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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20540
FORM 10-K
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 1997
Commission File No. 0-23360
COUNTRY WIDE TRANSPORT SERVICES, INC.
-------------------------------------
(Name of Registrant as specified in its charter)
DELAWARE 95-4105996
(State or Other Jurisdiction (I.R.S. Employer
or Organization) Identification No.)
119 DESPATCH DRIVE, EAST ROCHESTER, N.Y. 14445
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (716) 381-5470
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $.10 per share NASD
OTC
Bulletin Board
Indicate by check whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve (12) months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers, pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-K or any amendment to this Form 10-K [X]
[Cover page 1 of 2 pages.]
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As of September 13, 1997 there were 4,248,100 shares of the Company's Common
Stock, $.10 par value, outstanding. The aggregate market value of the voting
stock held by non-affiliates of the registrant on September 13, 1997 was
$5,819,897.
[Cover page 2 of 2 pages.]
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PART I
ITEM 1. BUSINESS
THE BUSINESS
------------
Effective January, 1997, the Company's core business is conducted through
its sole operating subsidiary Vertex Transportation, Inc., (Vertex). In
business since 1978 and purchased by the Company on July 1, 1994, Vertex
operates in the area of third party transportation logistics. As a non asset
based service entity Vertex provides customers with transactional
transportation opportunities as a freight forwarder as well as full service
logistics capabilities in less-than-truckload (LTL), truckload, intermodal
and international transportation. Additionally, the Company provides
logistics management programs for its customers.
BUSINESS HISTORY, AND DEVELOPMENT
---------------------------------
Country Wide Truck Service, Inc. ("CW Truck") formerly one of the
Company's wholly-owned subsidiaries, was incorporated in California in 1962.
The Company was organized under the laws of the State of Delaware in February
1987 and all of the outstanding common stock of CW Truck was transferred to
the Company in exchange for shares of the Company's Common Stock. On April
3, 1987, the Company issued 150,000 shares of its Common Stock in a public
common stock offering. In 1988, CSX/Sea-Land Logistics, Inc. acquired a
controlling interest in the Company, and expanded the business in a manner
which created significant losses. The original owners reacquired control in
1990 and thereafter downsized the operations. By virtue of a Plan and
Agreement of Reorganization effective as of July 1, 1992, the Company
acquired from Martrade, Ltd., a Minnesota corporation, all of the issued and
outstanding shares of common stock of Nationwide Produce Co. (formerly
Yellowstone Transportation, Inc.), a Minnesota corporation ("Nationwide"), in
exchange for 255,000 shares of the Company's Common Stock. On August 31,
1992, Martrade, Ltd., whose majority shareholder is William Martindale,
purchased an aggregate of 200,000 additional shares of the Company's common
stock from its then principal shareholders, Barry Plost and David J. Abts, in
a private transaction, thereby acquiring a controlling interest in the
Company.
Effective July 1, 1994, CW Truck acquired Vertex Transportation, Inc.
("Vertex"). Vertex was established in October 1978 as Vertex Associates
Transportation, Inc., a New York corporation. It was originally established
as an agent for CW Truck. In 1980, Vertex received authority as a broker and
while continuing to serve CW Truck as agent, began to expand its business
beyond its relationship with CW Truck. During the 1980's, Vertex developed
its brokerage and logistics management capabilities and began representing
many large corporations, including Kodak, Xerox, DuPont, Bausch & Lomb,
Champion Products and General Motors. In 1988, this company changed its name
to Vertex Transportation, Inc., in order to more succinctly describe its
dedication to third party transportation logistics. In 1992, Vertex became
an unregulated freight forwarder. This change was not simply a change of
name or form but was a step to signal a total consolidated freight management
service. Vertex operated as a division of CW Truck through June 27, 1996,
when it was again incorporated and presently operates as a subsidiary of the
Company.
Through its former subsidiary, Nationwide Produce Co., ("Nationwide"),
the Company operated a "mixer" produce operation. Having experienced
significant losses in certain divisions of Nationwide during the quarter
ended March 31, 1995, management began a review of its entire product sales
group. As a result of the review, two of Nationwide's divisions (Salinas
lettuce packing and the tomato repackaging divisions) were closed in May of
1995. Continued losses in the Company's product sales segment through June
30, 1995 with no possibility of improvement forced management and the Board
of Directors on June 26, 1995 to decide to discontinue the entire segment
through an orderly liquidation process which they estimated would occur over
the subsequent two month period. Immediately thereafter, the operations were
begun to close, and on September 18, 1995 the Company made a General
Assignment of all assets of its subsidiary, Nationwide Produce Co, for the
pro rata benefit of
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all creditors of the subsidiary. A General Assignment under California State
Law is an alternative to Chapter 7 bankruptcy liquidations. The Company had
provided both organic and commercial produce from growers in and around
California, the Pacific Northwest, Mexico and the Southeastern United States
to the principal chain supermarkets, wholesalers and food service
distributors in the United States and Canada as well as overseas. (See also
Certain Relationships and Related Transactions and Management's Discussion
and Analysis of Financial Condition and Results of Operations herein)
In September 1996, the Company announced a merger arrangement with
Continental American Transportation, Inc., which would have assumed the
operation of Country Wide Truck Service, Inc.. However, after required due
diligence, the Board of Directors determined that the merger was not in the
best interests of shareholders. In December 1996, it was decided due to the
failed merger with Continental American, continuing and increasing losses at
CW Truck, as well as significant licensing costs due at year-end, that CW
Truck would be liquidated.
On December 31, 1996, a General Assignment for the Benefit of Creditors
of the assets of Country Wide Truck Service, Inc. was made to the Hamer
Group of Los Angeles as Assignee. A General Assignment under California
State Law is an alternative to Chapter 7 bankruptcy liquidation.
Simultaneously, an asset sale of all owned and leased tractors and trailers
was made to Mid-Cal Express, a California Corporation. This sale was
approved by the equipment lessors under the condition of continued Corporate
guarantees of the Company until such leases have been satisfied by Mid-Cal
Express. As of September 13, 1997, Mid-Cal has fulfilled all of its
obligations under the assumed leases.
At present the Company consists of but one operating subsidiary, Vertex
Transportation, Inc.. Throughout the past two years the Vertex operations
have recorded consistent profitability in spite of negative results in public
relations of the Company's former failed subsidiary's.
TRANSPORTATION OPERATIONS
-------------------------
Vertex is a non-asset based full service domestic freight forwarder
providing its customers a complete range of transportation services including
truckload, less-than-truckload (LTL), consolidations, distribution,
management logistics implementation, intermodal and international services.
In business since 1978, Vertex maintains a fully staffed sales and
operating terminal in Rochester, New York with additional sales offices in
Buffalo, New York and Greensboro, North Carolina. From this primary location
the Company conducts business nationwide using a computerized system for
managing operational requirements of each shipment as well as completing all
necessary accounting, administration, and information technology for customer
use.
This computer system allows our customer service and logistics personnel
to conduct business nationwide and provides customers with updates on the
location and status of each shipment, prompt responses to inquiries, and
reliable delivery information on time sensitive loads.
These customer service representatives are also responsible in
maintaining tight communication with the over 2,000 transportation providers
listed in the Vertex computer files with which the Company delivers customers
freight. Additionally the Company maintains an office of the Vice President
of Carrier Services to assure a consistent communication pipeline to the
transportation providers which are critical to the success of any third party
logistics operation.
In marketing its service, the sales force emphasize the Company's
commitment to customer service and its expertise in service oriented
shipments, particularly time-sensitive deliveries as well as transportation
solutions to the most complicated requirements. During the fiscal year
ending June 30, 1997, the Company transported a wide variety of commodities
including retail goods, auto parts, photographic material, pharmaceuticals
and printed material. During this period the Company's 25, 10, and 5 largest
customers accounted for approximately 64%, 52% and 40% of the Company's
logistics operations revenue.
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The Company's two largest customers, Eastman Kodak and Echlin Corporation in
aggregate accounted for approximately thirty-five (35%) percent of the
Company's total revenue from its logistics operations. The loss of either of
these customers could have a material adverse effect on the Company. No other
customer accounted for more than five (5%) percent of the revenue for the
logistics operation.
EMPLOYEES
At June 30, 1997, the Company employed 37 persons in its logistics
operations. Additionally, the Company has a number of contract sales
agreements. Employees are not represented by any union and the Company
believes that its employee relations are very good.
COMPETITION
The transportation services business is highly competitive with thousands
of alternatives to the shipping public. As a third party logistics provider,
the Company competes with other similar providers, Intermodal Marketing
Companies, freight brokers and trucking companies (some of which are much
larger and financially secure). This extensive competition maintains
constant pressure on freight rates, and thus results in thin margins. The
Company has demonstrated that it can maintain customers through service and
experience gained from twenty years in the business, as well as, superior
information technology provided by its computer system. Additionally, the
wide range of service offered by the Company attracts and retains customers
with diverse and specialized needs.
REGULATIONS
The Company maintains authority with Federal regulatory agencies as a
freight forwarder, as well as, a broker of property. Recent deregulatory
actions by Congress and the elimination of the Interstate Commerce Commission
have resulted in a less regulated environment in transportation with the
primary concern of the Department of Transportation being safety related.
Routing and rating restrictions have largely been eliminated.
INSURANCE
The Company has the following types of insurance coverage:
TYPE OF INSURANCE MAXIMUM COVERAGE
----------------- ----------------
General Liability $2,000,000
Personal Injury $1,000,000
General Umbrella Policy $2,000,000
Cargo Policy $ 500,000
The Company's management believes that its current insurance coverages
are adequate in light of the scope and nature of its operations.
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DISCONTINUED OPERATIONS
-----------------------
Through its former subsidiary, Nationwide Produce Co. (Nationwide), the
Company operated a "mixer" produce operation. Having experienced significant
losses in certain divisions of Nationwide during the quarter ending March 31,
1995, management began a review of its entire product sales group. As a
result of the review, two of Nationwide's divisions (Salinas lettuce packing
and the tomato repackaging divisions) were closed in May of 1995. Continued
losses in the Company's product sale segment through June 30, 1995 with no
possibility of improvement forced management and the Board of Directors on
June 26, 1995 to decide to discontinue the entire segment through an orderly
liquidation process which they estimated would occur over the subsequent two
month period. Immediately thereafter, the operations were begun to close, and
on September 18, 1995 a General Assignment of all assets of Nationwide
Produce Co. was made for the pro rata benefit of all creditors of the
Subsidiary. A General Assignment under California State Law is an
alternative to Chapter 7 bankruptcy liquidation. The Company had provided
both organic and commercial produce from growers in and around California,
the Pacific Northwest, Mexico and the Southeastern United States to the
principal chain supermarkets, wholesalers and food service distributors in
the United States and Canada, as well as, overseas. (See also certain
Relationships and Related Transactions and Management's Discussion and
Analysis of Financial Conditions and Results of Operations herein).
Nationwide Produce Co. ("Nationwide") operated a full-service marketing
firm in Los Angeles, California importing, exporting and distributing
conventional and organic produce nationwide and overseas. Operating from a
100,000 square foot leased warehouse adjacent to the Los Angeles Produce
Market, Nationwide shipped domestically and internationally to major domestic
food retailers and wholesalers. Another division of Nationwide, Martrade,
operated as an export sales arm of principal food and other consumer product
manufacturers.
Following the General Assignment for the benefit of creditors of the
assets of Nationwide, the Company was left with two operating subsidiaries,
CW Truck and Vertex. The damage to the Company's balance sheet caused by the
significant losses incurred by Nationwide as well as the loss of produce
customers who had tendered a large amount of transportation business to CW
Truck, sent the Company in a downward business cycle which could not be
counteracted. A program of downsizing and elimination of unprofitable
divisions was begun in the early months of 1996. Numerous attempts and
proposals were made to sell CW Truck which would have left the Company with
one operating subsidiary, Vertex Transportation, Inc., however, these
attempts were futile.
