,806
----------
OTHER ASSETS:
Net investment in sales-type leases (Note 2) 1,520,474
Goodwill, net of accumulated amortization
of $496,075 (Note 1) 1,461,093
Other intangible assets, net of accumulated
amortization of $172,026 (Note 1) 986,974
Notes receivable 354,218
Other assets 402,305
----------
TOTAL OTHER ASSETS 4,725,064
----------
TOTAL ASSETS $28,327,830
==========
See notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
<S> <C>
Cash overdraft $ 395,156
Notes payable (Note 4) 1,580,269
Line of credit (Note 3) 3,093,044
Accounts payable 998,347
Accrued liabilities 471,409
Due to related party (Note 9) 439,646
----------
TOTAL CURRENT LIABILITIES 6,977,871
----------
LONG-TERM OBLIGATIONS, NET OF CURRENT
MATURITIES:
Notes payable (Note 4) 3,710,740
Due to related party (Note 9) 665,468
----------
TOTAL LONG-TERM OBLIGATIONS, NET OF
CURRENT MATURITIES 4,376,208
----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 10, 11, 18)
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 - 50,000,000 shares
Issued and outstanding - 6,801,512 shares 68,015
Additional paid-in capital 29,204,181
Stock subscription receivable (37,785)
Deferred compensation (Note 11) (545,089)
Accumulated deficit (13,515,571)
----------
TOTAL STOCKHOLDERS' EQUITY 16,973,751
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $28,327,830
===========
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
U. S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
REVENUES $21,509,751 $13,670,321
----------- -----------
EXPENSES:
Cost of goods sold 996,673 2,180,195
Operating expenses for services 12,376,818 5,814,900
Selling, general and administrative 8,253,096 3,149,187
Depreciation expense 973,570 607,095
Rent expense 1,300,311 404,147
Amortization of intangible assets 425,579 124,861
----------- -----------
TOTAL EXPENSES 24,326,047 12,280,385
----------- -----------
(LOSS) INCOME FROM OPERATIONS (2,816,296) 1,389,936
----------- -----------
OTHER INCOME (EXPENSES):
Interest expense (617,029) (339,042)
Interest income 387,305 276,054
Gain / (loss) on sales of assets 54,680 (419,775)
Loss on Mt. View Settlement (215,500) (75,796)
Other expenses (69,395) (34,135)
----------- -----------
Other expenses, net (459,939) (592,694)
----------- -----------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (3,276,235) 797,242
INCOME TAX EXPENSE (BENEFIT) 750,000 (364,000)
----------- -----------
(LOSS) INCOME FROM CONTINUING OPERATIONS
(CARRIED FORWARD) $(4,026,235) $ 1,161,242
----------- -----------
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
U. S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- ---------------
<S> <C> <C>
(LOSS) INCOME FROM CONTINUING OPERATIONS
(BROUGHT FORWARD) $ (4,026,235) $ 1,161,242
-------------- ---------------
DISCONTINUED OPERATIONS (Note 14):
Discontinuation of custom equipment manufacturing segment:
(Loss) income from custom equipment manufacturing operations. (1,787,859) 94,545
Estimated losses during phase-out period (Note 14) (196,843) -
Discontinuation of entertainment ticket segment:
(Loss) income from entertainment operations (683,514) 35,330
Adjustment of estimated loss on disposal of charter segment,
net of income tax benefit of $86,000 in 1995 (Note 14) - (167,199)
-------------- ---------------
LOSS FROM DISCONTINUED OPERATIONS (2,668,216) (37,324)
-------------- ----------------
NET (LOSS) INCOME (6,694,451) 1,123,918
LESS: PREFERRED DIVIDEND 169,335 191,700
-------------- ---------------
NET (LOSS) INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ (6,863,786) $ 932,218
============== ===============
(LOSS) EARNINGS PER COMMON SHARE:
(Loss) Income from continuing operations $ (1.04) $ .53
(Loss) from discontinued operations (.66) (.02)
-------------- ---------------
(LOSS) EARNINGS PER COMMON SHARE $ (1.70) $ .51
============== ===============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,036,930 1,823,588
============== ===============
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
--------------------- --------------------------- Paid-In
Shares Amount Shares Amount Capital
---------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,222,198 $ 12,222 180,000 $1,800,000 $13,570,093
- -------------------------- --------- -------- -------- ---------- -----------
Preferred stock issuance - - 170,000 2,040,000 (1,073,524)
Preferred stock conversion 425,000 4,250 (170,000) (2,040,000) 2,035,750
Restricted stock grant issuance - - - - -
Stock options issued - - - - -
Preferred dividends 9,580 96 - - (96)
Common stock issued in connection with purchase
of Armstrong Freight Express 130,000 1,300 - - 564,200
Common stock issued in connection with purchase
of Trans-Lynx Express 19,424 194 - - 84,296
Common stock issued in connection with purchase
of Automated Solutions 300,000 3,000 - - 1,347,000
Common stock issued in exchange for
consulting services 55,833 558 - - 242,067
Common stock issued in connection with
contract settlement 8,333 83 - - 36,167
Stock options exercised 61,667 617 - - 250,558
Net income - - - - -
--------- -------- -------- --------- -----------
Balance, December 31, 1995 (carried forward) 2,232,035 $ 22,320 180,000 $1,800,000 $17,056,511
========= ======== ======= ========== ===========
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Stock Sub- Deferred Retained
scription Compen- Earnings
Receivable sation (Deficit) Total
------------ ----------- ----------- ----------
<S> <C> <C> <C>
Balance, December 31, 1994 $ - $ (811,359) $ (7,555,263) $7,015,693
- -------------------------- -------- ---------- ------------- ----------
Preferred stock issuance - - - 966,476
Preferred stock conversion - - - -
Restricted stock grant issuance - 135,667 - 135,667
Stock options issued - 17,188 - 17,188
Preferred dividends - - (220,440) (220,440)
Common stock issued in connection with purchase
of Armstrong Freight Express - - - 565,500
Common stock issued in connection with purchase
of Trans-Lynx Express - - - 84,490
Common stock issued in connection with purchase
of Automated Solutions - - - 1,350,000
Common stock issued in exchange for
consulting services - - - 242,625
Common stock issued in connection with
contract settlement (36,250) - - -
Stock options exercised (254,035) - - (2,860)
Net income - - 1,123,918 1,123,918
------- ---------- ------------- ----------
Balance, December 31, 1995 (carried forward) $(290,285) $ (658,504) $ (6,651,785) $11,278,257
========= ========== ============= ===========
</TABLE>
F-6
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
----------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital
---------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 (brought forward) 2,232,035 $ 22,320 180,000 $ 1,800,000 $17,056,511
- -------------------------------------------- --------- -------- -------- ----------- -----------
Net proceeds from exercise of warrants and options 60,000 600 - - 206,900
Common stock issued in connection with
purchase of Krogel Freight 18,333 183 - - 54,817
Preferred stock issuance - - 300 300,000 (43,272)
Conversion of debentures into common stock 753,667 7,537 - - 1,768,751
Preferred stock conversion 88,889 889 (300) (300,000) 299,111
Restricted stock grant issuance - - - - -
Preferred stock dividends - - - - -
Repurchase of common stock (47,500) (475) - - (89,495)
Common stock issued in connection with bridge loan 109,957 1,100 - - 248,454
Common stock offering net of offering costs
of $1,500,208 1,705,043 17,050 - - 4,996,006
Common stock issued in connection with
consulting services 314,167 3,142 - - 874,733
Common stock issued in connection with
employment contracts 16,667 167 - - 124,833
Common stock issued in connection with
purchase of BancPro Transportation and
employment agreement 336,000 3,360 - - 864,540
Common stock issued in exchange for
covenant not-to-compete 199,444 1,994 - - 548,006
Change in features of preferred stock - - - - 680,000
Obligation to issue 1,000,000 shares of common stock
in regards to long-term employment agreement with
Company officer 1,000,000 10,000 - - 1,552,500
Other 14,810 148 - - 61,786
Net loss - - - - -
--------- -------- -------- --------- -----------
Balance, December 31, 1996 6,801,512 $ 68,015 180,000 $1,800,000 $29,204,181
========= ======== ======= ========== ===========
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Stock Sub- Deferred Retained
scription Compen- Earnings
Receivable sation (Deficit) Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 (brought forward) $(290,285) $(658,504) $(6,651,785) $11,278,257
- -------------------------------------------- ---------- ---------- ---------- -----------
Net proceeds from exercise of warrants and options - - - 207,500
Common stock issued in connection with
purchase of Krogel Freight - - - 55,000
Preferred stock issuance - - - 256,728
Conversion of debentures into common stock - - - 1,776,288
Preferred stock conversion - - - -
Restricted stock grant issuance - 113,415 - 113,415
Preferred stock dividends - - (169,335) (169,335)
Repurchase of common stock - - - (89,970)
Common stock issued in connection with bridge loan - - - 249,554
Common stock offering net of offering costs of $1,500,228 - - - 5,013,056
Common stock issued in connection with
consulting services 252,500 - - 1,130,375
Common stock issued in connection with
employment contracts - - - 125,000
Common stock issued in connection with
purchase of BancPro Transportation - - - 867,900
Common stock issued in exchange for
covenant not-to-compete - - - 550,000
Change in features of preferred stock - - - 680,000
Obligation to issue 1,000,000 shares of common
stock in regards to long-term employment
agreement with Company officer - - - 1,562,500
Other - - - 61,934
Net loss - - (6,694,451) (6,694,451)
------- ----------- ----------- -----------
Balance, December 31, 1996 $ (37,785) $(545,089) $(13,515,571) $16,973,751
======== =========== =========== ===========
</TABLE>
F-7
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
OPERATING ACTIVITIES:
<S> <C> <C>
Income / (Loss) from continuing operations $ (4,026,235) $ 1,161,242
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,399,149 731,956
Amortization of deferred compensation 113,415 152,855
Deferred tax benefit 750,000 (450,000)
Stock issued in exchange for consulting services 1,030,410 -
Write off of notes receivable - 75,796
Loss on Mt. View Settlement 215,500 -
Bad debt expense 339,969 -
Changes in features of preferred stock 680,000 -
Obligation to issue stock in regards to long-term
employment agreement 1,562,500 -
Loss / (gain) on sales of assets (54,680) 419,775
Other 94,605 -
Change in assets and liabilities:
Accounts receivable (1,774,357) (452,231)
Inventories (381,542) (300,655)
Other receivables - (14,980)
Prepaid and other current assets 311,361 (279,566)
Other intangibles (50,000) -
Accounts payable 476,924 (762,358)
Accrued liabilities 31,609 (280,481)
---------------- ----------------
Net cash provided by continuing operations 718,628 1,353
--------------- ----------------
Loss from discontinued operations (2,668,216) (37,324)
Adjustments to reconcile loss to net cash
used in discontinued operations:
Depreciation and amortization 611,031 306,482
Change in net assets and liabilities and
losses of discontinued operations (1,504,394) (1,098,916)
---------------- ----------------
Net cash used in discontinued operations (3,561,579) (829,758)
--------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES
(CARRIED FORWARD) $ (2,842,951) $ (828,405)
--------------- ----------------
</TABLE>
F-8
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ----------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES
(BROUGHT FORWARD) $ (2,842,951) $ (828,405)
--------------- ----------------
INVESTING ACTIVITIES:
Capital expenditures (854,926) (786,891)
Purchase of intangible assets in Krogel acquisition (150,000) -
Purchase of intangible assets in Eagle Air Express acquisition (10,800) -
Proceeds from sales of assets 149,803 1,047,756
Transfers from cash - restricted 6,006 16,726
Advances on notes receivable (952,532) (160,552)
Collection of notes and leases receivable 691,714 813,431
Other 86,587 (246,796)
--------------- ----------------
NET CASH PROVIDED BY (USED IN)- INVESTING
ACTIVITIES (1,034,148) 683,674
---------------- ---------------
FINANCING ACTIVITIES:
Cash overdraft 395,156 (35,570)
Cash received from related parties 500,000 295,465
Cash paid to related parties (237,181) (400,946)
Cash obtained through business acquisitions - 75,266
Proceeds from issuance of preferred stock 256,728 1,555,933
Proceeds from common stock offering 5,013,056 -
Proceeds from bridge loan 982,000 -
Payment of preferred dividends (169,335) (220,439)
Principal payments on debt (10,392,011) (10,949,935)
Borrowings on debt 8,986,026 9,776,459
Proceeds from issuance of convertible
debentures - 1,776,287
Proceeds from options and warrants
exercised 207,500 -
--------------- ----------------
NET CASH PROVIDED BY -
FINANCING ACTIVITIES 5,541,939 1,872,520
--------------- ---------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,664,840 1,727,789
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,727,789 -
--------------- ----------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 3,392,629 $ 1,727,789
=============== ================
</TABLE>
F-9
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
1996 1995
-------- --------
Cash paid during the year for:
Interest $744,200 $484,600
======== ========
Taxes $ -0- $ -0-
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
------------------------
The Company acquired revenue equipment in 1996 and 1995 utilizing
long-term debt of $4,849,137 and $554,907, respectively.
During 1996 and 1995 the Company sold buses in exchange for $154,351
and $2,151,630 respectively, of sales type financing lease receivables.
During 1996 and 1995, the Company issued 314,167 and 55,833 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 March 1995, the Company sold a substantial portion of the assets
of Suncoast Transportation for $25,000 cash and a promissory note of $175,000.
In June 1995, the Company issued 130,000 shares of common stock in
exchange for 100% of the outstanding common stock of Avanti Delivery Services,
Inc. and Priority Express, Inc.
In July 1995, the Company issued 19,424 shares of common stock in
exchange for 100% of the outstanding common stock of Trans-Lynx Express, Inc.
In November 1995, the Company issued 300,000 shares of common stock
in exchange for 100% of the outstanding common stock of Automated Solutions,
Inc.
In 1996, the Debentures with a book value of $1,776,288 at December
31, 1995 were converted into 753,667 shares of the Company's common stock.
In February 1996, the Company issued 18,333 shares of common stock in
exchange for certain assets of Krogel Air Freight, Inc. and Krogel Freight
Systems of Tampa, Inc.
In 1996, the Company issued 252,111 shares of common stock in regards
to employment contracts and covenants not-to-compete.
In 1996, the Company converted 300 shares of convertible preferred
stock into 88,889 shares of common stock.
In 1996, the Company acquired 47,500 shares of its common stock for
$89,970, which included the cancellation of a note receivable of $68,960.
In September 1996, the Company issued 300,000 shares of common stock
in exchange for 100% of the outstanding common stock of BancPro Transportation,
Inc.
In October 1996, the Company acquired certain intangible assets of
Eagle Air Express in exchange for a note of $32,400 and a cash payment of
$10,800.
In November 1996 the Company converted the Preferred Stock Series C
to Preferred Stock Series M, which on the date of conversion had a market value
differential of $680,000.
In November 1996 the Company executed a long term employment contract
with its Chairman which obligated the Company to issue 1,000,000 shares of its
Common Stock which on the date of issuance had a market value of $1,562,500.
F-10
<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")
are currently engaged in business areas which relate to transportation. The
transportation services consist of: (i) providing bus, motor vehicle and
packaging and delivery transportation related services; and (ii) manufacturing
of electrical harnesses for transportation equipment. The Company's operations
are conducted in selected cities throughout the United States and
internationally.
In November 1996 the Company made the decision to discontinue
Automated Solutions, Inc. ("ASI"), a segment engaged in custom designing and
manufacturing machinery which folds and tests airbags, and the entertainment
divisions (Downtown Theatre Ticket Agency, Inc., DBA "Advance Entertainment,"
Advance Entertainment - Chicago, Inc., Broadway Theatours, Inc. and Premier Box
Office, Inc.), a segment specializing in the retail sale of tickets for theater,
sports and various entertainment events in New York and Chicago (see Note 14).
As more fully discussed in Note 13, during 1996 the Company acquired
certain intangible assets of Krogel Air Freight, Inc. and Krogel Freight Systems
of Tampa, Inc. ("Krogel") which operate a local package pick-up and delivery
service; certain assets of Jackson & Johnson, Inc., which operates a tractor/
trailer delivery service; 100% of the stock of BancPro Transportation, Inc.,
which operates a car rental service; and certain assets of U&M Express and Eagle
Air Express; which operate a pick-up and delivery service.
In October 1996, the Company's harness manufacturing subsidiary,
American Trade-A-Bus, Inc. (ATAB), lost its long term profitable contract with
its only customer Stewart & Stevenson ("S&S"). During the 1996 year, ATAB
contributed approximately $140,000 to continuing operations. Management is
attempting to secure other customers and other profitable work with S&S. If
management is unsuccessful, the Company may be required to liquidate the assets
of ATAB.
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.
F-11
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Inventories
-----------
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Inventories were comprised of:
Parts $192,549
Raw materials 169,400
Work in Process 220,088
Sundry 12,238
--------
Total $594,275
========
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,
tractor-trailers 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.
F-12
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 (see Note 9). 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. Such common stock equivalents
were antidilutive in 1996. All share and per share amounts have been
retroactively adjusted for the one-for-six reverse stock split declared on
August 27, 1996.
Impairment of Long-Lived and Intangible Assets
---------------------------------------------
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. In evaluating the fair value and the future benefits of
long-lived assets, the Company performs an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets and reduces
their carrying value by the excess, if any, of the result of such calculation.
The Company adopted SFAS No. 121 effective Janaury 1, 1996.
Stock-Based Compensation
------------------------
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" effective January 1,
1996. SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. The Company elected to continue to
account for employee stock-based compensation as prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees" and to provide pro forma
disclosures in the Notes to Financial Statements of the effects of SFAS No. 123
on net income and earnings per share. There was no effect on the results of
operations as a result of adopting SFAS No. 123.
[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 2001. There were no
initial or executory costs with respect to these leases.
The following is a summary of the components of the Company's net
investment in these sales-type leases at December 31, 1996:
Total Minimum Lease Payments Receivable $ 3,046,000
Less: Unearned Income 685,263
-----------
NET INVESTMENT IN SALES-TYPE LEASES $ 2,360,737
===========
F-13
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Minimum lease payments to be received as of December 31, 1996 are as
follows:
1997 $1,199,000
1998 750,000
1999 545,000
2000 323,000
2001 229,000
------------
TOTAL $3,046,000
============
[3] SECURED LINE OF CREDIT
----------------------
The Company entered into a line of credit agreement with a Bank in
October 1996, which agreement replaced the Company's previous line of credit
agreement with a different institution. The agreement contains an accounts
receivable financing component and an equipment loan component which provide for
an aggregate maximum borrowing balance of $5,000,000. The accounts receivable
component of the line of credit is secured by accounts receivable and sales-type
leases receivable and has a maximum borrowing limit of $3,500,000; the
receivables component borrowing base is computed at 80% of eligible accounts
receivable and 90% of eligible sales-type leases receivable. The equipment loan
component, which has a maximum borrowing limit of $1,500,000, is secured by
equipment, primarily buses, tractors and trailers. All outstanding balances are
due October 8, 1999, 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 1.5 percent (9.75% at
December 31, 1996), which interest is payable monthly. At December 31, 1996, the
amount borrowed and outstanding under the line of credit agreement was
$3,093,044 and is included on the balance sheet in Line of Credit Obligation.
[4] NOTES PAYABLE
-------------
Notes payable consist of the following at December 31, 1996:
Notes payable and capitalized leases, col-
lateralized by equipment, payable monthly
and maturing through December 2001,
interest rates ranging from 8% to 14%
(including certain notes with interest based
upon the prime rate, average interest rate
approximating 10%) $ 4,056,451
F-14
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Notes payable, unsecured, resulting from
acquisitions, payable monthly and maturing
through Sept. 1998 with interest rates
which approximate 10% 1,000,398
Mortgage notes payable, collateralized by
real property, payable in monthly
installments of $5,310 and $1,879 through
August 1998 and November 2007
respectively, (average interest rate
approximately 11%) Property with a carrying
value approximating $675,000 secures the
mortgages 234,160
---------
Total Notes Payable 5,291,009
Less: Current Maturities 1,580,269
---------
NON-CURRENT NOTES PAYABLE $3,710,740
=========
Annual maturities of notes payable, as of
December 31, 1996, are as follows:
1997 $1,580,269
1998 2,041,170
1999 810,163
2000 548,914
2001 215,294
Thereafter 95,199
----------
TOTAL $5,291,009
=========
In April 1996, the Company completed a Bridge Financing issuing an
aggregate of $1,200,000 principal amount of Bridge Notes. The Company received
net proceeds of $982,000, after deducting the placement agent's discount and
expense allowance and other expenses of the offering. Upon repayment of the
Bridge Notes, the Company recognized a charge to operations of $441,038 based on
the difference between the amount allocated to the note and the principal
repaid. Such charges are included in interest expense.
[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, 1996:
F-15
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Operating
Leases (Non-Related)
------ -------------
1997 $ 444,000
1998 390,000
1999 390,000
2000 368,000
2001 312,000
------------
TOTAL MINIMUM LEASE PAYMENTS $1,904,000
============
[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.
In 1996, the Company fully reserved its previously recorded net
deferred tax asset of $750,000. The decision to fully reserve the previously
recorded deferred tax asset of $750,000 was based upon management's evaluation
that, with the Company's losses in 1996 and the aspect of losses continuing at
least through June 30, 1997, future profits are not certain enough to presently
substantiate carrying a tax asset on the books. At December 31, 1996, the
Company had available for tax purposes net operating loss ("NOL") carryforwards
of approximately $12,100,000 and general business credits of approximately
$470,000. NOL carryforwards will expire commencing in 2002 and ending in 2011,
as follows: $3,800,000 expiring in 2002; $1,440,000 expiring in 2007; $5,310,000
expiring in 2008; $370,000 expiring in 2009 and the remainder expiring in 2011.
Tax credit carryforwards will expire commencing in 1997 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, it is less certain to what
extent the Company will realize any benefit from its tax credits.
The Company has reserved $2,838,000 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" which occurred
in January 1996, within the meaning of section 382 of the IRS Code. Although the
F-16
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
determination of whether an ownership change has occurred is subject to factual
and legal uncertainties, the Company believes that an ownership change occurred
in January 1996 from the issuance of common stock pursuant to the conversion of
convertible debentures. 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 only 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 on all NOL carryforwards originating before 1996 will be approximately
$605,000 per year, and accordingly, the Company will not, in any case, be able
to utilize its full NOL benefits.
A reconciliation of the total income taxes computed by applying the
statutory federal rate and the effective tax rate follows:
<TABLE>
<CAPTION>
1996 1995
Income Income
Taxes % Taxes %
--------------- ------- -------- ----
<S> <C> <C> <C> <C>
Federal Statutory Tax Rate $ - - $ 382,000 34 %
Use of NOL to offset tax - - (746,000) (66)
Increase in valuation allowance 750,000 11%
--------------- ------- -------- ----
Total Federal Income Tax
(Benefit) / Expense $ 750,000 11% $ (364,000) (32)%
=============== ======= ========= ====
The components of deferred taxes are as follows as of December 31, 1996:
Assets Liabilities
------ -----------
Accelerated Depreciation $ 194,000
Discontinued Operations 12,000
Goodwill 145,000
Installment Sales 332,000
Bad Debts $ 56,000
Tax Credits 470,000
Net Operating Loss 2,995,000
---------- ---------
Total 3,521,000 683,000
Valuation Allowance (2,838,000)
----------- ---------
TOTAL $ 683,000 $ 683,000
=========== =========
</TABLE>
F-17
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[7] SEGMENT INFORMATION
-------------------
In 1996 and 1995 the Company's operations are classified into two
principal industry segments: transportation and manufacturing. The following is
a summary of segment information.
<TABLE>
<CAPTION>
1996 1995
------------- ------------
Net Sales to Unaffiliated Companies:
- ------------------------------------
<S> <C> <C>
Transportation $ 18,697,452 $ 9,455,622
Manufacturing 2,812,299 4,214,699
------------- ------------
Totals $ 21,509,751 $ 13,670,321
============= ===========
Income (Loss) from Operations:
- ------------------------------
Transportation $ (2,957,159) $ 331,651
Manufacturing 140,863 1,058,285
------------- ------------
Totals (2,816,296) 1,389,936
Other expense, net (459,939) (592,694)
------------- ------------
(Loss) Income Before Income Taxes and Discontinued
Operations as Reported in the Accompanying
Statement of Operations $ (3,276,235) $ 797,242
============= ===========
Identifiable Assets from Continuing Operations:
- -----------------------------------------------
Transportation $ 20,506,506 $ 10,961,938
Manufacturing 781,451 1,161,709
------------- ------------
Totals $ 21,287,957 $ 12,123,647
============= ===========
Depreciation and Amortization:
- ------------------------------
Transportation $ 1,175,799 $ 654,143
Manufacturing 223,350 77,813
------------- ------------
Totals $ 1,399,149 $ 731,956
============= ============
Capital Expenditures:
- ---------------------
Transportation $ 5,463,707 $ 1,080,292
Manufacturing 240,356 198,084
------------- ------------
Totals $ 5,704,063 $ 1,278,376
============= ============
</TABLE>
F-18
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[8] MAJOR CUSTOMERS
---------------
Revenues from a single transportation contract with Ford Motor
Company approximated 12% and 17% of the Company's revenues from continuing
operations in 1996 and 1995, respectively. Revenues received in 1996 and 1995
approximated $2,520,000 and $2,364,000, and their receivables at December 31,
1996 approximated $407,000.
ATAB, a wholly-owned subsidiary, derives substantially 100% of its
revenue from S&S. Revenues received in 1996 and 1995 approximated $2,812,000 and
$4,112,000, and their receivable at December 31, 1996 approximated $17,000. The
remaining contract work for S&S will be completed in June 1997.
