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, 1998
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
of 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, $.10 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 [ ]
As of September 23, 1998 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 23, 1998 was
$1,170,225.
Documents incorporated by reference:
None.
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
Country Wide Transport Services, Inc. (the "Company") is a non-asset based,
full service domestic freight forwarder. Operating entirely through its
wholly-owned subsidiary, Vertex Transportation, Inc. ("Vertex"), the Company
provides customers with a complete range of transportation services, including
truckload, less-than-truckload (LTL), consolidation and distribution, logistics
management, intermodal, and international.
Forward Looking Information
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which represent the Company's expectations or
beliefs, including, but not limited to, statements concerning industry
performance, the Company's operations, performance, financial condition, growth
and acquisition strategies, margins and growth in sales of the Company's
products. For this purpose, any statements contained in this Annual Report on
Form 10-K that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors, including those
described under the "Risk Factors" section below in this Item 1 and elsewhere in
this Annual Report on Form 10-K and the documents incorporated herein by
reference.
Business History, and Development
In 1962, Country Wide Truck Service, Inc. ("CW Truck") was incorporated in
the State of Delaware, and thereafter it conducted a trucking business with
owned and leased trucks. The Company (Country Wide Transport Service, Inc.) was
incorporated in the State of Delaware in February 1987 and then exchanged some
of its shares of common stock for all the outstanding shares of CW Truck. In
April 1987 the Company sold 150,000 shares of common stock in a public offering.
In 1992 the Company acquired all the outstanding stock of Nationwide Produce Co.
("Nationwide"). In July 1994 CW Truck acquired all the outstanding stock of
Vertex, which had been incorporated in New York in 1978, operated as an agent
for CW Truck, and by 1994 was providing transportation brokerage and third party
transportation services and logistics management to several large corporations.
Shortly thereafter, Vertex was merged into CW Truck, but was operated as a
separate division.
The Nationwide subsidiary experienced ongoing losses. In September 1995 a
general assignment of its assets was made for the benefit of its creditors and
it was liquidated. Similarly, CW Truck experienced considerable losses, and in
June 1996 the Vertex business operation and considerable liabilities were
separated
2
<PAGE>
from CW Truck and put into a separate corporation incorporated under the laws of
New York (this corporation now being the Vertex subsidiary). In December 1996 CW
Truck made a general assignment of its assets for the benefit of its creditors
and it was liquidated. For further details see "Discontinued Operations" below
and Notes 7 and 8 of the audited financial statements.
As a result of the foregoing, Vertex is the only remaining operating
subsidiary of the Company and all business operations of the Company are
conducted by that subsidiary. During each of the years it has operated, whether
as a separate corporation or as a division of CW Truck, Vertex has been
profitable. The two founders and principal officers of Vertex (Timothy Lepper
and Wayne N. Parry) became two of the then eight members of the Company's board
of directors in 1994 when Vertex was acquired. In 1995 Mr. Lepper became the
Company's Chief Executive Officer and Mr. Parry became the President of Vertex.
During 1995 four of the eight directors resigned, leaving Messrs. Lepper and
Parry, Mark T. Boyer, and John Russell as the four remaining members of the
Company's board of directors. Mr. Russell subsequently resigned in 1997. Prior
to Mr. Lepper's election as the Company's CEO, other persons controlled the
Company. For information concerning certain legal proceedings involving former
officers and directors of the Company, see Item 3. Legal Proceedings in this
Annual Report on Form 10-K.
In 1996, the Company's principal offices were moved from Corona,
California, to the Vertex offices in East Rochester, New York.
For further details, see "Discontinued Operations" below in this Item 1,
Item 3. Legal Proceedings, and Notes 7, 8, and 9 to the Company's financial
statements for the fiscal year ended June 30, 1998, included pursuant to Item 14
of this Annual Report on Form 10-K.
Transportation Operations
Vertex was founded in 1978 by Timothy Lepper (now President & Chief
Executive Officer of the Company) and Wayne N. Parry (now President of Vertex).
It 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), consolidation and distribution, logistics management,
intermodal, and international. Vertex maintains a fully staffed sales and
operating terminal in East Rochester, New York, with an additional sales office
in Buffalo, New York.
From its primary location the Company conducts business nationwide, using a
computerized system for managing operational requirements of each shipment and
for completing all necessary accounting, administration, and information for
customer use. That computer system allows the Company's 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. The
Company is constantly seeking to improve its computer system and to train its
personnel, but it does not conduct or sponsor any other research or development
activities. As part of providing responsive service, the Company rarely has any
significant backlog of customer orders.
The Vertex computer maintains files on over 2,000 transportation providers.
The Company's customer service representatives maintain close communication with
those providers, first in order to seek among them the best price, delivery, and
other terms for each customer and then in order to keep track of the customer's
3
<PAGE>
shipment. The transportation providers are critical to the success of any third
party logistics operation. Vertex provides several benefits to these carriers
through the provision of steady freight, which reduces the need for large
marketing departments and can be particularly beneficial for smaller carriers.
In addition, Vertex provides access to additional customers and back-haul
opportunities, thereby improving the carrier's efficiency.
During the fiscal year ended June 30, 1998, the Company transported a wide
variety of commodities including retail goods, auto parts, photographic
material, pharmaceuticals and printed material. During that year the Company's
25, 10, and 5 largest customers accounted for approximately 73%, 67%, and 56% of
the Company's logistics operations revenue. The Company's two largest customers,
Eastman Kodak and Echlin Corporation accounted for 31% and 11% respectively of
the Company's total revenue. The loss of either of these customers could have a
material adverse effect on the Company. No other customer accounted for more
than five percent (5%) of Company revenues during the fiscal year ended June 30,
1998.
In the transportation industry, generally shipping activity increases in
the late summer and fall seasons preceding the holiday period and decreases
during the winter season. The Company historically has lower margins in the
fall, as competition for the transportation providers' equipment increases.
At September 25, 1998, the Company employed 47 persons. Additionally, the
Company currently has two agreements with independent sales representatives.
Employees are not represented by any union and the Company believes that its
employee relations are very good.
The Company generally does not encounter costs for compliance with
environmental protection requirements and does not expect to incur any material
capital costs for such compliance.
Competition
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 have substantial capital, but none
of which, and no small group of which, is dominant in the industry). This
extensive competition maintains constant pressure on freight rates, thus
resulting in thin margins. Thus, the transportation services business is highly
competitive, with a great many alternatives available to the shipping public.
The majority of the shippers are business organizations. Those
organizations have three alternatives for transportation services. They can have
their own vehicles or other shipping equipment and handle their needs in-house.
Alternatively, companies choosing to outsource their shipping functions have two
basic alternatives: use a carrier (which is asset-based, namely owning or
leasing the necessary vehicles or other equipment) or use a non-asset based
freight forwarder or broker (which will find and negotiate with one or more
carriers in order to procure the needed transportation). A freight forwarder
procures shipments from customers, makes arrangements for transportation of the
cargo with a third-party carrier, and arranges both for pick-up from the shipper
to the carrier and for delivery of the shipment from the carrier to the
recipient.
The Company believes that the proportion of business organizations handling
their transportation needs in-house is decreasing, as part of the trend to focus
on their core businesses, and therefore that the amount of outsourcing of
transportation services is increasing.
