SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934 [Fee Required]
For the Fiscal Year ended June 30, 1996
Commission File No. 0-18729
CONTINENTAL AMERICAN TRANSPORTATION, INC.
Name of Small Business Issuer in its Charter
COLORADO 84-1099599
State or Other Jurisdiction of IRS Employer Identification
Incorporation or Organization Number
495 Lovers Lane, Calhoun, Georgia 30701
Address of Principal Executive Offices Zip Code
(706) 629-8682
Issuer's telephone Number, Including Area Code
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock Over the Counter (OTC)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of Securities Exchange Act
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in
this Form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ ]
Registrant's' revenues for the fiscal year ended June 30, 1996
were $36,801,423
The aggregate market value of voting stock held by non-
affiliates of the registrant as of October 4, 1996, was
$8,487,581 (based upon $2.995 per share being the average bid
and asked prices on that date as reported by the Electronic
Bulletin Board of the National Association of Securities
Dealers, Inc.). In making this calculation, registrant has
assumed, without admitting for any purpose, that all executive
officers, directors, employees of registrant, as well as any
entities they control, and no other persons, are affiliates.
<PAGE>
CONTINENTAL AMERICAN TRANSPORTATION, INC.
CONTENTS
PART I. Page
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a
Vote of Security Holders 13
PART II.
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 14
Item 6 Managements' Discussion and
Analysis or Plan of Operation 19
Item 7. Financial Statements and
Supplementary Data 25
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 25
PART III.
Item 9. Directors and Executive Officers
of the Registrant 27
Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain
Beneficial Owners and Management 33
Item 12. Certain Relationships and
Related Transactions 34
PART IV.
Item 13. Exhibits, Financial Statement
Schedules, and Reports on 8-K 36
<PAGE>
PART I
Item 1: Business
General
Continental American Transportation, Inc. (the "Company"), a
Colorado corporation organized in 1983, has its principal corporate
offices located in Calhoun, Georgia, which is also the location of
its largest, wholly owned subsidiary, Carpet Transport, Inc.
("CTI"). In addition, the Company has two other wholly owned
operating subsidiaries, Chase Brokerage, Inc. ("Chase"), located in
Palatka, Florida, and Blue Mack Transport, Inc. ("Blue Mack"),
located in Pottstown, Pennsylvania. Collectively, the Company and
its subsidiaries operate a national non-union full and less than
truckload carrier and freight brokerage and logistics business.
The substantial majority of the Company's business is operated by
CTI which primarily transports carpet goods, textiles, and produce.
CTI utilizes eighteen terminals to consolidate shipments for the
carpet and textile manufacturing industry. Blue Mack is a short to
medium-haul, dry van and refrigerated full truckload carrier
operating primarily east of the Mississippi River, from the States
of Maine to Florida. Blue Mack transports general commodities,
including consumer goods, packaged foodstuffs, and paper, plastic,
and beverage products. Chase operates a freight brokerage and
logistics business from its principal offices located in Palatka,
Florida.
Historically, the Company has focused on acquisitions to
achieve growth and to provide existing customers of the acquired
entities with a high quality of service with the goal of obtaining
sustained and predictable long term business growth. The Company's
business expansion strategy is to continue to increase its business
with its existing customer base and to make selective acquisitions.
The Company's acquisitions record is indicative of its
business growth strategy. In June, 1995, the Company acquired Blue
Mack of Pottstown, Pennsylvania by means of a reverse merger
acquisition. Also, in June, 1995, the Company purchased certain
revenue equipment from Herr's Motor Express, Inc., doubling the
size of the Company's then existing revenue equipment. On April 4,
1996, effective on February 29, 1996 the Company completed its
acquisition of CTI, Chase and the affiliated company, A&P
Transportation, Inc., since merged into CTI.
This document may contain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. See "General", "Strategy and Operations", "Revenue
Equipment" and "Competition" in this Item, and "Management's
Discussion and Analysis or Plan of Operation" in Part II, Item 6.
<PAGE>
Strategy and Operations
To serve its customers in the carpet and textile manufacturing
industry, the Company has a network of regional terminals and
offices strategically located throughout the United States. In the
Western United States, the Company has terminals located in Tulsa,
Oklahoma and in San Antonio, Houston and Dallas, Texas.
In the Eastern United States, the Company has terminals
located in Canadaigua, New York, Pottstown, Pennsylvania,
Philadelphia and Pittsburgh, Pennsylvania, Baltimore Maryland and
Richmond, Virginia.
The Company's terminals in the Southern United States are
located in Greensboro, North Carolina, Monroe, Louisiana, Port
Allen Louisiana, Mobile, Alabama, Memphis, Tennessee, Kingsport,
Tennessee, and in Tampa, Orlando, Jacksonville, and Miami, Florida.
The current network of terminals enables the Company to
respond more rapidly to customers' changing distribution
requirements. This network also permits the Company to expedite
the maintenance of its equipment on a regional basis and to
purchase fuel in bulk. All of the Company's terminals have
terminal managers who work and coordinate their activities with the
fleet managers, customer service representatives and dispatchers as
well as oversee the needs of the Company's drivers.
This network of terminals provides the Company with the
ability to principally serve its carpet manufacturing customers in
accordance with their traditional distribution requirements. The
Company, however, in an effort to more fully utilize its revenue
generating equipment resources on their return or back-haul trips
from western points such as from the Seattle, Portland, San
Francisco and Los Angeles metropolitan areas, has recently signed
a letter of intent to acquire a California-based transportation
company, Country Wide Transport Services, Inc. ("Country Wide").
Country Wide Truck Service, Inc., based in Corona, California, is
an irregular-route truckload common and contract carrier which
transports temperature-controlled commodities throughout the United
States and Canada from its terminal base in southern Califoronia.
Vertex Logistics, Inc., a subsidiary of Country Wide, based in
Rochester, New York, is a freight brokerage operation providing
logistics management services to producers of consumer and durable
goods. In the event the Company's acquisition of Country Wide is
successfully completed, the Company will then have integrated a
western terminal center with which to provide customer
transportation needs for routes coming east, resulting in more
productive "round-trip" utilization of the Company's revenue
generating equipment.*
* May contain "forward-looking statements".
<PAGE>
The Company focuses on the marketing of its services to the
large carpet manufacturers located in the southeast region of the
United States. The Company's services to these customers include
multiple drops; appointment pick-ups and deliveries; assistance in
loading and unloading; dedicated equipment with extra trailers that
can be located for the convenience of customers, and; the
assignment of particular drivers and equipment to prescribed
routes, providing better service to customers while maintaining a
high equipment utilization.