[9] RELATED PARTY TRANSACTIONS
--------------------------
At December 31, 1996, the Company owed its Chairman, and or
corporations under his control, and related family entities $1,105,114 which
consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Balance due at December 31, 1995 $ 602,295
Accrued preferred stock dividends 169,335
Accrued interest charged to operations 131,484
Sale of buses to Company 240,000
Advances - cash 500,000
Repayments (538,000)
----------
Balance due at December 31, 1996 $ 1,105,114
==========
Annual maturities as of December 31, 1996 are as follows:
1997 $ 439,646
1998 203,000
1999 146,700
2000 170,300
2001 145,468
----------
Total $ 1,105,114
===========
</TABLE>
The above loan bears interest at 15% per annum, with weekly
payments including interest of $10,000. $500,000 of the balance due at December
31, 1996 are subordinated to amounts due under a line of credit agreement (See
Note 3).
In November 1996, the Company entered into an eleven year
employment agreement, commencing January 1, 1997, with the Chairman. The
agreement provides, among other things for the Chairman to receive a salary of
$250,000 per year plus annual CPI adjustments and for a bonus equal to 8% of the
Company's pretax income. In addition, the agreement grants the Chairman the
right to receive 1,000,000 shares of the Company's common stock until March
1997.
The Company recorded compensation expense for $1,562,500 in 1996
for the market value of the stock on the day the agreement was executed. The
stock was issued to the Chairman in February 1997. The number of shares
outstanding and weighted average number of shares of common stock and common
stock equivalents outstanding during 1996 have been adjusted to reflect the
issuance as if it occurred in November 1996. See Note 18 with respect to the
Company's obligation to repurchase the capital stock owned by Mr. Margolies or
members of his family.
F-19
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In November 1996, the Company entered into an agreement whereby the
180,000 shares of Preferred Stock Series C, all of which is held by the
Company's Chairman and his family, were converted to 180,000 shares of Preferred
Stock Series M. The Preferred Series C had the following features: dividends
cumulative and payable annually 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 3.3 common stock voting shares per each preferred
share. The Preferred Series M has the following features: no dividend rights; no
redemption rights; no voting rights; convertible into the Company's common stock
after December 31, 1997 at the rate of 9.5 common shares per each preferred
share. The Company recorded an expense of $680,000 in 1996, in regards to this
transaction, which amount was equal to the valuation differential resulting
from the change in features from the Series C to the Series M stock on the date
the conversion was approved by the Company's Board of Directors.
[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, 1996 and
1995. Another company maintains a non-contributory 401(k) plan.
[11] STOCK
-----
The Company Stock plan as outlined below have been analyzed in regards
to fair value accounting provided for under FASB Statement No. 123. In
management's opinion such valuation has no material impact upon the operating
results of the Company.
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 20,000 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 33,333 shares of the Company's common stock, all of which
were exercised except as follows:
8,333 shares at $7.50 per share through April 11, 1997
F-20
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- In October 1994 the Company issued stock options, pursuant to a
consulting agreement in connection with the acquisition of ATAB,
for 18,333 shares of common stock in 1994 and 50,000 shares of
common stock in 1995, of which 59,167 options were exercised in
1995 at $3.00 and $4.50 per share; the remaining option was
cancelled pursuant to a superseding consulting agreement.
- In November 1995, the Company, pursuant to the acquisition of ASI,
reserved and issued options to certain principals and/or employees
to purchase 55,000 shares of common stock as follows:
18,333 shares at $7.50 per share between December 1, 1996 through
December 31, 1998
18,333 shares at $9.00 per share between December 1, 1997 through
December 31, 1998
18,334 shares at $12.00 per share between December 1, 1998 through
December 31, 1998
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, 1994 - $ - 833 $ .36 18,333 $3.00
- ------------------
Granted 33,333 4.50-7.50 - - 106,667 4.50-12.00
Exercised - - (833) .36 (60,833) 3.00- 4.50
Expired - - -
Cancelled - - - - - -
-------- ------ -------
Outstanding at
December 31, 1995 33,333 4.50-7.50 - - 64,167 4.50-12.00
- ----------------- -------- ------ -------
Granted - - - - - -
Exercised (25,000) 4.50 - - - -
Expired - - - - - -
Cancelled - - - - (9,167) 4.50
- ----------------- -------- ------ -------
Outstanding at
December 31, 1996 8,333 $7.50 - $ - 55,000 $7.50-12.00
- ----------------- ======== ======== ====== ===== ======= ==========
</TABLE>
F-21
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
PUBLIC OFFERING OF SECURITIES
-----------------------------
In August, 1996 the Company completed a public offering of 1,815,000
Units of securities. Each "Unit" consisted of one share of Common Stock, $.01
par value, and one Redeemable Class C Common Stock Purchase Warrant (See "Stock
Warrants" below). The offering was underwritten by a syndicate of broker-
dealers, with First London Securities Corporation acting as Representative of
the underwriters. The Units were offered to the public at a price of $3.82 per
Unit, or a total offering of $6,933,300. The prospectus prepared by the Company
stated that net proceeds of $5,496,805 (after payment of the expenses of the
offering, including payments to the underwriters) were anticipated. For purposes
of this accounting, net proceeds from the offering of $5,013,056 have been
recorded, as additional expenses have been charged to the offering. The Company
expects to use the net proceeds primarily to repay debt, to finance acquisitions
and for working capital.
STOCK GRANT
-----------
On January 18, 1994, the Board of Directors of the Company adopted a
Restricted Stock Grant Program (the "Program") pursuant to which 183,333
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
183,333 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,
items one and two were met in 1995 and item one was met in 1996. 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 $4.50 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
related to this stock grant at December 31, 1996 was $545,089. Deferred
compensation expense in connection with this grant was $113,415 and $135,667,
respectively, for the years ended December 31, 1996 and 1995, 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.
STOCK SPLIT
-----------
The Company's Board of Directors declared a one-for-six reverse stock
split of its common stock, effective August 27, 1996. The par value of the
common stock remains at $.01 per share. All share data have been adjusted for
the effects of the split.
F-22
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STOCK WARRANTS
--------------
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 66,667 shares
of the Company's Common Stock at $2.25 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 33,333 of the shares which Argent could purchase
under the warrants issued to it in 1994. These warrants were fully exercised in
1996.
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.
Effective with the February 28, 1995 offering, the Company issued
170,000 Class A Common Stock Purchase Warrants, each of which allowed the
holders to purchase a share of the Company's common stock and a Class B Common
Stock Purchase Warrant for $8.10. Each Class B Warrant permitted the purchase of
a share of common stock at $9.90. No Class A Warrants were exercised before such
warrants expired on August 20, 1996.
Effective with the August 27, 1996 offering, the Company issued
1,815,000 Class C Common Stock Purchase Warrants, each of which allows the
holders to purchase a share of the Company's common stock at $3.82 per share.
The Class C Warrants expire on August 27, 1999. No Class C Warrants have been
exercised as December 31, 1996.
STOCK AUTHORIZATION
--------------------
On 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.
REGISTRATION OF "FORM S-8" STOCK
--------------------------------
In September 1996 the Company established the U.S. Transportation
Systems, Inc. Employee Stock and Stock Option Plan.
On October 16, 1996, the Company registered 2,000,000 common shares
pursuant to a Form S-8 filing with the Securities and Exchange Commission. The
stock is reserved for issuance to the Company's Employees, Directors, Officers,
or in consideration for bona fide services provided to the Company by
consultants or advisors. The Company's Board has the sole discretion in
determining when to issue such shares. As of December 31, 1996, the Company had
issued 326,000 Common Shares so registered under such Form S-8 filing. The
Company had no commitment at December 31, 1996 to issue any additional shares.
F-23
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[12] MOUNTAIN VIEW SETTLEMENT
------------------------
In 1993 the pending litigation between Mountain View Coach Lines, Inc.
(which was 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, insured 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 aggregated $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. In October 1996, after deducting court-approved offsets
of liabilities to the New York Department of Taxation & Finance and the New York
Worker's Compensation Board, the Company received approximately $109,000 in
regards to its claim against Mountain View; the difference between the amount
receivable on the Company's books and the eventual proceeds were expensed in
1996.
[13] ACQUISITIONS
------------
In February 1996, the Company acquired 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 18,333 shares of the
Company's common stock. This acquisition was accounted for as a purchase. As a
result of this acquisition the Company recorded goodwill of $205,000 which is
being amortized over eight years.
In June 1996, the Company purchased certain assets from Jackson &
Johnson, Inc. for $160,000 in cash and the assumption of approximately
$2,860,000 in secured debt. No goodwill was recorded as the fair value of the
assets acquired approximated the consideration given by the Company.
In September 1996, the Company acquired 100% of the common stock of
BancPro Transportation, Inc. in exchange for: a $1,150,000 zero interest-bearing
note due September 1998; 300,000 shares of the Company's common stock; and the
following preferred stock (25% of which relates to an employment contract with
the principal officer of BancPro Transportation, Inc.), the balance of the
shares relate to a consulting agreement with CFM:
6,667 shares of Preferred Stock Series E
8,333 shares of Preferred Stock Series F
10,833 shares of Preferred Stock Series G
12,500 shares of Preferred Stock Series H
14,167 shares of Preferred Stock Series I
15,833 shares of Preferred Stock Series J
17,500 shares of Preferred Stock Series K
19,167 shares of Preferred Stock Series L
F-24
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Each share of preferred stock is convertible into a maximum of ten shares of the
Company's common stock upon the attainment by BancPro of certain revenue goals.
Since it is not certain that any such goals will be attained, no amount was
booked for the issuance of these preferred shares. As revenue goals are reached,
the Company will record expense for the respective common shares which are
issued. As part of the agreement the Company received a guarantee from the
Seller in regards to BancPro receivables acquired. This acquisition was
accounted for as a purchase and resulted in recorded goodwill of $455,906, which
is being amortized over eight years.
In June 1995, the Company acquired the capital stock of Avanti Delivery
Services, Inc. and Priority Express Service, Inc. for an aggregate of 130,000
shares of the Company's 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 19,424 shares of the Company's 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 300,000 shares of the Company's
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. In November 1996, the Company's management made the decision
to discontinue ASI's operations, and it is, thereby, accounted for in the
accompanying financial statements as a discontinued operation (See Note 14).
The purchase price for all acquisitions in 1996 and 1995 was allocated
as follows:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Property and equipment $ 3,029,900 $ 953,800
Intangible assets 660,900 4,464,300
Working capital, net 1,250,000 (3,395,700)
------------- --------------
Total $ 4,940,800 $ 2,022,400
============= ==============
</TABLE>
F-25
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following unaudited pro forma statements does not purport to be
indicative of the results of operations that would have occurred if U.S.
Transportation Systems, Inc. had acquired Armstrong, Krogel, Jackson & Johnson
and BancPro at the beginning of the periods presented.
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------------------------------------------------
Armstrong
Freight
U.S Krogel, Service and Total Before
Transportation Jay & Jay and Trans Lynx Pro Forma Pro Forma
Systems BancPro Express Adjustments Adjustments Total
------------- ------------- ----------- ----------- ----------- -----
Year Ended
December 31, 1995
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $12,225,000 $15,610,000 $2,050,000 $29,885,000 $ - $29,885,000
Total expenses 10,770,000 15,970,000 2,030,000 28,770,000 30,000 28,800,000
Other expense 220,000 260,000 15,000 495,000 90,000 585,000
Income tax benefit 364,000 - - 364,000 - 364,000
----------- ----------- ---------- ----------- --------- ------------
Income/(loss) from
continuing operations 1,599,000 (620,000) 5,000 984,000 (120,000) 864,000
Loss from discontinued
operations (37,000) - - (37,000) - (37,000)
----------- ----------- ---------- ----------- --------- ------------
Net income/(loss) $ 1,562,000 ($ 620,000) $ 5,000 $ 947,000 ($120,000) $ 827,000
=========== =========== ========== =========== ========= ===========
Earinings per share:
Income from continuing operations $ 0.37
Loss from discontinued operations (0.02)
------
$ 0.35
======
Year Ended
December 31, 1996
- -----------------
Revenue $16,610,000 $10,330,000 $ - $26,940,000 $ - $26,940,000
Total expenses 18,020,000 11,190,000 - 29,210,000 110,000 29,320,000
Other expense 1,110,000 150,000 - 1,260,000 90,000 1,350,000
Income tax (expense) (750,000) - - (750,000) - (750,000)
----------- ----------- ---------- ----------- --------- ------------
Loss from
continuing operations (3,270,000) (1,010,000) - (4,280,000) (200,000) (4,480,000)
Loss from discontinued
operations (2,668,000) - - (2,668,000) - (2,668,000)
----------- ----------- ---------- ----------- --------- ------------
Net loss ($ 5,938,000) ($ 1,010,000) $ - ($ 6,948,000) ($ 200,000) ($ 7,148,000)
=========== =========== ========== =========== ========= ===========
Earinings per share:
Loss from continuing operations ($1.15)
Loss from discontinued operations (0.66)
------
($1.81)
======
The proforma adjustments for the years ended December 31, 1996 and 1995
are as follows:
1996 1995
---- ----
Amortization of goodwill $110,000 $ 30,000
Interest expense on note issued 90,000 90,000
-------- --------
Total proforma adjustments $200,000 $120,000
======== ========
</TABLE>
F-26
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[14] DISCONTINUED OPERATIONS
-----------------------
Airbag Equipment Manufacturer
- -----------------------------
In November 1996, the Company adopted a formal plan to discontinue its
operation that engages in the design, manufacturing and sales of machinery which
folds and tests airbags and assembles airbag modules for installation in
passenger and utility vehicles. These operations were located in Phoenix,
Arizona. ASI's operations experienced lower gross profit margins than the
Company believed was attainable at the time of acquisition. Further, ASI's
projected capital requirements for 1997 exceeded any amount the Company believed
were warranted by the timing of the anticipated returns. The decision to
discontinue ASI's operations was, thus, precipitated by management's belief that
this segment no longer represented the best utilization of the Company's assets.
On March 28, 1997 the Company sold ASI as a continuing operation for:
$100,000 cash; a 10.5% interest bearing note of approximately $5,200,000 with
monthly payments of approximately $80,000, the unpaid principal fully due on
April 1, 1999; and a non-interest bearing note of $685,000 due April 1, 1999.
These notes are guaranteed personally by the Seller's principal shareholder
and secured by the assets of ASI; additionally, 100% of ASI stock is pledged
against these notes.
During the year ended December 31, 1996, the Company booked $196,843
for the Company's provision for the estimated operating losses from discontinued
operations during the phase-out period. The operating loss of the Company's
airbag equipment manufacturing segment for the year ended December 31, 1996 was
$1,787,859 (excluding the phase-out period losses) as compared to net income for
the period from November 15, 1995 (the date of acquisition) to December 31, 1995
of $94,545. The results of operations of ASI have been reclassified to
discontinued operations for the years ended December 31, 1996 and 1995. The
segment's net sales were $6,889,758 in 1996 and $905,247 in the aforementioned
period in 1995. Net assets of the discontinued segment held for sale, includes
accounts receivable, inventory (including work in progress), property and
equipment and intangibles.
Entertainment Divisions
- -----------------------
In November 1996, the Company adopted a formal plan to discontinue its
entertainment divisions which specialize in the retail sale of tickets for
theater, sports and various entertainment events in the New York and Chicago
area. These operations were located in Chicago and New York. The entertainment
divisions experienced lower gross profit margins and increasing losses in recent
years, and the Company believed that the potential for profitability is doubtful
in the near future and was attainable at the time of acquisition. The decision
to discontinue the entertainment divisions was based upon management's belief
that this segment no longer represented a profitable segment.
On January 7, 1997 the Company sold the entertainment divisions as a
continuing operation for 850,000 shares of common stock of Packaging Plus
Services, Inc., a
F-27
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
publicly-held company. PKGP was trading at $0.875 per share and the 850,000
shares represented approximately 28% of PKGP's total issued and outstanding
common stock at the time of the sale.
During the year ended December 31, 1996, the Company recorded no
provision for the estimated operating losses from discontinued operations during
the phase-out period (January 1-7, 1997), as the operating activity for such
period was de minimus. The operating loss of the Company's entertainment
divisions for the year ended December 31, 1996 was $683,514, as compared to a
net income of $35,330 for 1995. The results of operations for the entertainment
division have been reclassified to discontinued operations for the years ended
December 31, 1996 and 1995. The segment's net sales were $2,331,770 and
$2,775,480 in 1996 and 1995, respectively. Net assets of the discontinued
segment held for sale of $189,400 comprised of approximately $80,000 in ticket
inventory and the remainder in computer equipment and furniture and fixtures are
included in Net Assets Held for Sale on the Balance Sheet at December 31, 1996.
Charter Bus
- -----------
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 resulted from
management's belief that charter operations no longer represented a profitable
segment and that the segment'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 the assets to other
Company locations. Additionally, in 1995 the Company disposed of its charter bus
operations in Florida (March 1995) and Ohio (October 1995) as continuing
operations. As of December 31, 1996, all assets relating to discontinued charter
operations had been disposed of with the exception of one highway motorcoach
with a carrying value approximating fair market value of $55,953, which amount
is included in Assets Held for Sale. The company generated $97,000 and
$3,091,000 from the sale of assets of the discontinued charter bus segment
during the years ended December 31, 1996 and 1995: $97,000 and $2,123,000 in the
form of sale-type leases in 1996 and 1995, respectively; and $375,000 in two
promissory notes in 1995.
The results of operations for charter bus operations have been
reclassified to discontinued operations for the year ended December 31, 1995.
During the year ended December 31, 1995, the Company increased its reserve for
estimated loss on disposal of discontinued operations by $167,199 (net of income
tax benefit of $86,000) as a result of losses from discontinued operations
exceeding the Company's previous provision for such losses. The operating loss
of the Company's charter bus segment for the year ended December 31, 1995 was
$410,431 and net sales
F-28
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
were $1,275,182. Net assets of the discontinued segment of $55,953, relating to
one highway motor coach, are included in Net Assets Held for Sale on the Balance
Sheet as of December 31, 1996.
Interest Expense Allocation
- ---------------------------
Interest expense has been allocated to discontinued operations.
Interest expense allocated to discontinued operations totals $577,000 and
$129,000 in 1996 and 1995, 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.
Net Assets Held for Sale
- -------------------------
In November 1996, the Company announced its intention to dispose of its
airbag equipment manufacturer and entertainment division. In a prior year, the
Company's charter bus operation was discontinued. The consolidated balance sheet
relating to the discontinued operations as of December 31, 1996 has been
reclassified to net assets held for sale as follows:
Net Assets Held for Sale:
Current assets $2,879,257
Property, net 905,522
Intangibles net 3,586,800
----------
Total assets 7,371,579
----------
Bank debt 766,327
Other liabilities 2,013,446
----------
Total liabilities 2,779,773
----------
Net assets held for sale $4,591,806
==========
[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 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 receivables,
BancPro's receivables, payables, investments in sales-type leases and related
party debt.
[16] CONCENTRATION OF CREDIT RISK
----------------------------
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] 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 net proceeds of $1,776,288 and, in
February 1996, the Company sold $300,000 of convertible preferred stock for net
proceeds of $256,728. 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 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 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 753,667 shares of common
stock. In March 1996, the preferred stock was converted into 88,889 shares of
the Company's common stock.
[18] 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
F-29
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
liability at December 31, 1996 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, 1996, 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, 1996, the Company has recorded a
liability of approximately $55,000 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 $372,000 and $480,000 for 1996 and 1995, respectively.
On July 10, 1996 the Company entered into an employment agreement
with Ronald P. Sorci to act as the Company's controller for a term of five
years. The agreement was modified on November 22, 1996. Under the agreement as
modified, Mr. Sorci will receive an annual salary of $100,000, an annual non-
accountable expense allowance of $25,000, 2,083 shares of Common Stock each
March 31 and November 30, and other customary benefits. The agreement also
contained a covenant by Mr. Sorci that he would not compete with the Company,
for which Mr. Sorci received 199,444 shares of Common Stock plus a loan in the
amount of $250,000. The loan is due on May 31, 1997 with interest at 9.5%, and
is secured by 70,000 shares of Common Stock. In addition, the Company agreed to
indemnify Mr. Sorci against certain contingent liabilities which may arise from
Mr. Sorci's previous service as Chief Executive Officer of RPS Executive
Limousines Ltd., a limousine service in the New York metropolitan area.
In November 1996, the Company entered into an employment agreement
with the Chairman (See Note 9). The Agreement further provides that in the event
of a change in control of the Company the Company must (i) repurchase all shares
of capital stock owned by Mr. Margolies or members of his family, (ii) pay Mr.
Margolies ten times his last annual salary, (iii) issue to Mr. Margolies 25% of
the Common Stock of the Company, and (iv) repay all loans by the Margolies
family to the Company. Mr. Margolies has agreed to waive these "change of
control" provisions in connection with the proposed merger with Precept
Investors, Inc.
[19] IMPAIRMENT OF ASSET
In October 1996 the Company's harness manufacturing subsidiary,
ATAB of Texas, lost its long term profitable contract with Stewart & Stevenson
("S&S"), ATAB's only customer. Although ATAB continues to do work for S&S, all
subsequent work has materially lower profit margins to the extent that future
profits at ATAB are uncertain. As such, management determined that certain
intangible assets including goodwill should be written off as the net realizable
value of such assets had been significantly impaired as a result of the
significant change in the profit outlook for ATAB.
F-30
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
[20] SUBSEQUENT EVENTS
-----------------
On March 7, 1997 the Company signed a letter of intent to enter into a merger
agreement with Precept Investors, Inc. ("Precept"), a Texas corporation,
which is a leading distributor of business forms and product management
systems and which also has a limousine service business and a package
delivery business. Pursuant to the aforementioned agreement, Precept would be
merged into the Company with the Precept shareholders receiving an aggregate
of 36,000,000 shares of the Company's common stock. The merger will not be
completed, however, unless a number of conditions precedent are satisfied,
including inter alia; negotiation and execution of a binding merger agreement
and other related agreements, documents and instruments; satisfactory
completion of due diligence reviews by both Precept and the Company, which
reviews are presently ongoing; receipt of a fairness opinion from an
investment banker of the Company; the expiration or termination of any
applicable waiting periods under the Hart Scott-Rudino Antitrust Improvements
Act of 1976, as amended; and approval of the merger by the shareholders of
the Company and of Precept. Accordingly, these financial statements have been
prepared as if no merger will take place.
On January 30, 1997 the Company formed a wholly-owned subsidiary named U. S.
Trucking, Inc. ("USTI"). Thereafter, the following transactions
contemporaneously took place:
--100% of the issued and outstanding stock of the Company's wholly-owned
tractor-trailer subsidiaries, Trans Lynx Express, Inc. and Jay & Jay
Transportation, Inc., were merged into USTI as wholly-owned subsidiaries
thereof;
--USTI acquired 100% of the issued and outstanding stock of Mencor, Inc., a
tractor-trailer brokerage company in exchange for $75,000 and 37,500 shares
of the Company's common stock;
--USTI acquired 100% of the issued and outstanding stock of Gulf Northern
Transport, Inc., ("GNTI") a tractor-trailer delivery company for common
shares of USTI which represented 25% of the issued and outstanding stock of
USTI.
In connection with the acquisition of Mencor and GNTI, USTI entered into
employment agreements with Danny Pixler and Michael Menor. The agreement with
Danny Pixler provides that USTI will employ Mr. Pixler through January 30,
2002 as President of USTI and GNTI. Mr. Pixler will receive an annual salary
of $105,000 as well as options to purchase 60,000 shares of the Company's
Common Stock at prices from $1.75 through $3.75. The Agreement with Mr. Menor
provides that he will be employed through January 30, 2000 as President of
Mencor. Mr. Menor will receive an annual salary of $60,000. The Company also
issued 18,750 shares of Common Stock to Mr. Menor as consideration for his
covenant not to compete with the Company for two years after termination of
his employment.
F-31
<PAGE>
CERTIFICATE OF DESIGNATION
OF
SERIES E PREFERRED STOCK
SERIES F PREFERRED STOCK
SERIES G PREFERRED STOCK
SERIES H PREFERRED STOCK
SERIES I PREFERRED STOCK
SERIES J PREFERRED STOCK
SERIES K PREFERRED STOCK
AND
SERIES L PREFERRED STOCK
OF
U.S. TRANSPORTATION SYSTEMS, INC.
Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter
78, Section 1955, the undersigned officers do hereby certify:
FIRST: That by the certificate of incorporation duly filed in that
State of Nevada, the total number of shares which this Corporation may issue is
stated by Article FIFTH to be as follows:
The aggregate number of shares which the Corporation shall have the
authority to issue is 50,000,000 shares of Common Stock, $.01 par
value, designated as "Common Stock," and 10,000,000 shares of Preferred
Stock, par value $.01, designated as "Preferred Stock." The Board of
Directors is authorized, subject to limitations prescribed by law and
the provisions hereof, to provide for the issuance from time to time of
Preferred Stock in one or more series, and by filing a certificate
pursuant to ss.78.1955 of the Nevada General Corporation Law, as
amended and supplemented from time to time, to establish the number of
shares to be included in each such series, and fix the voting powers,
designations, preferences, limitations, restrictions, relative rights,
and distinguishing designation of the shares of each such series not
fixed hereby. The aforesaid authorization of the Board shall include,
but not be limited to, the power to provide for the issuance of shares
of any series of Preferred Stock convertible, at the option of the
holder or of the Corporation or both, into shares of any other class or
classes or of any series of the same or any other class or classes.