4
<PAGE>
Carriers have the strengths and weaknesses of owning and/or leasing their
own vehicles or other equipment. They need to cover their high fixed costs, and
often do that by having regular delivery schedules and defined shipment weights,
sizes, and types. Customers that can work with such limitations often can do
well by working directly with a carrier, especially if the carrier can itself
provide a total transportation solution, including by providing pick-up and
delivery service, such as with the carrier's own trucks.
Freight forwarders are non-asset based and generally provide a service when
there is no obvious carrier that can take care of the customer's needs. Freight
forwarders generally compete against carriers by offering greater flexibility,
and sometimes at a lower cost than would be available from a single carrier.
They generally make arrangements for shipments of any size and can offer
customized shipping options. Freight forwarders often tailor the routing of each
shipment to meet the price and service requirements of the customer by selecting
from various transportation options and from different carriers in routing
customer shipment needs. When serving a customer, of course, a freight forwarder
is negotiating shipping arrangements with the very carriers that compete
generally for the shipping business that the forwarder is handling, but the
forwarder provides benefits to the carriers, as noted above.
The Company believes it attracts and maintains customers through service
and the experience gained from twenty years in the business, as well as through
superior information technology provided by its computer system. Additionally,
the wide range of services offered by the Company attracts and retains customers
that have diverse and specialized needs. In marketing the Company's services,
the sales force emphasizes the Company's commitment to customer service and its
expertise in service oriented shipments, particularly time-sensitive deliveries
as well as solutions to complicated requirements.
Regulation and Intangible Property Rights
The Company maintains authority with the Federal Department of
Transportation as a freight forwarder and 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.
Except for the two types of authority secured from the Department of
Transportation, there are no patents, trademarks, licenses, franchises, or
concessions held by the Company.
Insurance
The Company has the following types of insurance coverage limits: General
Liability ($2,000,000), Personal Injury ($1,000,000), General Umbrella Policy
($2,000,000), and Cargo Policy ($500,000). The Company's management believes
that the current insurance coverages are adequate in light of the scope and
nature of the Company's operations.
Discontinued Operations
Through its former subsidiary, Nationwide Produce Co. (Nationwide), the
Company operated a full-service marketing firm in Los Angeles, California,
importing, exporting, and distributing conventional and
5
<PAGE>
organic produce nationwide and overseas. Having experienced significant losses
in certain Nationwide divisions, and after a review, two of Nationwide's
divisions (Salinas lettuce packing and the tomato repackaging divisions) were
closed in May 1995. After continued losses in the remaining Nationwide sales
groups through June 30, 1995, and with no prospects for improvement, it was
determined to discontinue Nationwide's entire business, through an orderly
liquidation process. On September 18, 1995, a general assignment of all assets
of Nationwide was made for the pro rata benefit of all creditors of that
subsidiary. A general assignment under California state law is an alternative to
Chapter 7 bankruptcy liquidation.
Following that general assignment, the Company was left with the CW Truck
and Vertex divisions. 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 into a downward business cycle which the Company was not
able to counteract. A program of further downsizing and elimination of
unprofitable divisions was begun in the early months of 1996. In June 1996 the
Vertex division business and substantial Company debt were transferred to a new
subsidiary corporation formed under New York law (which now is the Vertex
subsidiary). Subsequent efforts to sell CW Truck were unsuccessful. Faced with
significant equipment licensing costs at CW Truck in December of 1996 and in
light of continued significant losses, on December 31, 1996 a general assignment
was made for the benefit of creditors of CW Truck under California law.
The assignees for the benefit of the creditors of Nationwide and of CW
Truck started two legal proceedings against a former officer and director of the
Company arising out of certain transactions he conducted in the name of the
Company. See Item 3. Legal Proceedings below in this Annual Report on Form 10-K.
No such legal proceedings have been brought against any of the Company's current
directors and officers or against the Company or its subsidiary, Vertex.
Simultaneously with the assignment of CW Truck's assets for the benefit of
creditors, an asset sale of the rolling stock of CW Truck was made to Mid-Cal
Express Inc., a California corporation and a wholly owned subsidiary of Prime
Companies, Inc. Mid-Cal Express, Inc. assumed certain equipment leases and notes
payable related to the rolling stock, but as part of that transaction the
creditors required that the Company's guarantee of those leases and debts be
continued. At June 30, 1998, the remaining balance on those obligations was
about $4,398,000. Prime Companies, Inc. has had losses of $695,000 for the year
ended December 31, 1997 and $843,000 for the six months ended June 30, 1998.
While the Company's management believes that Mid-Cal Express will be able to
meet its obligations on those notes and leases, there can be no assurance that
it will be able to do so, nor can there be any assurance that the Company will
not have to pay upon its guarantee. See Note 7 to the Company's audited
financial statements.
For further details, see "Discontinued Operations" above in this Item 1,
Item 3. Legal Proceedings, and Notes 7, 8, and 9 to the Company's financial
statements for the fiscal year ended June 30, 1998, included pursuant to Item 14
of this Annual Report on Form 10-K.
Risk Factors
Outstanding Company Guarantee. In connection with the general assignment of
the assets of CW Truck in December 1996, CW Truck sold its rolling stock to
Mid-Cal Express, Inc., a wholly owned subsidiary of Prime Companies, Inc., which
assumed certain equipment leases and notes payable related to the rolling stock
assigned to it, but as part of that transaction the creditors required that the
Company's guarantee of those leases and debts be continued. At June 30, 1998,
the
6
<PAGE>
remaining balance on these obligations was about $4,398,000. Prime Companies,
Inc. has had losses of $695,000 for the year ended December 31, 1997 and
$843,000 for the six months ended June 30, 1998. While the Company's management
believes that Mid-Cal Express will be able to meet its obligations on those
notes and leases, there can be no assurance that it will be able to do so, nor
can there be any assurance that the Company will not have to pay upon its
guarantee. See Note 7 of the Company's audited financial statements.
Substantial Losses. During the fiscal years ended June 30, 1995, 1996 and
1997, the Company sustained losses of $5,411,000, $1,470,000 and $3,698,000,
respectively, and during the fiscal year ended June 30, 1998, the Company had
net income of $940,000. While management believes the Company has made
sufficient changes to allow it to continue its recent profitability, there can
be no assurance that the Company will not incur losses in the future.
Material Dispositions of Assets. From September 1995 through January 1997
all but one of the Company's subsidiaries made substantial dispositions of
assets, and those subsidiaries were liquidated. While the remaining subsidiary,
Vertex Transportation, Inc., has been profitable during the fiscal years ended
1995, 1996, 1997 and 1998, there can be no assurance that the remaining business
of that subsidiary will continue to be profitable or that some unforeseen
liability of the liquidated subsidiaries will not affect the Company's business,
assets, or liabilities in the future.
Motor Carrier Industry. The business of the Company's remaining subsidiary,
Vertex Transportation, Inc., includes negotiation of motor carrier
transportation services on a short-term basis and thus is substantially affected
by the availability of such transportation services, as well as by the overall
pricing and other competitive considerations of that industry as compared to
those of alternative transportation industries.
Government Regulation. Motor Carriers are subject to regulation by various
federal and state governmental agencies, including the United States Department
of Transportation. These regulatory agencies have broad powers, and the motor
carrier industry is subject to regulatory and legislative changes that can
affect the economics of the industry by requiring changes in the operating
practices or influencing the demand for, and the costs of providing, services to
shippers.
Effects of Fuel, Insurance and Interest Rates. Fuel prices and insurance
premiums are expenses over which the Company has little or no control. If these
costs are increased to the Company's transportation providers, the increases
will be passed on to the Company by increased rates. These increased rates, if
not offset, will reduce the Company's profitability.