Faced with equipment licensing cost at CW Truck in December of 1996 and
in light of continued significant losses the Company on December 31, 1996
made a General Assignment for the benefit of creditors of Country Wide Truck
Service, Inc. and simultaneously made an asset sale of the rolling stock of
CW Truck to Mid-Cal Express Inc., a California Corporation. The equipment
lessors agreed to the assumption of the equipment leased by Mid-Cal Express
with the continuance of a conditional guarantee of the Company. A General
Assignment under California State Law is an alternative to Chapter 7
bankruptcy liquidation. (See also Certain Relationships and Related
Transactions and Management discussions and Analysis of Financial Condition
and Results of Operations herein).
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ITEM 2. PROPERTIES
At June 30,1997, the Company owned no rolling stock, but owned office,
computer and other equipment having a book value of approximately $216,000.
The Company leases the following facilities for the operation of Vertex
Transportation, Inc.
LOCATIONS TYPE SIZE ANNUAL RENTAL
- --------- ---- ---- -------------
East Rochester Warehouse, Office 10,000 Sq. Ft $90,000
New York
Buffalo, New York Office 400 Sq. Ft $ 2,400
Greensboro, N. C. Office 400 Sq. Ft $ 2,220
ITEM 3. LEGAL PROCEEDINGS
With the closing of the trucking and transportation operations the amount
of litigation in which the Company has been involved has been substantially
reduced. The nature of the Company's business, however, results in
litigation of a derivative nature due to property damage or loss. The
Company believes that all pending litigation is adequately covered by
insurance and the adverse results in one or more of these matters will not
have a material adverse effect on its financial position or operations.
Effective September 18, 1995, The Company's subsidiary, Nationwide
Produce Co., which comprised the entire product sales segment of the Company,
made a General Assignment of all assets of the corporation to Credit Managers
Association of California for the pro rata benefit of all creditors of the
corporation. The Company has ceased all business functions in its product
sales segment.
On December 13, 1995, in Los Angeles Superior Court, Credit Managers
Association of California, on behalf of all creditors of Nationwide Produce
Co. filed suit against a former director and officer of the Company to
recover $497,000 of funds which Credit Managers Association of California
believes was misappropriated by a former officer to a corporation he owned
and controlled.
On February 27, 1996, Credit Managers Association of California, on
behalf of all creditors of Nationwide Produce Co., filed suit to collect more
than $600,000 arising from the sale of a business division of Nationwide in
1994.
On February 27, 1996, Credit Managers Association of California, on
behalf of all creditors of Nationwide Produce Co., filed suit to recover at
least $70,000 from two former employees of nationwide. The suit alleges that
while employees of Nationwide, the defendants used Nationwide assets for the
benefit of another business.
During the month of September, 1995, the Company's transportation
subsidiary, CW Truck had a cargo loss that approximated $650,000 filed
against it by one of its customers, Eastman Kodak Company. The insurance
carrier, National Union Fire Insurance, citing certain exceptions in the
cargo policy declined to pay the claim and referred the issue of coverage to
litigation on February 27, 1996, in New York State Supreme Court. The
Company initiated legal action against the insurance carrier and its agent.
The customer additionally filed a cross claim against the Company.
Management believes that the Company's suit will be successful. To preserve
the relationship between the Company and the customer the Company has paid to
the customer a sum of $509,000 as of June 30, 1997 in satisfaction of its
loss. The balance of the claim is accrued in the Company's financial
statements. Said payments were made out of the operating revenues of the
Company. It is managements belief that the successful suit against the
insurance carrier will reimburse the Company for all funds paid to the
customer.
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In 1996 the Assignee of the assets of Nationwide commenced an action
against a former customer of Nationwide to recover approximately $600,000 due
Nationwide. The debtor, Oertley/Oasis Mountain, cross complained against the
Company, Vertex and all of the officers and directors of the Company claiming
that the directors and Company were negligent in allowing the former CEO of
the Company to enter into fraudulent and misleading arrangements with the
customer. The Company has directors and officers insurance, insuring the
officers of the Company against this claim or any sum in excess of $100,000.
The obligation of the Company is likewise insured pursuant to said policy by
virtue of the fact that it has agreed to indemnify the officers and directors
of the Company. The total claim alleged by the customer is $2,400,000;
however, only the sum of $100,000 has been reserved by virtue of the
insurance coverage. The Company believes that the claim against the Company
and the directors is without merit and will be unsuccessful.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 1997 the certificate of incorporation of the Company was
amended to increase the par value of the Company's common shares from $.02 to
$.10 per share. This amendment required the approval of shareholders and the
Company obtained the written consent of the required number of shareholders
for approval of this amendment pursuant to Section 228 of the Delaware
General Corporation Law. On April 9, 1997 the certificate of incorporation
of the Company was amended to increase the number of authorized common shares
from 10,000,000 common shares to 30,000,000 common shares. This amendment
required the approval of shareholders and the Company obtained the written
consent of the required number of shareholders for approval of this amendment
pursuant to Section 228 of the Delaware General Corporation Law.
Effective May 15, 1997 the Company's common shares were adjusted by a
reverse split of one new share for each five shares of stock outstanding.
The required approval of the shareholders was obtained by written consent of
the required number of shareholders pursuant to Section 228 of the Delaware
Corporation Law. Said consent was obtained before April 1, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
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The Company's common stock was traded on the NASDAQ Small Cap Market
under the symbol CWTS until August 1996. Having failed to meet the listing
requirements for continued listing on the NASDAQ Small Cap Market the
Company's shares have been traded on the NASD OTC Bulletin Board, since
August 1996. The following table presents high and low prices for the
Company's common stock published by the National Quotation Service, Inc., as
well as the range of closing high and low bid prices as so reported. The
quotations represent prices in the over-the-counter-market between dealers in
securities and do not include retail markup, markdown or commissions and do
not necessarily represent actual transactions. As a result of the Company's
one for five reverse split, the Company's stock symbol under which the
Company's shares are now traded is CWTV. This change was effective May 19,
1997. Quarterly market price information for the Company's shares of common
stock is as follows:
QUARTER ENDING BID PRICES ASK PRICES
- -------------- ---------- ----------
HIGH LOW HIGH LOW
---- --- ---- ---
March 31, 1995 4-1/2 2-7/8 4-3/4 3
June 30, 1995 3-5/8 1-3/8 3-7/8 1-9/16
September 30, 1995 2-3/16 1-1/8 2-1/8 1-1/16
December 31, 1995 15/16 17/32 15/16 17/32
March 31, 1996 11/16 9/32 5/8 1/4
June 30, 1996 7/16 5/32 3/8 5/32
HIGH LAST TRADE** LOW
---- ---------- ---
September 30, 1996 .62 .15
December 31, 1996 .50 .15
March 31, 1997 .28 .12
June 30, 1997* 1.47 .12
* Reverse split of stock one for five effective May 15 1997.
** With the Company's stock being traded on NASD OTC Bulletin Board
during quarter ended 9/30/96, the information available through
National Quotation, Inc. consisted of last trade information.
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SHAREHOLDERS
------------
As of June 30, 1997, the number of shareholders of record of common stock,
excluding the number of beneficial owners whose securities are held in street
name was approximately 186.
DIVIDEND POLICY
---------------
The Company plans to retain future earnings, if any, for use in its
business and, accordingly, the Company does not anticipate paying dividends
in the foreseeable future. Any earnings are expected to be used for the
operation and expansion of the Company's business. Payment of dividends is
within the discretion of the Company's Board of Directors and will depend,
among other factors upon the Company's earnings, financial condition and
capital requirements. In addition, as a holding company, the Company's
ability to pay dividends may be dependent upon distributions received from
its operating subsidiaries. The Company's subsidiary has a line of credit
agreement which contain certain provisions which limit the ability of the
subsidiaries to pay dividends. For a description of securities sold by the
Company within the past three years which were not registered under the
Securities Act, Item 5 of the Company's current report on form 8-K dated
May 7, 1997 is incorporated herein by reference.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected historical financial data of the Company and
should be read in conjunction with the respective consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
STATEMENT OF OPERATIONS DATA
(in thousands, except per share amount)
Year Ended June 30
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
OPERATING REVENUE:
Transportation revenue $34,035 $47,356 $54,744 $34,210 $27,117
Operating expenses 38,134 48,940 54,421 32,499 25,859
------- ------- ------- ------- -------
Operating income (loss) (4,099) (1,584) 323 1,711 1,258
------- ------- ------- ------- -------
Net income (loss) from
continuing operations before
discontinued operations and
extraordinary item (4,581) (2,552) (169) 677 444
------- ------- ------- ------- -------
Net income (loss) per
common share from
continuing operations before
discontinued operations and
extraordinary item (2.94) ( 2.66) (0.18) 0.88 0.64
------- ------- ------- ------- -------
Weighted average shares outstanding 1,556 960 955 766 696
------- ------- ------- ------- -------
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BALANCE SHEET DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
YEAR ENDING JUNE 30
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Cash and
cash equivalents $ 10 $ 37 $ 57 $ 910 $ 165
Working capital
(deficit) (1,168) (4,157) (1,691) 3,199 ( 340)
Property and
equipment, net 110 3,580 4,069 5,752 7,916
Total assets 6,887 14,608 18,910 21,626 19,510
Long-term debt and
capital leases,
excluding current
portion 1,748 2,616 1,579 5,730 6,715
Total liabilities 7,047 12,706 15,538 14,264 13,981
Total stockholders
equity (deficit) (160) 1,902 3,372 7,372 5,529
(See Item 7 below for information on dispositions of assets which affect the
year to year comparability of the information shown above.)
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides information and analysis of the
Company's financial condition and results of operations for the years ended
June 30, 1997, 1996 and 1995. The discussion should be read in conjunction
with the Company's audited financial statements and notes thereto and
"Selected Financial Data" included elsewhere herein.
INTRODUCTION
For the fiscal year ended June 30, 1997, the Company derived revenue from
its logistics operation for twelve months and from its trucking subsidiary
through December 31, 1996, when it was discontinued effective December 31,
1996. For the fiscal years ended June 30, 1996 and 1995, the Company derived
revenues from transportation services (logistics and trucking) and from
product sales until product sales was discontinued effective June 26, 1995.
When practical, the Company realized the benefit from administrative
economics of scale by utilizing centralized credit, personnel, and accounting
functions for the benefit of the consolidated group.
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The following analysis of the Company's financial condition and results
of operations for the fiscal year ended June 30, 1997, 1996, and 1995, should
be read in conjunction with the Consolidated Financial Statements, related
Notes thereto, and other information presented elsewhere in this Form 10-K.
Average balances (including such balances used in calculating financial and
performance ratios), are generally a blend of month-end averages which
management believes are representative of the operations of the Company.
RESULTS OF OPERATIONS
---------------------
FINANCIAL INFORMATION FOR THE
YEARS ENDED JUNE 30, 1997 AND 1996
The net loss from continuing operations for the year ended June 30, 1997
for the Company amounted to $4,581,000 as compared to a net loss of
$2,552,000 for the year ended June 30, 1996. The increase in losses was
primarily attributable to the continuing losses experienced by CW Truck
created by a continued deterioration of the business levels and failure to
consummate a sale of this subsidiary. Additionally, the assignment for the
benefit of creditors of CW Truck as well the liquidation of the rolling stock
to Mid Cal has caused a non-reoccurring loss to the Company.