SECOND: That pursuant to the authority so vested in the Board of
Directors by the certificate of incorporation, the Board of Directors at a
meeting duly convened and held on September 11, 1996, adopted the following
resolutions:
<PAGE>
RESOLVED, that there be created eight series of preferred
stock (collectively, the "Designated Preferred Stock") which the
Corporation may issue, as follows:
Number
Designation of Shares
----------- ---------
Series E Preferred Stock 5,000
Series F Preferred Stock 6,250
Series G Preferred Stock 8,125
Series H Preferred Stock 9,375
Series I Preferred Stock 10,625
Series J Preferred Stock 11,875
Series K Preferred Stock 13,125
Series L Preferred Stock 14,375
FURTHER RESOLVED, that all shares of the eight series of
Designated Preferred Stock shall have the same relative rights,
preferences and limitations, except as to the designation and
conversion features of each, and that the relative rights, preferences
and limitations of all of the Designated Preferred Stock shall be as
follows:
A. Dividend Rights
Holders of the Designated Preferred Stock are entitled to
receive no dividends.
B. Voting Rights
The holders of Designated Preferred Stock shall not be
entitled to receive notice of any meeting of the shareholders of the
Corporation nor to cast votes at any such meeting.
C. Liquidation Preference
In the event of a voluntary or involuntary liquidation or
winding up of the Corporation, the holders of Designated Preferred
Stock will be entitled to share in the assets of the Corporation
available for distribution to shareholders on a share-for-share basis
pari passu with the holders of Common Shares. The foregoing liquidation
rights shall not be operative in the event of (i) any consolidation or
merger of the Corporation with or into any other corporation, (ii) any
dissolution, liquidation, winding up or reorganization of the
Corporation immediately followed by reincorporation of a successor
corporation or creation of a successor partnership or (iii) a sale or
other disposition of all or substantially all of the Corporation's
assets to another corporation or partnership if, in each case,
effective provision is made in the certificate of incorporation of the
resulting or surviving corporation or the articles of partnership of
the resulting partnership or otherwise, for the protection of the
rights of the holders of the Designated Preferred Stock.
2
<PAGE>
D. Redemption
At any time after September 10, 2001, the Corporation shall be
entitled to redeem all or part of the shares of Designated Preferred
Stock by giving written notice to the registered holders thereof not
less than five days prior to the redemption date. Each such notice
shall state (1) the redemption date, (2) the number of share to be
redeemed from each holder, and (3) the place where certificates for the
Designated Preferred Stock are to be surrendered. Upon surrender in
accordance with said notice of certificates for the shares to be
redeemed, such shares shall be redeemed at a price of $.01 per share.
Notice having been given, upon the redemption date (unless the
Corporation shall default in paying the redemption price), said shares
shall no longer be deemed to be outstanding.
FURTHER RESOLVED, that the Designated Preferred Stock shall be
convertible into shares of Common Stock, $.01 par value, of the
Corporation (the "Common Stock") under certain conditions, as follows:
E. Conversion
The Designated Preferred Stock shall be convertible, at the
discretion of the record holder thereof, into Common Stock upon the
occurrence of a "Conversion Condition." A Conversion Condition shall
occur if, during any twelve month period ending on or prior to August
31, 2001, the BTI Revenue, as defined below, shall exceed any of the
Thresholds specified below. For purposes hereof, the term "BTI Revenue"
shall mean the aggregate gross revenue, determined in accordance with
generally accepted accounting principles, of (a)
Bancpro-Transportation, Inc., an Arizona corporation ("BTI"), and (b)
any other entity controlled by the Corporation which is engaged in a
business substantially similar to that in which BTI was engaged on
September 11, 1996. The "Thresholds" for determining whether a
Conversion Condition has occurred shall be as follows:
Series of Preferred Stock Threshold
------------------------- ---------
Series E Preferred Stock $ 2,500,000
Series F Preferred Stock $ 4,000,000
Series G Preferred Stock $ 6,000,000
Series H Preferred Stock $ 8,500,000
Series I Preferred Stock $11,000,000
Series J Preferred Stock $14,000,000
Series K Preferred Stock $18,000,000
Series L Preferred Stock $22,000,000
3
<PAGE>
By way of example only: if during the twelve month period
ending on July 31, 1999, the BTI Revenue is $7,000,000, then from
August 1, 1999 until the date of redemption of the Designated Preferred
Stock, the Series E, Series F and Series G Preferred Stock shall be
convertible. If the BTI Revenue during the twelve month period ending
on August 31, 1999 is $9,000,000, then the Series H Preferred Stock
shall also become convertible.
Any of the Designated Preferred Stock which has become
convertible may be converted into Common Stock may be converted into
Common Stock on the following basis:
(a) Ten (10) shares of Common Stock for each share of
Designated Preferred Stock if the "Average Stock Price" is
less than $9.00;
(b) Seven (7) shares of Common Stock for each share of
Designated Preferred Stock if the "Average Stock Price" equals
or exceeds $9.00 but is less than $15.00;
(c) Four (4) shares of Common Stock for each share of
Designated Preferred Stock if the "Average Stock Price" equals
or exceeds $15.00.
For purposes hereof, the "Average Stock Price" means the
average daily closing bid prices of the Common Stock for the period of
5 consecutive trading days immediately preceding the date of the
conversion of the Designated Preferred Stock in respect of which such
Average Stock Price is determined.
The conversion rates and Average Stock Prices set forth
immediately above shall be subject to equitable adjustment at the
reasonable discretion of the Board of Directors of the Corporation in
the event of the occurrence of the following events: a dividend or
distribution payable in shares of Common Stock, subdivisions,
combinations or reclassifications of the Common Stock, the distribution
to the holders of Common Stock of evidences of indebtedness or assets
(excluding cash dividends or distributions made out of current or
retained earnings), a merger or consolidation, reorganization, or sale
of the assets of the Corporation.
The conversion right, if effective, may be exercised only by
the record holder of Designated Preferred Stock, in whole or in part,
by the surrender of the share certificate or share certificates
representing the Designated Preferred Stock to be converted at the
principal office of the Corporation (or at such other place as the
Corporation may designate in a written notice sent to the holder by
first-class mail, postage prepaid, at its address shown on the books of
the Corporation). Each Designated Preferred Stock certificate
surrendered for conversion shall be endorsed by its holder.
4
<PAGE>
THIRD: That the said resolutions of the Board of Directors, and the
creation and authorization of issuance thereby of said series of preferred stock
and determination thereby of the dividend rate, voting rights, liquidation
preference, and conversion rights, were duly made by the Board of Directors
pursuant to authority as aforesaid and in accordance with Section 1955 of the
General Corporation Law.
Signed on September 11, 1996 U.S. TRANSPORTATION SYSTEMS, INC.
By:
-----------------------------------
Terry A. Watkins
Executive Vice President
By:
-----------------------------------
Michael Margolies, Secretary
5
<PAGE>
STATE OF NEW YORK )
)SS.:
COUNTY OF NEW YORK )
On September 11, 1996, personally appeared before me, a Notary Public,
for the State and County aforesaid, Terry A. Watkins, as Executive Vice
President of U.S. Transportation Systems, Inc., who acknowledged that he
executed the above instrument.
---------------------------------------
Notary Public
6
<PAGE>
CERTIFICATE OF DESIGNATION
OF
SERIES M PREFERRED STOCK
OF
U.S. TRANSPORTATION SYSTEMS, INC.
Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter
78, Section 1955 the undersigned officers do hereby certify:
FIRST: That by the certificate of incorporation duly filed in that
State of Nevada, the total number of shares which this Corporation may issue is
stated by Article FIFTH to be as follows:
The aggregate number of shares which the Corporation shall have the
authority to issue is 50,000,000 shares of Common Stock, $.01 par
value, designated as "Common Stock," and 10,000,000 shares of Preferred
Stock, par value $.01, designated as "Preferred Stock." The Board of
Directors is authorized, subject to limitations prescribed by law and
the provisions hereof, to provide for the issuance from time to time of
Preferred Stock in one or more series, and by filing a certificate
pursuant to ss.78.1955 of the Nevada General Corporation Law, as
amended and supplemented from time to time, to establish the number of
shares to be included in each such series, and fix the voting powers,
designations, preferences, limitations, restrictions, relative rights,
and distinguishing designation of the shares of each such series not
fixed hereby. The aforesaid authorization of the Board shall include,
but not be limited to, the power to provide for the issuance of shares
of any series of Preferred Stock convertible, at the option of the
holder or of the Corporation or both, into shares of any other class or
classes or of any series of the same or any other class or classes.
SECOND: That pursuant to the authority so vested in the Board of
Directors by the certificate of incorporation, the Board of Directors at a
meeting duly convened and held on November 18, 1996 adopted the following
resolution:
RESOLVED, that there be created a series of preferred stock to
be designated as Series M Preferred Stock, the number of shares of such
series to be one hundred and eighty thousand (180,000), which the
Corporation may issue. The designation, relative rights, preferences
and limitations of the Series M Preferred Stock shall be as follows:
<PAGE>
A. Dividend Rights
Holders of Series M Preferred Stock are entitled to receive no
dividends.
B. Voting Rights
The holders of Series M Preferred Stock shall not be entitled
to receive notice of any meeting of the shareholders of the Corporation
nor to cast votes at any such meeting.
C. Liquidation Preference
In the event of a voluntary or involuntary liquidation or
winding up of the Corporation, the holders of Series M Preferred Stock
will be entitled to receive out of the assets of the Corporation
available for distribution to shareholders $10.00 per share plus all
accrued and unpaid dividends, whether or not declared, before any
distribution is made to the holders of Common Shares or any other class
or series of stock ranking junior to the Series M Preferred Stock as to
distribution of assets. No payment on account of such liquidation or a
dissolution or winding up of the affairs of the Corporation shall be
made to the holders of any class or series of stock ranking on a parity
with the Series M Preferred Stock in respect of the distribution of
assets, unless there shall likewise be paid at the same time to the
holders of the Series M Preferred Stock like proportionate distributive
amounts, ratably, in proportion to the full distributive amounts to
which they and the holders of such parity stock are respectively
entitled with respect to such preferential distribution. After payment
of the full amount of the liquidating distribution to which they are
entitled, the holders of Series M Preferred Stock will have no further
interest in the assets of the Corporation. The foregoing liquidation
rights shall not be operative in the event of (i) any consolidation or
merger of the Corporation with or into any other corporation, (ii) any
dissolution, liquidation, winding up or reorganization of the
Corporation immediately followed by reincorporation of a successor
corporation or creation of a successor partnership or (iii) a sale or
other disposition of all or substantially all of the Corporation's
assets to another corporation or partnership if, in each case,
effective provision is made in the certificate of incorporation of the
resulting or surviving corporation or the articles of partnership of
the resulting partnership or otherwise, for the protection of the
rights of the holders of the Series M Preferred Stock.
2
<PAGE>
D. Conversion
The Series M Preferred Stock shall be convertible, at the
discretion of the record holder thereof, into Common Stock at any time
after December 31, 1997. Each share of the Series M Preferred Stock
shall be convertible into 9.5 shares of Common Stock. Said conversion
rate shall be subject to equitable adjustment at the reasonable
discretion of the Board of Directors of the Corporation in the event of
the occurrence of the following events: a dividend or distribution
payable in shares of Common Stock, subdivisions, combinations or
reclassifications of the Common Stock, the distribution to the holders
of Common Stock of evidences of indebtedness or assets (excluding cash
dividends or distributions made out of current or retained earnings), a
merger or consolidation, reorganization, or sale of the assets of the
Corporation.
The conversion right may be exercised only by the record
holder of Series M Preferred Stock, in whole or in part, by the
surrender of the share certificate or share certificates representing
the Series M Preferred Stock to be converted at the principal office of
the Corporation (or at such other place as the Corporation may
designate in a written notice sent to the holder by first-class mail,
postage prepaid, at its address shown on the books of the Corporation).
Each Series M Preferred Stock certificate surrendered for conversion
shall be endorsed by its holder.
THIRD: That the said resolution of the Board of Directors, and the
creation and authorization of issuance thereby of said series of preferred stock
and determination thereby of the dividend rate, voting rights, liquidation
preference, and conversion right, were duly made by the Board of Directors
pursuant to authority as aforesaid and in accordance with Section 1955 of the
General Corporation Law.
Signed on November 22, 1996 U.S. TRANSPORTATION SYSTEMS, INC.
By:
------------------------------------
Terry A. Watkins
Executive Vice President
By:
------------------------------------
Michael Margolies, Secretary
3
<PAGE>
STATE OF NEW YORK )
)SS.:
COUNTY OF NEW YORK )
On November 22, 1996, personally appeared before me, a Notary Public,
for the State and County aforesaid, Terry A. Watkins, as Executive Vice
President of U.S. Transportation Systems, Inc., who acknowledged that he
executed the above instrument.
------------------------------
Notary Public
4
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement made as of the 18th day of November 1996 by and
between U.S. Transportation Systems, Inc., a Nevada corporation, having a
principal place of business located at 33 West Main Street, Elmsford, New York
(the "Company") and Michael Margolies (the "Executive") , whose address is
located at 2208 N. 45th Avenue, Hollywood, Florida 33021 (the "Agreement ").
WITNESSETH:
WHEREAS, the Executive has been a valued employee and key executive of the
Company and possesses unique personal knowledge, experience, and expertise
concerning the business and operations of the Company; and
WHEREAS, the Company is desirous of ensuring the continued services of the
Executive upon the terms and conditions set forth in this Agreement;
NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:
1. Term; Duties; Best Efforts; Indemnification.
(a) The Company agrees to and hereby does continue the Executive in its
employ as its Chairman and Chief Executive Officer and the Executive agrees to
and hereby does continue in the employ of the Company as its Chairman and Chief
Executive Officer for a period commencing on January 1, 1997 ending on December
31, 2007 (the "Term"), unless the Agreement is sooner terminated pursuant to the
provisions herein.
(b) Employee shall serve as Chairman and Chief Executive Officer of the
Company, subject only to policy directions from the Board of Directors of
Company. No other Chairman, Chief Executive Officer or other executive officer
will be appointed with authority over the business of the Company superior to
the Executive.
(c) Subject to the provisions of Company's Certificate of Incorporation and
Bylaws, each as amended from time to time, the Company shall indemnify the
Executive to the fullest extent permitted by the Business Corporation Law of the
State of Nevada, for all amounts (including without limitation, judgments,
fines, settlement payments, expenses and attorney's fees) incurred or paid by
the Executive in connection with any action, suit, investigation or proceeding
arising out of or relating to the performance by the Executive of services for
the Company, or the acting by the Executive as a director, officer or employee
of the Company, or any other person or enterprise at the Company's request. The
Company shall use its best efforts to obtain and maintain in full force and
effect during the Term, directors, and officers' liability instance policies
providing full and adequate protection to the
<PAGE>
Executive for his capacities.
2. Attention to Business; Duties
The Executive agrees to continue to devote his full time, attention, skill,
and efforts to the performance of his duties and responsibilities to the
Company, and to any subsidiary or subsidiaries of the Company, all under the
supervision and direction of the Company's Board of Directors, but nothing in
this Agreement shall preclude the Executive from devoting reasonable periods
required for;
(a) serving as a director or member of a committee of any organization or
corporation involving no conflict of interest with the interests of
the Company and with written consent of the Company, said consent not
to be unreasonably withheld;
(b) delivering lectures, fulfilling speaking engagements, and any writing
or publication related to his area of expertise;
(c) engaging in professional organization and program activities;
(d) serving as a consultant in his area of expertise to government,
industrial, and academic panels where it does not conflict with the
interests of the Company; and
(e) managing his personal investments or engaging in any other
noncompeting business;
3. Compensation
For all services to be rendered by him in any capacity hereunder (including
services as an officer, director, member of any committee or otherwise), the
Company agrees to provide the Executive with the following compensation, so long
as he shall be employed hereunder:
(a) The Executive shall entitled to a fixed full base salary at the rate
of Two Hundred and Fifty Thousand Dollars ($250,000) per annum,
payable in such installments as determined by the Board of Directors
with such increases as shall be awarded by the Board of Directors from
time to time (such increases in rate at lease equal on a percentage
basis to the increase, if any, in the cost-of-living shown on the
Consumer Price Index for the New
2
<PAGE>
York/Northeastern New Jersey Statistical Area (1967=100) published by
the Bureau of Labor Statistics of the United States Department of
Labor for the preceding year (the "Annual Salary Adjustment")). Such
increases shall be in accordance with the Company's regular
administrative practices of other salary increases applicable to
executives of the Company in effect on the date of this Agreement.
(b) The Executive shall also be entitled to receive an annual bonus (the
"Annual Bonus") equal to eight percent (8%) of the Company's pre-tax
income as reported by its audited financial statements certified by
the Company's independent auditors. The Annual Bonus shall be paid to
the Executive not later than ninety {90) days from the last day of the
Company's fiscal year.
(c) The Company shall provide two automobiles for the Executive and shall
pay all costs associated therewith, including, expenses, gas,
insurance, repairs and any related expenses.
(d) Upon payment of Ten Thousand Dollars ($10,000), the Executive shall be
entitled to receive one million (1,000,000) shares of the Company's
common stock ( "Common Stock") as compensation for anticipated future
services in his capacity as Chairman and Chief Executive Officer. Such
shares shall be issued to the Executive no later than March 31, 1997,
such issuance date to be otherwise determined solely by the Executive.
(e) The Company shall pay the premiums on a life insurance policy or
similar annuity policy (as shall be determined by the Executive on the
life of the Executive having a death benefit of One Million
($1,000,000) Dollars, and upon the expiration or termination of this
Agreement, the Executive shall have the right to own the policy and to
determine, in his discretion, the beneficiary of such policy. The
company agrees that it shall continue make payment of all premiums on
behalf of the
3
<PAGE>
Executive.
(f) The Executive shall be entitled to participate in any Management
Incentive Compensation Plans adopted by the Company's Board of
Directors during the Term of this Agreement on a basis as determined
by the Board of Directors consistent with such Management Incentive
Compensation Plans.
(g) The Executive shall be entitled to participate, to the extent
determined by the Board of Directors or appropriate committee, in any
stock option plan established for eligible employees by the Company's
Board of Directors or appropriate committee.
(h) The Executive shall be a participant in, and beneficiary, of, any and
all pension, profit sharing, life, dental, medical, and other group
benefit plans provided by the Company for eligible employees during
the term of this Agreement.
(i) The Executive shall entitled to a vacation of six (6) weeks, during
which time his compensation shall be paid in full. The Executive shall
notify the Board of Directors prior to his absence on account of
vacation plans.
(j) The Executive shall be eligible for participation in any supplemental
executive retirement plan adopted by the Company's Board of Directors
during the Term of this Agreement.
(k) Upon the expiration or termination of this Agreement, or upon the
death of the Executive, or upon a "Change of Control" as defined in
Section 9 below (any of such events referred to hereinafter as a
"Redemption Event"), the Company shall be required, ninety (90) days
after written notice is mailed to the Company from the Executive (in
the case of expiration or termination of this Agreement, or upon a
Change of Control), or by his duly appointed executor or administrator
(in the event of the Executive's death), to redeem the shares of
Common Stock and Preferred Stock of the Company owned by the Executive
and his affiliates, including shares held by (1)
4
<PAGE>
members of the Executive's family; and (2 ) trusts created for the
benefit of the Executive and/or his family members (collectively, the
"Affiliates"). The redemption price ("Redemption Price") of each share
of Common Stock owned by the Executive or his Affiliates shall be
equal to the average closing bid price of the Common Stock; (if the
shares are traded on The NASDAQ Stock Market ), or the closing sale
price (if the shares are traded on a national securities exchange),
for a period of thirty (30) trading days prior to, and ending on the
date written notice of the Redemption Event was been mailed to the
Company, provided however, that in no event shall the Redemption Price
be less than $3.00 per share. In the event that the Company's shares
of Common Stock are not publicly traded at the time a Redemption Event
occurs, the Redemption Price per share shall be equal to an agreed
upon value of the shares as determined by an independent certified
accounting firm selected jointly by the Company and the Executive or
his executor or administrator (as applicable), provided however, that
in no event shall the Redemption Price be less than $3.00 per share.
The Redemption Price of the Preferred Stock owned by the Executive and
his Affiliates shall be Ten Dollars ($10.00) per share.
4. Competition with the Company
The Executive agrees that during the Term of his employment and for a
period of two years thereafter, he will not directly or indirectly, for his own
benefit, or an behalf of others, compete, or be an officer, director, employee
or controlling shareholder of the capital stock or other equity interest of any
corporation or other entity located within a fifty (50) mile radius of the
location of any Company plant or office which competes with any business
conducted by the Company, its subsidiaries, or affiliates during the time of his
employment and at the date of such termination. Any breach or threatened breach
of any provision of this Section 4, which the Executive agrees would cause the
Company irreparable harm for which the Company will have no adequate remedy at
law, shall entitle the Company to legal remedies including but not limited to
injunctive relief, except that the Executive may raise all of his legal and
equitable defenses and remedies in any action or proceeding brought by the
Company.
5. Disclosure of Information
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(a) The Executive agrees that he will not disclose any information which is
treated by the Company as confidential, including, but not limited to,
information relating to any of the Company's inventions, processes, methods of
distribution, customers, trade secrets relating to the Company devices and
systems, and information relating to any person, firm, corporation, association,
or other entity (the "Confidential Information"). Disclosure of Confidential
Information may be made if such disclosure is in the Company's best interests or
is made in order to promote and enhance the Company's business, provided
sufficient arrangements are made by the Executive and a Company officer
authorized to act in the matter by the Board of Directors with such entity to
insure the confidentiality of such disclosure.
(b) The Executive also agrees that upon leaving the Company's employ, he
will not take with him, or disclose, without the prior written consent of an
officer authorized to act in the matter by the Board of Directors of the Company
any information which is treated by the Company as Confidential.
(c) A material breach or threatened material breach by the Executive of the
provisions of this Section 5, which the Executive agrees would cause irreparable
harm to the Company for which the Company will have no adequate remedy at law,
shall entitle the Company to legal remedies including but not limited to
injunctive relief restraining the Executive from disclosing any such
information, or from rendering any service to any person, firm, corporation,
association, or other entity to whom such information has been disclosed or is
threatened to be disclosed in violation of the provisions of this Section 5,
except that the Executive may raise all of his legal and equitable defenses and
remedies in any action or proceeding brought by the Company. The provisions of
this Section 5 shall survive any termination of this Agreement.
6. Grant of Rights.
(a) The Executive agrees to assign and does hereby assign to the Company
all inventions, discoveries or new products conceived, made or discovered by the
Executive whether solely or in collaboration with others during the term of his
employment by the Company (hereinafter the "Executive Products"), which directly
relate to the Company's business as then constituted (i.e., the business being
conducted by the Company or any subsidiary at the time of such conception or
discovery).
(b) Should the Company elect to sell or otherwise transfer the Company's
rights to any of the Executive Products, the Executive must be notified within
ten (10) days by certified mail, and is then granted the right of first refusal
to personally acquire the ownership of any such Executive Products on the same
terms obtained by the Company through any bona fide offer for such
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rights. The Executive must exercise his option to do so within ninety (90) days
of notice of such a competing offer. The provisions of this subparagraph (b) of
this Section 6 shall survive for a period of two (2) years following any
termination of this Agreement by the Executive or the Company except for
termination for Cause.
7. Return of Documents
Upon leaving the employ of the Company, the Executive shall not take with
him, without written consent of an Executive Officer of the Company, any
manuals, records, drawings, blueprints, data, tables, calculations, letters,
documents, or any copy or other reproduction thereof, or any other property or
Confidential Information, of or pertaining to the Company or any of its
subsidiaries. All of the foregoing shall be returned to the Board of Directors
on or before the date of termination of employment.
8. Key Man Life Insurance
The Executive shall do whatever is reasonably necessary in order to enable
the Company to maintain key man life insurance on his life with all benefits
payable to the Company. Upon the expiration or termination of this Agreement,
the Executive shall have the right to cancel his key man life insurance policy
or rename the beneficiary upon the Executive's assuming the payment of premiums
from the Company.
9. Change of Control
(a) For purposes of this Agreement, a change of control of the Company (the
"Change of Control") is defined as follows:
(i) Of the nature that would be required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14(A) promulgated under the
Securities Exchange Act of 1934, as amended ( "Exchange Act" ); or
(ii) If any "person" (as such term is used in Section 13(d) and 14(d)
of the Exchange Act) is or becomes the beneficial owner, directly or
indirectly by acquisition, or otherwise, of securities of the Company
representing twenty-five (25%) percent or more of the combined voting power
of the Company's then outstanding securities; or
(iii) During any period of twelve (12) consecutive months, individuals
who at the beginning of such twelve (12) month period constitute the Board
of Directors of the Company cease, for any reason, to constitute at least a
majority thereof, unless the election or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who
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<PAGE>
were directors at the beginning of the period.
(b) In addition to all other entitlements granted to the Executive under
this Agreement, effective upon a "Change of Control" of the Company, as defined
above, the Executive shall be entitled to receive immediately upon such "Change
of Control" and without the payment of any further consideration:
(i) cash compensation equal to ten times the Executive's last annual
salary;
(ii) that number of shares of the Company's Common Stock which shall
equal twenty-five percent (25%) of the total number of shares of Common
Stock outstanding as of the date of the Change of Control on a fully
diluted basis (i.e. giving effect to the exercise of all outstanding
warrants, options, convertible rights and all other rights to purchase
shares of the Company's Common Stock);
(iii) payment of all outstanding loans to the Company made by the
Executive or his affiliates, including family members or trusts created for
the benefit of the Executive's or his family members; and
(iv) redemption of all outstanding shares of preferred and common
stock owned by the Executive or his affiliates, including family members or
trusts created for the benefit of the Executive or his family members, as
set forth in Section 3(k) above.
(c) Payment of all compensation due to the Executive upon a Change of
Control as set forth in Section 9(b) above, shall be made immediately upon the
Change of Control. In the event that the Company shall fail to pay such
compensation when due, the Executive shall be entitled to a blanket lien upon
all assets of the Company to secure the obligations of the Company hereunder.