Absence of Dividends. The Company anticipates that all of its earnings in
the foreseeable future, if any, will be retained for the development and
expansion of its business, and accordingly, has no current plans to pay
dividends. 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. The Company's subsidiary, which
now conducts substantially all the business operations of the Company, has
line-of-credit agreements which contain provisions limiting the ability of the
subsidiary to pay dividends.
Liquidity and Market Price. The Company was de-listed from trading on The
Nasdaq SmallCap Market on August 13, 1996 due to its failure to maintain the
necessary equity and other criteria of The Nasdaq Stock Market. The OTC Bulletin
Board on which the Company's shares are now quoted must be viewed as
7
<PAGE>
having very little liquidity, and any amount of purchasing or selling of Company
shares on that market could cause significant and abrupt price changes in the
reported market prices for the shares.
Competitive Industry. The Company is participating in a highly competitive
industry and rates demanded by competitors directly control the rates for which
the Company can render its services. In the event competitors rates are reduced,
any such reduction will have the effect of reducing the rates the Company can
charge and thereby reducing the Company's opportunities to earn profits.
Maintenance of Capital. In order for the Company to attract the necessary
transportation providers, it is necessary for the Company to maintain sufficient
capital to ensure timely and current payment of transportation fees to these
providers. Any reduction of capital below that which is necessary to properly
attract these transportation providers will have a substantial adverse effect on
the profitability of the Company.
General Economic Risk. The major risk encountered by a logistics services
company is that it will not generate sufficient income to meet its operating
expenses and debt service. Its net income is entirely dependent upon the
continuation of the service to its customers as well as the existence of
available transportation providers. The net income of the Company may be
affected by many factors including: (a) bad debts, insolvency and bankruptcy of
customers; (b) adverse changes in general economic conditions; (c) adverse
changes in transportation laws; (d) unanticipated increases in operating costs;
(e) increases in transportation and other taxes; and (f) increases in interest
rates on funds borrowed by the Company not offset by increased revenues.
Dependence on Significant Customers. The success of the Company depends
heavily on the business it conducts with a limited number of significant
customers. For the Company's fiscal year ending June 30, 1998, approximately
31%, and 11% of its net sales were derived from sales to its two largest
customers. The Company has had long-standing relationships with most of its
significant customers; however, it generally does not have long-term contracts
with them and they may unilaterally reduce or discontinue the purchase of the
Company's services without penalty. The Company's loss of (or the failure to
retain a significant amount of business with) any of its significant customers
could have a material adverse effect on the Company.
8
<PAGE>
ITEM 2. PROPERTIES
At June 30,1998, the Company owned no rolling stock, but owned office,
computer and other equipment having a book value at approximately $263,000. The
Company leases the following facilities for the operation of Vertex
Transportation, Inc.
<TABLE>
<CAPTION>
Locations Type Size Annual Rental
- --------- ---- ---- -------------
<S> <C> <C> <C>
Victor, New York Warehouse 13,000 Sq. Ft $52,000
East Rochester Warehouse, Office 10,000 Sq. Ft $90,000
New York
*(See item 13. Certain Relationships and Related Transactions)
Buffalo, New York Office 400 Sq. Ft $ 2,400
</TABLE>
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 any 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 its assets to Credit Managers Association of
California for the pro rata benefit of all its creditors. 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 the former
officer. During the year end June 30, 1997 Credit Managers Association secured a
judgment in these proceedings against the former director and officer for the
amount sought. The Company believes that any amount collected from that judgment
will be used for the benefit of Nationwide's creditors and that the Company will
not receive any amount as a result of the judgment.
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. 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 the 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 for any sum in excess of $100,000 (which is the deductible
under the policy and was paid by the Company during the fiscal year ended June
30, 1998). The obligation of the Company is likewise insured pursuant to that
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;
but management believes that the Company's
9
<PAGE>
liability with respect to this claim is the $100,000 already paid for the
deductible and the remainder, if any, will be paid by the insurance carrier
pursuant to the insurance coverage. In addition, the Company believes that the
claim against the Company, Vertex, and the officers and directors is without
merit and will be unsuccessful.
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, and an additional $150,000 during the fiscal year ended June 30, 1998,
thereby having paid the customer in full for its loss. Those payments were made
out of the operating revenues of the Company. It is management's belief that the
suit against the insurance carrier will be successful and will reimburse the
Company for substantially all funds paid to the customer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 1998 the Company's annual meeting was held. At the meeting,
Wayne N. Parry was elected to serve as a director for a three year term. The
term of office as a director of Timothy Lepper continues until the 1999 annual
meeting, and the term of Mark T. Boyer continues until the annual meeting to be
held in 2000.
Also at the May 11, 1998 annual meeting, the shareholders ratified the
selection of Hein + Associates LLP as the independent accountants of the
Company.
A total of 3,556,375 shares of the Company's total 4,248,000 outstanding
shares of Common Stock were present in person or by proxy at the annual meeting
held on May 11, 1998. All of the shares present at the meeting were voted in
favor of the nominee for director (Wayne N. Parry), except 6,408 which were
withheld, and in favor of the ratification of the selection of Hein + Associates
LLP, except 10 shares voted against.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
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 of the NASDAQ Small Cap, the Company's shares have been traded on
the 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 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 Last Trade** Low
---- ----------------
September 30, 1996 .62 .15
December 31, 1996 .50 .15
March 31, 1997 .28 .12
June 30, 1997* 1.47 .12
High Low High Low
---- --- ---- ---
September 30, 1997 1.125 .75 1.50 1.00
December 31, 1997 1.06 .53 1.375 .50
March 31 1998 1.43 .90 1.56 1.125
June 30, 1998 2.25 1.125 2.438 1.156
* Reverse split of stock one for five effective May 15 1997.
** With the Company's stock being traded on OTC Bulletin Board during
quarter ended September 30, 1996, the information available through
National Quotation, Inc. consisted of last trade information.
11
<PAGE>
Shareholders
As of June 30, 1998, 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
limits the ability of the subsidiaries to pay dividends.
12
<PAGE>
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.
<TABLE>
<CAPTION>
Statement of Operations Data
----------------------------
(in thousands, except per share amount)
Year Ended June 30
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenue:
Transportation revenue $34,283 $34,035 $47,356 $54,744 $34,210
Operating expenses 33,277 38,134 48,940 54,421 32,499
------ ------ ------ ------ ------
Operating income (loss) 1,006 (4,099) (1,584) 323 1,711
------ ------ ------ ------ ------
Net income (loss) from
continuing operations before
discontinued operations and
extraordinary item 940 (4,581) (2,552) (169) 677
------ ------ ------ ------ ------
Basic net income (loss) per
common share from
continuing operations before
discontinued operations and
extraordinary item 0.22 (2.94) (2.66) (0.18) 0.88
------ ------ ------ ------ ------
Diluted net income (loss) per
common share from
continuing operations before
discontinued operations and
extraordinary item 0.19 (2.94) (2.66) (0.18) 0.88
------ ------ ------ ------ ------
Weighted average shares outstanding 4,248 1,556 960 955 766
------ ------ ------ ------ ------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data
(in thousands, except per share amount)
Year ending June 30
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and
cash equivalents 6 10 37 57 910
Working capital
(deficit) 479 (1,168) (4,157) (1,691) 3,199
Property and
equipment, net 263 110 3,580 4,069 5,752
Total assets 8,532 6,887 14,608 18,910 21,626
Long-term debt and
capital leases,
excluding current
portion 2,514 1,748 2,616 1,579 5,730
Total liabilities 7,752 7,047 12,706 15,538 14,264
Total stockholders
equity (deficit) 780 (160) 1,902 3,372 7,372
</TABLE>
(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, 1998,
1997 and 1996. The discussion should be read in conjunction with the Company's
audited financial statements and notes thereto and "Selected Financial Data"
included elsewhere herein.