The Company has signed an agreement to purchase the Innovative
Computer System software and IBM hardware in order to automate the
operational and administrative functions of CTI. Management
anticipates improved informational resources and internal controls
as a result of this system. This management information system is
already installed and fully implemented in the Company's
subsidiary, Blue Mack. Once the system is installed and
implemented in CTI, the Company anticipates integration of the
operations of CTI and Blue Mack in order to improve utilization of
its revenue equipment and a reduction of administrative personnel.*
The Company is purchasing a fully integrated computer network,
"Qualcomm onboard" with planned installation over the next several
years; this communications system shall include mobile
communications terminals that will be installed on 500 of the
Company's tractors. This system, together with its specialized
licensed software, will link the tractor drivers with the Company's
headquarters in Calhoun, Georgia, via satellite at any time except
from 10:00 PM to 3:00 AM Pacific Time during the 7 day week. With
its system of code buttons, this communications equipment will
enable drivers to inform their dispatchers of the status of their
route performance and, in cases of emergency, their need for
immediate assistance. The Company believes this communications
system will enhance driver retention, improve equipment utilization
and provide for better customer service.*
** May contain "forward-looking statements".
<PAGE>
Revenue Equipment
The Company acquires premium tractors to assist in the hiring
and retention of qualified drivers, to promote safety and minimize
maintenance and the costs of repair.
The following table shows the number of units and age of
revenue equipment operated by the Company at June 30, 1996:
Refrigerated
Model Year Tractors Trailers Trailers
1996 0 55 0
1995 241 160 71
1994 176 0 0
1993 156 50 0
1992 20 227 55
1991 21 134 77
1990 17 324 20
1989 43 134 0
1988 and
prior 59 297 41
Total 733 1,381 264
The Company seeks to minimize its operating costs by
maintaining a relatively new fleet and to replace existing
equipment every 36 months after their respective dates of purchase.
The Company selects and purchases its tractors based upon a number
of factors, including technological engine enhancements, fuel
efficiency, the used equipment market and financing costs. The
Company maintains a comprehensive maintenance program at its
Calhoun, Georgia headquarters that seeks to minimize down time and
maintain the value of its equipment. The Company expects to retain
an adequate inventory of specialized trailers in order to continue
to provide specialized services to existing and future customers
requiring such equipment.
The Company owns and primarily operates Freightliner and
Kenworth Tractors, the majority of which are powered by Detroit
Diesel electronically controlled engines which seek to decrease
fuel consumption and control speed. The Company utilizes its
refrigerated trailers to service its west coast produce customers
as well as its east coast foodstuff/commodities customers.
<PAGE>
Marketing and Customers
The Company continues to target the large carpet manufacturers
located in the southeast region of the United States as the
principal source of its business. CTI has been serving these
customers for over 20 years and has been able to retain these
customers based upon its record of quality and responsive service;
timely deliveries; assistance in loading and unloading;
availability of extra equipment to service the needs of these
customers, and; the utilization of Company employee drivers and
Company owned equipment as opposed to significant reliance upon
owner-operators. The Company intends to continue to rely upon
these well-established service and equipment priorities in order to
expand its market share in the carpet manufacturing industry.
The Company maintains its strong commitment to customer
relations and marketing and assigns a member of its management team
to each of its largest customers in order to provide the maximum
amount of customer support. CTI, A&P, and Chase (Collectively, the
"CTI Companies) accounted for $26,587,530 in revenue for the last
four months of fiscal year 1996. The largest 25, 10, and 5
customers accounted for approximately 46.8%, 31.5%, and 20.8%
respectively, of the CTI Companies' revenues during fiscal year
1996. No customer accounted for more than 5% of the CTI Companies'
gross revenues during the last four months of fiscal year 1996.
The Company's Pennsylvania based subsidiary, Blue Mack had
gross revenues of $10,089,264 for the twelve months ending fiscal
year 1996. The largest 25, 10, and 5 customers accounted for
approximately 77.8%, 52.3% and 36.2%, respectively, of Blue Mack's
revenues during fiscal year 1996. No customer accounted for more
than 10% of Blue Mack's gross revenues during the last twelve
months of fiscal year 1996.
Drivers and Employees
The Company maintains a specialized staff at its Calhoun,
Georgia headquarters to recruit, train, support and retain its
employee drivers. Company drivers are chosen based upon specific
Company guidelines relating pimarily to safety history, driving
experience, road test evaluations, physical examinations as well as
mandatory drug and alcohol testing. Upon being hired, a Company
driver is trained at the Company's headquarters in Calhoun, Georgia
in all phases of the Company's operational and safety policies as
well as the fuel efficient operation of the Company's equipment.
All Company drivers must pass a safety test and have a current and
valid Commercial Driver's License.
The Company strives to retain its qualified driver employees
by providing new equipment and comfortable driver lounge/resting
facilities at its Calhoun, Georgia headquarters and at select
terminals across the United States. In addition, the Company's
driver employees have direct access to Company management and
<PAGE>
receive competitive wages and benefits designed to establish a
long-term employment relationship. For the 12-month period ended
June 30, 1996, the Company's approximate annual driver turnover
rate was 120%. The Company seeks to recognize its driver employees
who provide loyal and long-term superior service and who maintain
a good driving safety record by rewarding the drivers with semi-
annual pay increases of half of one penny per mile.
As of June 30, 1996, the Company employed 1,035 persons: 725
are drivers; 42 are in the maintenance department(s), and; 268 are
in the Company's management and administration. None of the
Company's employees are represented by a labor union.
Safety and Risk Management
The Company places its safety policy at the forefront of its
driver hiring and retention program. Drivers are constantly
trained on the operational features of all revenue equipment on an
ongoing basis with the principal emphasis on safety. The Company's
Director of Safety and his staff constantly communicates with
drivers on such matters as review of applicable laws and
regulations concerning speed, driving hours and equipment
inspections. If a driver is involved in any accident or emergency,
notwithstanding its scope or gravity, he is subject to a thorough
and routine safety interview and examination as well as to required
testing from which a report is prepared by the Company's Safety
Department. The Company implements all recommendations received
from its Safety Department based upon its review of trends and
accident reports.