Operating revenue for the year ended June 30, 1997 decreased 28.1% to
$34,035,000 from $47,356,000 for the comparable 1996 period. Revenues from
the Company's transportation logistics division (Vertex) increased by
$2,095,000 to $26,485,000, an increase of 8.5% for the year ended June 30,
1997 from $24,390,000 for the year ended June 30, 1996. Revenues of CW Truck
decreased by $15,727,000 to $7,590,000 for the year ended June 30, 1997 from
$23,317,000 for the year ended June 30, 1996. CW Truck was closed on
December 31, 1996 and no new revenues were generated from that division
following that date. The decrease was attributable to deteriorating business
conditions prior to liquidation.
Operating cost decreased $11,333,000 to $37,626,000 for the year ended
June 30, 1997 from $48,959,000 for the year ended June 30, 1996, a 23.1%
decrease. As a percentage of sales, operating costs increased to 110.6% for
the year ended June 30, 1997 from 103.4% for the year ended June 30, 1996.
The percentage increase is primarily attributable to the deteriorating
business conditions of CW Truck prior to liquidation.
Interest expense decreased $306,000 for the year ended June 30, 1997
compared to the prior year period and is reflective of the Company's
decreased borrowing, due to the closing of CW Truck.
Having experienced significant losses in CW Truck throughout the first
two quarters of the fiscal year ended June 30, 1997, management began to
review the trucking operations value to the Company. After having failed in
attempts to conduct mergers with other trucking entities it was the Company
view that it was in the Company's best interest to terminate the operations
of CW Truck. On December 31, 1996, a General Assignment for the benefit of
creditors was made for CW Truck. Simultaneously an asset sale of the rolling
stock was made to Mid Cal Express, Inc., a California Corporation and
subsequently the balance of the assets were sold by the Assignee. The asset
sale resulted in a $508,000 loss, which is reflected in the financial
statements of the Company as a loss on disposal. A General Assignment is an
alternative to Chapter 7 bankruptcy liquidation. During the year ended June
30, 1997, the Company's trucking operation generated a loss before income tax
expenses of approximately $4,820,000. This reflects the continued operating
losses generated by CW Truck before the General Assignment for the benefit of
creditors as well as a wind down of expenses associated with the General
Assignment. The trucking operation segment also generated an extraordinary
gain on the forgiveness of debt of $898,000 for the year ended June 30, 1997.
Management believes that adequate reserves exists as of June 30, 1997 for
any future expenses associated with the General Assignment.
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During the fiscal year ended June 30, 1997 the Company experienced
significant losses from operations. These losses were primarily generated by
CW Truck which had a pretax loss of $3,922,000. An approximate $15.7 million
decrease in revenue was due to a soft market for trucking services, severe
winter conditions, eroding customer base, and the ultimate closing of the
trucking operations. Additionally, the Company was experiencing high
interest rates associated with its financing through its commercial lender.
In May, 1997, the Company obtained new financing through a new bank
lender. This financing accommodation enabled the Company to repay all of its
obligations to its former bank. This financial accommodation is written at
an interest rate of prime plus 2.5 percent and when compared to the prior
interest rate charged by the former bank is a reduction of 0.5 percent.
Additionally, late charges and other fees charged by the former lender have
been substantially reduced or eliminated.
As a result of the change of Banking relationship the Company is not
currently experiencing violation of its financial covenants.
FINANCIAL INFORMATION FOR THE
YEARS ENDED JUNE 30, 1996 AND 1995
Loss from continuing operations for the year ended June 30, 1996, amounted
to $2,552,000 compared to a loss of $169,000 for the year ended June 30, 1995.
The increase loss was primarily attributed to a soft market for trucking
services, severe winter weather, unfavorable prior year governmental audits,
increased insurance claims and a one time loss on the sale of a business
division.
Operating revenue for the year ended June 30, 1996 decreased 13.5% to
$47,356,000 from $54,744,000 for the comparable 1995 period. Revenue within
the Company's transportation logistics division decreased by $100,000 to
$24,039,000 for the year ended June 30, 1996 from $24,139,000 for the
comparable 1995 period. Revenue within CW Truck decreased by $7,288,000 to
$23,317,000 for the year ended June 30, 1996 from $30,605,000 for the
comparable 1995 period. The decrease is attributable to the negative market
conditions as well as a reduction in the Company's tractor fleet from 216
units at June 30, 1995 to 118 units at June 30, 1996. Loaded miles decreased
from 26,776,000 to 20,535,000 for the period while pricing increased $.021
per loaded mile for the year ended June 30, 1996.
Operating costs decreased $5,592,000 to $48,959,000 for the year ended
June 30, 1996 from $54,551,000 for the year ended June 30, 1995, a 10.3%
decrease. As a percentage of sales, operating costs increased to 103.4% for
the year ended June 30, 1996 from 99.7% for the year ended June 30, 1995.
The percentage increase is primarily attributable the results of two
unfavorable audits conducted by governmental agencies, for prior periods, and
increased insurance claims for the period. The percentage increase consists
of an $330,000 and .8% increase in operating taxes and licenses attributable
to the aforementioned governmental audits, a $117,000 and .6% increase in
insurance claims, a $300,000 and 1.1% increase in increase in revenue
equipment rentals which reflects the Company's acquiring of equipment through
operating leases and a larger than normal tractor to trailer ratio, and a .2%
increase in general operating expenses including a $105,000 cost for
professional fees the Company incurred in connection with the aforementioned
governmental audits.
Interest expense increased $174,000 for the year ended June 30, 1996
compared to the prior year period and is reflective of the Company's higher
incremental borrowing rates for working capital as well as higher rates for
new upgraded tractor equipment financed during the second quarter of the
current year.
The Company also sold certain assets of it's Freight Peddlers logistics
division effective March 1, 1996 resulting in a loss on the sale of that
division of $222,000 which included a fully reserved unsecured $200,000 note
receivable.
14
<PAGE>
The Company also had a $111,000 decrease in gain on the sale of assets as
compared to the previous years comparable period due to a need to sell
equipment in a generally depressed equipment market.
During the fiscal year ended June 30, 1995, the Company discontinued its
product sales segment which operated within the Company's subsidiary,
Nationwide Produce Co. Having experienced significant losses in certain
divisions of Nationwide Produce during the quarter ended March 31, 1995,
management began a review of its entire product sales group. As a result of
the review, two of Nationwide's divisions (Salinas lettuce packing and the
tomato repackaging division) which together lost a total of $1,400,000 during
the quarter ended March 31, 1995, were closed during May 1995. In addition,
the Company closed its Country Wide Produce division which consisted of
marketing and distribution of organic produce from facilities in Thermal,
California and Pittsburgh, Pennsylvania. After continued losses in the
product sale segment through June 30, 1995 and with no possibility of
improvement, management and the Board of Directors determined on June 26,
1995 to wind-down and discontinue the entire product sales operations
effective June 30, 1995. This process culminated in the filing of a General
Assignment during September 1995 of all assets of Nationwide Produce for the
pro rata benefit of all creditors of that subsidiary. A General Assignment is
an alternative to a Chapter 7 bankruptcy liquidation. Results of operations
for the product sales segment have been classified as discontinued operations
in the Company's audited financial statements for all periods presented.
During the year ended June 30, 1996, the Company's product sales segment
generated a loss before income tax expense of approximately $959,000. This
reflects the continuing operating losses generated by Nationwide Produce Co.
before the General Assignment for the benefit of creditors as well as wind
down expenses associated with the General Assignment. The product sales
segment also generated a gain on forgiveness of debt of $2,370,000 net of
income tax benefit of $1,630,000 for the year ended June 30, 1996.
Management feels that adequate reserves exist as of June 30, 1996 for any
future expenses associated with the General Assignment.
During the fiscal year ended June 30, 1996, the Company experienced
significant losses from continuing operations. These losses were primarily
generated by CW Truck, which generated a pre-tax loss of $3,223,000. An
approximately $7.2 million decrease in revenue was due to a soft market for
trucking services, severe winter weather conditions and an eroding customer
base. The aforementioned, unfavorable government audits and increased
insurance claims further increased the losses.
The above-mentioned losses, lack of compliance with financial covenants
of its primary lender and the resulting negative working capital, caused the
Company's independent auditors to conclude in their report for fiscal year
ended June 30, 1996, that substantial doubt existed as to the Company's
ability to continue as a going concern.
15
<PAGE>
RESULTS OF OPERATIONS
UNUSUAL OR INFREQUENT EVENTS
In September, 1996, the Company announced a planned merger with
Continental American Transportation, Inc.. After completion of due diligence
it was determined by the Board of Directors that this merger was not in the
best interests of shareholders and was abandoned. The primary reason for
this merger was placement of the money losing subsidiary Country Wide Truck
Service in a changed environment to enhance the possibility of a turn around.
The Board of Directors determined in December 1996 that this subsidiary
without extensive investment of time and capital was not in a position to
become profitable and the best course of action would be to liquidate this
subsidiary. This was accomplished on December 31, 1996, by making a General
Assignment for the benefit of creditors, which under California State law is
an alternative to a Chapter 7 bankruptcy liquidation. Simultaneously there
was a sale of rolling stock to Mid-Cal Express, a California Corporation,
which was agreed to by the existing equipment lessors conditional to the
continuing guarantee of the Company.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Pursuant to a loan agreement with a commercial bank dated the 30th day of
April, 1997 the Company utilizes a credit facility which provides for a
maximum outstanding borrowing of $4 million. This agreement bears interest
at the banks reference rate plus 2 1/2%. The credit facility expires on
April 29, 2000 and is secured by substantially all assets of the Company,
including accounts receivable. At June 30, 1997 the Company had unused
credit available under the line of about $750,000. This accommodation
replaces the Company's previous primary commercial lender. The Company's
product sales subsidiary formerly had a credit facility with its primary
lender with an outstanding balance of $834,000 as of June 30, 1996. This
credit line was cross guaranteed and cross collateralized by the Company's
transportation subsidiary, CW Truck. With the General Assignment for the
benefit of creditors and sale of the assets of CW Truck the aforesaid credit
line was repaid with the proceeds of the new credit facility identified above.
The Company utilized $281,000 of cash flow from continuing operations and
utilized $69,000 of cash flow from discontinued operations during the year
ended June 30, 1997. The General Assignment for the benefit of creditors and
sale of the assets reduced the Company's outstanding payable and leasehold
obligations by $6,009,000. As of June 30, 1997 the Company had total debt of
$7,047,000. The Company's ratio of current assets to current liabilities and
its debt to equity were 0.9:1 and (44):1 respectively as compared to 0.6:1
and 6.7:1 as of June 30, 1996. These ratios were negatively affected by the
Company's operations of its CW Truck subsidiary for the fiscal year and it is
managements projection that these ratios will improve in the future.
The Company ended the June 30, 1997 period with $10,000 of cash and cash
equivalents, and negative working capital of $641,000. Based upon expected
cash flow from operations and funds available under existing credit
facilities, management believes that the Company's capital resources are
sufficient to meet its presently anticipated operating needs and capital
expenditure requirements. However, should these sources prove inadequate or
unavailable, the Company may be required to seek additional financing through
capital investment.
In March 1997 the Company offered common stock pursuant to a private
placement memorandum to several current investors in the Company. Pursuant
to that offering the Company raised approximately $1.6 million in cash in
return for the sale of common shares at an offering price of $.10 per share
out of an original offering of $2 million. This infusion of capital enabled
the Company to make past due payments to its transportation providers and to
maintain a current accounts payable position, as well as to make a payment to
one of the Company's customers who filed a property loss claim against the
Company.
16
<PAGE>
IMPACT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
--------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued a new
statement titled "Earnings per Share" ("FAS 128"). The new statement is
effective for both interim and annual periods ending after December 15, 1997.
FAS 128 replaces the presentation of primary and fully diluted earnings per
share with the presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is calculated by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issued common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earning of the entity
Adoption of the standard would have no impact on the financial statements.
EFFECTS OF INFLATION
--------------------
Inflation can be expected to have an impact on the Company's operating
costs. A prolonged period of inflation would cause interest rates, and other
costs to increase and would adversely affect the Company's results of
operations unless freight rates could be increased. The effect of inflation
has been minimal over the past three years.