14
<PAGE>
Introduction
For the fiscal year ended June 30, 1998, the Company derived revenue from
its transportation logistics operation. For fiscal year ended June 30, 1997, the
Company derived revenue from its transportation logistics operation for twelve
months and from its trucking subsidiary for six months through December 31,
1996, when it was discontinued. 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.
The following analysis of the Company's financial condition and results of
operations for the fiscal year ended June 30, 1998, 1997, and 1996, 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, 1998 and 1997
The net income for the Company from continuing operations for the year
ended June 30, 1998 was $940,000 as compared to a net loss of $4,581,000 for the
year ended June 30, 1997. The increase in income was due to an income tax
benefit of $51,000; an increase in net profits from the Company's logistics
subsidiary, Vertex Transportation and the discontinuance of unprofitable
subsidiaries and operations in previous years. For fiscal year ended June 30,
1998 income from continuing operations increased 76.5% to $1,121,000 from
$635,000 for the period ended June 30, 1997 for the Vertex subsidiary. The
reason for this increase was the return of management's focus to the Company's
core logistics business.
Operating revenue for the year ended June 30, 1998 increased 0.8% to
$34,283,000 from $34,035,000, for the comparable 1997 period. This increase was
accomplished through additional revenue generated by the Company's logistics
division. The revenue for fiscal 1997 included $7,590,000, which was generated
by the Company's subsidiary CW Truck which was liquidated after the second
fiscal quarter of 1997, which ended December 31, 1996. Revenue from the
Company's transportation logistics subsidiary, Vertex, increased by $5,918,000
to $34,283,000 an increase of 20.9% for the year ended June 30, 1998, from
$28,365,000 for the year ended June 30, 1997.
Operating cost decreased $4,349,000 to $33,277,000 for the year ended June
30, 1998 from $37,626,000 for the year ended June 30, 1997, a 11.6% decrease. As
a percentage of sales, operating costs decreased to 97.1% for the year ended
June 30, 1998 from 110.6% for the year ended June 30, 1997. The decrease was the
result of the discontinuance of CW Truck.
Interest expense decreased $238,000 for the year ended June 30, 1998
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
15
<PAGE>
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 sales 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,
1998 and 1997 for any future expenses associated with the General Assignment.
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.
At June 30, 1998, the Company was not in compliance with certain covenants.
Subsequent to June 30, 1998, the Company received a waiver from the commercial
bank with regards to those items.
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 of about $508,000.
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.
16
<PAGE>
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's 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 sales 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.
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.
At June 30, 1998, the Company was not in compliance with certain covenants.
Subsequent to June 30, 1998, the Company received a waiver from the commercial
bank with regards to those items.
17
<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. The agreement bears interest at a banks
reference rate plus 2 1/2%. The credit facility which expires on April 29, 2000
is secured by substantially all assets of the Company, including accounts
receivable. At June 30, 1998 the Company had unused credit available under the
line of about $1,486,000. 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 $282,000 of cash flow from continuing operations and
utilized $123,000 of cash flow from discontinued operations during the year
ended June 30, 1998. The General Assignment for the benefit of creditors and
sale of the assets has reduced the Company's outstanding payable and leasehold
obligations by $6,009,000. As of June 30, 1998 the Company had total debt of
$7,752,000. The Company's ratio of current assets to current liabilities and its
debt to equity were 1.09:1 and 9.9:1 respectively as compared to 0.7:1 and
(44):1 as of June 30, 1997.
The Company ended the June 30, 1998 period with $6,000 of cash and cash
equivalents, and working capital of $479,000. 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
18
<PAGE>
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.
IMPACT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards 130, "Reporting Comprehensive Income" and Statement of
Financial Accounting Standards 131 "Disclosures About Segments of an Enterprise
and Related Information." Statement 130 establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, Statement 130 requires that all components of comprehensive income
shall be classified based on their nature and shall be reported in the financial
statements in the period in which they are recognized. A total amount for
comprehensive income shall be displayed in the financial statements where the
components of other comprehensive income are reported. Statement 131 supersedes
Statement of Financial Accounting Standards 14 "Financial Reporting for Segments
of a Business Enterprise." Statement 131 establishes standards on the way that
public companies report financial information about operating segments in annual
financial statements issued to the public. It also establishes standards for
disclosures regarding produces and services, geographic areas and major
customers. Statement 131 defines operating segments as components of a company
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Statements 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Results of operations and financial position will
be unaffected by implementation of these standards.
SFAS No. 132, "Employers' Disclosures abut Pensions and Other
Postretirement Benefits," was issued in February 1998. This statement revises
the disclosure requirement for pensions and other postretirement benefits. This
statement is effective for the Company's financial statements for the year ended
June 30, 1999 and the adoption of this standard is not expected to have a
material effect on the Company's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for the Company's financial
statements for the year ended June 30, 2001 and the adoption of this standard is
not expected to have a material effect on the Company's 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.
Year 2000 Issues
The Company believes that the general nature of its business operations
limits its risks with respect to Year 2000 issues, with the state of readiness
of its own computer system being the key consideration. Most of the Company's
business is conducted by telephone, fax, e-mail, and mail communications with
customers and transportation providers. The Company's computer system is
independent of external computers, except for e-mail Internet communications.
Generally orders are taken by phone, and shipping arrangements are made by
phone, with subsequent written confirmations. The Company uses its internal
computer system to keep track of orders and related expenses and billing
information and eventually to provide accounting for the business transactions
and the Company's financial statements. All data used by the computer is entered
at the Company's offices by employees.
The independent developer of the Company's customized software system has
advised the Company that the system, including computer firmware, is Year 2000
compliant. In fall 1998 the Company will be administering testing scenarios. If
the computer system needed even major overhaul in order to become Year 2000
compliant, the Company believes that necessary expense and time will be
allocated to do it.
The Company believes that Year 2000 problems that its customers might
experience are as likely to increase the Company's business and results of
operations as they are to decrease them. If any customers whose shipping needs
are significantly managed by computers do in fact experience Year 2000 problems,
they probably would need to use freight forwarders more, in order to find
available carriers who can make timely deliveries. Even with that increase in
business, of course, problems with finding, negotiating, and managing the
shipments and then billing and collecting for them could result in the Company
experiencing higher costs and delayed receipts on billings, thereby negatively
affecting margins on Company business.
The Company believes that Year 2000 problems that the transportation
providers might experience could generally impair the availability of
transportation and the efficiency with which rolling stock is used. This
problem, too, appears as likely to increase Company business and results of
operations as to decrease them, with the carriers becoming more dependent on
freight forwarders for finding and arranging ways to fill the rolling stock for
various trips. With such a less efficient system, of course, the Company's
overhead probably would increase, thereby negatively affecting margins on
Company business.