Claims of loss in the Company's business consist primarily of
cargo loss and damage and auto liability. The Company maintains
liability insurance policies on its fleet equipment for personal
injury and property damage up to a maximum limit of $1,000,000 per
occurrence with a $5,000 deductible. The Company is self-insured
for workmen's compensation claims up to a maximum of $250,000 per
occurrence. Company management closely scrutinizes all claims and
actively participates in all claims adjustment matters. In the
case of any self-insured claims, Company management estimates the
approximate amount of the potential liability which are accrued as
liabilities on the Company's balance sheet.
Fuel
Increases in fuel prices or taxes could have a direct effect
on the Company's operating results if such increases are not
correspondingly passed on to the customer. Conversely, any such
increase in fuel prices or fuel taxes has the danger of increasing
the Company's customer billing prices to a point where such prices
could render the Company non competitive with other carriers who
compete for such customers' business. In such latter cases, the
Company may be forced to absorb most if not all of these increases
in order to maintain competitive customer billing rates. The
<PAGE>
Company stores fuel in underground tanks situated in its Calhoun,
Georgia facility and in aboveground storage tanks at select bulk
fueling terminals. In addition, the Company negotiates fuel
discounts with certain truck stop operators and other fuel
suppliers and, on occasion, purchases large bulk quantities of
fuel.
Regulation
The Company is regulated by the United States Department of
Transportation ("DOT") and by various state agencies. These
regulatory agencies have broad powers, generally governing
activities such as the authority to engage in motor carrier
operations, rates and charges, accounting systems, periodic
financial reporting, and certain mergers, consolidations, and
acquisitions. In addition, the trucking industry is subject to
regulatory and legislative changes such as increasingly stringent
environmental regulations which can affect the economics of the
industry at any time.
The Motor Carrier Act of 1980 significantly deregulated the
trucking industry and increased competition among motor carriers.
Following enactment of the Motor Carrier Act, applicants have
obtained DOT operating authority more easily, and interstate motor
carriers, such as the Company have been able to change their rates
more freely with less regulatory scrutiny and delay. In addition,
the Motor Carrier Act has also removed many route and commodity
restrictions on transportation of freight.
Interstate motor carrier operations are subject to safety
requirements prescribed by the DOT. Such matters as weight and
dimensions of equipment are also subject to federal and state
regulation. The DOT requires national driver's licenses for
interstate truck drivers.
The Company's motor carrier operations are also subject to
environmental laws and regulations, including laws and regulations
dealing with underground fuel storage tanks, the transportation of
hazardous materials, and other environmental matters. The Company
has initiated programs to comply with all applicable environmental
regulations. As part of its safety and risk management program,
the Company periodically performs an internal environmental review
to assist the Company achieve environmental compliance and avoid
environmental risk. The Company's main terminal facilities located
in Calhoun, Georgia were designed to contain and properly dispose
of hazardous substances and petroleum products used in connection
with the Company's business. The Company has rarely transported
environmentally hazardous substances and, to date, has experienced
no claims for hazardous substance shipments. In the event the
Company should fail to comply with applicable regulations, the
Company could be subject to substantial fines or penalties and to
civil or criminal liability.
<PAGE>
Seasonality
In the transportation industry, results of operations
generally show a seasonal pattern as customers reduce shipments
during and after the winter holiday season. The Company's
operating expenses also tend to be higher in the winter months
primarily due to increased operating costs in colder weather and
higher fuel consumption due to increased idle time.
Competition
The Company competes primarily with other regional, medium and
long-haul as well as national truckload carriers. Railroads and
air freight carriers also provide competition, but to a lesser
extent, to the Company. Company management believes that the most
significant competitive factors are pricing, service and the
availability of its revenue generating equipment to meet customers'
requirements. In general, the trucking industry has been
historically fragmented and highly competitive. A number of the
Company's competitors have greater financial resources, more
revenue generating equipment and transport a higher volume of
freight than the Company. In addition, the Company also competes
with other motor carriers for the services of drivers.
Item 2: Properties
The following table provides information regarding the
Company's regional terminals and offices:
Company Owned Monthly
Location Leased Lease Rate
Calhoun, Georgia Own
Pottstown, Pennsylvania Leased $5,200
Baltimore, Maryland Leased $9,234
Dallas, Texas Leased $3,378
Greensboro, North Carolina Leased $3,921
Houston, Texas Leased $4,231
Jacksonville, Florida Leased $3,115
Kingsport, Tennessee Leased $1,000
Memphis, Tennessee Leased $2,075
Miami, Florida Leased $8,897
Mobile, Alabama Leased $2,060
Monroe, Louisiana Leased $2,100
Orlando, Florida Own
Philadelphia, Pennsylvania Leased $3,781
Pittsburgh, Pennsylvania Leased $1,800
Port Allen, Louisiana Own
Richmond, Virginia Leased $7,500
San Antonio, Texas Leased $3,246
Tampa, Florida Own
Tulsa, Oklahoma Leased $6,405
<PAGE>
The Company's headquarters, principal place of business and
location of its main terminals are located on approximately 30.28
acres in Calhoun, Georgia. This property contains 33,015 square
feet of office space, 27,806 square feet of shop, tire and
maintenance facilities, 1,882 square feet for the employee-driver's
training and lounge facilities, and 129-bay loading dock facilities
and a 4-lane fueling center.
Blue Mack, the Company's wholly owned Pennsylvania subsidiary,
leases approximately 4.5 acres containing a building consisting of
4,000 square feet of office space, a 10-bay maintenance facility
and a 2,000 square foot warehouse located in Pottstown,
Pennsylvania from Mr. Timothy Holstein, an officer and director of
the Company, pursuant to a 5-year lease on a triple net basis, with
monthly rental payments of $5,200 per month.
As a result of its acquisition of certain assets from Wayne
and Robert Herr, the Company assumed a lease for the following
described terminal in New York State upon the terms stated:
Description: 18,000 square feet of storage, repair space
and 1,200 square feet office space located in a prefabricated
steel and masonry building situate on five (5) acres:
Location: Rt. 21, Canadaigua, New York;
Monthly Rent: $3,600;
Term: July 1, 1995 to June 30, 1997;
Item 3: Legal Proceedings
The Company is party to ordinary routine litigation incidental
to its business, primarily involving claims for personal injury or
property damage incurred in the transportation of freight. The
Company maintains insurance to cover liabilities in amounts in
excess of self-insured retentions.
The Company has learned that a former shareholder of the
Company filed a complaint with the Securities and Exchange
Commission alleging that the Company illegally canceled his stock
certificate being held in escrow. Following a thorough internal
audit, the Company has responded to this complaint alleging, among
other things, that this individual made a claim to these shares
without providing any proof of consideration or payment for them.