SEASONALITY
-----------
In the transportation industry generally shipping activity increases in
late summer and fall seasons preceding the holidays and decreases during the
winter season. The Company historically has lower margins in the fall as
competition for the transportation providers equipment increases.
FORWARD LOOKING INFORMATION
---------------------------
The Company during the current fiscal year has completed a number of
essential steps in order to have the opportunity to implement its business plan.
- Liquidation of the final money losing subsidiary Country Wide
Truck Service, Inc.
- Establish new working line of credit of $4,000,000 with new
commercial lender.
- Raise approximately $1.6 million in new capital through a private
offering to improve corporate liquidity.
- Maintain business levels at Vertex Transportation subsidiary
throughout reorganization period.
Country Wide Transport Services, Inc., is now positioned as a
non-asset based third party transportation logistics provider. The Company
intends to aggressively market its services through its Vertex Transportation
subsidiary and pursue the possibilities of acquiring additional third party
logistics operations throughout the United States, which can fit the mold of
the Vertex business model.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
The following table sets forth the names and ages of all directors and
executive officers of the Company, all positions and offices with the Company
held by each person, each person's term of office as a Director and their
business experience for each of the past five years.
NAME AGE POSITION
- ---- --- --------
Timothy Lepper 49 Chairman, Chief Executive Officer, and
President - of the Company
Wayne N. Parry 46 Director, Secretary of the Company
President, Vertex Transportation, Inc.
(Subsidiary of the Company)
Mark T. Boyer 40 Director
At the annual meeting for 1997, Mr. Lepper, Mr. Parry, and Mr. Boyer
were re-elected to the Board at the annual meeting held on July 12, 1997.
Mr. Boyer was elected for a three year term, Mr. Lepper to a two year term
and Mr. Parry a one year term.
Set forth below is certain information with respect to the directors,
executive officers and key employees of the Company.
TIMOTHY LEPPER - Chairman, Chief Executive Officer and President -
Country Wide Transport Service, Inc. graduated in 1973 from Brockport State
College. From 1971-1974 he was employed as a salesman for REA Express and
later promoted to District Sales Manager, Rochester and Buffalo, NY. From
1974-1978 he was employed by Time D.C. as Terminal Manager in Rochester and
Buffalo, NY. In 1978, Mr. Lepper was Terminal Manager for Transcon Lines,
Rochester, NY. In 1978 he co-founded Vertex Transportation, Inc. with Mr.
Parry. Mr. Lepper served as President of Vertex from 1978 until its
acquisition by CW Truck on July 1, 1994. Effective July 1, 1994 Mr. Lepper
was appointed to the post of President of Country Wide Truck Service, Inc.
until September 1995 when he was appointed President and CEO of Country Wide
Transport Services, Inc.
WAYNE N. PARRY - Director and President of Vertex Transportation, Inc.(a
subsidiary of the Company) graduated in 1973 cum laude from Niagara
University with a B.S. in Transportation. In 1973 he joined the management
training program at Red Star Express Lines, Buffalo, NY and became Customer
Service Manager. In 1975 he was employed with Mobil Chemical Company,
Macedon, NY as a Transportation Manager and in 1977 was promoted to Customer
Service/Distribution Manager. In 1978 he co-founded Vertex Transportation
Inc. Mr. Parry served as Vice President and Secretary of Vertex from 1978
until its acquisition by CW Truck on July 1, 1994. Since this date Mr. Parry
has served as President of Vertex.
MARK BOYER - Director, has spent the majority of his working career in
the investment business. Since July, 1992, Mr. Boyer has been the president
and a director of ROI Capital Management. During the preceding year, Mr.
Boyer managed his personal securities portfolio. From February 1988 to July
1991, he was general partner and portfolio manager with Volpe,
18
<PAGE>
Welty & Company, in San Francisco, California, and from May 1982 to February
1988, he was an analyst and fund manager with Fidelity Management Research,
Inc., in Boston, Massachusetts. Mr. Boyer received his BA degree, magna cum
laude, in finance, accounting, and computer sciences from American university
in 1980 and his MBA degree in finance and accounting from Columbia University
in 1982.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth base compensation paid to the Chief
Executive Officer and the Executive Officers of the Company and its
subsidiaries for services rendered to the Company and its subsidiaries during
the fiscal year ended June 30, 1996, whose total cash compensation exceeded
$100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C>
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER COMPENSATION
- --------------------------- ---- ------ ----- ------------------
Timothy Lepper (1) 1995 $250,000 - -
President CEO 1996 $250,000 - -
1997 $201,930
Wayne N. Parry (1) 1995 $250,000 - -
President - Vertex 1996 $250,000 - -
Transportation 1997 $201,930
William A. Martindale (1)(2) 1995 $250,000 - -
Chairman of the Board 1996 -0- - -
President 1997 -0-
CEO
Kenneth L. Gordon (3) 1995 $135.000 -
Vice President 1996 -0- - -
Nationwide Produce Co. 1997 -0-
(1) Aggregate value of perquisites and other personal benefits was less than
10% of total salary and bonus.
(2) Mr. Martindale resigned September 1, 1995 and was replaced as President and
CEO by Timothy Lepper. Mr. Martindale resigned as a director on
September 30, 1995.
(3) Mr. Gordon resigned on September 18, 1995.
</TABLE>
19
<PAGE>
DIRECTOR COMPENSATION
The Company's Board of Directors presently consists of three members. Two
directors hold salaried positions with the Company and receive no additional
compensation. One outside director presently receives compensation of $6,000
per annum.
STOCK OPTIONS
In April and August 1993, the Company granted to certain officers and key
employees of the Company, options for the purchase of 10,000 shares and
50,000 shares of the Company's common stock, respectively, at an exercise
price of $20.00 per share, which approximated the fair market value at the
date of grant. All options vest at a rate of 20% per year for five years
beginning on the first anniversary date after the options were granted.
Vesting of options are generally conditioned on the employee being employed
by the Company on the vesting dates. All options granted expire between
April 1998 and September 1998.
On June 1, 1994, the Company granted options for 40,000 shares with
exercise prices ranging from $15.00 to $20.00 per share to four investment
banking firms, as compensation for investment banking and marketing services.
All options were immediately exercisable and expire from May 31, 1996 through
May 31, 1997. The excess of the fair market value over option price has been
treated as compensation to the recipient in the accompanying consolidated
financial statements.
During the years ended June 30, 1997, 1996 and 1995, options of 23,900,
50,000 and 16,000 shares, respectively were canceled.
Effective May 19, 1997, the Company adopted a stock option plan whereby
two of the Company's senior executive officers, to wit, Timothy Lepper and
Wayne N. Parry, each have the option to purchase up to 425,000 common shares
of the Company at an option price of $.15 per share. The option expires
May 18, 2002 and may be exercised by the employees at any time prior to that
date. The fair value of each option at the date of grant is set forth in
Note 11 of the Company's financial statements for the year ended June 30,
1997 filed as part of this report.
BENEFIT PLANS
Effective April 1, 1993, the Company adopted a Deferred Compensation 401K
Plan (the "Plan") covering all full-time employees of itself and its
subsidiaries. To be eligible to participate in the plan, employees, with the
exception of drivers, must have been employed by the Company for 90 days;
drivers are eligible to participate following one year of service. Employees
involved in the Plan may contribute up to 20% of their compensations, on a
pre-tax basis, subject to statutory and Internal Revenue Service guidelines.
Contributions to the Plan are invested at the direction of the participant.
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of June 30, 1997 by (i) each
director of the Company, (ii) each person nominated to become a director of
the Company, (iii) each of the executive officers named in the Summary
Compensation Table above, (iv) all directors and executive officers of the
Company as a group, and (v) each person known by the Company to own
beneficially more than five (5%) percent of the Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND
TITLE OF CLASS NAME AND ADDRESS OF NATURE OF
PERCENT OF CLASS BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
- ---------------- ------------------------ ---------- ---------
<S> <C> <C> <C>
Common Timothy Lepper 525,960(1) 10.32%
18 Kilkenny Court
Fairport, NY 14450
Common Wayne N. Parry 505,000(2) 9.91%
27 Fall Meadow Dr.
Pittsford, NY 14534
Common Mark Boyer 665,500(3) 13.05%
o/o ROI Partners
17 East Francis Drake, Suite 225
Larkspur, CA 94939
Common Special Situation Funds 1,593,000(4) 31.25%
153 East 53rd Street
New York, NY 10022
Common Salcott Holding Limited 570,000 11.18%
o/o Arabella privatim Finance Ag
Waldmann Strasse 6
Zurich, Switzerland CH-8024
Common All Directors and Officers as a 1,696,460(1)(2)(3) 33.28%
group (3 individuals)
</TABLE>
(1) Includes 425,000 shares purchasable by Mr. Lepper pursuant to an option
described in Item 11 above.
(2) Includes 425,000 shares purchasable by Mr. Parry pursuant to an option
described in Item 11 above.
(3) 578,000 of the shares attributed to Mark Boyer are owned by ROI Partners,
ROI & Lane L.P. or accounts controlled by ROI Partners. Mr. Boyer is a
general partner of ROI Partners.
(4) Stock owned by Special Situation Funds is held in three specific funds:
Special Situations Cayman Fund L.P.
Special Situations Private Equity Fund L.P.
Special Situations Fund III, L.P.
21
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's discontinuance of the product sales
segment, Nationwide Produce Co., the Company discovered a potential
irregularity relative to misappropriation of cash receipts totaling
approximately $497,000 by a former officer and director. Current management
and the other members of the board of directors performed a review of the
method of concealment which consisted of depositing customer checks into a
bank account of an entity owned by the former officer and director. The
Company retained independent legal council and notified Credit Manager's
Association of California, which is the Assignee of Nationwide Produce Co.,
and Nationwide's secured lender whose collateral is the subject of the
potential irregularity. As a result of the foregoing the Company established
a reserve as of June 30, 1995, of $497,000 against the trade receivables of
the discontinued segment. Based on procedures performed by the Company,
management does not believe that there exists any other potential material
irregularities. Effective year end June 30, 1997 Credit Managers
Association, the Assignee of Nationwide, secured a binding legal judgement
for the amount referenced above against the former officer and director. (See
also item #3 Legal Proceedings contained herewith).
Effective September 18, 1995, the Company's subsidiary, Nationwide
Produce Co., made a General Assignment of all assets of the corporation for
the pro rata benefit of all creditors of that corporation. A General
Assignment under California state law is an alternative to Chapter 7
bankruptcy liquidation.
Effective July 1, 1994, the Company acquired Vertex Transportation, Inc.
from Timothy Lepper and Wayne Parry, the former shareholders. The purchase
price of $3,571,000 was paid in cash of $2,231,000 and through the issuance
of 100,000 newly issued shares of common stock valued at $12.50 per share.
Additionally, effective July 1, 1994 CW Truck entered into a five year lease
of certain office space and warehouse facilities in East Rochester, NY with
Vertex Investment Partners, a partnership whose partners are Wayne Parry and
Timothy Lepper. The lease provides for annual rental payments of $90,000.
Effective September 1, 1995, William Martindale resigned as an officer
and employee of the Company. For and in consideration of (a) the execution of
a consulting agreement through June 30, 1998 totaling approximately $200,000,
(b) the transfer and assignment of 17,769 shares of the Company's common
stock to the Company by Martindale and/or Martrade Ltd., (c) the release of
Martindale from any and all guaranties to repay indebtedness, if any, of
Martrade Ltd., to the Company or any of its subsidiaries under a certain loan
agreement dated August 31, 1994, and (d) cancellation of Martindale's
employment agreement with the Company, the debt of Martrade Ltd. to
Nationwide Produce Company of approximately $666,000 was settled and
compromised as of September 1, 1995. Also effective September 30, 1995,
Martindale resigned as a director of the Company. On November 30, 1995, the
board of directors informed Martindale of their decision to cancel the
above-mentioned consulting agreement with an effective date of September 1,
1995.