Lastly, the company also believes that it does not have significant
exposure to embedded technology problems, except for possible problems that
could have widespread effects. The Company's offices are in a stand-alone,
single story building with basic utilities and HVAC and security systems, each
which could be replaced without material expense to the Company. Thus, the
Company's primary exposure to embedded technology problems appears to focus on
communications and utilities. If electricity became unavailable or erratic, or
if telephone, fax, e-mail, and/or mail systems became unusable or erratic, the
Company might have severe difficulties in maintaining its business operations.
The Company does not have a contingency plan with respect to a possible loss of
electricity, telephone, or mail systems.
Forward Looking Information
See Item 1. Business above in this annual report on form 10K for important
comments about forward looking information contained in this annual report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a).
19
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<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 50 Chairman, Chief Executive Officer, and President -
of the Company
Wayne N. Parry 47 Director, Secretary of the Company
President, Vertex Transportation, Inc.
(subsidiary of the Company)
Mark T. Boyer 41 Director
On May 11, 1998 the Company's annual meeting was held. At the meeting,
Wayne N. Parry was elected to serve as a director for a three year term. The
term of office as director of Timothy Lepper continues until the 1999 annual
meeting, and the term of Mark T. Boyer continues until the annual meeting to be
held in 2000.
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. 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 (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.
21
<PAGE>
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, 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.
Section 16(b) Beneficial Ownership Reporting Compliance
The company believes that Form 4 reports should have been filed with
respect to the following transactions and were not:
(a) Sale of 1,300 shares of common stock on November 3, 1997 and 2,700
shares on November 7, 1997 by Timothy Lepper, President of the Company, at
a sale price of $1.00 per share ans $0.687 per share respectively.
(b) Sale of 1,300 shares of common stock on November 3, 1997 and 4,300
shares on November 7, 1997 by Wayne N. Parry, President of Vertex (the
Company's subsidiary) at a sale price of $1.00 per share and $0.687 per
share respectively.
Messrs. Lepper and Parry are filing those reports at or about the same time
as this Annual Report of Form 10-K is being filed with the Securities and
Exchange Commission.
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
Fiscal
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Timothy Lepper(1)(2) 1996 $250,000 - --
President CEO 1997 $201,930 - --
1998 $156,697 - --
Wayne N. Parry(1)(2) 1996 $250,000 - --
President - Vertex 1997 $201,930 - --
Transportation 1998 $156,697
</TABLE>
(1) Aggregate value of perquisites and other personal benefits was less than
10% of total salary and bonus.
(2) As discussed under Item 13 of this Annual Report on Form 10-K, Messrs.
Lepper and Parry are the partners of the partnership that is the Company's
landlord at its offices at 119 Despatch Drive, East Rochester, New York,
for which a total rent of $90,000 was paid by the Company during the fiscal
year ended June 30, 1998.
The officers participate in ordinary employee benefits made available to the
Company's other employees. Except for participation in the Company's 401(k)
retirement savings plan, the Company does not have any retirement program for
officers or other employees.
22
<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. Outside Directors receive $500.00 per meeting.
Stock Options
During the fiscal year ended June 30, 1998, no options were granted to
officers or directors of the Company and no options held by any director or
officer were exercised.
The following table sets forth information with respect to the named
executive officers concerning the unexercised options held by them as of June
30, 1998. The value of the underlying Common Stock was determined by taking the
mean between the bid and asked prices of the Common Stock on the OTC Bulletin
Board (which was $1.86 pr share), minus the exercise price.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at June 30, 1998 At June 30, 1998
----------------------------- -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Timothy Lepper 425,000 0 $726,750 0
Wayne N. Parry 425,000 0 $726,750 0
</TABLE>
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.
23
<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, 1998 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 521,960(1) 10.23%
18 Kilkenny Court
Fairport, NY 14450
Common Wayne N. Parry 499,400(2) 9.79%
27 Fall Meadow Dr.
Pittsford, NY 14534
Common Mark Boyer 665,500(3) 13.25%
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 1,686,860(1)(2)(3) 33.09%
group (3 individuals)
</TABLE>
(1) Included 425,000 shares purchasable by Mr. Lepper pursuant to an option
described in Item 11 above.
(2) Included 425,000 shares purchasable by Mr. Parry pursuant to an option
described in Item 11 above.
(3) 578,000 of the shares attributed to Mr. 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.
24
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a brief description of each transaction, or series of
similar transactions, since the beginning of the Company's fiscal year ended
June 30, 1998, or any currently proposed transaction, or series of similar
transactions, to which the Company or its subsidiary, Vertex, was or is to be a
party, in which the amount involved exceeds $60,000 and in which any of the
following persons had, or will have, a direct or indirect material interest: any
director or executive officer of the Company, any nominee for election as a
director, any security holder who is known to the Company to own of record or
beneficially more than 5% of the Company's Common Stock, and any member of the
immediate family of any of the foregoing persons.
As of July 1, 1994 CW Truck, a former subsidiary of the Company (see Item 1
of this Annual Report on Form 10-K) entered into a five year lease of office
space and warehouse facilities in East Rochester, NY with Vertex Investment
Partners, a partnership whose partners are Timothy Lepper (now the President and
Chief Executive Officer of the Company) and Wayne N. Parry (now the President of
the Company's subsidiary, Vertex). The lease provides for annual rental payments
of $90,000. This lease has been extended and will expire as of June 30, 2000.
During the year ended June 30, 1996 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. No such expenses were incurred for the years ended
June 30, 1998 and 1997.
During the year ended June 30, 1996 the Company paid rent to an officer and
employee of a Company subsidiary of $14,000. No such expenses were incurred for
the years ended June 30, 1998 and 1997.
During the years ended June 30, 1998, 1997 and 1996, the Company received
management fees from a company controlled and 49% owned by two officers of the
Company totaling $57,000, $89,000 and $58,000, respectively.
None of the persons covered by this Item 13 (and no trust or estate in
which any of them has any beneficial interest or serves as trustee or in any
similar capacity) has been indebted to the Company since the beginning of the
Company's fiscal year ended June 30, 1998 other than for ordinary advances for
travel or other expenses in the ordinary course of business.
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 are filed as part of this report.
3. Exhibits
None
(b) 1. Reports on Form 8-K
There were no form 8-K filings during the last quarter of the period
covered by this report.
25
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1998, 1997 AND 1996
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditor's Report...........................................................................F-2
Consolidated Balance Sheets - June 30, 1998 and 1997...................................................F-3
Consolidated Statements of Operations - For the Years Ended June 30, 1998, 1997 and 1996...............F-4
Consolidated Statement of Stockholders' Equity (Deficit) - For the Period from July 1, 1995
through June 30, 1998............................................................................F-6
Consolidated Statements of Cash Flows - For the Years Ended June 30, 1998, 1997 and 1996...............F-7
Notes to Financial Statements..........................................................................F-9
</TABLE>
F-1
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three year period ended June 30, 1998 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.