On the basis of this complaint, the Securities and Exchange
Commission is conducting a preliminary investigation into the
Company's past trading activities. Company management is fully
cooperating with this preliminary investigation and intends to
vigorously defend against this action.
<PAGE>
Charles B. Prater, an employee of the Company and one of the
former owners of the Company's wholly owned subsidiaries, Carpet
Transport, Inc., A&P Transportation, Inc. and Chase Brokerage, Inc.
(collectively the "CTI Companies"), is under indictment in a
pending criminal proceeding entitled United States of America v.
Charles B. Prater, et al., United States District Court, Northern
District of Georgia, Atlanta Division, Criminal Indictment No.
1:95-CR-460. The indictment charges Mr. Prater, along with certain
other parties, including Mr. Lynwood S. Warmack, a former employee
and co-owner of the CTI Companies, with the embezzlement of several
millions of dollars from the CTI Companies in addition to criminal
fraud and criminal tax evasion. In addition to the criminal
penalties provided by statute if convicted, the indictment seeks to
assess a forfeiture penalty against Mr. Prater and others in the
amount of approximately $363,000.
As part of the consideration paid to the sellers of the CTI
Companies, the Company issued 500,000 shares of its common stock to
Mr. Prater, rendering him the beneficial owner of record of more
than 5% of the Company's outstanding common stock. In order to
assist the Company following its acquisition of the CTI Companies,
the Company retained and continues to retain the services of
Charles Prater as an employee at will on a non-contractual basis.
A&P Transportation, Inc. ("A&P") was sued in a wrongful death
action in Federal Court in West Virginia prior to its acquisition
by the Company. Other claims have also been made against A&P
arising out of the same accident. Company management believes that
A&P's liability could exceed the $1,000,000 maximum limit coverage
provided by its current insurance policy. In the event the claims
arising out of this accident exceed this insurance coverage and A&P
is found liable therefor, the Company intends to seek
indemnification from the previous owners of A&P pursuant to the
provisions of the acquisition agreement that provides for such
relief.
Blue Mack Transport, Inc. v. Trustee for Mural Transport,
Inc.: Blue Mack commenced a core proceeding in the U.S. Bankruptcy
Court, Trenton, New Jersey, seeking the return of a $100,000 loan
it made to this debtor. Company management has recently learned
that the Bankruptcy Court has recognized this claim as valid.
Mural Transport, Inc. v. GMAC: The Company and Blue Mack are
defendants in a core proceeding in the U.S. Bankruptcy Court,
Trenton, New Jersey, in which GMAC seeks payment for and/or lease
payments allegedly due it as a result of the alleged utilization of
its revenue-generating equipment by these parties; the Company and
Blue Mack have, and continue to, vigorously prosecute their defense
against these claims. The Complainant has failed to specify any
specific amount of its claims against the Company and Blue Mack,
and Company has filed a motion for summary judgment in this matter.
<PAGE>
Trustee for Mural Transport, Inc. v. Continental American
Transportation, Inc., et al: The Company and Blue Mack are
defendants in a core proceeding in the U.S. Bankruptcy Court,
Trenton, New Jersey, in which the Trustee is suing on a $15,000
claim representing the alleged value of a piece of revenue
equipment allegedly in Defendants' possession.
Item 4: Submission of Matters To A Vote of Security Holders
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended June 30,
1996.
<PAGE>
PART II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters
(a) The Company's common stock is currently traded on the
Electronic Bulletin Board of the National Association of Securities
Dealers, Inc. under the symbol "COAW". The following is a summary
of the high and low bid information per share of the Company's
common stock as quoted during the two preceding fiscal years based
on information available to Company management:
Quarter Ended High Low
June 30, 1996 $ 4.75 $2.25
March 31, 1996 $ 3.87 $2.49
December 31, 1995 $ 6.55 $1.58
September 30, 1995 $12.14 $ .97
June 30, 1995 $ .375 $ .25
March 31, 1995 N/A N/A
December 31, 1994 N/A N/A
September 30, 1994 N/A N/A
June 30, 1994 N/A N/A
The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent
actual transactions.
(b) As of June 30, 1996, there were approximately 286 holders
of record of the Company's common shares.
(c)(1) The Company has not paid cash dividends on its common
stock in either of the two preceding fiscal years, and it is the
current intention of management to retain earnings to finance the
growth of the Company's business. Future payment of cash dividends
will depend upon the financial condition, results of operations,
and capital requirements of the Company as well as other factors
deemed relevant by the Board of Directors.
701. Recent Sales of Unregistered Securities
On July 10, 1995, the Company sold 90,909 of its common shares
to Potex Trust Reg., a Liechtenstein trust with offices located at
Aeulestrasse 5, FL 9490 Vaduz, for the purchase price of $2.75 per
share, or for an aggregate of $250,000. The offer and sale was
made pursuant to the exemptions from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Regulation S promulgated thereunder and memorialized in
an Offshore Securities Subscription Agreement between the Company
and Potex, dated July 10, 1995. The Company paid a commission to
its placement agent, Mr. Arden Brown of Boca Raton, Florida, a
placement fee in the amount of 10% of the gross sales proceeds of
<PAGE>
the placement, or $25,000, and Mr. Erik Bailey, a director and
officer of the Company, transferred 8,000 shares of the Company's
common stock from his own account and which payment Mr. Bailey made
on behalf of the Company. The Company relied upon the following
facts to claim the exemption available. Potex represented and
warranted to the Company in its subscription agreement, among other
things, that: it was not a U.S. person; that Potex was outside the
United States at all times during the transaction; that Potex
purchased the Company's securities for its own account and not for
the account of any U.S. person; that Potex acknowledged and
understood that during the 40 day, restricted period, commencing
upon the date of Closing, July 10, 1995, that any offers and sales
of the Company's securities purchased shall only be made in
compliance with the provisions of Regulation S, and; that the
aforementioned restrictions on resale of the Company's securities
purchased shall be set forth in a legend upon the certificates
representing the Company's securities purchased and that the
Company's stock transfer agent will be instructed to place a stop
transfer order against the transfer of such certificates for the
duration of the 40 day restricted period.