The Company hereby agrees to execute all documents required to create, perfect
and protect such lien by the Executive.
10. Termination Due to Disability, Retirement, "For Cause, "For Good
Reason" or Death
(a) Disability. The Company may terminate this Agreement for disability at
any time if within ninety (90) after written notice of termination is given, the
Executive has not returned to full time performance of his duties. For purposes
of this Agreement, the term "disability" shall mean if, as a result of
incapacity due to physical or mental illness, the Executive shall have been
absent from his duties with the Company on a full time basis for 60 consecutive
business days.
(b) "For Cause". The Company may terminate the
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Executive's employment "For Cause" at any time. For purposes of this Agreement,
"For Cause" shall mean:
(i) the willful and continued failure by him to substantially perform his
duties with the Company (other than any such failure resulting from
his incapacity due to physical or mental illness), after a written
demand for substantial performance is delivered to the Executive by
the Board of Directors which specifically identifies the manner in
which the Board believes that he has not substantially performed his
duties, or
(ii) the willful engaging by the Executive in misconduct materially and
demonstrably injurious to the Company. For purposes of this Section 10
subparagraph (c) (ii), no act, or failure to act, on the part of the
Executive shall be considered "willful" unless done, or omitted to be
done, by him in bad faith and without reasonable belief that his
action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Executive shall not be deemed to have
been terminated "For Cause" unless and until there shall have been delivered to
him a Copy of a resolution adopted by the affirmative vote of not lees than
three quarters (3/4) of the entire membership of the Board at a meeting of the
Board held for that purpose (after reasonable notice to the Executive and an
opportunity for him, together with his counsel, to be heard before said Board),
finding that the Executive was guilty of conduct set forth above in Sections 10
(c) (i) or (ii) above and specifying the particulars thereof in detail.
Notwithstanding the foregoing, the Company shall have the right to
terminate this Agreement upon twenty-four (24) hours notice to the Executive, if
the Executive is convicted of, or has pled guilty to fraud, embezzlement, or any
felonious offense.
(c) For "Good Reason". The Executive may terminate his employment "For Good
Reason". For purposes of this Agreement "For Good Reason" shall mean:
(i) without the express written consent of Executive, the assignment to
him of any duties grossly inconsistent with his positions, duties,
responsibilities and status with the Company immediately prior to a
Change of Control as defined in Section 9, or a change in his
reporting responsibilities, titles, or offices as in effect
immediately prior to a Change of Control as defined in Section 9, or
any removal of him from or any
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<PAGE>
failure to re-elect him to any of such positions, including the Board
of Directors, except because of the termination of his employment For
Cause, disability or retirement or as a result of his death; or the
failure of the Company to maintain and keep in effect sufficient
Officers' and Directors' Liability Insurance to adequately protect the
Executive during the Term; or
(ii) a reduction by the Company in the Executive's base salary as in effect
on the date hereof, or as the same may be increased from time to time;
or the failure by the Company to pay the Annual Bonus when due; or
(iii) the Company, requiring the Executive to be based anywhere other than
the offices at which he was based immediately prior to a Change of
Control as defined in Section 9, except for required travel on Company
business to an extent substantially consistent with his present
business travel obligations, or, in the event he consents to such
relocation, the failure by the company to pay (or reimburse him for)
all reasonable moving expenses incurred by him relating to a change of
his principal residence in connection with such relocation and to
indemnify him against any loss (defined as the difference between the
actual bona fide price of such residence and the higher of (1) the
aggregate investment in such residence, or (2) the fair market value
of such residence as determined by the average of two (2) real estate
appraisers, one of which is to be designated by the Executive and the
other by the Company) realized in the sale of this principal residence
in connection with any such change of residence; or
(iv) the failure by the Company to continue in effect any Company-sponsored
benefit or compensation plan, pension plan, life insurance plan,
medical and dental plan, personal accident plan or disability plan in
which the Executive is participating at the time of a Change of
Control of the Company as defined in Section 9 (or plans providing him
with substantially similar benefits), or the taking of any action by
the Company which would adversely affect his participation in or
materially reduce his benefits under any of such plans or deprive him
at the time of the Change of Control as defined in Section 9, or the
failure by the Company to provide him with the number of paid vacation
days to which he is then entitled under the provisions of this
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Agreement; or
(v) the failure of the Company to obtain the assumption of an agreement to
perform this Agreement by any successor as contemplated in Section 12
hereof; or
(vi) any purported termination of the Executive's employment which is not
effected pursuant to a notice of termination satisfying the
requirements of this Section 10; and for purposes of this Agreement,
no such purported termination shall be effective unless such notice of
termination shall have been given pursuant to this Section 10.
(e) Death. If the Executive dies during the term of his employment
hereunder, the Executive's legal representatives shall be entitled to receive,
in addition to the death benefits provided in Section 3(k) above, his fixed
compensation as described in Sections 3(a) and (b) above, to the last day of the
calendar month in which the Executive's death shall have occurred and for twelve
(12) months thereafter.
(f) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean:
(i) if this Agreement is terminated for Disability, thirty (30) days after
a notice of termination is given (provided that the Executive shall
not have returned to the performance of his duties on a full-time
basis during such sixty (60) day period;
(ii) if the Executive`s employment is terminated "For Cause, the date
specified in the notice of termination; and
(iii) if the Executive's employment is terminated for any other reason, the
date a notice of termination is given; provided that if within thirty
(30) days after any notice of termination is given, the party or
parties receiving such notice of termination notifies the other party
or parties that a dispute exists concerning the termination, the Date
of Termination shall be the date on which the dispute is finally
determined by a final judgement, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected); provided, however, that the
Executive's action is finally adjudicated in his favor and against the
Company or that the Executive's action is settled by mutual written
agreement of the parties in the Executive's favor.
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11. Compensation Upon Termination or Expiration of Agreement
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or metal illness, the
benefits shall be determined in accordance with the Company's Short-Term
Disability Policy or Long-Term Disability Insurance Plan, or a substitute plan
then in effect.
(b) If the Executive's employment shall be terminated "For Cause", the
Company shall pay him the base salary through the Date of Termination at the
rate in effect at the time notice of termination is given and the Company shall
have no further obligations to the Executive under this Agreement.
(c) If the Company shall terminate the Executive's employment for any other
reason or if the Executive shall terminate his employment "For Good Reason" and
in any event, upon the expiration of this Agreement, then the Company shall pay
the Executive the following amounts:
(i) The Executive's full base salary through the Date of Termination at
the rate in effect at the time notice of termination is given, payable
in monthly installments for the balance of the term of this Agreement
and for five (5) additional years thereafter; and
(ii) The Executive's Annual Bonus for the balance of the term and for five
(5) additional years thereafter; and
(ii} All indemnity payments as set forth in Section 10 (d)(3); and
(iv) All legal fees and expenses, if any, incurred in contesting or
disputing any termination of this Agreement or in seeking to obtain or
enforce any right or benefit provided by this Agreement; and
(v) The Company shall maintain in full force and effect, for the continued
benefit of the Executive, all employees benefit plans and programs or
arrangements in which he was entitled tO participate immediately prior
to the Date of Termination provided that the Executive's continued
participation is possible under the general terms and provisions of
such plans and programs until the earlier of: (A) the date on which
the salary payments and Annual Bonus payment cease under Section 11
subparagraphs (c) (i) and (ii), or (B)
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<PAGE>
such time as the Executive secures new full-time employment and
comparable benefits pursuant to that employment have commenced. In the
event that the Executive's participation in any such plan or program
is barred, the Company shall arrange to provide him with benefits
substantially similar to those which he is entitled to receive under
such plans and programs. At the end of the period of coverage, he
shall have the option to have assigned to him at no cost and with no
apportionment or prepaid premiums, any assignable insurance policy
owned by the company and relating specifically to the Executive; and
(vi) If the Company shall terminate the Executive's employment for any
reason except "For Cause" or if the Executive shall terminate his
employment "For Good Reason" then the Executive shall be entitled to
receive, in addition to any benefits provided him under any employee
benefit plan maintained by the Company, an annual benefit, commencing
on the first (1st) day of the month following the Date of Termination,
equal to the benefit he would have been entitled to receive if he were
then eligible for earlier retirement under the Company's retirement
plan (or any successor thereto) , less any benefit actually paid to
him for such plan.
(d) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 11 by seeking other employment or
otherwise; provided, however, that in the event that the Company compensates the
Executive under Section 11 (c) (i) and (ii), all remuneration, wages or salary
earned by the Executive after five (5) years following the Date of Termination,
either as an employee, independent contractor or consultant to any person, firm
or corporation other than the Company, shall be a setoff to the Company's
obligation to the Executive under that subparagraph.
12. Successors; Binding Agreement
(a) The Company will require any successor (whether direct or indirect, by
purchase, merger consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to the Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if such succession had not taken place. Failure to obtain
such agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the name terms as he would be entitled
hereunder if the Executive terminated his employment for "Good Reason, except
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that for purposes of implementing the foregoing, the date on which any such
succession become effective shall be deemed the Date of Termination. As used in
this section, "Company" shall mean the Company as hereinbefore defined, and any
successor to its business and/or assets as aforesaid which executes and delivers
the agreement provided for in this Section 12 or which otherwise becomes bound
by all the terms and provision of the Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees, and legatees. If the Executive should
die while any amounts would still be payable to him hereunder if he had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee, or other designee or, if there be no such designee, to the Executive's
estate.
13. Notice
(a) For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
Certified mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the Board
of Directors with a copy to the Secretary of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only upon
receipt.
14. Legal Fees and Court Costs
In the event the Executive initiates legal action against the Company for
an alleged breach of any provision of this Agreement, and, solely in the event
the Executive's action is finally adjudicated in his favor and against the
Company, and only after such event, all reasonably necessary expenses incurred
by the Executive pursuant to such legal action will be reimbursed to the
Executive by the Company within ten (10) days of the Executive presenting an
invoice to the Company. The provisions of this Section 14 shall survive any
termination or expiration of this Agreement and remain enforceable.
15. Miscellaneous
(a) This written Agreement contains the sole and entire agreement between
the parties, and shall supersede any and all other agreements between the
parties. No agreements or representations, oral or otherwise, expressed or
implied, with
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respect to the subject matter hereof have been made by any party which are not
set forth expressly in this Agreement.
(b) No provision of this Agreement may be modified, waived, or discharged
unless such waiver, modification, or discharge is agreed to in writing signed by
the Executive and such officers as may be specifically designated by the Board
of Directors of the Company. No waiver by any party hereto at any time of the
breach by any other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent, construction, and performance of this Agreement shall be
governed by the laws of Minnesota.
(c) The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
(d) This Agreement may be executed in one or more counterparts, each of
which shall deemed to be an original but all of which together will constitute
one and the same instrument
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and its seal to be affixed thereto by its officers thereunto duly authorized,
and the Executive has signed and sealed this agreement as of the day and year
first written above.
U.S. TRANSPORTATION SYSTEMS, INC.
By: /s/ Terry Watkins
---------------------------
Terry Watkins
Chief Financial Officer and
Executive Vice President
/s/ Michael Margolies
---------------------------
Michael Margolies
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STOCK PURCHASE AGREEMENT
For the Sale of the Capital Stock of
Downtown Theatre Ticket Agency, Inc.,
a subsidiary of
U. S. Transportation Systems, Inc.,
and related Entertainment
Subsidiaries and Divisions
Dated as of December 31, 1996
<PAGE>
AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of December 31, 1996, by and between
U. S. TRANSPORTATION SYSTEMS, INC., a Nevada corporation ("USTS") and PACKAGING
PLUS SERVICES, INC. a Nevada corporation ("PKGP").
WITNESSETH:
WHEREAS, PKGP desires to purchase all of the issued and outstanding shares
of capital stock of Downtown Theatre Ticket Agency, Inc. (D/B/A "Advance
Entertainment"), and its related entertainment subsidiaries and divisions
("Entertainment"), as set forth in Schedule A hereto; and
WHEREAS, USTS is the sole shareholder of Entertainment and is willing to
sell all of the issued and outstanding shares of capital stock of Entertainment
to PKGP;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. SALE AND PURCHASE OF CAPITAL STOCK OF ENTERTAINMENT.
1.1 Sale of Stock and Delivery. USTS hereby agrees to sell, transfer and
deliver to PKGP, free of all debt, liens and encumbrances, and PKGP
agrees to purchase from USTS, on the date fixed in accordance with
Section 3 for the closing hereunder (the "Closing Date"), all of the
outstanding shares of the capital stock of Entertainment.
Certificates for the Entertainment capital stock, endorsed in blank,
shall be delivered by USTS to PKGP at the Closing.
1.2 Purchase Price. The purchase price to be paid by PKGP to USTS for
Entertainment shall be by delivery at the Closing of a stock
certificate of PKGP for 850,000 of its common shares, "restricted",
for a two year period (the "Shares").
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1.3 Repurchase of Shares of PKGP. PKGP will have a right to repurchase
the Shares as follows:
a) PKGP has a right to repurchase all or any part of the 850,000
Shares for $1.15 per share, during the first 6 months from the
Closing. If PKGP does not repurchase all of such shares during
the 6-month period, PKGP shall deliver an additional 50,000
shares to USTS, and the repurchase period shall be extended
for the 7th through 12th month;
b) PKGP has a right to repurchase all or any part of the 900,000
Shares or the remaining Shares not repurchased, at $1.20 per
share, during the 7th through 12th month. If PKGP does not
repurchase all of such shares during such period, PKGP shall
deliver an additional 50,000 shares to USTS, and the
repurchase period shall be extended for the 13th through 18th
month;
c) PKGP has a right to repurchase all or any part of the 950,000
Shares or the remaining Shares not repurchased, at $1.25 per
share, during the 13th through 18th month. If PKGP does not
repurchase all of the shares during such period, PKGP shall
deliver an additional 50,000 shares to USTS, and the
repurchase period shall be extended for the 19th through the
24th month; and
d) PKGP has a right to repurchase all or any part of the
1,000,000 Shares at $1.30 per share during the 19th through
24th month.
e) The right to repurchase Shares shall terminate at the end of
the 24th month.
1.4 Registration of Shares of PKGP. PKGP will agree to include or
"piggyback" any Shares of PKGP owned by USTS on its next
registration statement.
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1.5 Loan to PKGP. At the Closing, USTS will loan PKGP $100,000, to be
repaid with interest at 10% per annum, in eighteen (18) monthly
installments from the date of Closing, the first six (6) monthly
installments of which shall be interest only, and the last twelve
(12) monthly installments shall consist of equal payments of
principal and interest. The loan will be secured by 300,000
"restricted" common shares of PKGP, placed in an appropriate escrow
account with Wagner & DiMaio, LC. Failure to make any payment when
due after a 10 business day grace period shall require the release
of the Shares to USTS, but shall in no way effect PKGP's obligation
to repay the loan.
1.6 Adjustment of Purchase Price. PKGP and USTS will agree that the
purchase price for Entertainment will be adjusted after the first
year from the Closing if gross revenue generated by Entertainment
falls below 10% from gross revenues estimated for the 1997 of
$2,300,000. Accordingly, for every $100,000 less than $2,070,000 in
revenues, USTS will return 42,500 shares to PKGP.
2. OTHER DELIVERIES AND ASSURANCES.
2.1 Other Deliveries. At the Closing, in addition to the delivery of the
stock certificates for Entertainment, in accordance with Section 1.1
hereof, USTS shall deliver to PKGP the following:
2.1.1 Corporate Books. The minute books, certificates of
incorporation, by-laws, stock transfer books and corporate
seals of Entertainment and any of its subsidiaries.
2.1.2 Resignations. The resignations of all of the present officers
and directors of Entertainment and any of its subsidiaries, to
be effective upon completion of the Closing.
2.2 Assurances. Each party hereto shall take such other action from time
to time as the other party may reasonably request in order to
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more effectively carry out the sale and the deliveries provided for
in this Agreement.
3. CLOSING.
Subject to the terms and conditions of this Agreement, the closing of the
transactions provided for herein (the "Closing") shall take place at the offices
of USTS, 33 West Main Street, Elmsford, New York on January 8, 1997, at 10:30
a.m.; or at such prior date and time as may be mutually agreed upon by USTS and
PKGP.
4. USTS'S REPRESENTATIONS AND WARRANTIES.
USTS hereby represents and warrants to PKGP as follows:
4.1 Organization and Good Standing. USTS, and Entertainment and its
subsidiaries, are corporations duly organized, validly existing and
in good standing under the laws of the states of their
incorporation. USTS and Entertainment have authority to own, operate
and lease their properties and to carry on their businesses as now
being conducted. Copies of the charter and By-Laws, and all
amendments thereto, of Entertainment and its subsidiaries have been
delivered to PKGP and are complete and correct as of the date
hereof. Entertainment is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the
character of its properties owned or leased or the nature of its
activities makes such qualification necessary, except where the
failure so to qualify or to be in good standing would not have a
materially adverse effect on the business, operations, assets or
financial condition of Entertainment.
4.2 Capitalization. Entertainment has the authorized, issued and
outstanding capital stock set forth in Schedule A. All of such
issued and outstanding shares are validly issued, fully paid and
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nonassessable. Entertainment does not have authorized, issued or
outstanding any other shares of capital stock or any subscription or
other rights to the issuance or receipt of shares of its stock.
4.3 Authorization. USTS has all requisite corporate power and authority
to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement by USTS and
the consummation by USTS of the transactions contemplated hereby
have been duly authorized by USTS's Board of Directors and no other
corporate action or proceeding on the part of USTS is necessary for
the execution or delivery of this Agreement by USTS or for the
consummation by USTS of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by USTS and (assuming
this Agreement has been duly executed and delivered by PKGP) is a
legally valid and binding obligation of USTS, enforceable against
USTS in accordance with its terms.
4.4 Non Conflict: No Consents or Approvals Required. Neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby by USTS will, with or without
notice or passage of time, or both, (i) violate any provision of the
Certificate or Incorporation or By-Laws or USTS or the charter
documents or by-laws of Entertainment, (ii) violate any law, rule,
regulation, ordinance, order, writ, injunction, judgment or decree
applicable to USTS or Entertainment or by which Entertainment's
properties or assets are bound or affected, or (iii) conflict with
or result in any breach of or constitute a default under the terms,
conditions or provisions of any note, bond, mortgage, indenture,
permit, license, franchise agreement, lease or other contract,
instrument or obligation to which USTS or Entertainment is a party
or by which USTS or Entertainment or any of their respective
properties or assets is bound or affected, except, in the case of
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<PAGE>
clauses (ii) and (iii) above, for any such violation, conflict,
breach or default which individually or in the aggregate will not
have a material adverse effect on the business, operations, assets
or financial condition of Entertainment.
4.5 Litigation. To the best knowledge of USTS, there is no action,
proceeding or investigation pending or threatened against or
involving Entertainment, which, if determined adversely, would
materially and adversely affect the financial condition, business or
operations of Entertainment, nor is there any judgment, decree,
injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding
against Entertainment having, or which, insofar as can be foreseen,
in the future would be likely to have, any such effect.
4.6 Contracts. To the best knowledge of USTS, Entertainment is not in
material default under any contract made or obligation owed by
Entertainment, which contract or obligation, individually or in the
aggregate, is material to Entertainment.
4.7 Trademarks and Trade Names. Set forth in Schedule B hereto is a list
of the trademarks and trade names owned by Entertainment.
Entertainment owns, or is licensed or otherwise has the full right
to use, all trademarks, trade names, copyrights, technology,
know-how and processes currently used and conducted which are
material to the financial condition, results of operations or
business of Entertainment. To the best knowledge of USTS, no claim
has been asserted by any person with respect to the use of any such
trademark, trade name, copyright, technology, know-how or process or
challenging or questioning the validity or effectiveness of any such
license.
4.8 Tax Matters. Entertainment has filed, or on behalf of Entertainment
there has been filed, all United States federal income tax returns,
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<PAGE>
declarations and information returns, state and local income and
franchise tax returns, declarations and information returns which
are required to be filed including, but not limited to, Federal, New
York State and Illinois Unemployment Taxes and New York City
Occupancy Tax. All taxes as shown on said returns and all
assessments received have been paid to the extent that such taxes
have become due. All income and franchise tax returns filed on
behalf of Entertainment by USTS, with respect to periods ending on
or prior to the Closing Date, shall be filed based on normal and
consistent tax accounting practices and in accordance with
applicable law.
4.9 Lists of Certain Items. The following lists, setting forth summary
descriptions, as of the date hereof, shall be true as of the Closing
Date.
(i) Insurance Policies. Schedule C. USTS shall deliver
simultaneously with the execution of this Agreement a summary
description of all present policies of insurance with respect
to Entertainment and covering its properties, buildings,
equipment, furniture, fixtures or operations, all of which are
presently in force;
(ii) Real Property. Schedule D. All real property owned of record
or beneficially or leased by Entertainment;
(iii) Automobiles and Trucks. Schedule E. All automobiles and trucks
owned or leased by Entertainment;
(iv) Leases. Schedule F. Each presently existing lease of personal
property to which Entertainment is a party;
(v) Sales Contracts and Customer Purchase Orders. Schedule G.
Schedule G lists each sales contract and
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<PAGE>
customer purchase order for the delivery of products or
performance of services by Entertainment, which would result
in the right to receive revenues of at least $1,000 and a list
of specific contracts or commitments each involving purchases
of inventories or supplies in excess of $1,000;
(vi) Banks. Schedule H. The name of each bank in which
Entertainment has an account or safe deposit box, and the
names of all persons authorized to draw thereon or have access
thereto;
(vii) Loan and Credit Agreement, etc. Schedule I. All mortgages,
pledges, deeds of trust, loan or credit agreements, notes and
similar instruments to which Entertainment is a party, and all
amendments or modifications of any thereof.
(viii)Apportionment of Expenses. All rents, bond payments, payroll
and other expenses relating to Entertainment will be prorated
between USTS and PKGP as of the date of the Closing.
4.10 Brokers. USTS represents that it has not incurred any obligation to
pay a finder's fee or similar acquisition services compensation in
connection with the proposed acquisition, or if it has or does, it
will pay such obligation.
4.11 Financial Matters. USTS represents that Entertainment will be debt
free at the Closing; USTS will retain accounts payable and accounts
receivable of Entertainment in effect as of the Closing, but will
deliver to PKGP all of the inventory associated with Entertainment.
4.12 Transfer of Shares. USTS will transfer title to the capital stock of
Entertainment to PKGP on the Closing Date, free and clear of all
debt, liens, pledges, encumbrances, voting trusts and voting
8
<PAGE>
agreements. There is no existing option, warrant or other agreement
(other than this Agreement) to which USTS or Entertainment is a
party requiring, and there are no convertible or exchangeable
securities of USTS or Entertainment, which upon conversion or
exchange would require, the issuance or sale of any shares of the
capital stock of Entertainment.
5. PKGP's REPRESENTATIONS AND WARRANTIES.
PKGP hereby represents and warrants to USTS as follows:
5.1 Membership on PKGP's Board of Directors. USTS will receive one board
seat on PKGP's Board of Directors as long as USTS holds at least
200,000 of the Shares. As long as USTS has one board seat, the Board
shall not exceed five members.
5.2 Consent of Designated Director. As long as USTS holds at least
200,000 of the Shares, PKGP will not take any action without the
consent of USTS' designated director, which would affect USTS'
Shares and not similarly and proportionally affect the shares held
by PKGP's President, Richard A. Altomare, or his assigns or any
related party.
5.3 Organization and Good Standing. PKGP is a corporation duly
organized, validly existing and in good standing under the laws of
the State of Nevada, with full corporate power and authority to
carry on its business as it is now being conducted and as proposed
to be conducted. Copies of PKGP'S Certificate of Incorporation, By-
Laws, and all amendments thereto, in effect prior to the date
hereof, have been delivered to USTS and are complete and correct as
of the date hereof.
5.4 Authorization. PKGP has all requisite corporate power and authority
to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement by PKGP
9
<PAGE>
and the consummation by PKGP of the transactions contemplated hereby
have been duly authorized by PKGP's Board of Directors and no other
corporate action or proceeding on the part of PKGP is necessary for
the execution or delivery of this Agreement by PKGP or for the
consummation by PKGP of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by PKGP and (assuming
this Agreement has been duly executed and delivered by USTS) is a
legally valid and binding obligation of PKGP enforceable against
PKGP in accordance with its terms.
5.5 Brokers. PKGP represents that it has not incurred any obligation to
pay a finder's fee or similar acquisition services compensation in
connection with the proposed acquisition, or if it has or does, it
will pay such obligation.
6. TAX LIABILITIES.
6.1 USTS agrees that it shall be responsible for and shall pay (a) the
federal income tax liabilities of Entertainment for all taxable
periods ending with and prior to the Closing Date and (b) the state
and local income and franchise tax liabilities of Entertainment for
all taxable periods ending with and prior to the Closing Date.
6.2 USTS's liability for federal, state and local income and franchise
taxes for Entertainment for periods prior to the Closing Date shall
survive the Closing for a period coterminous with the applicable
statute of limitations.
7. LITIGATION. CLAIMS AND LIABILITIES.
7.1 Liability Claims. USTS has no knowledge of any material liability
claim against Entertainment.
7.2 USTS's Obligations. USTS hereby agrees to indemnify, hold harmless
and defend PKGP and its shareholders, directors, officers and
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<PAGE>
employees from all such obligations and liabilities incurred by
Entertainment or arising from Entertainment business prior to the
Closing, including the payment of all expenses and attorneys' fees
arising therefrom.
8. SURVIVAL OF REPRESENTATIONS AND COVENANTS.
The representations, warranties and covenants of USTS and PKGP in this
Agreement shall survive the Closing for a period of four years, except that
subsections 1.4, 5.1 and 5.2 shall survive the Closing without limitation.