\s\HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
August 14, 1998
F-2
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
---------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 6,000 $ 10,000
Accounts receivable, net 5,548,000 4,009,000
Accounts receivable - officers and employees 4,000 39,000
Accounts receivable - other 108,000 8,000
Carrier advances 13,000 16,000
Prepaid expenses 38,000 49,000
---------- ----------
Total current assets 5,717,000 4,131,000
PROPERTY AND EQUIPMENT, net 263,000 110,000
OTHER ASSETS:
Deposits 34,000 8,000
Excess of purchase price over fair value of net assets
acquired, net 2,518,000 2,638,000
---------- ----------
Total assets $8,532,000 $6,887,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ -- $ 160,000
Accounts payable and accrued liabilities 5,088,000 4,612,000
Liabilities in excess of assets of discontinued
subsidiary 150,000 404,000
Liabilities in excess of assets of discontinued
operations -- 123,000
----------- -----------
Total current liabilities 5,238,000 5,299,000
LONG-TERM DEBT, LESS CURRENT PORTION 2,514,000 1,748,000
----------- -----------
Total liabilities 7,752,000 7,047,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 8 and 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000,000 share
authorized, issuable in series, none issued -- --
Common stock, $.10 par value, 6,000,000
shares authorized, 4,248,000 shares issued and
outstanding at June 30, 1998 and 1997 425,000 425,000
Additional paid-in capital 8,110,000 8,110,000
Retained earnings (deficit) (7,755,000) (8,695,000)
----------- -----------
Total stockholders' equity (deficit) 780,000 (160,000)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 8,532,000 $ 6,887,000
=========== ===========
</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,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET REVENUES:
Transportation revenue $ 34,283,000 $ 34,035,000 $ 47,356,000
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Purchased transportation 30,068,000 26,521,000 33,044,000
Salaries and related expenses 1,984,000 3,579,000 5,653,000
Operating expenses 208,000 2,695,000 4,786,000
Revenue equipment rentals -- 819,000 1,884,000
General supplies and expenses 845,000 1,380,000 2,336,000
Depreciation and amortization 172,000 2,632,000 1,256,000
(Gain) loss on disposition of assets -- 508,000 (19,000)
------------ ------------ ------------
Total operating costs and expenses 33,277,000 38,134,000 48,940,000
------------ ------------ ------------
OPERATING INCOME (LOSS): 1,006,000 (4,099,000) (1,584,000)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (197,000) (435,000) (741,000)
Interest income -- 1,000 33,000
Other, net 80,000 15,000 (36,000)
Loss on sale of business division -- -- (222,000)
------------ ------------ ------------
Total other income (expense) (117,000) (419,000) (966,000)
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES,
DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEM: 889,000 (4,518,000) (2,550,000)
PROVISION FOR INCOME TAX (EXPENSE)
BENEFIT 51,000 (63,000) (2,000)
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 940,000 (4,581,000) (2,552,000)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued business segments, net
of applicable income tax (expense) benefit
of $0 and ($329,000) for the years ended
June 30, 1997 and 1996, respectively -- (15,000) (1,288,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 940,000 (4,596,000) 3,840,000
Gain on forgiveness of debt of discontinued
operations, net of applicable income tax
expense of $1,630,000 (Note 8) -- -- 2,370,000
Gain on forgiveness of debt of discontinued
subsidiary, net of applicable income tax
expense of $0 (Note 7) -- 898,000 --
------------ ------------ ------------
NET INCOME (LOSS) $ 940,000 $ (3,698,000) $ (1,470,000)
============ ============ ============
</TABLE>
(Continued)
F-4
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
---------------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
BASIC INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ 0.22 $ (2.94) $ (2.66)
Discontinued operations -- (0.01) (1.34)
Extraordinary item -- 0.57 2.47
------- -------- --------
Basic income (loss) per common share $ 0.22 $ (2.38) $ (1.53)
======= ======== ========
DILUTED INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ 0.19 $ (2.94) $ (2.66)
Discounted operations -- (0.01) (1.34)
Extraordinary item -- 0.57 2.47
------- -------- --------
Diluted income (loss) per common share $ 0.19 $ (2.38) $ (1.53)
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM JULY 1, 1995 THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
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, 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)
Net income -- -- -- -- 940,000 940,000
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 1998 4,248,000 $ 425,000 $ -- $ 8,110,000 $(7,755,000) $ 780,000
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing
operations $ 940,000 $(4,581,000) $(2,552,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 173,000 2,632,000 1,256,000
(Gain) loss on disposition of assets -- 508,000 (19,000)
Loss on disposal of business
divisions -- -- 222,000
Provision for uncollectible accounts
receivable -- 9,000 (76,000)
(Increase) decrease in:
Accounts receivable (1,540,000) 236,000 1,332,000
Accounts receivable - officers and
employees 35,000 -- (46,000)
Accounts receivable - other (100,000) -- --
Carrier advances 3,000 54,000 204,000
Inventories -- 7,000 2,000
Prepaid expenses 10,000 274,000 92,000
Deposits (25,000) (63,000) (58,000)
Increase (decrease) in:
Accounts payable and accrued
liabilities 476,000 239,000 757,000
Liabilities in excess of assets of
discontinued subsidiary (254,000) 404,000 --
----------- ----------- -----------
Net cash provided by (used in)
operating activities from continuing
operations (282,000) (281,000) 1,114,000
----------- ----------- -----------
Net loss from discontinued operations -- (15,000) (1,288,000)
Depreciation and amortization -- -- 8,000
Loss on disposition of assets -- -- 14,000
Changes in operating assets (123,000) (54,000) 274,000
----------- ----------- -----------
Net cash used in operating activities
from discontinued operations (123,000) (69,000) (992,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (206,000) (130,000) (408,000)
Proceeds from disposal of property and
equipment -- 175,000 3,028,000
Proceeds from disposal of business division -- -- 70,000
----------- ----------- -----------
Net cash provided by (used in) investing
activities (206,000) 45,000 2,690,000
----------- ----------- -----------
</TABLE>
(continued)
F-7
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
For The Years Ended June 30,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Principal payments on borrowings (33,096,000) (45,619,000) (58,954,000)
Cash borrowings from line of credit 33,703,000 44,261,000 56,151,000
Payments on notes payable -- -- (29,000)
Sale of common stock, net -- 1,636,000 --
------------ ------------ ------------
Net cash provided by (used in) financing
activities 607,000 278,000 (2,832,000)
------------ ------------ ------------
DECREASE IN CASH (4,000) (27,000) (20,000)
CASH, at beginning of year 10,000 37,000 57,000
------------ ------------ ------------
CASH, at end of year $ 6,000 $ 10,000 $ 37,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 288,000 $ 451,000 $ 719,000
============ ============ ============
Income taxes $ 38,000 $ 45,000 $ 47,000
============ ============ ============
Non-cash investing and financing
transactions:
Purchase of property and equipment
with debt or reduction of
receivable $ -- $ -- $ 3,316,000
============ ============ ============
Property and equipment sold for the
assumption of notes payable $ -- $ 2,544,000 $ --
============ ============ ============
Net liabilities surrendered in
connection with disposal of
subsidiary $ -- $ 943,000 $ --
============ ============ ============
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. 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.
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.
Carrier Advances - The Company periodically advances funds to carriers
during the normal course of business. Carriers are advanced funds for
expenses incurred during trips. All such advances are offset against total
amounts due upon settlement with the carriers.
Property and Equipment - 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. Leasehold improvements are amortized
over the shorter of the useful life or term of the lease.
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 betterments are capitalized. Maintenance and
repairs expense for the years ended June 30, 1998, 1997 and 1996 were
$8,229, $229,000 and $518,000, respectively.
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 $480,000 and $360,000 at June 30, 1998 and
1997, respectively. The carrying value of goodwill is evaluated at least
annually.
F-9
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 long-lived 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.
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.
Stock Based Compensation - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB25) and related interpretations in accounting for its employee stock
options. In accordance with FASB Statement No. 123 "Accounting for Stock-
Based Compensation" (FASB123), the Company will disclose the impact of
adopting the fair value accounting of employee stock options. Transactions
in equity instruments with non-employees for goods or services have been
accounted for using the fair value method as prescribed by FASB123.