On October 15, 1995, the Company entered into a Finder's Fee
Agreement with Knobloch Bay Cove Trust, a foreign corporation with
offices located at Splugenstrasse 10, Zurich, Switzerland ("Bay
Cove") pursuant to the principal terms of which the Company
appointed Bay Cove as a non-exclusive agent to seek and identify
potential acquisition candidates in the transportation industry and
introduce any such candidates to the Company. Bay Cove was
authorized to contact any such potential acquisition candidates,
negotiate the preliminary terms of any transaction and bring the
acquisition terms to the attention of the Company. In the event
that the Company proceeded to acquire an acquisition candidate
introduced to it by Bay Cove the Company agreed to pay Bay Cove a
finder's fee based upon the traditional Lehman Formula, plus
expenses and costs.
Thereafter, the Company offered and sold 600,000 of its common
shares to Bay Cove for $1,200,000 on November 29, 1995. Bay Cove
paid for the Company's securities by delivering its promissory note
in the principal amount of the purchase price, accruing interest at
7% per annum, with accrued interest and the principal balance due
and payable on November 29, 1997.
The Company relied upon, among other things, the following
facts set forth in a certain Offshore Securities Subscription
Agreement, dated November 29, 1995, by and between the Company and
Bay Cove, to claim the exemption from the registration requirements
of the Securities Act provided by Regulation S promulgated
hereunder: that Bay Cove was not a U.S. person, was outside of the
U.S. at all times during the subject transaction and was not
purchasing the Company's securities on behalf of nor for the
account of any U.S. person; that Bay Cove acknowledged and
understood that during the applicable 40 day restricted period,
<PAGE>
commencing upon the date of Closing, November 29, 1995, that any
offers and sales of the Company's securities shall only be made in
compliance with the provisions of Regulation S or pursuant to a
registration statement filed under the Securities Act or pursuant
to an exemption therefrom. The Company did not utilize the
services of a placement agent or underwriter for this Regulation S
placement and, therefore, did not pay any fees or commissions in
connection therewith.
Subsequently, Bay Cove introduced Carpet Transport, Inc., A&P,
Inc. and Chase Brokerage, Inc. (the "CTI Companies") to the Company
and on April 4, 1996, the Company closed its acquisition of the CTI
Companies. In accordance with the terms of the Finder's Fee
Agreement with Bay Cove, the Company owed Bay Cove approximately
$910,000, as a finder's fee. Further, the Company agreed to
reimburse Bay Cove for $290,000 of its costs and expenses incurred
in connection with this transaction. The Company and Bay Cove
agreed thereafter that the Company would forgive the $1,200,000 Bay
Cove Promissory Note in full and complete payment of the finder's
fee due Bay Cove under the terms of the Finder's Fee Agreement.
The Company placed an aggregate of 700,000 of its Series A
Preferred Shares in Regulation S placements with Ageratum Anstalt,
a Liechenstein corporation, having offices c/o Dr. Peter Weibel,
Erlenstrasse 27, CH-4106 Therwil ("Anstalt") and with Seatex AG, a
Swiss corporation, having offices c/o Dr. Peter Weibel,
Erlenstrasse 27, CH-4106 Therwil ("Seatex"), with 400,000 of such
shares being placed with Anstalt and 300,000 of such shares being
placed with Seatex pursuant to seven (7) Offshore Securities
Subscription Agreements dated at various times between the period
commencing on December 21, 1995 through March 15, 1996, for which
the Company received aggregate gross proceeds in the amount of
$700,000. The Company's Series A Preferred Shares are convertible
into common shares of the Company based upon a conversion price
that is the lesser of (i) the closing price of the Company's common
shares upon the date of conversion, less a 30% discount, or (ii)
$3.50 per share. The Company utilized the services of Mr. Arden
Brown of Boca Raton, Florida as its placement agent and paid to Mr.
Brown 10% of the gross proceeds received by the Company in this
placement and issued to Mr. Brown warrants to purchase 35,000
Company common shares at $.25 per share and 40,000 Company common
shares at $2.50 per share.
The Company relied upon the following facts to claim the
exemption from the registration requirements of the Securities Act
provided by Regulation S promulgated hereunder: that Anstalt and
Seatex were not U.S. persons, were outside of the U.S. at all times
during the subject transactions and were not purchasing the
Company's securities on behalf of nor for the account of any U.S.
person; that Anstalt and Seatex acknowledged and understood that
during the applicable 40 day restricted period, commencing upon the
dates of closings, that any offers and sales of the Company's
securities shall only be made in compliance with the provisions of
<PAGE>
Regulation S or pursuant to a registration statement filed under
the Securities Act or pursuant to an exemption therefrom.
On February 22, 1996, the Company retained Meridian Holdings,
Inc., a Florida corporation ("Meridian"), to act as its placement
agent for the placement of up to the face amount of $2,000,000 of
its 5-year convertible debentures pursuant to the provisions of
Regulation S promulgated under the Securities Act. The Company's
5-year convertible debentures were denominated in increments of
$100,000 each and bore interest at the rate of 10% per annum,
payable in cash after one year, if held by the purchaser during
such period (the "Convertible Debentures"). The Convertible
Debentures are convertible into Company common shares at a price
per share that is (i) 20% less than the closing average bid price
of the Company's common shares for the 5 trading days prior to
conversion, or (ii) at a conversion price per share that is 120% of
the closing average bid price of the Company's shares for the 5
trading days prior to the Closing of the subject Regulation S
placement.
The Company paid Meridian a placement agent fee equal to 10%
of the gross amount of the Convertible Debentures placed and issued
to Meridian a warrant to purchase 100,000 Company common shares
exercisable at varying times from 6 months to 36 months following
the Closing of the Regulation S placement and at exercise prices
ranging from $2.50 to $7.50 per share.
Meridian placed 22 Convertible Debentures with a total face
amount of $2,120,000 to non-U.S. persons. Each of the non-U.S.
persons who subscribed to purchase the Convertible Debentures
represented and warranted to the Company, among other things; that
it was not a U.S. person; that it was outside the United States at
all times during the transaction; that it purchased the Convertible
Debentures for its own account and not for the account of any U.S.
person; that it acknowledged and understood that during the 40 day
restricted period, commencing upon the Closing of the subject
Regulation S placement, that any offers and sales of the
Convertible Debentures shall only be made in compliance with the
provisions of Regulation S, and; that the aforementioned
restrictions on resale of the Convertible Debentures shall be set
forth in a legend upon the certificates representing the
Convertible Debentures and that the Company's stock transfer agent
will be instructed to place a stop transfer order against such
certificates for the duration of the 40 day restricted period.