Effective December 31, 1996, the Company's subsidiary, CW Truck, made a
General Assignment of all assets of the corporation for the pro rata benefit
of all creditors of that corporation. A General Assignment under California
state law is an alternative to Chapter 7 bankruptcy liquidation.
During the fiscal years ended June 30, 1996 and 1995, the Company paid to
law firms of which John C. Russell, a former director, is or was a partner
of, approximately $53,000 and $172,000 respectively. No fees were paid in
fiscal 1997.
22
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The financial statements listed on the accompanying Index to
Financial Statements and Financial Statement Schedule Covered by
Report of Independent Auditors are filed as part of this report.
2. SCHEDULE
The schedule listed on the accompanying Index to Financial
Statements and Financial Statement Schedule Covered by Report of
Independent Auditors is filed as part of this report.
3. EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this report
1. Report on Form 8-K dated January 3, 1997 regarding filing of
General Assignment for pro rata benefit of Creditors for
Company's subsidiary CW Truck. The subsidiary ceased all
business functions in its long haul trucking operation.
2. Report on Form 8-K dated January 3, 1997 regarding change of
Corporate address to:
119 Despatch Drive
East Rochester, NY 14445
3. Report on Form 8-K filed on May 7, 1997 regarding following:
- Company's operating subsidiary, Vertex Transportation,
Inc. secured a new three-year revolving credit facility
with a commercial bank at $4,000,000.
- Company received approval from a majority of
stockholders and Board of Directors to increase the
authorized number of common shares to 30 million.
- Company received approval from a majority of the
stockholders and Board of Directors to effectuate a one
(1) for five (5) reverse split of the common stock
effective May 15, 1997.
- The Company completed a private placement to certain
existing accredited stockholders in the amount of
$1,644,000 in exchange for 16,440,000 shares of common
stock.
23
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on October 7, 1997.
COUNTRY WIDE TRANSPORT SERVICES, INC.
By: S/ TIMOTHY LEPPER
--------------------------------
Timothy Lepper, President
Chief Executive Officer
Chief Financial Officer
and Principal Accounting Officer
24
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant by the following
persons constituting a majority of the directors of the registrant on
October 7, 1997.
SIGNATURES TITLE DATE
- ------------------ ------------------- ---------------
S/ TIMOTHY LEPPER Chairman, President October 7, 1997
- ------------------ CEO, Director
Timothy Lepper
S/ MARK BOYER Director October 7, 1997
- -----------------
Mark Boyer
S/ WAYNE N. PARRY Secretary, Director October 7, 1997
- -----------------
Wayne N. Parry
25
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1997 AND 1996
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . F-2
CONSOLIDATED BALANCE SHEETS - June 30, 1997 and 1996 . . . . . . . . F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1997, 1996 and 1995 . . . . . . . . F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from July 1, 1994 through June 30, 1997 . . . . . F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years
Ended June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . F-7
NOTES TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . F-9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Country Wide Transport Services, Inc.
East Rochester, New York
We have audited the consolidated balance sheets of Country Wide Transport
Services, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three year period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Country Wide
Transport Services, Inc. and subsidiaries as of June 30, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three year period ended June 30, 1997 in conformity with generally accepted
accounting principles.
Our audits referred to above include audits of the financial statement schedule
listed under Item 14(a)(2) of Form 10-K. In our opinion, the financial
statement schedule presents fairly, in all material respects, in relation to the
financial statements taken as a whole, the information required to be stated
therein.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
August 20, 1997
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------
1997 1996
------------- --------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 10,000 $ 37,000
Accounts receivable, net 4,009,000 5,199,000
Accounts receivable - officers and employees 47,000 85,000
Driver advances 16,000 203,000
Inventories - 29,000
Prepaid expenses 49,000 380,000
------------- --------------
Total current assets 4,131,000 5,933,000
PROPERTY AND EQUIPMENT, net 110,000 3,580,000
OTHER ASSETS:
Deposits 8,000 270,000
Excess of purchase price over fair value of net assets
acquired, net 2,638,000 4,825,000
------------- --------------
Total assets $ 6,887,000 $ 14,608,000
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 160,000 $ 4,329,000
Accounts payable and accrued liabilities 4,612,000 5,584,000
Liabilities in excess of assets of discontinued subsidiary 404,000 -
Liabilities in excess of assets of discontinued operations 123,000 177,000
------------- --------------
Total current liabilities 5,299,000 10,090,000
LONG-TERM DEBT, LESS CURRENT PORTION 1,748,000 2,616,000
------------- --------------
Total liabilities 7,047,000 12,706,000
------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 7, 8, 9, 10
and 13)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, issuable in series, none issued - -
Common stock, $.10 par value, 30,000,000 and
10,000,000 shares authorized, 4,248,000 and 960,000
shares issued and outstanding at June 30, 1997 and 425,000 96,000
1996 respectively
Warrants - 40,000
Additional paid-in capital 8,110,000 6,763,000
Retained earnings (deficit) (8,695,000) (4,997,000)
------------- --------------
Total stockholders' equity (deficit) (160,000) 1,902,000
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 6,887,000 $ 14,608,000
------------- --------------
------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET REVENUES:
Transportation revenue $34,035,000 $47,356,000 $54,744,000
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Purchased transportation 26,521,000 33,044,000 38,169,000
Salaries and related expenses 3,579,000 5,653,000 6,333,000
Operating expenses 2,695,000 4,786,000 4,598,000
Revenue equipment rentals 819,000 1,884,000 1,584,000
General supplies and expenses 1,380,000 2,336,000 2,499,000
Depreciation and amortization 2,632,000 1,256,000 1,368,000
(Gain) loss on disposition of assets 508,000 (19,000) (130,000)
------------ ------------ ------------
Total operating costs and
expenses 38,134,000 48,940,000 54,421,000
------------ ------------ ------------
OPERATING INCOME (LOSS) (4,099,000) (1,584,000) 323,000
OTHER INCOME (EXPENSE):
Interest expense (435,000) (741,000) (567,000)
Interest income 1,000 33,000 22,000
Other, net 15,000 (36,000) (12,000)
Loss on sale of business division - (222,000) -
------------ ------------ ------------
Total other income (expense) (419,000) (966,000) (557,000)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME
TAXES, DISCONTINUED OPERATIONS
AND EXTRAORDINARY ITEM (4,518,000) (2,550,000) (234,000)
PROVISION FOR INCOME TAX (EXPENSE)
BENEFIT (63,000) (2,000) 65,000
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (4,581,000) (2,552,000) (169,000)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued business
segments, net of applicable income
tax (expense) benefit of $0,
($329,000) and $2,116,000 for the
years ended June 30, 1997, 1996
and 1995, respectively. (15,000) (1,288,000) (5,242,000)
------------ ------------ ------------
Loss before Extraordinary Item (4,596,000) (3,840,000) (5,411,000)
EXTRAORDINARY ITEM:
Gain on forgiveness of debt of
discontinued operations, net of
applicable income tax expense of
$1,630,000 (Note 10) - 2,370,000 -
Gain on forgiveness of debt of
discontinued subsidiary, net of
applicable income tax expense of
$0 (Note 9) 898,000 - -
------------ ------------ ------------
NET LOSS $(3,698,000) $(1,470,000) $(5,411,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(continued)
F-4
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
FOR THE YEAR ENDED JUNE 30,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
NET INCOME (LOSS) PER COMMON
SHARE:
Continuing operations $ (2.94) $ (2.66) $ (0.18)
Discontinued operations (0.01) (1.34) (5.49)
Extraordinary item 0.58 2.47 -
---------- ---------- ----------
Net Income (loss) per
common share $ (2.38) $ (1.53) $ (5.67)
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 1,556,000 960,200 954,800
---------- ---------- ----------
---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
--------------------------
ADDITIONAL RETAINED TOTAL
NUMBER OF PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL (DEFICIT) EQUITY (DEFICIT)
----------- ----------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1994 850,000 $ 85,000 $ 40,000 $5,353,000 $ 1,884,000 $ 7,362,000
Stock issued for
Vertex acquisition 100,000 10,000 - 1,240,000 - 1,250,000
Exercise of options 10,000 1,000 - 170,000 - 171,000
Net loss - - - - (5,411,000) (5,411,000)
----------- ----------- ----------- ----------- ------------ ---------------
BALANCES, June 30, 1995 960,000 96,000 40,000 6,763,000 (3,527,000) 3,372,000
Net loss - - - - (1,470,000) (1,470,000)
----------- ----------- ----------- ----------- ------------ ---------------
BALANCES, June 30, 1996 960,000 96,000 40,000 6,763,000 (4,997,000) 1,902,000
Stock issued in private
placement, net of costs 3,288,000 329,000 - 1,307,000 - 1,636,000
Expiration of warrants - - (40,000) 40,000 -
Net loss - - - - (3,698,000) (3,698,000)
----------- ----------- ----------- ----------- ------------ ---------------
BALANCES, June 30, 1997 4,248,000 $ 425,000 $ - $8,110,000 $(8,695,000) $ (160,000)
----------- ----------- ----------- ----------- ------------ ---------------
----------- ----------- ----------- ----------- ------------ ---------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
<TABLE>
<CAPTION>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(4,581,000) $(2,552,000) $ (169,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 2,632,000 1,256,000 1,368,000
(Gain) loss on disposition of assets 508,000 (19,000) (130,000)
Loss on disposal of business divisions - 222,000 -
Provision for uncollectible accounts receivable 9,000 (76,000) 17,000
(Increase) decrease in:
Accounts receivable 236,000 1,332,000 (1,812,000)
Accounts receivable - officers and employees - (46,000) 134,000
Drivers advances 54,000 204,000 (54,000)
Inventories 7,000 2,000 71,000
Prepaid expenses 274,000 92,000 29,000
Deposits (63,000) (58,000) (40,000)
Increase (decrease) in:
Accounts payable and accrued liabilities 239,000 757,000 1,518,000
Liabilities in excess of assets of
discontinued subsidiary 404,000 - -
------------- ------------- -------------
Net cash provided by (used in)
operating activities from
continuing operations (281,000) 1,114,000 932,000
------------- ------------- -------------
Net loss from discontinued operations (15,000) (1,288,000) (5,242,000)
Depreciation and amortization - 8,000 132,000
Loss on disposition of assets - 14,000 -
Deferred income taxes - - (2,116,000)
Provision for uncollectible accounts
and notes receivable - - 1,327,000
Valuation allowance on forgiven note
receivable from related party - - 613,000
Reserve for loss on potential irregularity - - 497,000
Changes in operating assets (54,000) 274,000 2,249,000
------------- ------------- -------------
Net cash used in operating activities
from discontinued operations (69,000) (992,000) (2,540,000)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable - - (3,000)
Collections on notes receivable - - 81,000
Increase in note receivable - related party - - (17,000)
Collections on note receivable - related party - - 135,000
Additions to property and equipment (130,000) (408,000) (844,000)
Proceeds from disposal of property and equipment 175,000 3,028,000 774,000
Proceeds from disposal of business division - 70,000 -
</TABLE>
(continued)
F-7
<PAGE>
<TABLE>
<CAPTION>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Additions to goodwill - - (222,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities 45,000 2,690,000 (96,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (45,619,000) (58,954,000) (65,676,000)
Cash borrowings from line of credit 44,261,000 56,151,000 66,356,000
Payments on notes payable - (29,000) -
Sale of common stock, net 1,636,000 - 171,000
------------- ------------- -------------
Net cash provided by (used in) financing activities 278,000 (2,832,000) 851,000
------------- ------------- -------------
DECREASE IN CASH (27,000) (20,000) (853,000)
CASH, at beginning of year 37,000 57,000 910,000
------------- ------------- -------------
CASH, at end of year $ 10,000 $ 37,000 $ 57,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 451,000 $ 719,000 $ 870,000
------------- ------------- -------------
------------- ------------- -------------
Income taxes $ 45,000 $ 47,000 $ 25,000
------------- ------------- -------------
------------- ------------- -------------
Non-cash investing and financing transactions:
Purchase of property and equipment
with debt or reduction of receivable $ - $ 3,316,000 $ 117,000
------------- ------------- -------------
------------- ------------- -------------
Property and equipment sold for the
assumption of notes payable $ 2,544,000 $ - $ -
------------- ------------- -------------
------------- ------------- -------------
Net liabilities surrendered in
connection with disposal of
subsidiary $ 943,000 $ - $ -
------------- ------------- -------------
------------- ------------- -------------
Net assets of Vertex Transportation,
Inc. acquired with common stock $ - $ - $ 1,250,000
------------- ------------- -------------
------------- ------------- -------------
Liabilities surrendered in connection
with disposal of business division $ - $ 43,835 $ -
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Country Wide Transport Services, Inc. ("CWTS") was incorporated in the
State of Delaware in 1987. Through its wholly-owned subsidiary, Vertex
Transportation, Inc. ("Vertex"), the Company currently operates a full
service logistics company which provides truckload, less-than truckload
(LTL), intermodal, and international transportation services. Prior to the
incorporation of Vertex on June 27, 1996, Vertex operated as a division of
Country Wide Truck Service, Inc., a wholly owned subsidiary of the Company.