Income (Loss) Per Common and Common Equivalent Shares - In February 1997,
the Financial Accounting Standards Board issued a new statement titled
"Earnings per Share" ("FASB128"). The new statement is effective for both
interim and annual periods ending after December 15, 1997. FASB128 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. Common stock equivalents for the years ending June 30, 1997
and 1996 were anti-dilutive and excluded in the earnings per share
computation.
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.
F-10
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 amounts 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 and recoverability of goodwill. 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.
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,
1998 and 1997.
Impact of Recently Issued Standards - The Financial Accounting Standards
Board has issued Statement of Financial Accounting Standards 130,
"Reporting Comprehensive Income" and Statement of Financial Accounting
Standards 131 "Disclosures About Segments of an Enterprise and Related
Information." Statement 130 establishes standards for reporting and display
of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, Statement 130 requires that all components of
comprehensive income shall be classified based on their nature and shall be
reported in the financial statements in the period in which they are
recognized. A total amount for comprehensive income shall be displayed in
the financial statements where the components of other comprehensive income
are reported. Statement 131 supersedes Statement of Financial Accounting
Standards 14 "Financial Reporting for Segments of a Business Enterprise."
Statement 131 establishes standards on the way that public companies report
financial information about operating segments in annual financial
statements issued to the public. It also establishes standards for
disclosures regarding produces and services, geographic areas and major
customers. Statement 131
F-11
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.
Statements 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Results of operations and financial position
will be unaffected by implementation of these standards.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued in February 1998. This statement
revises the disclosure requirement for pensions and other postretirement
benefits. This statement is effective for the Company's financial
statements for the year ended June 30, 1999 and the adoption of this
standard is not expected to have a material effect on the Company's
financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the
Company's financial statements for the year ended June 30, 2001 and the
adoption of this standard is not expected to have a material effect on the
Company's 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. MERGERS, ACQUISITIONS, AND DIVESTITURES:
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 year ended
June 30, 1996 were $1,204,000 and the operating loss for the same period
was $319,000.
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.
Revenue for the division for the year ended June 30, 1996 was $588,000 and
operating income (losses) for the same year was $(24,000).
F-12
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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.
3. ACCOUNTS RECEIVABLE:
Accounts receivable, net of allowance for doubtful accounts, amounted to
$5,548,000 and $4,009,000, at June 30, 1998, and 1997, respectively. The
Company performs periodic credit evaluation of its customers' financial
condition and generally does not require collateral. The Company has
recorded an allowance for doubtful accounts of $75,000 at June 30, 1998 and
1997 which has been netted against the related accounts receivable.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
JUNE 30,
----------------------- ESTIMATED
1998 1997 USEFUL LIVES
--------- --------- --------------
Furniture and office equipment $ 268,000 $ 144,000 4 to 5 years
Leasehold improvements 154,000 72,000 life of lease
--------- ---------
422,000 216,000
Less accumulated depreciation and
amortization (159,000) (106,000)
--------- ---------
$ 263,000 $ 110,000
========= =========
During the years ended June 30, 1998, 1997 and 1996, the Company recorded
depreciation expense of $53,000, $446,000 and $1,040,000, respectively.
F-13
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consisted of the following:
JUNE 30,
----------------------------
1998 1997
---------- ----------
Accounts payable $2,913,000 $2,331,000
Accrued purchased transportation 1,948,000 1,448,000
Other accrued expenses 227,000 833,000
---------- ----------
$5,088,000 $4,612,000
========== ==========
6. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
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, 1998), collateralized by substantially all
assets of Vertex Transportation $ 2,514,000 $ 1,748,000
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 -- 160,000
----------- -----------
2,514,000 1,908,000
Less current portion -- (160,000)
----------- -----------
$ 2,514,000 $ 1,748,000
=========== ===========
</TABLE>
The $2,514,000 note at June 30, 1998 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, 1998, the Company was not
in compliance with certain covenants. Subsequent to June 30, 1998, the
Company received a waiver from the commercial bank with regards to those
items.
F-14
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of notes payable and long term debt are as follows:
YEAR ENDED
JUNE 30, AMOUNT
-------- ------
1999 $ --
2000 2,514,000
----------
Total $2,514,000
==========
7. 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 of CWTS and CW Truck to Mid-Cal Express, Inc., a wholly owned
subsidiary of Prime Companies, Inc., 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, 1998, the remaining balance on these
obligations is approximately $4,398,000 and expire through April 30, 2001.
Prime Companies, Inc. had net losses of $843,000 and $695,000 for the six
months ended June 30, 1998 and the year ended December 31, 1997,
respectively. As of June 30, 1998, Mid-Cal Express, Inc. was current in
most of its payments on the notes and leases. The Company's management
believes that Mid-Cal Express, Inc., will be able to meet its obligations
related to the notes payable and leases.
Revenues for CW Truck for the years ended June 30, 1997 and 1996 were
$7,590,000 and $22,747,000, respectively and operating losses for the same
periods were $1,956,000 and $2,634,000, respectively.
8. 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
F-15
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During the years ended June 30, 1998, 1997 and 1996 the Company's product
sales segment generated a net loss before income tax benefit of $0, $15,000
and $959,000, respectively, as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
REVENUE $ -- $ -- $ 4,307,000
------------ ----------- -----------
EXPENSES:
Cost of sales -- -- 3,977,000
Salaries and related expenses -- -- 460,000
Operating expenses -- -- 134,000
General supplies and expenses -- -- 116,000
Depreciation and amortization -- -- 8,000
Interest, net -- -- 171,000
Other -- 15,000 400,000
------------ ----------- -----------
Total expenses -- 15,000 5,266,000
------------ ----------- -----------
Loss before income tax (expense)
benefit $ -- $ (15,000) $ (959,000)
============ =========== ===========
</TABLE>
Revenue applicable to the discontinued product sales segment was
approximately $4,307,000, for the year ended June 30, 1996. There were no
revenues for the years ended June 30, 1998 or 1997.
F-16
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES:
Lease Commitments - Minimum lease commitments under noncancelable operating
lease agreements are as follows:
OPERATING
YEAR ENDING JUNE 30, LEASES
-------------------- ----------
1999 $142,000
2000 142,000
2001 17,000
2002 --
2003 --
Thereafter --
--------
Total minimum lease payments $301,000
========
Rental expense for all operating leases consisted of the following:
YEAR ENDED JUNE 30,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
Revenue equipment rentals $ 37,000 $ 833,000 $1,884,000
Terminal, warehouse, and
office rentals 104,000 215,000 204,000
Other equipment rentals 9,000 21,000 13,000
---------- ---------- ----------
$ 150,000 $1,069,000 $2,101,000
========== ========== ==========
Employment Contract - The Company and certain of its subsidiaries have
employment contracts with various officers with remaining terms up to one
year. 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, 1998, excluding bonuses, was approximately $500,000.
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
February 27, 1996. The customer additionally filed a cross claim against
the Company. On February
F-17
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24, 1997, the Company agreed to pay the customer and entered into a
promissory note for $659,000. As of June 30, 1998, the Company had paid off
the note. 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 had accrued $100,000 which represents the deductible on
the insurance policy.
10. 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.
During the years ended June 30, 1997 and 1996, options for 23,900 and
50,000 shares, respectively were canceled.
On May 19, 1997, the Company granted options for 850,000 shares with an
exercise price of $0.15 per 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.