The Company placed an aggregate of $2,120,000 of principal
amount of its 10% Convertible Promissory Notes with Rana Investment
Company, Ltd., a company formed under the laws of Saudi Arabia,
with offices at P. O. Box 60148, Riyadh 11545 ("Rana") for the
purchase price equal to the face amount of such notes, $2,120,000.
The placement closed on March 19, 1996, with respect to seven 10%
Convertible Promissory Notes ($700,000) and on April 2, 1996, with
respect to 14.2 10% Convertible Promissory Notes ($1,420,000),
<PAGE>
respectively. Each of the 10% Convertible Promissory Notes is
convertible into Company common shares up to the limit of 50% of
their face principal amount at any time during the period
commencing 45 days after the closings of the placements, on March
19, 1996 and April 2, 1996, respectively, through the 75th day
following such closings, and; following such 75th day, the holder
may then convert the remaining 50% principal balance of such Notes
into Company common shares; the conversion price of each of the 10%
Convertible Promissory Notes is equal to the lesser of (i) 80% of
the "Market Price" as of the date of conversion, or (ii) 120% of
the "Market Price" as of the dates of the closings and the
issuances of such Notes, on March 19, 1996 and April 2, 1996,
respectively. "Market Price" is defined in the Notes as the
average closing bid price of the Company's common shares for the
preceding 5 trading days before the conversion date. The Company
paid Meridian 10% of the gross proceeds of the subject placement
and warrants to purchse 100,000 Company common shares at exercise
prices ranging from $2.50 to $7.50 per share.
The Company relied (i) upon the representations and warranties
of Rana set forth in the three (3) Offshore Securities Subscription
Agreements executed by Rana, all dated March 31, 1996; (ii) upon
Rana's agent, International Escrow Agents, Inc., and its counsels,
Rossi & Associates, P.A., 140 East Broward Boulevard, Fort
Lauderdale, Florida, to insure strict compliance with all of the
terms and provisions of Regulation S; (iii) the placement of a
restrictive legend upon the 10% Convertible Promissory Notes,
designating them as restricted securities, and; (iv) the placement
of the total offering of the $2,120,000 principal amount of the 10%
Convertible Promissory Notes with one purchaser, Rana, to claim the
exemptions from the registration requirements of the Securities Act
provided by Regulation S and the private placement exemption of
Section 4(2) promulgated under said Act.
On April 5, 1996, the Company sold 25,000 common shares for
the purchase price of $2.00 per share, or $50,000, to End Run
Investments, Ltd., a corporation organized under the laws of the
Bahamas islands, with offices located at Charlotte House, 2nd
Floor, Charlotte Street, Nassau, Bahamas, pursuant to Regulation S
promulgated under the Securities Act. The Company relied upon the
representations and warranties made by the offshore purchaser set
forth in a certain Offshore Securities Subscription Agreement,
dated April 5, 1996, by and between the Company and the purchaser,
which affirmed, to wit, that: purchaser was not a U.S. person, was
outside the United States at all times during the subject
transaction and was not purchasing the Company securities for the
account nor on behalf of any U.S. person; that the purchaser
understood and acknowledged that any offers and sales of the
Company securities made prior to the 40-day restricted period,
commencing on April 5, 1996, shall only be made in compliance with
Regulation S, pursuant to a registration statement filed in
accordance with the Securities Act or pursuant to an exemption
therefrom; that the purchaser agreed not to offer for sale the
<PAGE>
Company securities purchased to any U.S. person during the 90 day
period following April 5, 1996, and that purchaser acknowledged
that the Company placed the appropriate Regulation S restrictive
legend on all of the certificates to be issued representing the
Company securities purchased and directed its stock transfer agent
to place a stop transfer order on such certificates during the 90
day period following the date of April 5, 1996.
Item 6: Management's Discussion and Analysis or Plan
of Operation
(a) Plan of Operation.*
The Company's plan of operation for the fiscal year ending
June 30, 1997, includes a plan to refinance its debt encumbering
its revenue generating equipment, raising $25 to $30 million of
long-term debt (5-year term) to restructure its balance sheet and
to provide capital for future acquisitions as well as to provide
the financing for the purchase of 300 tractors to expand and
replace the Company's existing fleet. The Company is in
discussions with various underwriters in an attempt to structure an
offering of its debt securities pursuant to the registration
requirements of the Securities Act of 1933, as amended (the
"Securities Act"). If the Company is successful in reducing its
financing and interest costs, the Company will be able to utilize
these savings to better meet its current cash requirements. In
addition, the Company anticipates restructuring its existing
liabilities encumbering its revenue equipment. Absent the
consummation of the planned refinancing of its revenue generating
equipment, the Company will be obligated to meet its future cash
needs through offerings of its equity or debt securities under the
Securities Act or pursuant to offerings exempt from the
registration requirements thereof.
The Company has signed a purchase order for 300 Freightliner
Tractors for unit prices ranging from $74,200 to $76,100, per
tractor. Assuming the successful completion of this equipment
transaction, delivery of these units is scheduled to occur
throughout the 1996-1997 fiscal year.
* May contain "forward-looking statements".
<PAGE>
The Company has executed a Letter of Intent with Country Wide
Transport Services, Inc., a California-based truckload carrier
("Country Wide") which includes it subsidiary, a New York-based
freight brokerage and logistics concern ("Vertex"), pursuant to the
general terms of which Country Wide will merge with and into a
wholly owned subsidiary of the Company pursuant to (i) a share
exchange on the basis of 1 Company Common share for 5 Country Wide
common shares held of record and (ii) the issuance to Country Wide
common shareholders of 1 Company warrant to purchase 1 Company
common share at the exercise price of $4.25 per share for each 20
Country Wide common shares held of record. The Letter of Intent is
subject to various conditions, including but not limited to the
parties executing and delivering a definitive agreement and
bilateral due diligence reviews. In the event that the proposed
transactions are consummated, the Company will have a substantial
operations center in Corona, California, and; significant customer
business going from the west coast eastward that the Company
anticipates will translate into a more efficient utilization of its
revenue equipment which currently at times either returns eastward
from delivery points on the west coast without sufficient cargo, or
on a "dead Head" basis, or which may remain at some western
location for extended periods of time before freight can be located
and shipped eastward. The Company also anticipates increased
utilization of the Country Wide fleet by providing greater revenue
producing shipments from the southeast to the west coast. In
addition, the Company anticipates improvement in the utilization of
its revenue equipment on shipments originating from the Northeast
through the use of Vertex's customer base.