9. BEST EFFORTS TO OBTAIN SATISFACTION OF CONDITIONS AND TRANSITION.
USTS agrees to use its best efforts to perform and fulfill all conditions
required to be performed by it under this Agreement, and PKGP agrees to use its
best efforts to perform and fulfill all conditions required to be performed by
it under this Agreement. Based upon the information presently available to PKGP
and its impressions gained in discussions with USTS, it is the intention of PKGP
to retain most of the present management personnel and other employees of
Entertainment and USTS shall use its best efforts to assure management and
employee continuity and a smooth transition of the businesses of Entertainment
to PKGP, with the exception of any persons who may be named in a separate
statement between the parties hereto.
10. PUBLIC ANNOUNCEMENTS.
Prior to the Closing and for one week thereafter, neither USTS nor PKGP
shall make any public announcement regarding any aspects of this Agreement, or
any of the transactions contemplated hereby, without first advising and
obtaining the consent of the other party.
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11. WAIVER.
The parties may mutually agree to waive any and all of the conditions or
requirements herein contained or defer them until after the Closing.
12. AMENDMENTS.
PKGP and USTS, by mutual consent of their respective duly authorized
officers, may amend or modify this Agreement, in such manner as may be agreed
upon, by a written instrument, executed by both PKGP and USTS.
13. SECTION AND PARAGRAPH HEADINGS.
The section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14. NOTICES.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or mailed
first claims postage prepaid:
(a) To USTS. If to USTS, to Michael Margolies, Chairman, U.S.
Transportation Systems, Inc., 33 West Main Street, Elmsford, New
York 10523.
(b) To PKGP. If to PKGP, to Richard A. Altomare, President and CEO,
Packaging Plus Services, Inc., 20 South Terminal Drive, Plainview,
New York 11803.
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<PAGE>
15. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
16. ENTIRE AGREMENT.
This Agreement contains the entire agreement between the parties hereto
with respect to the transactions contemplated herein.
17. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, without regard to the principles of conflicts of
laws thereunder.
IN WITNESS WHEREOF, the undersigned parties hereto have duly executed this
Agreement as of the date first above written.
December 31, 1996
PACKAGING PLUS SERVICES, INC.
By /s/ Richard A. Altomare
-------------------------------
Richard A. Altomare,
President and CEO
U.S. TRANSPORTATIONS SYSTEM, INC.
By /s/ Michael Margolies
-------------------------------
Michael Margolies
Chairman
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================================================================================
34 139728
A 2889
INCORPORATED UNDER THE LAWS OF THE
STATE OF NEVADA
[SEAL] [SEAL]
NUMBER SHARES
A2890 ***850000***
[LOGO](R)
P K G P
-------
CUSIP NO. 695161 40 6
THIS CERTIFIES THAT U.S. TRANSPORTATION SYSTEMS, INC
IS THE RECORD HOLDER OF ***EIGHT HUNDRED FIFTY THOUSAND***
fully paid and non-assessable shares of Common Stock, $.005 par value of
Packaging Plus Services, Inc.
transferable on the books of the Corporation in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated: 01/06/97
COUNTERSIGNED AND REGISTERED
OTC CORPORATION TRANSFER SERVICE CO.
(NASSAU COUNTY, N.Y.)
By /s/[illegible] TRANSFER AGENT
------------------------------- AND REGISTRAR
AUTHORIZED SIGNATURE
/s/ RICHARD A. ALTOMARE /s/ BARBARA HALPERN
- ----------------------- ----------------------
PRESIDENT ACTING SECRETARY
[SEAL]
PACKAGING PLUS SERVICES, INC.
CORPORATE SEAL
1983
NEVADA
SEE REVERSE SIDE FOR TRANSFER RESTRICTIONS
================================================================================
<PAGE>
STOCK SALE AGREEMENT
THIS STOCK SALE AGREEMENT ("AGREEMENT") entered into this 11th day of
September, 1996, by and between CONSOLIDATED FINANCIAL MANAGEMENT, INC., an
Arizona Corporation, ("CFM"), Seller and U.S. TRANSPORTATION SYSTEMS, INC., a
Nevada Corporation (hereinafter to referred to as "USTS") as Buyer.
R E C I T A L S
A. WHEREAS, CFM owns One Hundred Thousand (100,000) shares of Common stock
in the entity known as BANCPRO-TRANSPORTATION, INC., an Arizona corporation,
(hereinafter referred to as the "COMPANY");
B. WHEREAS, USTS desires to purchase all of the One Hundred Thousand Shares
of the COMPANY known as BANCPRO-TRANSPORTATION, INC.
C. WHEREAS, CFM desires to sell all its shares of Common stock it owns in
the COMPANY, in the manner hereinafter set forth.
NOW, THEREFORE, in consideration of the premises contained above, the
covenants and promises contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Incorporations. Recitals A through C are incorporated herein as though
fully set forth herein.
2. Purchase Price and Sale of Shares of Stock. The purchase
<PAGE>
price for the one Hundred Thousand shares of Common stock owned by CFM
shall be:
A. USTS Common Stock: Three Hundred Thousand (300,000) shares of
USTS Common Stock to be issued to CFM and shall be registered with the
SEC within ninety (90) days of the Closing date.
B. Promissory Note: USTS shall issue a Promissory Note (the
"Note") in favor of CMF for the sum of One Million One Hundred Fifty
Thousand ($1,150,000) dollars. (Said Note is attached hereto and
incorporated herein as Exhibit ("A"). The Note shall become fully due
and payable on September 11, 1998. In connection with the Note, the
following instruments shall be executed and delivered by the
respective parties thereto at closing:
(i). As additional security the COMPANY shall execute a
Guarantee, fully guaranteeing the performance of USTS'
obligations under the Note, in the form and content attached
hereto and incorporated herein as Exhibit "B";
(ii). Furthermore, the COMPANY shall execute a Security
Agreement and UCC-1 Financing Statement in which it shall pledge
all assets of the COMPANY and all future assets of the COMPANY as
collateral for performance of the Guarantee and the Promissory
Note, in the form and content attached Hereto and incorporated
herein as Exhibits "C" and "D";
(iii). Furthermore, CFM, USTS and the COMPANY shall execute
a Consulting Agreement in which CFM agrees to act as a consultant
to USTS and the COMPANY, the form and content as attached hereto
and incorporated herein as Exhibit "E".
3. Closing. The closing ("CLOSING") shall take place on September 10th,
1996 at CONSOLIDATED FINANCIAL MANAGEMENT, INC. offices located at
6220 E. Thomas Road, Suite #300, Scottsdale,
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<PAGE>
Arizona 85251; so long as all of the terms and conditions of this
AGREEMENT have been satisfied.
4. Representations and Warranties of CFM. CFM represents and warrants to
USTS, as follows:
4.1 Ownership of Shares: CFM is the sole and beneficial holder of
the One Hundred Thousand (100,000) shares, free and clear of any liens
or encumbrances. There are no agreements, arrangements or
understandings to which CFM is a party by which any of the shares are
bound with respect to the acquisition, disposition, voting or pledging
of the shares.
4.2 Approval of AGREEMENT. The execution and delivery of this
AGREEMENT has been authorized and approved where necessary by the
current Shareholders of the COMPANY and current Board of Directors of
the COMPANY and CFM, pursuant to the resolutions of the Shareholders
of the COMPANY, the Board of Directors of CFM, and the Board of
Directors of the COMPANY, the forms of which are hereby attached and
incorporated as Exhibits "F", "G", and "H".
4.3 Capitalization. The authorized capital stock of the COMPANY
consists of One Hundred Thousand (100,000) shares of Common Voting
Stock, no par value, all of which are issued and outstanding. The
100,000 shares represent (100%) percent of the issued and outstanding
shares. All such shares were duly and validly authorized and issued
and are fully paid and nonassessable.
4.4 Financial Statements. The financial statements provided by
CFM to USTS listed as Exhibit "I", are true and
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<PAGE>
correct. CFM warrants that the assets transferred into the COMPANY are
One Million Two Hundred Seventy Two Thousand Three Hundred Ninety Four
and 42/100*** ($1,272,394.42) Dollars worth of accounts receivables
formerly owned by CFM. Furthermore, all accounts receivables that have
been transferred were duly owned solely by CFM prior to being
transferred to the COMPANY. Furthermore, the accounts receivable and
all other assets transferred by CFM to the COMPANY are free and clear
of any liens or encumbrances. Attached hereto as Exhibit "J" are all
of the accounts receivables that are currently owned by the COMPANY.
Furthermore, attached hereto as Exhibit "K" is a listing of all of the
personal property owned by the COMPANY.
4.5 Collectability of Receivables. CFM warrants the
collectibility of One Million Two Hundred Fifty Thousand ($1,250,000)
of the accounts receivables listed in Exhibit "J" are one hundred
(100%) percent collectible. CFM shall reimburse to the COMPANY and/or
USTS the dollar amount in excess of Twenty Two Thousand Three Hundred
Ninety Four and 442/100*****($22,394.42) of any of the listed
receivables that become deemed uncollectible. For purposes of this
section, a listed receivable shall be deemed "uncollectible" if it is
not collected by August 14, 1998.
The COMPANY shall notify CFM by August 15, 1998, of any of the accounts
receivables that is deemed uncollectible pursuant to this section 4.5. CFM shall
have until August 31, 1998 to reimburse to the COMPANY the "uncollectible"
accounts receivables. If CFM does not reimburse the COMPANY or USTS by August
31, 1998, then USTS
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<PAGE>
shall have the right to deduct the dollar amount of the amount deemed
"uncollectible" from the Promissory Note referenced herein. Furthermore, once
the receivable is either reimbursed to the COMPANY or USTS by CFM, or the
receivable is deducted from the amount of the Promissory Note referenced herein,
then said receivable shall become the property of CFM.
4.6 Payables. CFM warrants that it is responsible and shall
continue to pay the rental company payables incurred prior to
September 1st, 1996 as such amounts become due and payable. The
balance of the rental company's payables as of September 1, 1996 is
Two Hundred Eighty Nine Thousand Six Hundred Fifty Dollars 53/100****
($289,650.53). If the COMPANY and/or USTS pays an obligation of CFM as
provided in this section 4.6 then the COMPANY and/or USTS shall give
CFM written notice for CFM to reimburse the amount paid within 30 days
of the notice to either the COMPANY and/or USTS. If CFM fails to cure
within the thirty (30) day period, then the amount paid by the COMPANY
and/or USTS shall bear interest at the rate of ten (10%) percent per
annum from the date of the notice to CFM until paid. If CFM has not
reimbursed the COMPANY and/or USTS within the 30 day period, USTS
shall have the option to offset the amount it or the COMPANY has paid
against the amount USTS owes on the Promissory Note referenced herein
A listing of the payables are attached hereto and incorporated herein
as Exhibit "L".
4.7 Tax Returns and Audits. The COMPANY was formed on June 27,
1996. Therefore, the COMPANY has not been required to
5
<PAGE>
file or caused to be filed any tax returns and tax reports to any
State or Federal agency. However, in the event that there is a
determination by any Federal or State taxing authority that there is
income tax or state sales tax or any other tax obligations due by the
COMPANY pertaining to any actions of the COMPANY prior to September 1,
1996, CFM shall indemnify and hold harmless the COMPANY of any such
federal or state tax obligations of the COMPANY.
4.8 Non-Litigation. The COMPANY is not involved in any suit or
legal proceeding. Furthermore, CFM is not aware of any threatened suit
or legal proceeding against the COMPANY.
4.9 Real and Personal Property-Leased/Liened. Set forth on
Exhibit "M" hereto is a description of each lease and lien under which
the COMPANY is the lessee or debtor of any real or personal property.
CFM has delivered to USTS a true correct and complete copy of each
lease or lien identified on Exhibit "M". The premises or property
described in such leases are presently occupied or used by CFM or the
COMPANY as lessee. All rentals or other payments due under such leases
have been paid and there exists no default under the terms of such
leases and no event has occurred which, upon passage of time or the
giving of notice, or both, would result in any event of default or
prevent CFM or the COMPANY from exercising and obtaining the benefits
of such leases or any options or rights contained therein. CFM or the
COMPANY has all right, title and interest of the lessee under the
terms of such leases, free of all liens, restrictions, encumbrances or
rights of
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<PAGE>
others of any kind and all such leases are valid and in full force and
effect. There will be no default or basis for termination under any
such lease and no consent of any lessor is required as a result of the
transactions contemplated by this AGREEMENT.
4.10 Arizona and Nevada Requirements. The COMPANY is currently
authorized to do business in the States of Arizona and Nevada as
evidenced by the certificate of good standing from the State of
Arizona attached hereto and incorporated herein as Exhibit "N" and the
corporate qualification certificate from the State of Nevada attached
hereto and incorporated herein as Exhibit "O".
4.11 Authority of CFM. CFM has the full, right, power and
authority to execute this AGREEMENT and any attachments hereto.
5. Representations and warranties of USTS. USTS represents and
warrants to CFM as follows:
5.1 Approval of AGREEMENT. The execution and delivery of this
AGREEMENT has been authorized and approved the Board of Directors of
USTS, the form of which is hereby attached and incorporated as Exhibit
"P" USTS has the right, power, legal capacity, and authority to enter
into, and perform their obligations under this AGREEMENT, and no
approval or consent of any persons other than USTS is necessary in
connection therewith.
5.2 Agreement-Permissible. Neither the execution nor delivery of
this AGREEMENT by USTS nor the performance of any of its obligations
hereunder, will result in a breach or violation of any term or
provision of or constitute a default under any indenture, mortgage or
other agreement or instrument to which USTS
7
<PAGE>
is a party or by which it is bound.
5.3 Authorization. USTS has the right, power, legal capacity, and
authority to enter into, and perform its obligations under this
AGREEMENT, and no approvals or consents of any persons other than USTS
is necessary in connection therewith.
6. Conditions to USTS's Obligations. All obligations of USTS under
this AGREEMENT are subject to the fulfillment as of the CLOSING date of
each of the following conditions:
6.1 Representations and Warranties. The warranties and
representations made by CFM herein shall be true and correct in all
material respects at the Closing date.
6.2 Performance. Each of the obligations of CFM to be performed
on or before the CLOSING date pursuant to the terms of this AGREEMENT
shall have been duly performed, and USTS shall not have discovered any
material error, misstatement or omission in the representations and
warranties made by them.
6.3 Execution of Attachments. All exhibits to this AGREEMENT have
been duly executed by all parties required for each exhibit.
6.4 Litigation. No suit of any kind shall have been commenced
against the COMPANY or CFM challenging the transactions provided for
under this AGREEMENT shall have been commenced.
7. Conditions to CFM's Obligations. All obligations of CFM under this
AGREEMENT are subject to the fulfillment as of the CLOSING date of each of
the following conditions:
7.1 Representations and Warranties. The warranties
8
<PAGE>
and representations made by USTS herein shall be true and correct in
all material respects at the CLOSING date.
7.2 Performance. Each of the obligations of USTS to be performed
on or before the CLOSING date pursuant to the terms of this AGREEMENT
shall have been duly performed, and CFM shall not have discovered any
material error, misstatement or omission in the representations and
warranties made by them.
7.3 Execution of Attachments. All exhibits to this AGREEMENT have
been duly executed by all parties required for each exhibit.
7.4 Litigation. No suit or proceeding challenging the
transactions provided for under this AGREEMENT shall have been
commenced.
8. Indemnification.
8.1 USTS shall indemnify and hold harmless CFM against any loss,
damage or expense (including court costs and reasonable attorney's
fees), (collectively "Damages"), suffered by CFM resulting from:
(a) any breach by USTS of this AGREEMENT; and
(b) any inaccuracy in or breach of any representations,
warranties or covenants made herein or in any documents,
certificates or exhibits delivered in accordance with the
provisions of the AGREEMENT by USTS; and
(c) any claim made by a third party alleging facts which, if
true, would entitle CFM to indemnification pursuant to 8(a) or
8(b) above.
8.2 CFM shall indemnify and hold harmless USTS against any loss,
damage or expense (including court costs and reasonable attorney's
fees), (collectively "Damages"), suffered by USTS
9
<PAGE>
resulting from:
(a) any breach by CFM of this AGREEMENT; and
(b) any inaccuracy in or breach of any representations,
warranties or covenants made herein or in any documents,
certificates or exhibits delivered in accordance with the
provisions of the AGREEMENT by CFM; and
(c) any claim made by a third party alleging facts which, if
true, would entitle USTS to indemnification pursuant to 8(a) or
8(b) above.
8.3 Right to Defend Etc. Within fifteen (15) days after the
written assertion against an indemnified party by a third person of a
claim or liability which would entitle the indemnified party to
damages, the indemnified party shall give written notice of the claim
to the party obligated to indemnify it ("INDEMNIFYING PARTY"). Failure
to give such notice, or delay materially prejudicial to the interests
of the INDEMNIFYING PARTY, shall relieve the INDEMNIFYING PARTY of any
obligation of indemnification with respect to such claim or liability.
Upon receipt of timely notice, the INDEMNIFYING PARTY shall undertake
the responsibility for the defense of such claim, at its own expense.
If, within fifteen (15) days after delivery of the notice of claim by
the indemnified party, the INDEMNIFYING PARTY fails to advise the
indemnified party of its agreement to contest and defend against any
such claim, or if the INDEMNIFYING PARTY does not participate in such
litigation, proceedings, or settlement negotiations, for any reason,
then the indemnified party shall have the right, at the INDEMNIFYING
PARTY's expense, to take such action as it deems appropriate to
defend, contest, settle, or compromise any such claim or liability,
and the INDEMNIFYING PARTY agrees to be bound
10
<PAGE>
by any and all rulings, judgments, compromises, and settlements
reached by the indemnified party in good faith, in the same manner as
if it had participated therein.
8.4 Payment. Each INDEMNIFYING PARTY agrees to reimburse each
Indemnified party within thirty (30) days after presentation of an
itemized statement of damages incurred by such indemnified party. In
computing the amount of damages due to an Indemnified party under this
Section 8, aggregate amount due shall be reduced by:
(a) any resultant net economic benefit inuring to the Indemnified
party, as determined by the independent Certified Public
Accountants of the Indemnified party; and
(b) the proceeds of any recoveries actually received by the
Indemnified party and not assigned to the INDEMNIFYING PARTY.
9. Termination and Abandonment.
9.1 Mutual Agreement. This AGREEMENT may be terminated and
abandoned at any time prior to the CLOSING date by the mutual written
consent of both parties.
9.2 Failure of CFM's Conditions. This AGREEMENT may be terminated
by USTS if at the CLOSING date the conditions set forth in Section 6
of this AGREEMENT shall not have been met by CFM or waived by USTS.
9.3 Failure of USTS's Conditions. This AGREEMENT may be
terminated by CFM if at the CLOSING date the conditions set forth in
Section 6 of this AGREEMENT shall not have been met by USTS or waived
by CFM.
10. Non-Compete.
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10.1 Non--Competition by CFM and its Directors. CFM and the
following of its Directors, JC Cannon, Nicholas Markette, Ross Murphy
and C. William Mulligan, III, agree that they shall not, either
directly or indirectly, carry on or engage in, or have any interest in
any person, firm, corporation or business (whether as an owner,
shareholder (except for less than two percent (2%) of any listed
company traded on the Public Stock Exchange), member, trustee,
security holder, consultant, employee, agent, officer, director,
partner or other participant) that engages in any business activity
which is the same as, or similar to or in competition with the
activity of the COMPANY or any successor as then conducted within any
metropolitan area in which the COMPANY or any successor then does
business for a ten (10) year period subsequent to the Closing date of
this AGREEMENT. To the extent the language of the covenants may
restrict competition to a greater degree than that permitted by such
applicable law, that portion thereof shall be ineffective but the
provisions of the covenants shall nevertheless remain effective with
respect to such portions thereof as shall be permitted by such
applicable law. Attached hereto and incorporated herein as Exhibit
"Q", is the Acknowledgement of Directors of the terms and conditions
that they are bound by pursuant to this section 10.1.
11. Authorization of Use of the Tradename "BANCPRO". USTS acknowledges
that CFM and its parent company, BANCPRO, Inc., are the registered owners
of the tradename BANCPRO. USTS acknowledges that CFM and its parent
company, BANCPRO Inc., have given their
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consent to the COMPANY to include the tradename BANCPRO in the COMPANY'S
corporate name and to use such tradename in all operational activities of
the COMPANY. USTS acknowledges that this AGREEMENT does not give to it or
any other entity it has an ownership interest in any right, title or
interest in the tradename BANCPRO other than the use of "BANCPRO" by the
COMPANY. USTS agrees that it or any other entity it has an ownership
interest in shall not use the tradename BANCPRO in the formation or
creation of any entity or any other use USTS may desire without the express
written consent of CFM and BANCPRO, Inc.
A. USTS acknowledges that its, or any other entity it has an ownership
interest in, unauthorized use of the tradename, "BANCPRO" will have a
materially adverse effect on CFM/BANCPRO, Inc. for which damages may
be difficult to ascertain. USTS thereby agrees that in addition to and
not in lieu of any other rights or remedies that CFM/BANCPRO, Inc. may
have, CFM and/or its parent company BANCPRO, Inc. shall have a right
to an immediate injunction enjoining any such use.
12. Miscellaneous Provisions.
12.1 Entire Agreement and Waiver. This AGREEMENT contains the
entire agreement between the parties hereto and supersedes all prior
and contemporaneous agreements, arrangements, negotiations and
understandings between the parties hereto, relating to the subject
matter hereof. There are no other understandings, statements, promises
or inducements, oral or otherwise, contrary to the terms of this
AGREEMENT. No supplement, modification, or amendment of any term,
provision or condition of this AGREEMENT shall be binding unless
executed in writing by all parties. No waiver of any term, provision,
or condition of this
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AGREEMENT whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or shall constitute, a waiver of any
other provision hereof, whether or not similar, nor shall such waiver
constitute a continuing waiver, and no waiver shall be binding unless
executed in writing by the party making the waiver.
12.2 Exhibits. All exhibits attached hereto and referred to
herein are an integral part of this AGREEMENT and are incorporated
herein by reference hereby.
12.3 Representations and Warranties. Each or the representations
and warranties contained in this AGREEMENT, in any attachment hereto,
or any certificate delivered in connection herewith, shall be
considered a material warranty and representation which was made as a
substantial inducement to the execution of this AGREEMENT and any
breach of any such representation and warranty shall be considered a
material breach of this AGREEMENT.
12.4 Survival of Representations Warranties, and Covenants. All
statements contained in any exhibit, document, certificate or other
instrument delivered by or on behalf of any party hereto in connection
with the transactions contemplated hereby shall be deemed to be
representations and warranties made pursuant to this AGREEMENT by such
party. The representations, warranties, covenants and agreements
contained in this AGREEMENT shall survive the CLOSING of the
transactions that are the subject matter of this AGREEMENT and any
investigation made by any party or such party's representative shall
not constitute a waiver thereof
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and no such representation, warranty, covenant or agreement shall be
merged into any document or instrument executed or delivered in
connection with this AGREEMENT.
12.5 Interpretations and Definitions. The parties agree that each
party and its counsel have reviewed and revised this AGREEMENT and
that any rule of construction to the effect that ambiguities are to be
resolved against the drafting party shall not apply in the
interpretation of this AGREEMENT. In this AGREEMENT whenever the
context so requires, the gender includes the neuter, feminine and
masculine and the number includes the singular and the plural and the
words "person" and "party" include an individual, corporation,
partnership, firm, trust or association.
12.6 Headings. The subject headings of articles, sections and
paragraphs in this AGREEMENT are included solely for purposes of
convenience and reference only, and shall not be deemed to explain,
modify, limit, amplify, or aid in the meaning, construction or
interpretation of any of the provisions of this AGREEMENT.
12.7 Relationships. Nothing contained in this AGREEMENT shall be
deemed or construed by the parties or by any third person to create
the relationship of principal and agent or of partnership or of joint
venture or any association between or among the parties hereto.
12.8 Parties in Interest. Nothing in this AGREEMENT whether
expressed or implied, is intended to confer any rights or remedies
under or by reason of this AGREEMENT on any persons other
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than the parties to it and their respective heirs, representatives,
successors and permitted assigns, nor is anything in this AGREEMENT
intended to relieve or discharge the obligations or liabilities of any
third persons to any party to this AGREEMENT, nor shall any provision
hereof give any third persons any right of subrogation against or
action over against any party to this AGREEMENT.
12.9 Governing Law. It is the intention of the parties that the
internal laws, and not the laws of conflicts, of the State of Arizona
shall govern the validity of this AGREEMENT, the construction of its
terms and the interpretation of the rights and duties of the parties.
12.10 Remedies Not Exclusive and Waiver. No remedy conferred by
any of the specific provisions of this AGREEMENT is intended to be
exclusive of any other remedy and each and every remedy shall be
cumulative and shall be in addition to every other remedy given
hereunder of now or hereafter existing at law or in equity or by
statute or otherwise. The election of any one or more remedies shall
not constitute a waiver of the right to pursue other available
remedies.
12.11 Attorneys' Fees. In any action at law or in equity to
enforce any of the provisions or rights under this AGREEMENT, the
unsuccessful party to such litigation, as determined by the Court in a
final judgment or decree, shall pay the prevailing party or parties
all costs, expenses and reasonable attorneys' fees incurred herein by
such party or parties (including without limitation such costs,
expenses and fees on any appeal),
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and if such prevailing party shall recover judgment in any such action
or proceeding, such costs, expenses and attorneys' fees shall be
included in as part of such judgment
12.12 Notices. All notices, requests, demands or other
communications ("notices") under this AGREEMENT shall be in writing
and shall be either delivered personally to the party to whom notice
is to be given, mailed by a reputable overnight courier service or
mailed in the United States mail, first class, postage prepaid,
registered or certified, return receipt requested and properly
addressed as follows:
(a) If to CFM, (SELLERS):
JC Cannon, President
Consolidated Financial Management, Inc.