Through its wholly-owned subsidiary, Country Wide Truck Service, Inc. ("CW
Truck"), an irregular-route, truckload common and contract carrier, the
Company transported a wide variety of commodities requiring temperature
control throughout the continental United States and Canada. During the
fiscal year ended June 30, 1996, CW Truck sold its CK Trucking and Freight
Peddlers Divisions. Effective December 31, 1996, the Company discontinued
CW Truck through an orderly liquidation process as a result of significant
losses within the subsidiary (See Note 8).
Through its wholly-owned subsidiary, Nationwide Produce Co. ("Nationwide"),
the Company operated a full service product sales marketing firm importing,
exporting and distributing conventional and organic produce as well as
consumer food products nationwide and overseas. CWTS merged with
Nationwide Produce Co. effective July 1, 1992. During the fiscal year
ended June 30, 1995, the Company discontinued its product sales segment
operated by Nationwide as a result of significant losses within the
subsidiary. Results of operations for the product sales segment have been
classified as discontinued operations for all periods presented (See Note
9).
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of CWTS and subsidiaries ("the Company"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
DRIVER ADVANCES - The Company periodically advances funds to drivers during
the normal course of business. Drivers are advanced funds for expenses
incurred during trips. All such advances are offset against total amounts
due upon settlement with the driver.
INVENTORIES - Inventories for the trucking operations consist primarily of
spare parts and oil and are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT AND DEPRECIATION - Property and equipment are stated
at cost. Provision for depreciation and amortization on property and
equipment is calculated using the straight-line and accelerated methods
over the estimated useful lives of the assets. Salvage values of 20% to
30% are used in the calculation of depreciation for transportation revenue
equipment.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to income as incurred whereas
significant renewals and
F-9
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
betterments are capitalized. Maintenance and repairs expense for the
transportation segment for the years ended June 30, 1997, 1996 and 1995 was
$229,000, $518,000 and $682,000, respectively.
Tires on new transportation revenue equipment were capitalized as a
component of the related equipment cost when the vehicle was placed in
service and recovered through depreciation over the life of the vehicle.
The cost of replacement tires, including recapped tires, was capitalized
and amortized over the estimated tire lives.
INTANGIBLE ASSETS - The excess of the aggregate purchase price over the
fair value of net assets of businesses acquired is included in the
accompanying balance sheet as "Excess of purchase price over fair value of
net assets acquired" ("Goodwill") and is being amortized over 25 years
using the straight-line method. Goodwill amounts are reported net of
accumulated amortization of $360,000 and $599,000 at June 30, 1997 and
1996, respectively. The carrying value of goodwill is evaluated at least
annually. The Company considers current facts and circumstances related to
purchased entities, including expected future operating income, to
determine whether it is probable that impairment has occurred.
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and circumstances
indicate that the costs of assets or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required.
ACCRUED INSURANCE AND LOSS RESERVES - The Company retains a portion of the
risk under vehicle liability, cargo loss, physical damage and other
insurance programs. Reserves have been recorded which reflect estimated
liabilities including claims incurred but not reported. Amounts estimated
to be paid within one year have been classified as accrued expenses with
the remainder, if any, included in other non-current liabilities.
REVENUE RECOGNITION - Transportation revenues and related expenses are
recognized using a method which approximates recognition of both revenue
and direct costs when shipment is completed.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the asset and liability method of Statement 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
difference are expected to be recovered or settled. Under Statement 109,
the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that included the enactment date.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In October 1995, the Financial
Accounting Standards Board issued a new statement titled "Accounting for
Stock-Based Compensation" (FAS 123). The new
F-10
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statement is effective for fiscal years beginning after December 15, 1995.
FAS 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the
new method in the notes to the financial statements. Transactions in
equity instruments with non-employees for goods or services must be
accounted for on the fair value method. The Company currently does not
intend to adopt the fair value accounting prescribed by FAS 123 for its
employees, and will be subject only to the disclosure requirements
prescribed by FAS 123. However, the Company intends to continue its
analysis of FAS 123 and may elect to adopt its provisions in the future.
EARNINGS PER COMMON SHARE - Earnings per common share was computed based on
the weighted average number of shares outstanding during the period
presented. The effect on earnings per common share from outstanding stock
options and warrants was antidilutive or immaterial. Additionally, see
Note 11.
STATEMENT OF CASH FLOWS - For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amount reported in these financial statements and accompanying
notes. Actual results could differ from those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the allowance for doubtful accounts, the estimated
useful lives for property and equipment, realizability of deferred tax
assets, recoverability of goodwill, and claims reserve. Due to the
uncertainties inherent in the estimation process, it is at least reasonably
possible that these estimates will be further revised in the near term and
such revisions could be material.
CONCENTRATIONS OF CREDIT RISK - Credit Risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk
(whether on or off balance sheet) that arise from financial instruments
exist for groups of customers or groups of counterparties when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly effected by changes in economic or
other conditions described below. In accordance with FASB Statement No.
105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF
CREDIT RISK, the credit risk amounts shown do not take into account the
value of any collateral or security.
The Company currently operates primarily in one industry segment and a
geographic concentration exists because the Company's customer are
generally located in the United States. Financial instruments that subject
the Company to credit risk consist principally of accounts receivable.
F-11
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments under SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS, are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The estimated fair values of the
Company's financial instruments, which includes all cash, accounts
receivables, accounts payable, long-term debt, and other debt, approximates
the carrying value in the consolidated financial statements at June 30,
1997 and 1996.
IMPACT OF RECENTLY ISSUED STANDARDS - In February 1997, the Financial
Accounting Standards Board issued a new statement titled "Earnings per
Share" ("FAS 128"). The new statement is effective for both interim and
annual periods ending after December 15, 1997. FAS 128 replaces the
presentation of primary and fully diluted earnings per share with the
presentation of basic and diluted earnings per share. Basic earnings per
share excludes dilution and is calculated by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity. Adoption of the standard would have no impact on the
financial statements.
RECLASSIFICATION - Certain reclassifications have been made to the prior
years consolidated financial statements to conform with the current
presentation. Such reclassifications had no effect on net income (loss).
2. BASIS OF PRESENTATION:
As shown in the accompanying consolidated financial statements, the Company
has reported significant net losses for the years ended June 30, 1997, 1996
and 1995 resulting in a total stockholders' deficit of $160,000 as of June
30, 1997. These conditions raise doubt about the Company's ability to
continue as a going concern.
Management commenced a program during 1995 to downsize the remaining
operations and to eliminate all excessive expenses. This program was
successfully completed during the fiscal year ended June 30, 1997, after
the Company discontinued CW Truck. The Company's remaining operating
entity, Vertex, had net income of approximately $635,000 for the fiscal
year ended June 30, 1997. In addition, the Company sold 3,288,000 shares
of common stock for net proceeds of $1,636,000 through a private placement
and secured a new credit agreement in which it can borrow up to $4 million.
Management believes these actions will allow the Company to continue as a
going concern.
Accordingly, the consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amount and classification of liabilities or any other
adjustment that might be necessary should the Company be unable to continue
as a going concern.
F-12
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MERGERS, ACQUISITIONS, AND DIVESTITURES:
On April 29, 1994, the Company executed an agreement to sell its produce
packing operation and related assets located in Thermal, California. The
purchaser was an unrelated corporation and the purchase was effective June
30, 1994. The sales price was $900,000 payable in $220,000 cash and a
$680,000 interest bearing note payable over six years. The sale resulted
in a gain to the Company in the amount of approximately $247,000. As of
June 30, 1995 the note was in default and in dispute with the maker and,
accordingly, the balance was fully reserved as of June 30, 1995.
Effective April 1, 1993, CW Truck acquired certain assets of Freight
Peddlers, Inc. for $100,000. This transaction was accounted for using the
purchase method and resulted in $12,000 of goodwill, representing the
excess of the purchase price over the fair market value of net assets
acquired. In addition, the Company paid the former owner $100,000 in the
form of notes payable and 5,000 shares of the Company's common stock,
valued at $81,000, for a covenant not to compete. Freight Peddlers had
insignificant operations through the date of acquisition. Effective March
1, 1996, the Company sold certain assets of its Freight Peddlers division
to a former officer of the Company for $50,000 cash and a fully-reserved
$200,000 unsecured promissory note receivable. The note receivable is
payable over time through a reduction in potential future commission
expense incurred by the Company and payable to the buyer. The net loss on
the sale was $222,000 which includes the fully-reserved, unsecured $200,000
promissory note receivable. Revenues for the division for the years ended
June 30, 1996, and 1995 were $1,204,000 and $2,524,000, respectively and
operating losses for the same periods were $319,000 and $119,000,
respectively.
On November 17, 1995, the Company sold certain assets of its CK Trucking
division for $20,000 and the assumption of certain liabilities totaling
approximately $44,000. The net gain on the sale was approximately $6,000.
Revenues for the division for the years ended June 30, 1996 and 1995 were
$588,000 and $1,496,000, respectively and operating income (losses) for the
same periods were $(24,000) and $78,000, respectively.
During May 1994, the Company purchased the export trading and animal feed
ingredients businesses of Martrade Ltd. for $150,000 in cash and the
extinguishment of $600,000 in debt owed by Martrade Ltd. to the Company.
Martrade Ltd. was 100% owned by an officer/director/stockholder of the
Company prior to its acquisition. In accordance with Accounting Principal
Board Opinion Number 16, the transaction was accounted for as a purchase,
with the net assets recorded at their historical net book value. The
excess of the purchase price over the historical net book value was charged
to paid in capital due to the transaction occurring between entities under
common control.
On July 1, 1994, the Company completed the acquisition of Vertex
Transportation, Inc., a privately-held, integrated logistics company
located in East Rochester, New York for $2,321,000 in cash and 100,000
shares of the Company's common stock valued at $1,250,000 in exchange for
all of the Vertex outstanding shares. The acquisition was accounted for as
a purchase. Vertex operated as a division of Country Wide Truck Services,
Inc. from July 1, 1994 until June 27, 1996 at which time Vertex was
incorporated as a wholly-owned subsidiary of the Company. The purchase
price of $3,571,000 was
F-13
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allocated to the net assets acquired, which approximated their fair market
value. The excess of purchase price over the recorded book value has been
allocated to "Excess of purchase price over fair value of net assets
acquired" which originally totaled $2,776,000. Such amount are amortized
to expense using the straight-line method over a twenty-five year period.