* May contain "forward-looking statements."
<PAGE>
(b) Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
The financial statements of the Company for the fiscal year
ended June 30, 1996, include the financial results of its recently
acquired companies, Carpet Transport, Inc. ("CTI"), A&P
Transportation, Inc. ("A&P") and Chase Brokerage, Inc. ("Chase")
(collectively, the "CTI Companies") for the last four months of the
fiscal year ended June 30, 1996. Prior to March 1, 1996, the
Company's financial statements reflect only the financial condition
and results of operations of its sole operating subsidiary, Blue
Mack Transport, Inc. ("Blue Mack"), acquired by the Company through
a reverse merger acquisition on June 21, 1995, with an effective
date of June 30, 1995. Accordingly, these recent Company
acquisitions do not permit a meaningful period to period
comparison. Prior to its acquisition of Blue Mack, the Company had
no significant operating businesses nor did it own any significant
assets.
From June 30, 1995 to June 30, 1996, the Company's gross
revenues grew from $0 to $36,801,423, while the net loss increased
from $171,196 to $673,214 during the same period. From June 30,
1995 to June 30, 1996, the Company's total assets increased from
$7,096,735 to $79,477,950, while shareholder's equity improved from
$2,587,089 to $6,475,587 during this same period. These results
are primarily attributable to the fact that the Company did not own
any operating companies until its acquisition of Blue Mack and
certain assets of Herr's Motor Express, Inc., effective June 30,
1995, and its subsequent acquisition of the CTI Companies on April
4, 1996, effective as of February 29, 1996. As a result, a
comprehensive comparative analysis would not be meaningful.
The Company's revenues were chiefly derived from its carrier
operations and, to a lesser degree, from its freight brokerage
business. The increase in revenue and asset growth was due
primarily to the Company's acquisition of the CTI Companies. At
June 30, 1995, the Company operated a fleet comprised of 128
tractors, 76 refrigerated trailers and 463 dry van trailers. At
June 30, 1996, the Company operated a fleet comprised of 733
tractors, 264 refrigerated trailers, and 1,381 dry van trailers.
<PAGE>
Results of Operations
The following table sets forth the percentage relationships of
expense items to operating revenues for the periods indicated:
Year ended June 30, 1996
Revenue Percentage
Operating revenue......................... $36,801,423 100.00%
Operating expenses:
Purchased transportation.................. 3,180,456 8.64%
Salaries and benefits.....................10,920,292 29.67%
Operating expenses........................13,541,344 36.80%
Operating taxes and licenses.............. 333,684 .91$
Claims and insurance...................... 1,654,116 4.49%
Communications and utilities.............. 734,887 2.00%
General and administrative................ 2,422,063 6.58%
(Gain)/Loss on sale of equipment.......... (189,934) ( .52)%
Depreciation and amortization............. 4,568,109 12.41%
Total operating expenses............ 37,165,017 100.99%
(Loss) from operations................... (363,954) ( .99)%
Total other income (expense)............. (787,375) (2.14)%
(Loss) before income taxes............... (1,150,969) (3.13)%
(Provision for) Benefit from
income taxes........................ 477,755 1.30%
Net income (loss)........................ (673,214) (1.83)%
Fiscal 1996
The Company's operating revenues on a consolidated basis were
$36,801,423 in 1996. The Company recognized revenue for twelve months from
its subsidiary, Blue Mack, of $10,258,378, and a net loss of $272,291. The
acquisition of the CTI Companies on April 4, 1996, effective as of February
29, 1996, accounted for a significant increase in revenues. The Company
recognized revenue for four months from its subsidiary, Carpet Transport
Holdings Corp. (the "CTI Companies"), of $27,772,736, and net income of
$1,512,302, prior to eliminations and adjustments for intercompany revenues
and expenses. During this period, CTI recorded revenue of $21,959,597, and
net income of $1,424,765, A&P recorded revenue of $2,860,198, and a net loss
of $123,327, and Chase recorded revenue of $2,952,941, and net income of
$210,864. During this period, management of the Company, merged A&P into CTI
in order to eliminate redundant personnel and administrative functions,
reduce insurance costs, and improve revenue equipment utilization. The
<PAGE>
Company expects annual savings and benefits in excess of $800,000 from this
internal merger.* As a result, A&P shall be reported as a discontinued
operation, effective May 1, 1996.
The Company embarked on a cost cutting program during the last three
months of fiscal 1996 which management believes will decrease operating
expenses without affecting service to its customers. As a result of the cost
cutting program, 75 administrative, maintenance, and terminal positions were
eliminated from which the Company expects to realize annual savings of
approximately $1,950,000.*
The Company anticipates improved operating results emanating from these
cost cutting initiatives. If, however, fuel prices continue to escalate and
excess capacity in the transportation industry continues, it could cause the
continuation of competitive pressures that could adversely affect equipment
utilization and revenue per mile.*
* May contain "forward-looking statements".
<PAGE>
Liquidity and Capital Resources.
The growth of the Company's business has required a significant
investment in new revenue equipment. The Company's primary source of
liquidity has been funds provided by operations, term borrowings to finance
equipment purchases and from capital raised through the private placements of
the Company's securities. Net cash used in operating activities totaled
approximately negative $1,369,859 for the year ended June 30, 1996.
Capital expenditures for the purchase of revenue equipment, office
equipment and leasehold improvements totaled $26,719 for the year ended June
30, 1996. The Company realized $1,519,963 in proceeds from the sale of
property and equipment for the year ended June 30, 1996. Net cash provided
by investing activities totaled approximately $431,443 for the year ended
June 30, 1996. The Company projects that capital expenditures for property
and equipment, will be approximately $24.5 million for the fiscal year ending
June 30, 1997, to be used primarily to acquire new revenue equipment to
expand and replace the Company's fleet, to upgrade existing facilities, and
to make several technological advancements of the Company's operational and
administrative facilities.*
Net cash used in financing activities amounted to $2,278,975 for the
year ended June 30, 1996. The Company's financing activities were primarily
the result of increasing debt, to finance the operational losses, purchase
the CTI Companies, and provide for the growth of the Blue Mack subsidiary.
At June 30, 1996, the Company's equipment-related long-term debt totaled
$47,242,848 million and matures in installments over various periods through
2001.
The Company maintains a $5,000,000 line of credit to finance working
capital for its CTI operation. In addition, the Company has a separate
$500,000 line of credit to finance working capital for its Blue Mack
operation. As of June 30, 1996, the Company had borrowed $4,834,378 against
these two lines of credit.