6220 E. Thomas Road, Suite #300
Scottsdale, Arizona 85251
(b) If to USTS, (BUYERS):
Mike Margolios, President
U.S. Transportation Systems, Inc.
33 West Main Street, #205
Elmsford , New York 10523
Any notice which is personally delivered shall be deemed to be given upon
the date of delivery. Any notice which is mailed by a reputable overnight
courier service shall be deemed to be given on the day following deposit with
such overnight courier service. Any notice which is mailed shall be deemed to be
given three days after the deposit of same into the United States mail, as above
provided. Any person named above may change the address to which notices are
sent to it by giving written notice thereof to all other persons referred to
above in the manner provided above.
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12.13 Time is of the Essence of this AGREEMENT. Time is of the
essence of this AGREEMENT. This AGREEMENT shall be binding upon the
heirs, personal representatives, executors, administrators,
successors, and assigns of the respective parties hereto.
12.14 Severability. Should any part, term or provision of this
Agreement or any document required herein to be executed be declared
invalid, void or unenforceable, all remaining parts, terms and
provisions hereof shall remain in full force and effect and shall in
no way be invalidated, impaired or affected thereby.
12.15 Counterparts. This AGREEMENT may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, said parties have hereunto set their hands and seals
the day and year above written.
CONSOLIDATED FINANCIAL MANAGEMENT INC
/s/JC CANNON
- ---------------------------------
BY: JC CANNON, President
U.S. TRANSPORTATION SYSTEMS, INC
/s/ TERRY A WATKINS
- ---------------------------------
BY: TERRY A WATKINS, Executive
Vice President/CFO
18
<PAGE>
CONSULTING AGREEMENT
THIS AGREEMENT ("AGREEMENT") entered into this 11th day of September, 1996,
between and among CONSOLIDATED FINANCIAL MANAGEMENT, INC., an Arizona
Corporation, ("CFM"), U.S. TRANSPORTATION SYSTEMS, INC., a Nevada Corporation
(hereinafter to referred to as "USTS") and BANCPRO-TRANSPORTATION, INC. an
Arizona corporation (hereinafter the "COMPANY").
R E C I T A L S
A. WHEREAS, CFM and USTS has entered into a STOCK SALE AGREEMENT of even
date herewith in which USTS purchased all of the issued stock of the COMPANY
owned by CFM;
B. WHEREAS, USTS desires to have CFM available as a consultant to the
COMPANY in order to ensure the COMPANY'S continued success;
C. WHEREAS, CFM agrees to be a consultant to the COMPANY under the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises contained above, the
covenants and promises contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. INCORPORATIONS. Recitals A through C are incorporated herein as though
fully set forth herein.
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2. CFM'S CONSULTING OBLIGATIONS. CFM agrees that it shall be available on
an as needed basis as a consultant for the COMPANY from September 11th, 1996
through September 11th, 2001.
3. PAYMENT BY USTS FOR CONSULTING SERVICES. In consideration of the
consulting services to be provided by CFM to USTS, USTS agrees to pay to CFM as
follows:
A. Expenses: USTS agrees to pay any and all expenses that CFM incurs as a
result of any consulting services provided by CFM to the COMPANY under this
AGREEMENT. USTS agrees that CFM'S expenses shall be reimbursed to CFM within 30
days of the date of CFM'S expense invoice is submitted.
B. Issuance of Preferred Stock: In addition to the Common Stock to be
issued above under the Stock Sale Agreement, USTS shall issue at the closing of
the Stock Sale Agreement the following series of shares of its Preferred Stock
to CFM:
Series Number of Shares
------ ----------------
i. D Five Thousand ( 5,000)
ii. E Six Thousand Two Hundred Fifty ( 6,250)
iii. F Eight Thousand One Hundred Twenty Five ( 8,125)
iv. G Nine Thousand Three Hundred Seventy Five ( 9,375)
v. H Ten Thousand Six Hundred Twenty Five (10,625)
vi. I Eleven Thousand Eight Hundred Seventy Five (11,875)
vii. J Thirteen Thousand One Hundred Twenty Five (13,125)
viii. K Fourteen Thousand Three Hundred Seventy Five (14,375)
C. Common features of Preferred Stock: The Preferred Stock listed above
shall all have the following common features, which features shall be clearly
written on the face of the Preferred Stock certificate(s):
i. Convertible: CFM shall have the right, upon meeting the revenue
goals specified in (d) below, to convert the Preferred stock listed above
into shares of
2
<PAGE>
USTS Common stock. The converted Preferred Stock into Common Stock shall be
restricted in accordance with Rule 144. However, within 30 days of the
conversion from Preferred Stock into Common Stock, USTS shall initiate such
action(s) to have the Common Stock registered with the SEC. The conversion
of each share of the Preferred Stock into the Common Stock shall have the
following conversion guidelines:
(a) Ten (10) shares of USTS Common Stock for each share of
Preferred Stock being converted herein if, at time of conversion, the
average bid price for the preceding Five (5) trading days ("Average
Price") is less than $9.00;
(b) Seven (7) shares of USTS Common stock for each share of
Preferred Stock being converted herein if the Average Price is greater
than $9.00 and less than $15.00;
(c) Four (4) shares of USTS Common Stock for each share of
Preferred Stock being converted herein if the Average Price is greater
than $15.00;
(d) The conversion guidelines listed in (a), (b) and (c), above
are contingent upon the COMPANY achieving the following revenue goals:
Series D, when COMPANY Revenue exceeds $ 2,500,000;
Series E, when COMPANY Revenue exceeds $ 4,000,000;
Series F, when COMPANY Revenue exceeds $ 6,000,000;
Series G, when COMPANY Revenue exceeds $ 8,500,000;
Series H, when COMPANY Revenue exceeds $11,000,000;
Series I, when COMPANY Revenue exceeds $14,000,000;
Series J, when COMPANY Revenue exceeds $18,000,000;
Series K, when COMPANY Revenue exceeds $22,000,000;
The revenue goals listed above for each series shall pertain to the
revenue of the COMPANY or any other entity that USTS has an ownership
interest in and/or conducts business that is similar to the COMPANY'S,
including but not limited to franchises and/or licensed operators, for
any consecutive twelve (12) month period, from September 1st 1996
through August 31st, 2001.
(e) REVENUE: For purposes of this AGREEMENT, the term REVENUE
shall mean the gross revenue, attributable to the COMPANY or any other
entity that USTS has an ownership interest in and/or conducts business
that is similar to the COMPANY'S, including but not limited to
franchises and/or
3
<PAGE>
licensed operators, as determined in accordance with generally
accepted accounting principles consistently applied.
ii) Redeemable: USTS shall have the right to redeem any of the Preferred
Stock that is issued and outstanding as of September 11th, 2001, at the
price of $0.01 per share upon Five (5) days notice by USTS to CFM;
iii). Dividend Rights: None of the series of Preferred shares listed above
shall be entitled to Dividend rights. Furthermore, none of the Preferred
shares shall be entitled to interest;
iv). Voting rights: None of the shares of Preferred Stock listed above
shall have voting rights in USTS.
USTS understands and agrees that the issuance of the Preferred Stock as
provided herein shall be issued to CFM and thereafter converted into USTS Common
Stock as the Revenue Goals that are provided herein are achieved whether or not
USTS requests that CFM provide any consulting services as provided in this
AGREEMENT.
4. Representations and Warranties of CFM. CFM represents and warrants to
USTS as follows:
4.1 Approval of AGREEMENT. The execution and delivery of this AGREEMENT has
been authorized and approved by the current Board of Directors pursuant to the
resolution of the Board of Directors of CFM the form of which are hereby
attached and incorporated as Exhibit "A".
4.2 Authority of CFM. CFM has the full, right, power and authority to
execute this AGREEMENT and any attachments hereto.
5. Representations and Warranties of USTS. USTS represents and warrants to
CFM as follows:
5.1 Approval of Agreement. The execution and delivery of this AGREEMENT has
been authorized and approved by the current Board of Directors of USTS pursuant
to the resolution of the Board of Directors of USTS the form of which are hereby
attached and
4
<PAGE>
incorporated as Exhibit "B".
5.2 Authority of USTS. USTS has the full right, power and authority to
execute this AGREEMENT and any attachments hereto.
5.3 Best Efforts. USTS shall use its best efforts to achieve the REVENUE
goals listed in paragraph 3 (C)(i)(d)(e).
5.4 Other Series Preferred Stock. Other than the Series of Preferred Stock
to be issued by USTS to CFM pursuant to the terms of this AGREEMENT, there is
currently only a Series C issuance of Preferred Stock outstanding. The Series C
does not have any conversion rights to become Common stock of USTS. Furthermore,
the Series C Preferred Stock does not in any way circumvent the rights that CFM
will acquire as the holder of the Series D through K Preferred Stock.
Furthermore, USTS agrees not to issue any other Series or Class of Common or
Preferred Stock or any warrants or options of Common or Preferred Stock that in
any way limits, restricts or circumvents any of the rights that CFM acquires as
holders of this Series D through K of Preferred Stock.
5.5 Other warranties. USTS agrees that it shall cause any other entity that
USTS has an ownership interest in and/or conducts business that is similar to
the COMPANY'S including but not limited to franchises or licensed operators to
execute a Guaranty and Security Agreement in favor of CFM as security for USTS's
obligations under the Promissory Note of even date herewith and this Agreement,
similar in form and content to the "Continuing Guaranty" and "Security
Agreement" that the COMPANY has executed with CFM on even date herewith.
5
<PAGE>
6. Representations and warranties of the COMPANY. The COMPANY represents
and warrants to CFM as follows:
6.1 Approval of AGREEMENT. The execution and delivery of this AGREEMENT has
been authorized and approved by the current Board of Directors of the COMPANY
pursuant to the resolution of the Board of Directors of the COMPANY the form of
which are hereby attached and incorporated as Exhibit "C".
6.2 Authority of the COMPANY. The COMPANY has the full, right, power and
authority to execute this AGREEMENT and any attachments hereto.
6.3 Other Warranties of the COMPANY. The COMPANY agrees that it shall cause
any other entity that the COMPANY has an ownership interest in and/or conducts
business that is similar to the COMPANY'S including but not limited to
franchises or licensed operators to execute a Guaranty and Security Agreement in
favor of CFM as security for USTS's obligations under the Promissory Note of
even date herewith and this Agreement and the COMPANY'S obligations under this
Agreement, the "Continuing Guaranty" and the "Security Agreement" that the
COMPANY has executed with CFM on even date herewith.
7. Indemnification.
7.1 USTS and the COMPANY, jointly and severally, shall indemnify and hold
harmless CFM against any loss, damage or expense (including court costs and
reasonable attorney's fees), (collectively "Damages"), suffered by CFM resulting
from:
(a) any breach by USTS and/or the COMPANY of this
6
<PAGE>
AGREEMENT; and
(b) any inaccuracy in or breach of any representations, warranties or
covenants made herein or in any documents, certificates or exhibits
delivered in accordance with the provisions of the AGREEMENT by USTS and/or
the COMPANY; and
(c) any claim made by a third party alleging facts which, if true, would
entitle CFM to indemnification pursuant to 7(a) or 7(b) above.
7.2 CFM shall indemnify and hold harmless USTS and the COMPANY against any
loss, damage or expense (including court costs and reasonable attorney's fees),
(collectively "Damages"), suffered by USTS resulting from:
(a) any breach by CFM of this AGREEMENT; and
(b) any inaccuracy in or breach of any representations, warranties or
covenants made herein or in any documents, certificates or exhibits
delivered in accordance with the provisions of the AGREEMENT by CFM; and
(c) any claim made by a third party alleging facts which, if true, would
entitle USTS or the COMPANY to indemnification pursuant to 8(a) or 8(b)
above.
7.3 Right to Defend Etc. Within fifteen (15) days after the written
assertion against an indemnified party by a third person of a claim or liability
which would entitle the indemnified party to damages, the indemnified party
shall give written notice of the claim to the party obligated to indemnify it
("INDEMNIFYING PARTY"). Failure to give such notice, or delay materially
prejudicial to the interests of the INDEMNIFYING PARTY, shall relieve the
INDEMNIFYING PARTY of any obligation of indemnification with respect to such
claim or liability. Upon receipt of timely notice, the INDEMNIFYING PARTY shall
undertake the responsibility for the defense of such claim, at its own expense.
If, within
7
<PAGE>
fifteen (15) days after delivery of the notice of claim by the indemnified
party, the INDEMNIFYING PARTY fails to advise the indemnified party of its
agreement to contest and defend against any such claim, or if the INDEMNIFYING
PARTY does not participate in such litigation, proceedings, or settlement
negotiations, for any reason, then the indemnified party shall have the right,
at the INDEMNIFYING PARTY's expense, to take such action as it deems appropriate
to defend, contest, settle, or compromise any such claim or liability, and the
INDEMNIFYING PARTY agrees to be bound by any and all rulings, judgment,
compromises, and settlements reached by the indemnified party in good faith, in
the same manner as if it had participated therein.
7.4 Payment. Each INDEMNIFYING PARTY agrees to reimburse each Indemnified
party within thirty (30) days after presentation of an itemized statement of
damages incurred by such indemnified party. In computing the amount of damages
due to an Indemnified party under this Section 8, aggregate amount due shall be
reduced by:
(a) any resultant net economic benefit inuring to the Indemnified party, as
determined by the independent Certified Public Accountants of the
Indemnified party; and
(b) the proceeds of any recoveries actually received by the Indemnified
party and not assigned to the INDEMNIFYING PARTY.
8. Miscellaneous Provisions.
8.1 Entire Agreement and Waiver. This AGREEMENT contains the entire
agreement between the parties hereto and
8
<PAGE>
supersedes all prior and contemporaneous agreements, arrangements, negotiations
and understandings between the parties hereto, relating to the subject matter
hereof. There are no other understandings, statements, promises or inducements,
oral or otherwise, contrary to the terms of this AGREEMENT. No supplement,
modification, or amendment of any term, provision or condition of this AGREEMENT
shall be binding unless executed in writing by all parties. No waiver of any
term, provision, or condition of this AGREEMENT whether by conduct or otherwise,
in any one or more instances, shall be deemed to be, or shall constitute, a
waiver of any other provision hereof, whether or not similar, nor shall such
waiver constitute a continuing waiver, and no waiver shall be binding unless
executed in writing by the party making the waiver.
8.2 Exhibits. All exhibits attached hereto and referred to herein are an
integral part of this AGREEMENT and are incorporated herein by reference hereby.
8.3 Representations and Warranties. Each of the representations and
warranties contained in this AGREEMENT, in any attachment hereto, or any
certificate delivered in connection herewith, shall be considered a material
warranty and representation which was made as a substantial inducement to the
execution of this AGREEMENT and any breach of any such representation and
warranty shall be considered a material breach of this AGREEMENT.
8.4 Survival of Representations, Warranties, and Covenants. All statements
contained in any exhibit, schedule,
9
<PAGE>
document, certificate or other instrument delivered by or on behalf of any party
hereto in connection with the transactions contemplated hereby shall be deemed
to be representations and warranties made pursuant to this AGREEMENT by such
party. The representations, warranties, covenants and agreements contained in
this AGREEMENT shall survive the CLOSING of the transactions that are the
subject matter of this AGREEMENT and any investigation made by any party or such
party's representative shall not constitute a waiver thereof and no such
representation, warranty, covenant or agreement shall be merged into any
document or instrument executed or delivered in connection with this AGREEMENT.
8.5 Interpretations and Definitions. The parties agree that each party and
its counsel have reviewed and revised this AGREEMENT and that any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not apply in the interpretation of this AGREEMENT. In this
AGREEMENT whenever the context so requires, the gender includes the neuter,
feminine and masculine and the number includes the singular and the plural and
the words "person" and "party" include an individual, corporation, partnership,
firm, trust or association.
8.6 Headings. The subject headings of articles, sections and paragraphs in
this AGREEMENT are included solely for purposes of convenience and reference
only, and shall not be deemed to explain, modify, limit, amplify, or aid in the
meaning, construction or interpretation of any of the provisions of this
AGREEMENT.
10
<PAGE>
8.7 Relationships. Nothing contained in this AGREEMENT shall be deemed or
construed by the parties or by any third person to create the relationship of
principal and agent or of partnership or of joint venture or any association
between or among the parties hereto.
8.8 Parties in Interest. Nothing in this AGREEMENT whether expressed or
implied, is intended to confer any rights or remedies under or by reason of this
AGREEMENT on any persons other than the parties to it and their respective
heirs, representatives, successors and permitted assigns, nor is anything in
this AGREEMENT intended to relieve or discharge the obligations or liabilities
of any third persons to any party to this AGREEMENT, nor shall any provision
hereof give any third persons any right of subrogation against or action over
against any party to this AGREEMENT.
8.9 Governing Law. It is the intention of the parties that the internal
laws, and not the laws of conflicts, of the State of Arizona shall govern the
validity of this AGREEMENT, the construction of its terms and the interpretation
of the rights and duties of the parties.
8.10 Remedies Not Exclusive and Waiver. No remedy conferred by any of the
specific provisions of this AGREEMENT is intended to be exclusive of any other
remedy and each and every remedy shall be cumulative and shall be in addition to
every other remedy given hereunder of now or hereafter existing at law or in
equity or by statute or otherwise. The election of any one or more remedies
shall not constitute a waiver of the right to pursue other
11
<PAGE>
available remedies.
8.11 Attorneys' Fees. In any action at law or in equity to enforce any of
the provisions or rights under this AGREEMENT, the unsuccessful party to such
litigation, as determined by the Court in a final judgment or decree, shall pay
the prevailing party or parties all costs, expenses and reasonable attorneys'
fees incurred herein by such party or parties (including without limitation such
costs, expenses and fees on any appeal), and if such prevailing party shall
recover judgment in any such action or proceeding, such costs, expenses and
attorneys' fees shall be included in as part of such judgment.
8.12 Notices. All notices, requests, demands or other communications
("notices") under this AGREEMENT shall be in writing and shall be either
delivered personally to the party to whom notice is to be given, mailed by a
reputable overnight courier service or mailed in the United States mail, first
class, postage prepaid, registered or certified, return receipt requested and
properly addressed as follows:
(a) If to CFM:
JC Cannon, President
Consolidated Financial Management, Inc.
6220 E. Thomas Road, Suite #300
Scottsdale, Arizona 85251
(b) If to USTS:
Mike Margolis, President
U.S. Transportation Systems, Inc.
33 West Main Street, #205
Elmsford, New York 10523
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<PAGE>
(c) If to the COMPANY:
Tim Balch, President
Bancpro-Transportation, Inc.
6220 E Thomas Road, Suite #100
Scottsdale, Arizona 85251
Any notice which is personally delivered shall be deemed to be given upon
the date of delivery. Any notice which is mailed by a reputable overnight
courier service shall be deemed to be given on the day following deposit with
such overnight courier service. Any notice which is mailed shall be deemed to be
given three days after the deposit of same into the United States mail, as above
provided. Any person named above may change the address to which notices are
sent to it by giving written notice thereof to all other persons referred to
above in the manner provided above.
8.13 Time is of the Essence of this AGREEMENT.
Time is of the essence of this AGREEMENT. This AGREEMENT shall be binding
upon the heirs, personal representatives, executors, administrators, successors,
and assigns of the respective parties hereto.
8.14 Counterparts. This AGREEMENT may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.15 Severability. Should any part, term or provision of this Agreement or
any document required herein to be executed be declared invalid, void or
unenforceable, all remaining parts, terms and provisions hereof shall remain in
full force and effect and
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<PAGE>
shall in no way be invalidated, impaired or affected thereby.
IN WITNESS WHEREOF, said parties have hereunto set their hands and seals
the day and year above written.
BANCPRO-TRANSPORTATION, INC.
/s/ TIM BALCH
- --------------
BY: TIM BALCH
President
CONSOLIDATED FINANCIAL MANAGEMENT, INC.
/s/ J C CANNON
- --------------
BY: J C CANNON
President
U.S. TRANSPORTATION SYSTEMS, INC.
/s/ TERRY WATKINS
- -----------------
BY: TERRY WATKINS
Executive Vice President/CFO
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EXHIBIT 10-J
STOCK PURCHASE AGREEMENT
THIS AGREEMENT, made the 30 day of January, 1997 between Logistics
Management, L.L.C., a Kentucky limited liability company ("Seller") and U.S.
Trucking, Inc., a Nevada corporation ("Buyer"),
W I T N E S S E T H:
WHEREAS Seller is the owner of all of the outstanding shares of capital
stock of Gulf Northern Transport, Inc., a Wisconsin corporation ("GNTI"), and
WHEREAS Buyer has agreed to purchase, and Seller has agreed to sell all of
its shares in GNTI on the terms and conditions hereinafter contained.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties agree as follows:
1. Schedules.
The following are the schedules attached to and incorporated in this Agreement
by reference and deemed to be a part hereof:
Schedule A: Schedule showing the issued capital stock of GNTI together with
the state of incorporation and a good standing certificate dated
1997 from the Secretary of State.
Schedule B: Balance Sheet and Profit and Loss Statement for GNTI for the
period ending November 30, 1996.
Schedule C: Contracts, including equipment financing, to which GNTI is a
party and extending beyond one year following the date hereof or
involving future payments in excess of $5,000.00.
Schedule D: Pending of threatened litigation.
Schedule E: Description of all operating location (where owned, deed or
mortgage, as applicable - where leased, copies of lease
agreements);
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Schedule F: Listing all assets, including:
F.1 detailed listing of tractors and trailers, including VIN #'s,
and information as to any lien holders;
F.2 detailed aged accounts receivable listing;
F.3 cash balances, per bank account;
F.4 physical inventory (spare parts, etc.) listing;
F.5 listing of all non-revenue property;
F.6 titles of all vehicles (copies where liens are applicable);
Schedule G: Listing of all equipment operating leases, with lease agreements;
Schedule H: Listing of all liabilities, including:
H.1 detailed aged vendor payable listing; and
H.2 detailed listing of all accrued liabilities, including
payroll and related payroll taxes; insurance premiums or
deductible liabilities; and workers compensation
liabilities;
H.3 listing of all debt, with balances and security identified
and copies of all such debt agreements.
2. Exhibits
Exhibit A: Employment Agreement between Buyer and Danny Pixler.
Exhibit B: Acquisition Agreement (of GNTI) between Seller and Mid-America
Transporters Group, Inc.
Exhibit C: Board Resolutions of Seller and Opinion of Counsel.
Exhibit D: Board of Resolutions of U.S. Transportation Systems, Inc. and
Opinion of Counsel.
3. Purchase Price
Seller will sell to Buyer and, in reliance on the representations and warranties
of Seller as contained herein and as otherwise expressed to Buyer and on the
documents delivered in connection with the transaction contemplated hereby,
Buyer will purchase, all of the outstanding shares of GNTI in consideration of
(a) the issuance and delivery to Seller of 25% (625 shares) of the issued and
outstanding shares (2500 total outstanding shares) of
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common stock of the Buyer; (all stock of the Seller to be held in accordance
with the referenced escrow agreement.)
4. Representations and Warranties of Seller
Seller hereby represent and warrant as follows:
4.1 Seller is the owner, beneficially and of record of all of the
issued and outstanding shares of capital stock of GNTI, free and clear of
any liens, pledges, security interests, claims or other encumbrances.
4.2 GNTI has no ownership or capital interest, stock or otherwise in
any entity.
4.3 Except to the extent reflected or reserved against in the balance
sheet as of November 30, 1996 or in any schedule attached thereto, GNTI as
at such date had no liabilities or obligations of any nature, whether
absolute, accrued, contingent or otherwise, and whether due or to become
due which are required to be reflected therein in accordance with generally
accepted accounting principles (including without limitation, any liability
for Federal, State or local taxes in respect of or measured by income or
profit, accumulated or otherwise, for any period prior to November 30, 1996
or arising out of any transaction entered into prior to December 31, 1996).
Seller further represents that there have been no material changes in the
operations, assets, liabilities or customer base of GNTI from November 30,
1996 to date.
4.4 The books and records of GNTI are maintained in accordance with
generally accepted accounting principles and accurately reflect the
financial condition of GNTI, and contain all of its liabilities required to
be reflected therein in accordance with generally accepted accounting
principles.
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4.5 Except as set forth in Schedule D, there is no litigation, claim,
assessment or judicial, administrative or governmental proceeding by or
against GNTI pending, or, to the knowledge of Seller, threatened, nor does
Seller know of any legal basis for any such litigation, claim, assessment
or proceeding in the future.
4.6 The execution and delivery of this Agreement, and the performance
of the transaction contemplated hereby have been duly authorized by Seller.
This Agreement is the legal, valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms except as
enforceability may be limited by bankruptcy and other similar law.
4.7 The Seller represents that no less than Ninety Percent (90%) of
its outstanding stock is owned or otherwise controlled by Dan Pixler or
Anthony Huff.
4.8 Seller represents that the Exhibits & Schedules attached hereto
are complete & accurate.
4.9 Seller represents that GNTI is a corporation duly organized and
validly existing and in good standing under the laws of the State of
Arkansas.
5. Representations and Warranties of Buyer
Buyer hereby represents and warrants as follows:
5.1 Buyer is a corporation duly organized and validly existing and in
good standing under the laws of the State of Nevada.
5.2 The execution and delivery of this Agreement and the other
agreements to be delivered by Buyer in connection herewith, and the
consummation of the transactions contemplated hereby, will not conflict
with or result in any violation of or default under Buyer's Certificate of
Incorporation or By-Laws or any law, statute, judgment, decree,
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order, rule or regulation of any Federal, state, local or other
governmental entity or instrumentality thereof or any court, agency or
similar body or any contract, security agreement, mortgage, note, deed,
lien, lease, agreement, instrument, order, judgment or decree applicable to
or binding upon Buyer.