No stock options were issued in 1998.
F-18
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Balance, July 1, 1995 73,900 $17.50
Granted -- --
Canceled 50,000 18.10
------- ------
Balance, June 30, 1996 23,900 16.25
Granted 850,000 0.15
Canceled 23,900 16.25
------- ------
Balance, June 30, 1997 850,000 0.15
Granted -- --
Canceled -- --
------- ------
Balance, June 30, 1998 850,000 $ 0.15
======= ======
</TABLE>
PRO FORMA INFORMATION
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FAS123 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
FAS123, 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)
=============
During the fiscal years ending June 30, 1998 and 1996, the Company did not grant
options. As a result, there would be no effect on the Company's net income
(loss) or net income (loss) per share.
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-19
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EARNINGS PER SHARE:
The following represents the calculation of earnings per share:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING JUNE 30,
----------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income (loss) from continuing
operations $ 940,000 $(4,581,000) $(2,552,000)
Less - preferred stock
dividends -- -- --
----------- ----------- -----------
Income from continuing
operations applicable to
common shareholders $ 940,000 $(4,581,000) $(2,552,000)
=========== =========== ===========
Weighted average number
of common shares 4,248,100 1,556,000 960,000
=========== =========== ===========
Basic income (loss) per share
from continuing operations $ 0.22 $ (2.94) $ (2.66)
=========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing
operations applicable to common
shareholders $ 940,000 $(4,581,000) $(2,552,000)
Add:
Preferred stock divided -- -- --
----------- ----------- -----------
Income (loss) from continuing
operations for diluted earnings
per share $ 940,000 $(4,581,000) $(2,552,000)
=========== =========== ===========
Weighted average number of
shares used in calculating basic
earnings per common share 4,248,100 1,556,000 960,000
Add:
Common equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise of
options 750,917 -- --
----------- ----------- -----------
Weighted average number of
shares used in calculation of
diluted earnings per share 4,999,017 1,556,000 960,000
=========== =========== ===========
Diluted income (loss) per share
from continuing operations $ 0.19 $ (2.94) $ (2.66)
=========== =========== ===========
</TABLE>
F-20
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
Income tax benefit (expense) for the years ended June 30, 1998, 1997, and
1996 are comprised of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- -----------
Year ended June 30, 1998
<S> <C> <C> <C>
Federal $ (2,000) $ -- $ (2,000)
State 53,000 -- 53,000
----------- ----------- -----------
$ 51,000 $ -- $ 51,000
=========== =========== ===========
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)
=========== =========== ===========
</TABLE>
F-21
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Computed
"expected" tax
benefit
(expense) $ (323,000) (34.0) $ 1,236,000 34.0 $ (167,000) (34.0)
State income
taxes, net of
Federal income
tax benefit (6,000) (.6) (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 (9,000) (.9) (730,000) (20.0) 127,000 25.8
Realization of
tax benefits -- -- -- -- (1,959,000) (398.7)
Effect of
alternative
minimum tax (2,000) (.2) -- -- -- --
State tax refund 21,000 2.2 -- -- -- --
Change in
valuation
allowance due
to liquidation
of subsidiary -- -- (524,000) (14.4) -- --
Effect of valuation
allowance 370,000 38.9 -- -- --
----------- ----- ----------- ----- ----------- -----
$ 51,000 (5.4) $ (63,000) (1.7) $(1,961,000) (399.2)
=========== ===== =========== ===== =========== ======
</TABLE>
F-22
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset recognized as of June 30, 1998
and 1997, are as follows:
JUNE 30
----------------------------
1998 1997
----------- ------------
Current Deferred Tax Assets (Liabilities)
Insurance reserve $ 2,000 $ 2,000
Vacation accrual reserve 7,000 7,000
Other 1,000 2,000
Bad debt reserve 30,000 30,000
Other reserves -- 84,000
Accrued assessment and claims 74,000 161,000
Prepaid insurance (3,000) (11,000)
----------- -----------
111,000 275,000
Valuation allowance (111,000) (275,000)
----------- -----------
Net current deferred tax asset $ -- $ --
=========== ===========
Long-term Deferred Tax Assets (Liabilities)
Depreciation $ 11,000 $ 5,000
Amortization (173,000) (146,000)
AMT tax credit carryforward 27,000 23,000
Net operating loss carryforward 4,408,000 2,538,000
----------- -----------
4,273,000 2,420,000
Valuation allowance (4,273,000) (2,420,000)
----------- -----------
Net long-term deferred tax asset $ -- $ --
=========== ===========
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 7), 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 8).
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
F-23
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deductible for tax purposes.
As of June 30, 1998, the Company has available net operating loss
carryforwards for federal and state purposes of $11,529,000 and $5,431,000,
respectively. The net operating losses begin to expire in 2005 for federal
and 2012 for New York. 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:
During the year ended June 30, 1996 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. No such expenses were incurred for the
years ended June 30, 1998 and 1997.
During the years ended June 30, 1998, 1997 and 1996, the Company paid rent
to a company controlled by two officers of the Company totaling $90,000,
$95,000, and $93,000, respectively. The lease expires June 30, 2000.
During the year ended June 30, 1996 the Company paid rent to an officer and
employee of a Company subsidiary of $14,000. No such expenses were incurred
for the years ended June 30, 1998 and 1997.
During the years ended June 30, 1998, 1997 and 1996, the Company received
management fees from a company controlled and 49% owned by two officers of
the Company totaling $57,000, $89,000 and $58,000, 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, 1998, 1997 and 1996.
F-24
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998 1997 1996
-------------- ------------- -------------- --------------
A 31% 25% 19%
B 11% 10% --
C -- -- 12%
At June 30, 1998, approximately $2,700,000 or 49% of the Company's accounts
receivable were due from two customers.
F-25
<PAGE>
COUNTRY WIDE TRANSPORT SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Schedule II
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, 1998:
Accumulated amortization -
Goodwill $ 360,000 $ 120,000 $ -- $ 480,000
Allowance for doubtful
accounts 75,000 -- -- 75,000
For the year ended June 30, 1997:
Accumulated amortization -
Goodwill $ 599,000 $2,187,000 $2,426,000 $ 360,000
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
</TABLE>
S-1
<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 September 25, 1998.
Country Wide Transport Services, Inc.
By: /s/Timothy Lepper
Timothy Lepper, President
Chief Executive Officer
Chief Financial Officer
and Principal Accounting Officer
<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 September
25, 1998.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/Timothy Lepper Chairman, President September 25, 1998
- ------------------------- CEO, Director
Timothy Lepper
/s/Mark Boyer Director September 25, 1998
- -------------------------
Mark Boyer
/s/Wayne N. Parry Secretary, Director September 25, 1998
- -------------------------
Wayne N. Parry
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 5,735
<ALLOWANCES> 75
<INVENTORY> 0
<CURRENT-ASSETS> 5,717
<PP&E> 421
<DEPRECIATION> 158
<TOTAL-ASSETS> 8,532
<CURRENT-LIABILITIES> 5,238
<BONDS> 0
0
0
<COMMON> 425
<OTHER-SE> 355
<TOTAL-LIABILITY-AND-EQUITY> 8,532
<SALES> 34,283
<TOTAL-REVENUES> 34,363
<CGS> 30,212
<TOTAL-COSTS> 32,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> 889
<INCOME-TAX> (51)
<INCOME-CONTINUING> 940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 940
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.19
</TABLE>