Vertex operations have been consolidated with the Company and are included
in the accompanying statement of operations commencing on the effective
merger date.
In connection with the purchase, the two prior owners entered into
three-year covenants not to compete and five-year employment contracts
which provide for minimum salary levels of $250,000 each per annum and
incentive bonuses. Additionally, the Company has agreed to rent a facility
from the prior owners for a term of 5 years commencing July 1, 1994 at an
amount of $90,000 per annum.
4. ACCOUNTS RECEIVABLE:
Accounts receivable, net of allowance for doubtful accounts, amounted to
$4,009,000 and $5,199,000, at June 30, 1997, and 1996, respectively. The
Company performs periodic credit evaluation of its customers' financial
condition and generally does not require collateral. The Company has
recorded allowances of $75,000, and $122,000, at June 30, 1997 and 1996,
respectively, which have been netted against the related amounts
receivable.
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
JUNE 30,
------------------------ ESTIMATED
1997 1996 USEFUL LIVES
---------- ---------- -------------
Revenue equipment $ - $3,834,000 5 to 7 years
Service cars - 11,000 5 years
Furniture and office
equipment 144,000 505,000 4 to 5 years
Machinery and equipment - 29,000 5 years
Leasehold improvements 72,000 137,000 life of lease
---------- ----------
216,000 4,516,000
Less accumulated depreciation
and amortization (106,000) (936,000)
---------- ----------
$ 110,000 $3,580,000
---------- ----------
---------- ----------
F-14
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consisted of the following:
JUNE 30,
-------------------------
1997 1996
----------- ------------
Transportation:
Accounts payable $ 2,331,000 $ 1,390,000
Accrued insurance - 469,000
Accrued purchased transportation 1,448,000 2,766,000
Other accrued expenses 833,000 959,000
----------- -----------
$ 4,612,000 $ 5,584,000
----------- -----------
----------- -----------
7. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt consisted of the following:
JUNE 30,
-------------------------
1997 1996
----------- ------------
Transportation:
Note payable to bank under a
revolving credit agreement, due
on April 30, 2000, bearing interest
at the bank's prime rate plus 2 1/2%
(11% at June 30, 1997),
collateralized by substantially all
assets of Vertex Transportation $1,748,000 $ -
Note payable to bank under a revolving
credit agreement, due on demand,
bearing interest at the bank's prime
rate plus 3% (11 1/4% at June 30,
1996), collateralized by substantially
all assets of CW Truck, replaced during
1997 by the above note - 3,560,000
Notes payable, due in aggregate monthly
installments of $24,000 including
interest at 9 3/4%, maturing at various
dates through December 2000,
collateralized by certain revenue
equipment - 2,974,000
F-15
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
-------------------------
1997 1996
----------- ------------
Notes payable, due in aggregate monthly
installments of $7,800 including
interest at 8 3/4%, maturing at
various dates through November 1997,
collateralized by certain revenue
equipment - 44,000
Notes payable, due in aggregate monthly
installments of $2,000 including
interest ranging from 12.6% to 28%,
maturing at various dates through
June 1997, collateralized by certain
computer equipment - 23,000
Notes payable, due in quarterly
installments of $30,000 including
interest at 10%, maturing April 1996,
unsecured - 269,000
Notes payable, due in aggregate monthly
installments of $18,900, including
interest at 6.99%, maturing October
1996, unsecured - 75,000
Notes payable, due in aggregate monthly
installments of $25,000 including
interest at 9%, maturing January 1998,
unsecured 160,000 -
----------- -----------
1,908,000 6,945,000
Less current portion (160,000) (4,329,000)
----------- -----------
$1,748,000 $2,616,000
----------- -----------
----------- -----------
The $1,748,000 note at June 30, 1997 arises from a credit agreement with a
commercial bank for Vertex which provides for maximum outstanding
borrowings aggregating $4 million and maturing on April 30, 2000. The
aggregate amount of advances under the revolving credit agreement is
limited to 80% of the eligible accounts receivable, less unbilled
receivables and any reserves the bank elects to establish, not to exceed
the aggregate principal amount. The obligations are collateralized by
substantially all of the assets of the company. Under the terms of the
agreement, the borrower is restricted from paying dividends on any classes
of its stock and the Company is required to maintain certain ratios and be
in compliance with other covenants. At June 30, 1997, the Company was in
compliance with all covenants.
Scheduled maturities of notes payable and long term debt are as follows:
YEAR ENDED
JUNE 30, AMOUNT
---------- -----------
1998 $ 160,000
1999 -
2000 1,748,000
2001 -
2002 -
-----------
Total $ 1,908,000
-----------
-----------
F-16
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DISCONTINUED SUBSIDIARY:
Having experienced significant losses in CW Truck the Company's Board of
Directors decided to discontinue the subsidiary through an orderly
liquidation. The Company closed the operations effective December 31, 1996
and made a General Assignment of all assets of its subsidiary, CW Truck,
for the pro rata benefit of all creditors of the subsidiary. At the date
of the assignment, CW Truck had liabilities in excess of assets in the
amount of $1,347,000. Included in this balance is $404,000 which CWTS
believes it will have to assume. As a result during the fiscal year ended
June 30, 1997, the Company realized a net gain to the extent of unpaid
liabilities (not guaranteed or accrued by CWTS) in excess of assets in the
amount of $898,000.
In conjunction with the discontinuance of CW Truck, the Company sold
equipment to a former officer of CWTS and CW Truck for the assumption of
the related notes payable and leases. All such notes payable and leases
are guaranteed by the Company. As of June 30, 1997, the remaining balance
on these obligations is approximately $4,043,000 and expire through April
30, 2001. Upon release of CWTS from all obligations and guarantees
referenced in these purchase contracts, CWTS will reimburse the former
officer of CWTS and CW Truck the sum of $150,000.
Revenues for CW Truck for the years ended June 30, 1997, 1996 and 1995 were
$7,590,000 $22,747,000 and $29,110,000, respectively and operating losses
for the same periods were $1,956,000, $2,634,000 and $479,000,
respectively.
9. DISCONTINUED OPERATIONS:
Having experienced significant losses in the product sales segment, the
Company's Board of Directors decided on June 26, 1995 to discontinue the
entire segment through an orderly liquidation process which they estimated
would occur over the subsequent two month period. Immediately thereafter,
the Company commenced to close the operations and on September 18, 1995
made a General Assignment of all assets of its subsidiary, Nationwide
Produce Co., for the pro rata benefit of all creditors of the subsidiary.
During the fiscal year ended June 30, 1996, the Company realized a net gain
to the extent of unpaid liabilities (not guaranteed or assumed by CWTS or
CW Truck) in excess of assets and operating losses from July 1, 1995 to
date of liquidation related to the liquidation of Nationwide.
At June 30, 1996, the Company has established a general accrual for
potential future expenses related to the discontinued segment amounting to
$177,000. At June 30, 1997, the Company established an additional $100,000
accrual relating to potential future expenses.
F-17
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1997 and 1996, the Company's product sales
segment generated a net loss before income tax benefit of $15,000 and
$959,000, respectively, as follows:
JUNE 30,
------------------------------
1996 1996
----------- -----------
Revenue $ - $4,307,000
----------- -----------
Expenses:
Cost of sales - 3,977,000
Salaries and related expenses - 460,000
Operating expenses - 134,000
General supplies and expense - 116,000
Depreciation and amortization - 8,000
Interest, net - 171,000
Impairment expense on investment in
produce doors - -
Valuation allowance on forgiven note
receivable from related party - -
Reserve for loss on potential
irregularity - -
Impairment expense on property and
equipment, and goodwill - -
Other 15,000 400,000
----------- -----------
Total expenses 15,000 5,266,000
----------- -----------
Loss before income tax
(expense) benefit $ (15,000) $ (959,000)
----------- -----------
----------- -----------
Revenues applicable to the discontinued product sales segment were
approximately $4,307,000, and $52,953,000, for the years ended June 30,
1996, and 1995, respectively. There were no revenues for the year ended
June 30, 1997.
F-18
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS - Minimum lease commitments under noncancelable operating
lease agreements are as follows:
OPERATING
YEAR ENDING JUNE 30, LEASES
-------------------- ---------
1998 $ 90,000
1999 90,000
2000 90,000
2001 -
2002 -
Thereafter -
---------
Total minimum lease payments $ 270,000
---------
---------
Rental expense for all operating leases consisted of the following:
YEAR ENDED JUNE 30,
-------------------------------------
1997 1996 1995
---------- ----------- -----------
Revenue equipment rentals $ 833,000 $ 1,884,000 $ 1,584,000
Terminal, warehouse, and
office rentals 215,000 204,000 289,000
Other equipment rentals 21,000 13,000 16,000
---------- ----------- -----------
$1,069,000 $2,101,000 $ 1,889,000
---------- ----------- -----------
---------- ----------- -----------
EMPLOYMENT CONTRACT - The Company and certain of its subsidiaries have
employment contracts with various officers with remaining terms up to two
years. Such agreements provide for minimum salary levels and incentive
bonuses, as well as severance payments upon termination or the
non-extension of employment. The aggregate commitment for future salaries
at June 30, 1997, excluding bonuses, was approximately $1,000,000.
LITIGATION - The nature of the Company's business routinely results in
litigation, primarily claims for personal injury and property damage
incurred in the transportation of freight. The Company believes that all
pending litigation of this type is adequately covered by insurance and that
adverse results in one or more of these matters would not have a material
adverse effect on its financial position or results of operations.
During September 1995, the Company's transportation subsidiary, CW Truck,
had a cargo claim that approximated $600,000 filed against it by one of its
customers. The insurance carrier, citing certain exceptions in the cargo
policy, declined to pay the claim and referred the issue to litigation on
F-19
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 27, 1996. The customer additionally filed a cross claim against
the Company. On February 24, 1997, the Company agreed to pay the customer
and a entered into a promissory note for $659,000. As of June 30, 1997,
the Company had made payments of $499,000. The Company is pursuing legal
action against the insurance carrier and its agent for the collection of
the $659,000.
On September 18, 1995, Nationwide ceased operations and executed a General
Assignment to CMAC. According to the books of Nationwide, it was owed a
sum of approximately $600,000 represented by a promissory note executed
jointly by Oasis Organic Citrus and John and Phillip Oertly. CMAC
instituted collection action on the Note which precipitated a
Cross-Complaint from Oertly. The Company maintains an insurance policy
covering officers and directors and the Company for potential claims
asserted in this cross-complaint. It is anticipated that continued efforts
will be made to try to settle the matter, however, the Company maintains
adequate insurance to cover any potential loss resulting from an adverse
judgment. At June 30, 1997, the Company has accrued $100,000 which
represents the deductible on the insurance policy.
11. STOCKHOLDER'S EQUITY:
Effective March 19, 1997, the Company increased the number of authorized
common shares to 30,000,000 and immediately thereafter declared a 1 for 5
reverse stock split. All shares and earnings per common share have been
retroactively restated for all periods presented.
During the fiscal year ending June 30, 1997, the Company completed the
sale, in a private offering, of 3,288,000 shares of common stock for net
proceeds of $1,636,000.
In April and August 1993, the Company granted to certain officers and key
employees of the Company, options for the purchase of 10,000 shares and
50,000 shares of the Company's common stock, respectively, at an exercise
price of $20.00 per share, which approximated the fair market value at the
date of grant. All options vest at a rate of 20% per year for five years
beginning on the first anniversary date after the options were granted.
Vesting of options are generally conditioned on the employee being employed
by the Company on the vesting dates. All options granted expire between
April 1998 and September 1998.