5.3 The execution and delivery of this Agreement and the other
agreements to be delivered by Buyer in connection herewith, and the
performance of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Buyer. This
Agreement and the other agreements to be delivered by Buyer in connection
therewith are the valid and binding obligations of Buyer, enforceable
against Buyer in accordance with their terms except as enforceability may
be limited by bankruptcy and other similar laws.
5.4 The shares of common stock to be issued to Seller hereunder have
been duly authorized, validly issued and are fully paid, nonassessable and
subject to no claims, liens, pledges, security interest or encumbrances of
any kind. Buyer has issued and outstanding 625 shares of common capital
stock and there are no outstanding shares of any other capital stock other
than 1,875 shares held of record and beneficially by U.S. Transportation
Systems, Inc. No other persons have any direct or indirect interest,
contingent or otherwise, in the capital stock of Buyer, including without
limitation any rights to purchase any Buyer shares or options, warrants or
securities convertible into or excercisable for Buyer shares.
5.5 Buyer agrees to permit GNTI to reimburse Seller up to Seventy
Thousand Dollars ($70,000) for any verified funds invested by Seller into
GNTI since
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its acquisition by Seller which amount is properly recorded on GNTI's
accounting books and records as a liability due to a related party.
6. Indemnification
Seller shall indemnify and hold harmless Buyer as to any damage or losses
incurred by Buyer as a result of any breach of this Agreement, to include any
breach of Seller's representations and warranties.
7. Survival of Representations and Warranties
All representations, warranties and agreements of Seller and Buyer contained
herein and in any document delivered in connection with the transaction
contemplated hereby shall survive the execution and delivery of this Agreement,
the closing hereunder and any investigation made by or in behalf of Seller or
Buyer, as the case may be.
8. Notices
All notices, requests, demands or other communications required to be given or
made hereunder shall be in writing and shall be deemed to be well and
sufficiently given in hand, delivered, or three (3) business days after being
mailed by prepaid Certified Mail, Return Receipt Requested, if to Seller,
addressed to:
Logistics Management, L.L.C. and Lynch, Cox, Gilman & Mahan,
2100 Citizens Plaza P.S.C.
Louisville, KY 40202 500 Meidinger Tower
Attn: Anthony Huff, Manager Louisville, Kentucky 40202
Attn: Judson B. Wagenseller
and
Scott Zoppoth, Esquire
2121 Citizens Plaza
Louisville, Kentucky 40202
and it to Buyer, addressed to:
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U.S. Trucking, Inc. and Wagner & Di Maio L.C.
33 West Main Street 52-15 11th Street
Elmsford, New York 10523 Long Island City, New York 11101
Such notice shall be deemed to have been given on the date of delivery. Any
party may change its address for notice by written communication mailed or
delivered as aforesaid.
9. Partial Invalidity
In case any one or more of the provisions contained herein shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such invalid,
illegal or unenforceable provision or provisions had never been contained
herein:
10. Execution in Counterparts
This Agreement may be executed in one or more counterparts, all of which shall
be considered one and the same Agreement, and shall become a binding Agreement
when one or more counterparts have been signed by each of the parties and
delivered to each of the other parties. The Closing shall be deemed to have
taken place at the offices of Buyer, 33 West Main Street, Elmsford, New York
10523 on the date first above written.
11. Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns. Whenever the singular or
masculine is used, the same shall be construed as the plural, feminine or neuter
where the context so requires.
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12. No Modification
This Agreement shall not be modified or amended except by written agreement
signed by the parties to be bound thereby.
13. Publicity
No press release or disclosure of terms will be issued by Buyer and Seller
without the other party's consent, which will not be unreasonably withheld,
except as required by law, but prior notice to the extent possible.
14. Governing Law
This Agreement has been executed in the State of New York, and Buyer has its
executive offices in the State of New York. All questions concerning the
validity or intention of this Agreement and all questions relating to
performance hereunder shall be resolved under the laws of the State of New York
and Seller consents to jurisdiction in the Supreme Court of the State of New
York, where any actions on the contract must be brought.
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15. Headings
The headings contained herein are for the sole purpose of convenience of
reference, and shall not in any way limit or affect the meaning or
interpretation of any of the terms or provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have on the day and year first above
written caused these presents to be executed in their behalf.
LOGISTICS MANAGEMENT, L.L.C. U.S. TRUCKING, INC.
By:/s/ Anthony Huff By:/s/ Ronald Sorci, Treasurer
- ----------------------- -----------------------------
Ronald Sorci, Treasurer
Witness Witness
/s/ John Ragland /s/ Diana Hernandez
- ----------------------- -----------------------------
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- --------------------------------------------------------------------------------
AGREEMENT OF SALE
dated March 27, 1997
between
U.S. Transportation Systems, Inc.
Seller
and
KAC, Inc.
Purchaser
- --------------------------------------------------------------------------------
<PAGE>
AGREEMENT OF SALE
AGREEMENT OF SALE, made as of March 27, 1997, between U.S. Transportation
Systems, Inc., a Nevada corporation, having an address at 33 West Main Street,
Elmsford, New York 10523 ("Seller"), KAC, Inc., a Arizona corporation, having an
address at 2985 West Whitton Ave., Phoenix, Arizona, 85017 ("Purchaser"), and
Scott E. Miller and Lora S. Miller, having an address at 2985 West Whitton Ave.,
Phoenix, Arizona, 85017 ("Purchaser's Guarantor").
WITNESSETH:
WHEREAS, Purchaser desires to acquire, and Seller desires to sell, the shares of
stock of Automated Solutions, Inc., upon the terms and conditions hereinafter
set forth, and
WHEREAS, Purchaser's Guarantor are the guarantors of obligations of Purchaser
hereunder, and under the Promissory Note to be delivered by Purchaser at the
closing.
NOW, THEREFORE, in consideration of the covenants and agreements hereafter set
forth, and other valuable consideration, the receipt and sufficiency of which
hereby is acknowledged, the parties hereto agree as follows:
1. Agreement To Sell. Seller agrees to sell, transfer and deliver to Purchaser,
and Purchaser agrees to purchase, upon the terms and conditions hereinafter set
forth, the 300 shares of the capital stock of Automated Solutions, Inc., a
corporation organized under the laws of Arizona (the "Corporation"), said shares
constituting all of the authorized and issued shares of the Corporation (the
"Shares").
2. The Assets Of The Corporation. It is the understanding of the parties that
the Corporation is the owner of certain assets (the "Assets") and that unless
specifically described and excluded in Exhibit A-10 hereto, the Assets will
become property of the Purchaser pursuant to this agreement. The Corporation
specifically warrants that it is the owner of the following Assets:
(a) the inventory of merchandise, finished goods, raw materials,
work-in-progress, packaging, parts and supplies described in Exhibit A-1
hereto (the "Merchandise");
(b) the machinery and equipment described in Exhibit A-2 hereto and all
similar equipment acquired or owned by the business on or before the
closing date (the "Equipment");
(c) the vehicles described in Exhibit A-3 hereto (the "Vehicles".);
(d) the furniture, fixtures and improvements described in Exhibit A-4
hereto and all similar items acquired or owned by the business on or before
the closing date (the "Improvements");
(e) the lease(s) described in Exhibit A-5 hereto (the "Lease(s)");
(f) the accounts receivable of the business outstanding on the closing date
(the "Accounts Receivable");
(g) the copyrights described in Exhibit A-6 hereto (the "Copyrights");
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(h) the patents and rights described in Exhibit A-7 hereto (the "Patents");
(i) the contracts and agreements described in Exhibit A-8 hereto (the
"Contracts");
(j) the other assets described in Exhibit A-9 hereto (the "Other Assets");
(k) the books and records of the business;
(1) all right, title and interest of Seller in the name Automated
Solutions, Inc. and any variants thereof (the "Name");
(m) the goodwill of the business (the "Goodwill"); and
(n) any and all other Assets regardless of form unless specifically
described and excluded in Exhibit A-10 hereto.
3. Purchase Price. The purchase price to be paid by Purchaser is Five Million
Nine Hundred Forty Five Thousand Eight Hundred Sixty Eight Dollars ($5,945,868)
payable as follows:
(a) One Hundred Thousand Dollars ($100,000.00) at the closing
(b) Five Million One Hundred Sixty Thousand Eight Hundred Sixty Eight
Dollars ($5,160,868) at the closing by the execution and delivery of a
Promissory Note by Purchaser to Seller in said amount, substantially in the
form of Exhibit I, hereto (the "Promissory Note"), secured by a Security
Agreement substantially in the form of Exhibit B-I hereto (the "Security
Agreement"), a Guaranty substantially in the form of Exhibit E -2 hereto
(the "Guaranty"), and a Stock Pledge Agreement substantially in the form of
Exhibit C hereto (the "Stock Pledge Agreement").
(c) A deferred fee in the amount of Six Hundred Eighty Five Thousand
Dollars ($685,000.00) due on April 1, 1999 and payable in accordance with
Exhibit J hereto (the "Deferred Fee Agreement").
4. The Closing. The "closing" means the settlement of the obligations of Seller
and Purchaser to each other under this agreement, including the payment of the
purchase price to Seller as provided in Article 3 hereof and the delivery of the
closing documents provided for in Article 5 hereof. The closing shall be held on
or about March 27, 1997 (the "closing date").
5. Closing Documents. At the closing Seller shall execute and deliver to
Purchaser:
(a) the certificate or certificates for the Shares, duly endorsed so as to
effectively transfer ownership of the Shares to Purchaser, together with
all appropriate Federal and State transfer tax stamps affixed (subject to
the obligation of Purchaser to deposit the Shares with Seller in accordance
with the provisions of the Stock Pledge Agreement);
(b) letters of resignation from each director and officer of the
Corporation, effective as of the closing hereunder, together with a
certificate of the resigning secretary of the Corporation, duly certified
by the resigning president and each resigning director of the Corporation,
certifying that at a meeting of the directors of the Corporation, duly
called and held and at which a quorum was present, the resignation of the
officers and directors thereof was accepted, and that there were duly
elected in the place thereof, effective as of the closing hereunder, such
persons as Purchaser theretofore shall have designated in writing as
officers and directors of the Corporation;
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(c) the Certificate of Incorporation or other organizational documents of
the Corporation, and the Bylaws, minute book, stock certificate book, and
seal of the Corporation; the Lease; any bills, vouchers, records showing
the ownership of the furniture, furnishings, equipment, other property used
in the operation of the Corporation, and all other books of account,
records and contracts of the Corporation,
(d) certified copies of resolutions duly adopted by the Board of Directors
and shareholders of Seller authorizing the sale of the Corporation and the
performance by Seller of its obligations hereunder,
(e) an opinion of Seller's counsel, dated as of the closing date, in form
and substance satisfactory to Purchaser's counsel, stating such counsel's
opinion that:
(i) Seller is a corporation duly organized, validly existing and in
good standing under the laws of Nevada;
(ii) Seller has full power and authority, corporate and otherwise, to
enter into this agreement and perform its obligations hereunder,
(iii) the execution and delivery of this agreement and the performance
by Seller of its obligations hereunder have been duly authorized by
the Board of Directors and shareholders of Seller as required by law
and no further action or approval is required in order to constitute
this agreement as the binding obligation of Seller, enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, moratorium, insolvency or other laws affecting creditor's
rights generally,
(iv) the execution and delivery of this agreement and the performance
by Seller of its obligations hereunder do not and will not violate any
provision of the Certificate of Incorporation or Bylaws of Seller, and
(v) except as may be set forth in this agreement, such counsel is not
representing Seller in any suit, action or proceeding against Seller
which, if adversely determined, would prohibit the consummation of the
transactions contemplated by this agreement
(f) any and all documents necessary to obtain Lessor's ( Chamberlain Family
Trust, d/b/a Chamberlain Enterprises) written consent pursuant to the
transfer of control of the Corporation as enumerated in Paragraph 12.1 (b)
of the commercial lease executed August 30, 1996, between the Corporation
and Lessor. The written consent agreement executed by the Lessor regarding
this paragraph shall be attached as Exhibit A-5-1 hereto;
(g) any and all documents or releases necessary to ensure that Automated
Solutions, Inc., or any employee or member thereof will be released from
any liens, encumbrances, mortgages or debt, regardless of form, entered
into or executed pertaining to the certain real property located at 3740
East LaSalle Street, Phoenix, Arizona. The documents and releases
necessary, regarding this paragraph, shall be attached as Exhibit F hereto;
(h) a financial statement for the fiscal year 1996 pertaining to the
Corporation. Seller warrants that the financial statements have been
completed in accord with GAAP. Furthermore, Seller agrees to deliver to
Purchaser within forty five (45) days after closing, a certified audit
opinion in regards to the aforementioned financial statements.
(i) such other instruments in form and substance satisfactory to
Purchaser's attorney as may be necessary or proper to transfer to Purchaser
good and marketable title to all other ownership interests in the
Corporation to be transferred under this agreement
Seller shall do all further acts and things as may be necessary, or reasonably
requested by Purchaser, to consummate the transactions contemplated by this
agreement, including the acquisition of possession of the Corporation. Seller
shall advise Purchaser of, and cause to be delivered to Purchaser, all trade
secrets and proprietary information pertaining to the business.
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At the closing Purchaser shall execute and deliver, or cause to be executed and
delivered, to Seller:
(a) the Promissory Note, Stock Pledge Agreement, and Security Agreement
provided for in Article 3 hereof, and
(b) the Guaranty of Scott E. Miller and Lora S. Miller, substantially in
the form of Exhibit B-2 hereto.
6. Closing Adjustments. Seller specifically warrants and represents that certain
liabilities of Automated Solutions, Inc. shall be fully assumed by Seller. The
following items shall be payable in full by Seller to Automated Solutions, Inc.,
upon demand:
(a) any and all accrued taxes of Automated Solutions, Inc., regardless of
form, including any and all applicable payroll taxes, for the periods up to
and including March 21, 1997, or part thereof;
Any errors or omissions in computing adjustments shall be corrected after the
closing.
7. Creditors. Seller represents that the Schedule of Creditors, annexed hereto
as Exhibit D, sets forth the names and business addresses of all of the
creditors of the Corporation, and the amounts owed to each of the creditors, and
also the names and business addresses of all persons who are known to Seller to
assert claims against the Corporation even though such claims are disputed and
the amounts of such disputed claims.
8. Representations And Warranties Of Seller. Seller represents and warrants to
Purchaser as follows:
(a) Seller is a corporation duly organized and validly existing under the
laws of Nevada, and is duly qualified to do business in Arizona. Seller has
full power and authority to carry out and perform its undertakings and
obligations as provided herein. The execution and delivery by Seller of
this agreement and the consummation of the transactions contemplated herein
have been duly authorized by the Board of Directors of Seller and will not
conflict with or breach any provision of the Certificate of Incorporation
or Bylaws of Seller, and do not and will not conflict with or result in any
breach of any condition or provision of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance
upon the Corporation by reason of the provisions of any contract, lien,
lease, agreement, instrument or judgment to which Seller is a party, or
which is or purports to be binding upon Seller or which affects or purports
to affect the Corporation. No further action or approval, corporate or
otherwise, is required in order to constitute this agreement the binding
and enforceable obligation of Seller.
(b) No action, approval, consent or authorization, including without
limitation any action, approval, consent or authorization of any
governmental or quasi-governmental agency, commission, board, bureau or
instrumentality, is necessary for Seller to constitute this agreement the
binding and enforceable obligation of Seller or to consummate the
transactions contemplated hereby.
(c) The Corporation is a corporation duly organized on May 1, 1987, under
the laws of Arizona, and the Corporation is validly existing and has not
been dissolved. The copies of the documents pertaining to the organization
of the Corporation provided by Seller to Purchaser are true and complete
copies of said documents.
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(d) Seller is the owner of the Shares, and the Shares are all of the issued
and outstanding shares of stock of the Corporation. All of the Shares have
no par value, are fully paid and non-assessable, have not been assigned,
pledged or hypothecated, and are free of all liens, claims and
encumbrances. There are no outstanding rights for subscription to any
additional stock of the Corporation by any person or entity. There are no
unpaid dividends heretofore declared, if any, to any stockholder of the
Corporation.
(e) The Corporation is the owner of all of the Assets enumerated in Article
2 hereof, free of all liens, claims and encumbrances, except as may be set
forth herein.
(f) There are no violations of any law or governmental rule or regulation
pending or, to the best of Seller's knowledge, threatened against Seller,
the Shares or the Corporation. Seller and the Corporation have complied
with all laws and governmental rules and regulations applicable to the
business or the Assets.
(g) The Corporation Schedule of Creditors set forth in Exhibit D is true
and complete in all material respects.
(h) Except as set forth in Exhibit K, there are no judgments, liens, suits,
actions or proceedings pending or, to the best of Seller's knowledge,
threatened against Seller, the Shares or the Corporation. Neither Seller,
the Shares nor the Corporation are a party to, subject to or bound by any
agreement or any judgment or decree of any court, governmental body or
arbitrator which would conflict with or be breached by the execution,
delivery or performance of this agreement, or which could prevent the
carrying out of the transactions provided for in this agreement, or which
could prevent the use by Purchaser of the Corporation or adversely affect
the conduct of the business by Purchaser.
(i) Except as set forth in Exhibit E, the Corporation has not entered into,
and is not subject to, any: (i) written contract or agreement for the
employment of any employee of the business; (ii) contract with any labor
union or guild; (iii) pension, profit-sharing, retirement, bonus,
insurance, or similar plan with respect to any employee of the business; or
(iv) similar contract or agreement affecting or relating to the
Corporation.
(j) The Lease(s) is/are in full force and effect and without any default by
the Corporation thereunder. All copies of the Lease(s) provided by Seller
to Purchaser are true and complete copies of the original Lease(s).
(k) The Contracts are in full force and effect and without any default by
the Corporation thereunder. All copies of the Contracts provided by Seller
to Purchaser are true and complete copies of the original Contracts.
(1) The Corporation has filed each tax return, including without limitation
all income, excise, property, gain, sales, franchise and license tax
returns, required to be filed by the Corporation prior to the date hereof.
Each such return is true, complete and correct, and the Corporation has
paid all taxes, assessments and charges of any governmental authority
required to be paid by it and has created reserves or made provision for
all taxes accrued but not yet payable. The Corporation has paid to the
proper taxing authorities all income, social security, unemployment and
other taxes and amounts required to be paid or withheld with respect to
officers, directors and employees of the Corporation and others receiving
compensation from the Corporation. No government is now asserting, or to
Seller's knowledge threatening to assert, any deficiency or assessment for
additional taxes or any interest, penalties or fines with respect to the
Corporation.
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(m) The financial statements, balance sheets and other information
pertaining to the Corporation set forth in Exhibit G hereto are true,
correct and complete as of the dates and for the periods set forth therein;
have been prepared in accordance width generally accepted accounting
principles consistently applied; and fairly represent the financial
position of the Corporation at such dates and for such periods. The
Corporation had at said dates no liabilities or obligations of any kind,
contingent or otherwise, not reflected in Exhibit I hereto (the
"Liabilities and Obligations"). Except as shown in Exhibit L the
Corporation owns outright each asset or item of property reflected therein,
free of all liens, claims and encumbrances. Since said dates and periods,
there has been no material adverse change in the financial condition,
assets or liabilities of the Corporation.
At the closing Seller shall execute and deliver an affidavit setting forth
the above representations as of the date of the closing.
9. Representations And Warranties Of Purchaser. Purchaser represents and
warrants to Seller as follows:
(a) Purchaser is a corporation formed under the laws of Arizona, and is
duly qualified to do business in Arizona. Purchaser has full power and
authority to carry out and perform its undertakings and obligations as
provided herein. The execution and delivery by Purchaser of this agreement
and the consummation of the transactions contemplated herein have been duly
authorized by the Board of Directors of Purchaser and will not conflict
with or breach any provision of the Certificate of Incorporation or Bylaws
of Purchaser. No further action or approval, corporate or otherwise, is
required in order to constitute this agreement the binding and enforceable
obligation of Purchaser.
(b) No action, approval consent or authorization, including without
limitation any action, approval, consent or authorization of any
governmental or quasi-governmental agency, commission, board, bureau or
instrumentality, is necessary for Purchaser to constitute this agreement
the binding and enforceable obligation of Purchaser or to consummate the
transactions contemplated hereby.
(c) Purchaser has or will obtain adequate working capital of up to four
million five hundred thousand dollars ($4,500,000.00), as required to
conduct the business of the Corporation in the normal, usual and regular
manner
(d) Until full and final payment of the Promissory Note attached hereto the
Purchaser agrees:
1) There will be no cash dividends paid on the Corporation's stock
regardless of class;
2) Scott E. Miller will not receive a salary unless he replaces an
officer in the Corporation, such officer employed as of the date of
this Sales Agreement;
3) There shall be no management fee paid to Purchaser in excess of ten
thousand ($l0,000.00) dollars per annum.
4) There will be no issuance of the Corporation's capital stock.
These terms are specifically limited in that they shall be self terminating upon
the satisfaction of the Promissory Note.
10. Conduct Of The Business. Seller, until the closing, shall:
(a) conduct the business in the normal, useful and regular manner,
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(b) preserve the business and the goodwill of the customers and suppliers
of the business and others having relations with Seller,
(c) not increase the compensation or change the personnel of the business
without the consent of Purchaser, which consent shall not be unreasonably
withheld; and
(d) give Purchaser and its duly designated representatives reasonable
access to the premises of the Corporation and the books and records of the
Corporation, and furnish to Purchaser such data and information pertaining
to the Corporation as Purchaser from time to time reasonably may request.
It is the understanding of the parties that the Corporation is being sold as an
ongoing business. Seller shall endeavor to cause the operations of the
Corporation to continue be conducted, from the date of this agreement until the
closing, in substantially the same fashion as such operations have been
conducted during the preceding year
11. Conditions To Closing-Purchaser. The obligations of Purchaser to close
hereunder are subject, at the option of Purchaser, to the following conditions:
(a) All of the terms, covenants and conditions to be complied with or
performed by Seller under this agreement on or before the closing shall
have been complied with or performed in all material respects.
(b) All representations or warranties of Seller herein are true in all
material respects as of the closing date.
(c) On the closing date, there shall be no liens or encumbrances against
the Corporation, except as may be provided for herein.
12. Conditions To Closing-Seller. The obligations of Seller to close hereunder
are subject, at the option of Seller, to the following conditions:
(a) All of the terms, covenants and conditions to be complied with or
performed by Buyer under this agreement on or before the closing shall have
been complied with or performed in all material respects.
(b) All representations or warranties of Buyer herein are true in all
material respects as of the closing date
13. Indemnification. Each party hereto shall indemnify and hold the other
parties harmless from and against all liability, claim, loss, damage or expense,
including reasonable attorneys' fees, incurred or required to be paid by such
other parties by reason of any breach or failure of observance or performance of
any representation, warranty or covenant or other provision of this agreement by
such party.
14. Employment During Transition Period. It is specifically agreed that no
agents or employees of the Seller will be employed after the date of the closing
unless agreed to by the parties and enumerated herein.
15. Covenant Not To Compete. The Bill of Sale shall contain a covenant by Seller
not to establish, open, be engaged in, nor in any manner whatsoever become
interested, directly or indirectly, either as employee, owner, partner, agent,
shareholder, director, officer, or otherwise, in any business, trade or
occupation similar to the business sold hereunder, for a period of three years
from the closing date, within those market areas served by the
7
<PAGE>
Corporation as of the date of this agreement. Pursuant to the terms of this
Article the Seller or any employee thereof shall not:
(i) Directly or indirectly, for its own account or as an agent, servant,
employee, or consultant (whether or not paid), or as a shareholder of any
corporation, partner in a partnership, member of any firm, or otherwise,
engage or attempt to engage in any business that solicits or promotes goods
or services that are competitive with the business conducted by the
Corporation;
(ii) Directly or indirectly, for its own account or as an agent, servant,
employee, or consultant (whether or not paid), or as a shareholder of any
corporation, partner in a partnership, member of any firm, or otherwise,
solicit any person or entity who is or has been an employee of the
Corporation to accept similar employment with the Seller.
Seller agrees that remedy at law for any breach of this Article shall be
inadequate and that the Corporation, its successors and assigns, shall be
entitled to injunctive relief, in addition to any other remedy they might have.
The Seller recognizes that the foregoing territorial and time limitations as
they apply to the non-competition restrictive covenant are properly required for
the adequate protection of the Corporation's business and that in the event that
any such territorial or time limitation is deemed unreasonable by a court of
competent jurisdiction, then the Corporation agrees and submits to the reduction
of either said territorial or time limitation to such an area or period as the
court shall deem reasonable.
16. Brokerage. The parties hereto represent and warrant to each other that they
have not dealt with any broker or finder in connection with this agreement or
the transactions contemplated hereby, and no broker or any other person is
entitled to receive any brokerage commission, finder's fee or similar
compensation in connection with this agreement or the transactions contemplated
hereby.
17. The Purchaser's Guarantors. Purchaser's Guarantors hereby confirm all of the
warranties of Purchaser hereunder, and agrees to indemnify and hold Seller
harmless from and against any failure by Purchaser to comply with any term,
covenant or condition this agreement. At the closing Purchaser's Guarantors
shall execute and deliver a Guaranty of the obligations of Purchaser under the
Promissory Note, substantially in the form of the Guaranty annexed hereto as
Exhibit B-2.
18. Grace Period. It is specifically agreed that before an event of default
shall allow Seller to exercise remedies, the following shall take place. Seller
shall give Purchaser written Notice of any event of default(s) and thereafter
Purchaser shall have fifteen (15) days to cure the default without penalty. If
Purchaser cures within the fifteen (15) day period there shall be no adjustment
in terms of the interest rate or terms of the promissory note. Interest as to
the promissory note shall become one and one half (1.5) percentage points higher
than according to the note and shall remain at such higher percentage only
during the period the promissory note is not brought current except that the
increase in the interest rate shall become permanent the second time the grace
period is exceeded.