On June 1, 1994, the Company granted options for 40,000 shares with
exercise prices ranging from $15.00 to $20.00 per share to four investment
banking firms, as compensation for investment banking and marketing
services. All options were immediately exercisable and expire from May 31,
1996 through May 31, 1997. The excess of the fair market value over option
price has been treated as compensation to the recipient in the accompanying
consolidated financial statements.
During the years ended June 30, 1997, 1996 and 1995, options for 23,900,
50,000 and 16,000 shares, respectively were canceled.
On May 19, 1997. the Company granted options for 850,000 shares with an
exercise price of $0.15 per
F-20
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
share to two officers of the Company. All options were immediately
exercisable and expire on May 1, 2002. The excess of the fair market value
over option price of $17,000 has been treated as compensation to the
recipient in the accompanying consolidated financial statements.
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
BALANCE WEIGHTED
BALANCE AT AT END AVERAGE
BEGINNING OF EXERCISE
YEAR ENDED OF YEAR GRANTED EXERCISED CANCELED PERIOD PRICE
- ------------- ---------- ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997 23,900 850,000 - 23,900 850,000 $0.15
---------- ------- --------- -------- -------
---------- ------- --------- -------- -------
June 30, 1996 73,900 - - 50,000 23,900 $16.25
---------- ------- --------- -------- -------
---------- ------- --------- -------- -------
June 30, 1995 100,000 - 10,100 16,000 73,900 $17.50
---------- ------- --------- -------- -------
---------- ------- --------- -------- -------
</TABLE>
PROFORMA INFORMATION
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FAS 123 for employees. Had compensation cost for stock
options issued to employees been determined based on the fair value at
grant date for awards in fiscal year ending June 30, 1997 consistent with
the provisions of FAS 123, the Company's net loss and net loss per share
would have been adjusted to the proforma amounts indicated below:
JUNE 30,
------------
1997
------------
Net loss $ (3,842,000)
------------
------------
Loss per common share $ (2.47)
------------
------------
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model using the following assumptions:
expected volatility of 430%, an expected life of 2 years, no dividends
would be declared during the expected term of the options, a risk free
interest rate of 6.2%. The weighted average fair value of the options on
the grant dates was $0.17 per share.
F-21
<PAGE>
COUNTRY WIDE TRADSPORT SERVIECS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
Income tax benefit (expense) for the years ended June 30, 1997, 1996, and
1995 are comprised of the following:
CURRENT DEFERRED TOTAL
----------- ----------- -----------
Year ended June 30, 1997
Federal $ - $ - $ -
State (63,000) - (63,000)
----------- ----------- -----------
$ (63,000) $ - $ (63,000)
----------- ----------- -----------
----------- ----------- -----------
Year ended June 30, 1996
Federal $ 20,000 $(1,959,000) $(1,939,000)
State (22,000) - (22,000)
----------- ----------- -----------
$ (2,000) $(1,959,000) $(1,961,000)
----------- ----------- -----------
----------- ----------- -----------
Year ended June 30, 1995
Federal $ - $ 2,181,000 $2,181,000
State - - -
----------- ----------- -----------
$ - $ 2,181,000 $ 2,181,000
----------- ----------- -----------
----------- ----------- -----------
The actual income tax benefit (expense) differs from the "expected" tax
benefit (expense) (computed by applying the U.S. Federal corporate income
tax rate of 34% for each period) as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
1997 1996 1995
-------------------- ----------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed
"expected" tax
benefit
(expense) $1,236,000 34.0 $(167,000) (34.0) $2,581,000 34.0
State income
taxes, net of
Federal income
tax benefit (42,000) (1.2) (22,000) (4.5) - -
Temporary
differences
utilized - - 40,000 8.1 - -
Refundable
credits (3,000) (.1) 20,000 4.1 - -
Non-deductible
expenses (730,000) (20.0) 127,000 25.8 111,000 1.6
Realization of
tax benefits - - (1,959,000) (398.7) - -
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
1997 1996 1995
-------------------- ----------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Change in
valuation
allowance due
to liquidation of
subsidiary (524,000) (14.4) - - - -
Limitation on
use of NOL
carryover - - - - (511,000) (6.9)
---------- ----- ----------- ------ ---------- -------
$(63,000 (1.7) $(1,961,000) (399.2) $2,181,000 28.7
---------- ----- ----------- ------ ---------- -------
---------- ----- ----------- ------ ---------- -------
</TABLE>
The components of the net deferred tax asset recognized as of June 30, 1997
and 1996, are as follows:
JUNE
-------------------------
1997 1996
--------- -------------
Current Deferred Tax Assets
(Liabilities)
Insurance reserve $ 2,000 $ 193,000
Vacation accrual reserve 7,000 24,000
Other 2,000 -
Bad debt reserve 30,000 155,000
Other reserves 84,000 32,000
Accrued assessment and claims 161,000 168,000
Prepaid taxes - (51,000)
Prepaid insurance (11,000) (88,000)
--------- -------------
275,000 433,000
Valuation allowance (275,000) (433,000)
--------- -------------
Net current deferred tax asset - -
--------- -------------
--------- -------------
Long-term Deferred Tax Assets
(Liabilities)
Write-down of investment for $ - $ 218,000
book not tax
Depreciation and capital lease 5,000 (110,000)
Amortization (146,000) 139,000
Forgiveness of debt - (1,640,000)
AMT tax credit carryforward 23,000 23,000
Net operating loss carryforward 2,538,000 3,526,000
--------- -------------
2,420,000 2,156,000
Valuation allowance (2,420,000) (2,156,000)
--------- -------------
Net long-term deferred tax asset $ - $ -
--------- -------------
--------- -------------
F-23
<PAGE>
The deferred tax asset includes the future benefit of the CWTS
pre-acquisition net operating losses of $843,000, which has been fully
reserved through a valuation allowance. During the year ended
June 30, 1994, goodwill was reduced by $423,000, resulting from the
utilization of the CWTS pre-acquisition net operation losses that were
previously fully reserved through a valuation allowance.
Due to the liquidation of CW Truck through the General Assignment of its
assets effective December 31, 1996 (Note 8), the CWTS pre-acquisition net
operating losses will be available for use by the parent company. Any
portion of the valuation allowance for this net operating loss will be
recognized as a tax benefit and will affect tax expense rather than
goodwill.
During the year ended June 30, 1996, the Company was able to realize a
portion of its net operating loss against the income it recognized in
fiscal 1996 as a result of certain debt forgiveness (See Note 9). Such
realization resulted in a tax benefit of $2,181,000 for the year ended June
30, 1995.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and
as measured by tax laws and regulations, principally related to net
operating losses and expense accruals and reserves for financial reporting
purposes not deductible for tax purposes.
As of June 30, 1997, the Company has available net operating loss
carryforwards for income tax purposes of $7,049,000 which expire in the
years 2003 through 2011. The benefit of the operating loss to offset
future taxable income is subject to reduction or limitation of use as a
result of certain consolidated return filing regulations and additional
limitations relating to a 50% change in ownership which occurred during
1992.
13. RELATED PARTY TRANSACTIONS:
Transactions with related parties and stockholders consist of the
following:
In connection with the Company's discontinuance of the product sales
segment, the Company discovered, on or about September 13, 1995, a
potential irregularity relative to misapplication of cash receipts totaling
approximately $497,000 by a former officer and director. Current
management and the other members of the board of directors have performed a
review of the method of misapplication which consisted of depositing
customer checks into a bank account of an entity owned by the former
officer and director. Management has notified corporate as well as outside
legal counsel, Credit Manager's Association of California which is the
trustee of Nationwide Produce Co. pursuant to the filing of a General
Assignment for the Benefit of Creditors, and Nationwide's secured lender
whose collateral is the subject of the potential irregularity. As a result
of the foregoing, the Company had established a reserve as of June 30, 1995
of $497,000 against the trade receivables of the discontinued segment.
During the year ended June 30, 1997, the trustee obtained a judgement
against the former officer and director in resolution of the foregoing.
F-24
<PAGE>
During the years ended June 30, 1996 and 1995, the Company incurred
expenses to various law firms in which a director of the Company was a
partner. Such legal expenses amounted to $53,000 and $172,000,
respectively. No such expenses were incurred for the year ended June 30,
1997
During the years ended June 30 1997, 1996 and 1995 the Company incurred
expenses to a CPA firm in which a director of the Company was the owner.
Such expenses amounted to $26,000, $10,000 and $10,000, respectively.
During the years ended June 30, 1997 and 1996, the Company paid rents to a
company controlled by two officers of the Company totaling $95,000 and
$93,000, respectively. The basic lease term is for 60 months through July
1999.
During the years ended June 30, 1996 and 1995, the Company paid rents to an
officer and employee of a Company subsidiary of $14,000 and $25,000,
respectively. No such expenses were incurred for the year ended June 30,
1997.
During the years ended June 30, 1997, 1996 and 1995, the Company received
management fees from a company controlled and 49% owned by two officers of
the Company totaling $ 89,000 and $58,000 and $63,000, respectively.
14. EMPLOYEE DEFINED CONTRIBUTION PLAN AND TRUST:
Effective April 1, 1993, the Company adopted a Deferred Compensation 401(k)
Plan ("the Plan") covering all full-time employees. To be eligible to
participate in the Plan, employees, with the exception of drivers, must
have been employed by the Company for 90 days; drivers are eligible to
participate following one year of service. Employees involved in the Plan
may contribute up to 20% of their compensation, on a pre-tax basis, subject
to statutory and Internal Revenue Service guidelines. Contributions to the
Plan are invested, at the direction of the participant. Under one
investment option, the Company makes matching contributions to the Plan.
Insignificant contributions were made by the Company to this plan during
the years ended June 30, 1997, 1996 and 1995.
15. MAJOR CUSTOMERS:
The Company had sales to unaffiliated customers, which individually
represented more than 10% of the Company's transportation sales as follows:
CUSTOMER 1997 1996 1995
----------------- --------- --------- --------
A 25% 12% 12%
B 10% - -
C - 19% -
F-25
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------------------------------- ------------ ------------ -------------- -----------
<S> <C> <C> <C> <C>
For the year ended
June 30, 1997:
Accumulated amortization -
Goodwill $599,000 $2,187,000 $2,426,000 $360,000
Accumulated amortization -
Covenants - - - -
Allowance for doubtful
accounts 122,000 31,000 78,000 75,000
For the year ended
June 30, 1996:
Accumulated amortization -
Goodwill $392,000 $ 207,000 $ - $599,000
Accumulated amortization -
Covenants 39,000 14,000 53,000 -
Allowance for doubtful
accounts 198,000 110,000 186,000 122,000
For the year ended
June 30, 1995:
Accumulated amortization -
Goodwill $207,000 $ 198,000 $ 13,000 $392,000
Accumulated amortization -
Covenants 82,000 17,000 60,000 39,000
Allowance for doubtful
accounts 273,000 234,000 309,000 198,000
</TABLE>
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 4,147
<ALLOWANCES> (75)
<INVENTORY> 0
<CURRENT-ASSETS> 4,131
<PP&E> 216
<DEPRECIATION> (106)
<TOTAL-ASSETS> 6,887
<CURRENT-LIABILITIES> 4,772
<BONDS> 0
0
0
<COMMON> 425
<OTHER-SE> (585)
<TOTAL-LIABILITY-AND-EQUITY> 6,887
<SALES> 34,035
<TOTAL-REVENUES> 34,035
<CGS> 33,614
<TOTAL-COSTS> 37,626
<OTHER-EXPENSES> 492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 435
<INCOME-PRETAX> (4,518)
<INCOME-TAX> 63
<INCOME-CONTINUING> (4,581)
<DISCONTINUED> (15)
<EXTRAORDINARY> 898
<CHANGES> 0
<NET-INCOME> (3,698)
<EPS-PRIMARY> (3,698)
<EPS-DILUTED> (2.38)
</TABLE>