19. Debt Reduction. It is specifically agreed that Seller shall have no claim
or interest pertaining to any debt or equity financing(s), regardless of the
number of financings, up to and including the amount of four million five
hundred thousand ($4,500,000.00) dollars which amount Purchaser has agreed per
Article 9 (c) hereof represents the adequate working capital necessary to
conduct the business of the Corporation. It is specifically agreed that fifty
percent (50%) of the net proceeds of any subsequent debt or equity financing(s)
in excess of this working capital requirement achieved by the Purchaser, will be
used to reduce the Corporation's indebtedness evidenced by the Promissory Note
to the Seller.
20. Public Offering- Equity "Kicker". It is specifically agreed that in the
event of a public equity financing achieved by the Purchaser, subsequent to the
closing, the Seller will be entitled to a certain number of the common stock
shares issued. The number of shares entitled to shall be computed as set forth
below:
[ Note Balance ]
------------
[Original Note Balance] multiplied by 0.5 [ Total Shares Of Public Offering]
8
<PAGE>
Defined Terms as used in this Article:
"Note Balance" shall mean, the promissory note balance owed Seller
after the proceeds of the public offering have been applied and used to
reduce the Outstanding Note Balance.
"Outstanding Note Balance" shall mean, the promissory note balance
owed Seller before applying the proceeds of the public offering to reduce
the amount owed Seller.
"Original Note Balance" shall mean, the original promissory note
balance as enumerated in Exhibit B-1 and attached hereto.
"Total Shares of Public Offering" shall mean the total number of
common stock shares offered for public sale.
21. Arbitration. Any dispute or controversy arising among the parties hereto
regarding any term, covenant or condition of this agreement or the breach
thereof shall, upon written demand of any party hereto, be submitted to and
determined by arbitration before the American Arbitration Association, in
Phoenix, Arizona, by a panel of three arbitrators, in accordance with the rules
of the Association then in effect. Any award rendered shall be made by means of
a written opinion explaining the arbitrators' reasons for the award. The
arbitrators may not amend or vary any provision of this agreement. Judgment upon
the award rendered by the arbitrators may be entered in any court of competent
jurisdiction, which court shall have the power to review such award for
compliance with this agreement.
22. Notices. All notices, demands and other communications required or permitted
to be given hereunder shall be in writing and shall be deemed to have been
properly given if delivered by hand or by registered or certified mail, return
receipt requested, with postage prepaid, to Seller or Purchaser, as the case may
be, at their addresses first above written, or at such other addresses as they
may designate by notice given hereunder.
23. Survival. The representations, warranties and covenant contained herein or
in any document, instrument, certificate or schedule furnished in connection
herewith shall survive the delivery of the Bill of Sale and shall continue in
full force and effect after the closing, except to the extent waived in writing.
24. Further Assurances. In connection with the transactions contemplated by this
agreement, the parties agree to execute and deliver such further instruments,
and to take such further actions, as may be reasonably necessary or proper to
effectuate and carry out the transactions contemplated in this agreement.
25. Changes Must Be In Writing. No delay or omission by either Seller or
Purchaser in exercising any right shall operate as a waiver of such right or any
other right. This agreement may not be altered, amended, changed, modified,
waived or terminated in any respect or particular unless the same shall be in
writing signed by the party to be bound. No waiver by any party of any breach
hereunder shall be deemed a waiver of any other or subsequent breach.
26. Captions And Exhibits. The captions in this agreement are for convenience
only and are not to be considered in construing this agreement. The Exhibits
annexed to this agreement are an integral part of this agreement, and where
there is any reference to this agreement it shall be deemed to include said
Exhibits.
27. Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of Arizona.
28. Binding Effect. This agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, executors, administrators, successors and assigns.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
first above written.
U.S. TRANSPORTATION SYSTEMS, INC.
By:/s/Terry Watkins
- ----------------------------------------
Terry Watkins, Executive Vlce President
KAC, INC. GUARANTORS:
By:/s/Scott E. Miller /s/Scott E. Miller
- ----------------------------------------- --------------------------
Scott E. Miller Scott E. Miller
/s/Lora S. Miller
--------------------------
Lora S. Miller
10
<PAGE>
STATE OF ARIZONA, COUNTY OF MARICOPA, SS.:
The foregoing instrument was acknowledged before me on the 27th day of
March, 1997, by Terry Watkins, to me known, who being duly sworn, did depose and
say and did acknowledge that he is the Executive Vlce President of U.S.
Transportation Systems, Inc., the corporation described in and which executed
the foregoing Agreement of Sale; that he knows the seal of said corporation;
that the seal affixed to said Agreement of Sale is such corporate seal; that it
was so affixed by the order of the board of directors of the said corporation;
and that he signed his name thereto by like order.
/s/Melissa D. Gregg
------------------------
Notary Public
My commission expires on 9/7/99
[SEAL]
Melissa D. Gregg
Notary Public-Arizona
Maricopa County
My commission expires on 9/7/99
STATE OF ARIZONA, COUNTY OF MARICOPA, SS.:
The foregoing instrument was acknowledged before me on the 27th day of
March, 1997, by Scott E. Miller, to me known, who being duly sworn, did depose
and say and did acknowledge that he is the President of KAC, Inc., the
corporation described in and which executed the foregoing Agreement of Sale;
that he knows the seal of said corporation; that the seal affixed to said
Agreement of Sale is such corporate seal; that it was so affixed by the order of
the board of directors of the said corporation; and that he signed his name
thereto by like order.
/s/Melissa D. Gregg
------------------------
Notary Public
My commission expires on: 9/7/99
[SEAL]
Melissa D. Gregg
Notary Public-Arizona
Maricopa County
My commission expires on 9/7/99
<PAGE>
STATE OF ARIZONA, COUNTY OF MARICOPA, SS.:
The foregoing instrument was acknowledged before me on the 27th day of
March, 1997, by Scott E. Miller.
/s/Melissa D. Gregg
------------------------
Notary Public
My commission expires on: 9/7/99
[SEAL]
Melissa D. Gregg
Notary Public-Arizona
Maricopa County
My commission expires on: 9/7/99
STATE OF ARIZONA, COUNTY OF MARICOPA,SS.:
The foregoing instrument was acknowledged before me on the 28TH day of
March, 1997, by Lora S. Miller.
/s/Johnnie Johnson
------------------------
Notary Public
My commission expires on:
[SEAL]
JOHNNIE JOHNSON
Notary Public-Arizona
Maricopa County
My commission expires on 9/7/99
<PAGE>
EXHIBIT J
Deferred Fee Obligation Agreement
March 27, 1997
PURSUANT TO THE SALES AGREEMENT ARTICLE 3 ATTACHED HERETO AND FOR VALUE
RECEIVED, KAC, Inc., a Arizona corporation, having an address at 2985 West
Whitton Ave., Phoenix, Arizona 85017 ("Payor"), hereby covenants and promises to
pay to U.S. Transportation Systems, Inc., a Nevada corporation, having an
address at 33 West Main Street, Elmsford, New York 10523 ("Payee"), or order, at
Payee's address first above written or at such other address as Payee may
designate in writing, Six Hundred Eighty Five Thousand ($685,000.00) dollars.
The Deferred Fee is payable, on April 1, 1999. Payor and Payee agree that this
is a Deferred Payment and that no part of the Five Hundred Thousand
($500,000.00) dollars shall accrue interest. Furthermore, the capital stock of
Automated Solutions, Inc., held in escrow pursuant to the Stock Pledge Agreement
of even date herewith, shall not be released until the Deferred Fee Obligation
has been paid. In the event that payment due hereunder is not paid as of April
1, 1999, Payor shall be considered in default, except that Article 18 of the
Sales Agreement shall control.
IN WITNESS WHEREOF, the parties have caused this Deferred Fee Agreement to be
executed and delivered as of the date first above written.
KAC, INC. U.S. TRANSPORTATION SYSTEMS, INC.
By/s/Scott E. Miller By/s/Terry Watkins
- --------------------------- ---------------------------------------
Scott E. Miller, President Terry Watkins, Executive Vlce President
<PAGE>
STATE OF ARIZONA, COUNTY OF MARICOPA,SS.:
The foregoing instrument was acknowledged before me on the 27th day of
March, 1997, by Scott E. Miller, to me known, who being duly sworn, did depose
and say and did acknowledge that he is the President of KAC, Inc., the
corporation described in and which executed the foregoing Stock Pledge
Agreement; that he knows the seal of said corporation; that the seal affixed to
said Stock Pledge Agreement is such corporate seal; that it was so affixed by
the order of the board of directors of the said corporation; and that he signed
his name thereto by like order.
/s/Melissa D. Gregg
------------------------
Notary Public
My commission expires on: 9/7/99
[SEAL]
Melissa D. Gregg
Notary Public-Arizona
Maricopa County
My commission expires on: 9/7/99
The foregoing instrument was acknowledged before me on the 27th day of
March, 1997, by Terry Watkins, to me known, who being duly sworn, did depose and
say and did acknowledge that he is the Executive Vlce President of U.S.
Transportation Systems, Inc., the corporation described in and which executed
the foregoing Stock Pledge Agreement; that he knows the seal of said
corporation; that the seal affixed to said Stock Pledge Agreement is such
corporate seal; that it was so affixed by the order of the board of directors of
the said corporation; and that he signed his name thereto by like order.
/s/Melissa D. Gregg
------------------------
Notary Public
My commission expires on: 9/7/99
[SEAL]
Melissa D. Gregg
Notary Public-Arizona
Maricopa County
My commission expires on: 9/7/99
<PAGE>
EMPLOYMENT AGREEMENT
BETWEEN
U.S. TRANSPORTATION SYSTEMS, INC. &
RONALD P. SORCI
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of July 10, 1996, by
and between U.S. Transportation Systems, Inc., a Nevada corporation, with
offices at 33 West Main Street, Elmsford, New York 10523 (the "Company"), and
Ronald P. Sorci, residing 88 Cedar Road, Wilton, Connecticut 06897 (the
"Employee"), who both agree as follows:
1. Employment Agreement
Upon the terms and subject to the conditions contained in this Agreement, the
Company hereby employs the Employee, and the Employee hereby accepts employment
by the Company.
2. Term of Employment
The term of the Employee's employment by the Company under this Agreement shall
be for five (5) years commencing on July 10, 1996 and ending July 9, 2001.
3. Services
The Employee shall be employed as the Treasurer and Controller of the Company,
and he shall perform such other services as may reasonably be assigned to him
from time to time by the Company. Employee shall devote his best efforts and his
full business and professional time to the faithful fulfillment of his duties
hereunder.
<PAGE>
4. Compensation
The Employee shall receive an annual salary of $100,000.00 during the term of
this Agreement, payable in accordance with the Company's general policies for
payment of compensation to its salaried personnel. In addition, Employee shall
receive a non-accountable expense allowance of $25,000.00 per annum (payable
monthly), plus 12,500 registered shares, via stock grant, of the Company`s
common stock on the 30th day of November and the 31st day of March throughout
the term of this Agreement.
5. Fringe Benefits and Perquisites
The Employee shall be entitled to all fringe benefits and perquisites that may
be provided generally for the Company's most senior executive officers pursuant
to policies established from time to time by the Company's board of directors,
including but not limited to a cellular phone, regular vacations, and
participation in the Company family medical plan, pension plan, profit sharing
plan and stock option plan. Specifically not included is the providing of an
automobile which shall be at the sole responsibility and expense of the
Employee.
6. Reimbursements
The Employee shall be reimbursed weekly for all direct substantiated
out-of-pocket expenditures duly made by him on the Company's behalf in the
performance of his services under this Agreement, subject to timely reporting
requirements imposed from time to time by the Company's board of directors.
2
<PAGE>
7. Indemnification
Prior to the date hereof, Employee has been engaged in the operation of a
limousine business in the metropolitan area under the name of RPS Executive
Limousines Ltd. ("RPS"). Employee has incurred various and sundry liabilities,
contingent and otherwise, in connection with the operation of RPS and, as
further consideration for his covenant not to compete, the company agrees to
indemnify Employee from any liability, cost or expense (including attorney(s)
fees) incurred in connection with the following matters:
(a) Any Internal Revenue Service liability evolving from a federal ruling
to the effect that certain RPS drivers are deemed to be employees as opposed to
independent contractors.
(b) Any similar ruling by the New York State Department of Unemployment to
the effect that certain drivers are deemed to be employees.
(c) Any ruling by the State of New York resulting in a Workers'
Compensation premium deficiency.
(d) Any attempt by either of Jean Paul Gimon or Ulf Runquist to seek
collection from Employee of any RPS debt.
(e) The lease, purchase and/or financing by RPS of the twelve (12) motor
vehicles set forth on Schedule A which is hereby made a part hereof.
8. Covenant Not to Compete
Employee shall not engage in the operation or any limousine, van or bus company,
or a company involved in the transportation of
3
<PAGE>
passengers or property by motor vehicle any place in the New York metropolitan
area for a term equivalent to the period of his employment with the Company,
plus a period of Two (2) years following his termination of employment by the
Company, but in no event sooner than July 9, 2003 (Employee's Term). Employee
shall not, during Employee's Term, directly or indirectly (on his own behalf or
as an agent, employee, officer, director, partner, shareholder, or other owner),
loan money or credit to, own any interest in, engage in, or otherwise
participate in a business directly competitive with the Company's present
operations and business throughout the continental United States. Employee
acknowledges that his covenant not to compete is essential to this Agreement,
that the Company would not have entered into this Agreement without this section
being included in it, and that this section is reasonable and does not place any
undue hardship on Employee, and that Employee has been amply and generously
compensated for agreeing to the terms of this Covenant by a combination of cash,
stock and indemnification incentives over and above his base salary. Employee
acknowledges and agrees that the Company's remedy at law for any breach of his
obligations under this section would be inadequate, and agrees and consents that
temporary and permanent injunctive relief may be granted in any proceeding which
may be brought to enforce any provisions of this section without the necessity
of proof of actual damages. With respect to any such provisions finally
determined by a court of competent jurisdiction to be unenforceable, such court
shall have
4
<PAGE>
jurisdiction to reform this Agreement and such provision so that it is
enforceable to the maximum extent permitted by law, and the parties shall abide
by such court's determination. If such unenforceable provision cannot be
reformed, such provision shall be deemed to be severed from this Agreement, but
every other provision of this Agreement shall remain in full force and effect.
9. Non-Compete Consideration
For his covenant not to compete, which is an integral part of this
Agreement, the Company is paying Employee, or his designee, the following:
(a) $50,000.00 in cash, receipt of which is acknowledged, and a common
stock allotment of 50,000 shares which the Company undertakes to register and
deliver by August 31, 1996.
(b) The equivalent of $500,000.00 in the form of shares of its common stock
which the Company agrees to register by August 31, 1996. The value of said
shares shall be based upon the average price for the five (5) trading days
immediately preceding the delivery of the shares, subject to a discount of
Twenty Percent (20%) -- Example: Assuming an average 5-day price of $1.00 less a
discount of 20% = $0.80 divided into $500,000.00 = 625,000 shares. Employee
agrees to deliver all of the shares described in this section "(b)" to a
registered broker acceptable to the Company. Employee will advise said broker
that single week sales are limited to a maximum of 1/13 of the total shares
delivered on a non-cumulative basis. These sales should not be construed as an
obligation of employee to sell any minimum number of shares. Employee will also
instruct his broker to furnish simultaneous confirmation of each sales
transaction to the
5
<PAGE>
Company.
10. Termination of Employment
Both the Company and the Employee have the mutual option to terminate this
Agreement at any time upon the following terms and conditions:
(a) Termination by Employee: Employee shall not be entitled to any
severance pay and, Employee's obligations under paragraph 8 of this Agreement
remains in full force and effect.
(b) Termination by Company: Other than for cause as hereinafter defined,
Employee shall receive severance pay as follows: If termination occurs during
Year 1 -- $50,000.00; Year 2 -- $40,000.00; Year 3 -- $30,000.00; Year 4 --
$20,000.00; Year 5 -- $10,000.00.
Notwithstanding anything contained in this Agreement to the contrary, this
Agreement may be terminated by the Company (but such termination shall not
affect Employee's obligations under paragraph 8 of this Agreement) at any time
on or after the occurrence of any of the following events, except as otherwise
set forth in this Agreement:
(i) Disability
Employee is unable to perform his duties assigned to him under this
Agreement for more than sixty (60) calendar days as a result of his becoming
Disabled (defined hereinafter) during any one (1) year period. "Disabled" shall
mean the inability of the Employee for medical reasons certified by a physician
selected by the Company and reasonably satisfactory to the Employee, to
6
<PAGE>
substantially perform his duties hereunder. The Employee shall make himself
available for examination by such physician upon reasonable request.
(ii) Fraud
Employee is found guilty by a court of competent jurisdiction of fraud or
dishonesty in the performance of his duties under this Agreement.
(iii) Crime
Employee is convicted of a felony.
(iv) Death
Employee dies.
(v) For Cause
Employee fails, within a reasonable time after notice, to follow the good
faith instructions communicated to Employee in writing, of the Company's board
of directors or by the Company's president.
(vi) Substance Abuse
Employee is found intoxicated or under the influence of illegal drugs or
other similar substance while performing his duties under this Agreement.
Notwithstanding anything in this Agreement and this paragraph, any termination
of employment herein provided shall not be effective unless notice of such event
is given to the Employee as hereinafter provided and the Employee fails to
remedy the situation within thirty (30) days of such notice.
7
<PAGE>
11. Employee's Capacity
The Employee represents and warrants to the Company that he has the capacity and
right to enter into this Agreement and perform all his services hereunder
without any restriction whatsoever by any other agreement, other document, or
otherwise.
12. Company Authority
The Company hereby represents and warrants to the Employee that: (i) it has full
power and corporate authority to execute and deliver this Agreement and to
perform its obligations hereunder; (ii) such execution, delivery and performance
will not (and with the giving of notice or lapse of time or both would not)
result in the breach of any agreements or other obligations to which it is a
party or otherwise bound; (iii) the execution and delivery of this Agreement is
not in violation of the Company's Certificate of Incorporation or Bylaws and
(iv) this Agreement is its legal, valid and binding obligation, enforceable in
accordance with its terms.
13. Severability
The intention of the parties to this Agreement is to comply fully with all laws
governing employment agreements, and this Agreement shall be construed
consistently with all such laws to the extent possible. If and to the extent
that any court of competent jurisdiction is unable to so construe part or all of
any provisions of this Agreement, and holds that part or all of that provision
to be invalid, such invalidity shall not affect the balance of the provision or
the remaining provisions of this Agreement which shall remain in full force and
effect.
8
<PAGE>
14. Complete Agreement
This document contains the entire agreement between the parties and supersedes
any prior decisions, negotiations, representations, or agreements between them
respecting employment of the Employee. No alterations, additions, or other
changes to this Agreement shall be binding unless made in writing and signed by
both parties to this Agreement.
15. Notices
Any notice or other communication required or desired to be given to any party
under this Agreement shall be in writing and shall be deemed given when (a)
delivered personally to that party; or (b) three (3) business days after being
deposited in the United States mail by Certified Mail Return Receipt Requested,
postage prepaid, at the address of such party set forth at the beginning of this
Agreement, or any other address hereafter designated by that party.
16. Non-Waiver
No failure by either party to insist upon strict compliance with any term of
this Agreement, to exercise any option, enforce any right, or seek any remedy
upon default of the other party shall affect, or constitute a waiver of, the
first party's right to insist upon such strict compliance, exercise that option,
enforce that right, or seek that remedy with respect to that default or any
prior, contemporaneous, or subsequent default; nor shall any custom or practice
of the parties at variance with any provision of this Agreement affect, or
constitute a waiver of either party's right to demand strict compliance with all
provisions of this Agreement.
9
<PAGE>
17. Governing Law
This Agreement has been executed in the State of New York, and the Company has
its executive offices in the State of New York. All questions concerning the
validity or intention of this Agreement and all questions relating to
performance hereunder shall be resolved under the laws of the State of New York
and employee consents to jurisdiction in the Supreme Court of the State of New
York.
18. Successors
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by and against the respective heirs, legal representatives,
successors, and assigns of each party to this Agreement, provided that this
Agreement shall be personal to the Employee, and the Employee shall not assign
any of his rights or obligations under this Agreement without the prior written
consent of the Company.
19. Headings
The headings contained herein are for the sole purpose of convenience of
reference, and shall not in any way limit or affect the meaning or
interpretation of any of the terms or provisions of this Agreement.
20. Execution in Counterparts
This Agreement may be executed in one or more counterparts, each of
10
<PAGE>
which shall be deemed an original, but all of which together shall constitute
one and the same document.
COMPANY:
U.S. TRANSPORTATION SYSTEMS, INC.
By /s/ Michael Margolies
-------------------------
Michael Margolies, CEO
EMPLOYEE:
/s/ Ronald P. Sorci
----------------------------
Ronald P. Sorci
<PAGE>
RPS EXECUTIVE LIMOUSINES LTD.
VEHICLE SCHEDULE (ALL LEASED)
JULY 1, 1996
RPS CAR # YEAR MAKE/MODEL SERIAL #
--------- ---- ---------- --------
11 1992 LINC. TOWN CAR 1LNLM81W1NY729566
16 1994 LINC. TOWN CAR 1LNLM81W2RY772397
17 1994 LINC. TOWN CAR 1LNLM81W5RY640797
42 1992 LINC. TOWN CAR 1LNLM81WXNY739626
54 1994 LINC. TOWN CAR 1LNLM81W2RY4764364
70 1992 LINC. TOWN CAR 1LNLM81W2NY617696
77 1992 LINC. TOWN CAR 1LNLM81W5NY607745
126 1994 LINC. LIMOUSINE 1LNLM81WRY665518
225 1995 MERC. GRAND MARQUIS 2MELM74W4SX661249
340 1994 LINC. TOWN CAR 1LNLM81WXRY623042
504 1991 LINC. TOWN CAR 1LNCM82W9MY757399
817 1995 LINC. LIMOUSINE 1LNLM81WOSY652992
(8 PSGR)
SCHEDULE A
<PAGE>
AGREEMENT IN SATISFACTION
AGREEMENT made this 22nd day of November, 1996 between U.S. TRANSPORTATION
SYSTEMS, INC., a Nevada corporation, (the "Company") and RONALD P. SORCI (the
"Employee").
WHEREAS, the Company and the Employee entered into an "Employment
Agreement" as of July 10, 1996, and the Employment Agreement provided in Section
9(b) thereof that the Company would issue to the Employee "the equivalent of
$500,000 in the form of shares of its common stock...;" and
WHEREAS, the Company has issued certain shares to the Employee in the past
and desires to issue certain additional shares and loan certain funds to the
Employee in satisfaction of its obligation under said Section 9(b), and the
Employee is willing to accept such additional shares and such loan in
satisfaction of Section 9(b).
NOW, THEREFORE, it is agreed:
1. Issuance of Shares. The Company agrees that it shall issue to the
Employee eighty thousand (80,000) shares of its Common Stock. The shares shall
be issued pursuant to the Company's Employee Stock and Stock Option Plan, the
securities in which have been registered with the Securities and Exchange
Commission on Form S-8. The Company shall cause certificates for the shares to
be issued prior to December 31, 1996. One certificate for ten thousand (10,000)
shares shall be delivered to the Employee. The other certificate for seventy
thousand (70,000) shares shall be held by the Company pursuant to the Pledge
Agreement referred to below.
2. Loan and Promissory Note. Simultaneous herewith, the Company shall
deliver to the Employee Two Hundred and Fifty Thousand ($250,000) Dollars, which
shall be a loan to the Employee. The Employee shall at the same time deliver to
the Company a promissory note in the principal amount of Two Hundred and Fifty
Thousand ($250,000) Dollars payable on May 31, 1997 with interest at the rate of
nine and one-half (9 1/2%) percent per annum.
3. Pledge Agreement. Simultaneous herewith, the Employee shall deliver to
the Company a certificate for 70,000 shares of Common Stock of U.S.
Transportation Systems, Inc. to be held as security for the loan described
above, together with a Pledge Agreement with respect to said shares.
4. Release. The Employee agrees and acknowledges that issuance of the
shares pursuant to Section 1 hereof and the loan pursuant to Section 2 hereof
shall constitute full and complete satisfaction by the Company of all
obligations arising under Section 9(b) of the Employment Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement in
Satisfaction as of the date written above.
U.S. TRANSPORTATION SYSTEMS, INC.
By: /s/ Michael Margolies /s/ RONALD P. SORCI
-------------------------- -------------------------
Michael Margolies RONALD P. SORCI
Chairman
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 11
EARNING/(LOSS) PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
---- ----
<S> <C> <C>
Average Shares Outstanding
Disregarding Outstanding Stock
Warrants and Options 4,036,930 1,740,649
Effect of Stock Warrants and
Options Based on the Treasury
Stock Method Modified for the 20%
Test Using the Average Market Price
Which Approximates Year End Price 262,517 39,933
------------- ----------
SHARES OUTSTANDING 4,299,447 1,780,582
=========== ==========
INCOME (LOSS) FROM
CONTINUING OPERATIONS AS
ADJUSTED FOR MODIFIED
TREASURY STOCK METHOD $ (4,008,564) $ 969,542
============ ==========
INCOME (LOSS) PER SHARE
FROM CONTINUING OPERATIONS (.93) .54
LOSS PER SHARE FROM DISCONTINUED
OPERATIONS (.62) (.02)
------------- ----------
NET INCOME (LOSS) PER SHARE $ (1.55) $ .52
============= ==========
</TABLE>
This computation is submitted in accordance with Regulation
S-B, Item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No.
15, Earnings per Share, in that its result is anti-dilutive in 1996.