The Company has adequate liquidity to meet its current needs. While the
current ratio of the Company is .59, and the debt to equity is 8.87%, the
Company believes that through the refinancing of its revenue equipment debt,
proceeds from the sale of equipment, and a private placement of long-term
debt (5-year notes) of the Company's securities, the Company will be able to
meet its short-term obligations.* Due to the capital intensive nature of the
trucking industry with respect to purchasing revenue equipment, the Company
will continue to have significant capital requirements over the long term,
which shall require the Company to incur additional debt.* If the Company is
unable to refinance its existing equipment debt, finance new revenue
equipment, or complete the aforementioned private placement, the Company may
seek to raise additional equity capital.* The availability of this capital
will depend upon prevailing market conditions,, the market price of the
common stock and other factors over which the Company has no control, as well
as the Company's financial condition and results of operations.*
* May contain "forward-looking statements".
<PAGE>
Seasonality.
In the transportation industry, results of operations generally show a
seasonal pattern as customers reduce shipments during and after the winter
holiday season. The Company's operating expenses also tend to increase in
the winter months primarily due to increased operating costs in colder
weather and higher fuel consumption due to increased idle time.
Inflation.
Many of the Company's operating expenses, including fuel costs and fuel
taxes, are sensitive to the effects of inflation, which could result in
higher operating costs. The effects of inflation on the Company's business
during 1996 and 1995 generally were not significant.
Item 7: Financial Statements
The Consolidated Balance Sheets of Continental American Transportation,
Inc. and Subsidiaries as of June 30, 1996 and the related Consolidated
Statements of Operations, Changes in Stockholders' Equity, and Cash Flows for
the years ended June 30, 1996 and 1995, together with the related notes and
report of Rosenberg Rich Baker Berman & Company, independent public
accountants, are set forth at pages 39 through 59 below.
Item 8: Changes in and Disagreements on Accounting and
Financial Disclosure.
(a)(1)(i) Prior to the change of control of the Company and the takeover
of its affairs by current Company management, effective on June 21, 1995, by
virtue of the reverse merger acquisition of Blue Mack Transport, Inc., on
July 29, 1994, the former Board of Directors of the Company dismissed the
firm of J. Roger Gregg, CPA as accountants for the Company. On the same
date, the Company engaged the firm of Rosenberg, Rich, Baker, Berman &
Company ("Rosenberg, Rich"), CPA as accountants for the Company.
(ii) J. Roger Gregg's reports on the financial statements for the years
ended June 30, 1994, 1992, and 1991 contained adverse opinions and disclaimers
of opinion and qualification.
(iii)(A)(B) The Company's Board of Directors made the decision to
engage Rosenberg, Rich and J. Roger Gregg. The Company has no audit or
similar committee.
(iv) During the Company's two preceding fiscal years and any subsequent
interim period preceding such dismissal, Company is not aware of any
disagreements with J. Roger Gregg on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
(v) J. Roger Gregg's opinion covering the fiscal years ended June 30,
1994, 1992 and 1991 contained an adverse opinion which, in effect, stated
that, based upon the Company's prior management's lack of disclosure,
cooperation, and absence of corporate records relating to its business
activities during these periods, Mr. Gregg was required to issue an adverse
<PAGE>
opinion on the subject financial statements corresponding to the periods
indicated. Mr. Gregg's opinion is contained in the Company's Form 10-K for
the year ended June 30, 1994 (the "1994 Form 10-K").
(a)(3) The Company requested J. Roger Gregg, to review the
disclosures contained in the 1994 Form 10-K and that firm was given an
opportunity to furnish the Company with a letter addressed to the Commission
containing any new information, clarification of the Company's expression of
its views, or the respect in which it does not agree with the statements made
by the Company herein. Mr. Gregg furnished the Company with a letter, dated
February 24, 1995, addressed to the Commission, a copy of which is annexed as
Exhibit G to the 1994 Form 10-K which is herein incorporated by reference,
stating that he has had no disagreements with current management with respect
to accounting principles or as to any completed transactions. Mr. Gregg
further stated that he performed no services for the Company relating to any
subsidiary of the Company not previously located in Asheville, North Carolina
during his period of engagement, nor did current management make him aware
that the Company had any subsidiaries other than those located in Asheville,
North Carolina, including Mural Transport, Inc. and/or any other company
during the period ending June 30, 1994.
<PAGE>
PART III
Item 9: Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
(a)(b) Identification of Directors and Executive Officers.
The directors and officers of the Company are listed in the table below
and brief summaries of their business experience are also set forth.
Name Age Position with Company
Timothy Holstein 38 Director
President
Chief Executive Officer
Erik Bailey 28 Director
Vice President
Chief Financial Officer
Brian Henninger 48 Director
Secretary
Comptroller
Timothy Holstein has been the President, Chief Executive Officer and a
director of the Company since June 21, 1995. Prior to joining the Company,
Mr. Holstein was the majority owner of Blue Mack Transport, Inc., a
Pennsylvania-based private trucking company which he founded in 1986 and
which company was acquired on June 21, 1995 by the Company pursuant to a
reverse merger acquisition. Mr. Holstein was appointed to the Company's
Board of Directors and shall remain a director until the next annual meeting
of the Company's shareholders. Mr. Holstein is also an officer and director
of Bio-Dyne Corporation, a reporting company under the Securities Exchange
Act of 1931, as amended, (the "Exchange Act").
Erik Bailey has been the Vice President, Chief Financial Officer and a
director of the Company since June 21, 1995. Prior to his appointment as a
member of the Board of Directors, Mr. Bailey was the Chief Financial Officer
of Blue Mack Transport, Inc., a Pennsylvania-based private trucking company,
since April, 1995. Prior to that time, Mr. Bailey served as a consultant to
private and public companies. Mr. Bailey was appointed to the Company's
Board of Directors and shall remain a director until the next annual meeting
of the Company's shareholders. Mr. Bailey is also an officer and director of
Bio-Dyne Corporation, a reporting company under the Exchange Act. Mr. Bailey
also serves as a consultant to several private and public companies with
respect to merger and acquisition analysis and advice.
Brian Henninger has been the Secretary and a director of the Company
since March 27, 1995. Prior to his appointment, Mr. Henninger served as a
financial consultant to several private companies. For the approximate ten
year period prior to November, 1995, Mr. Henninger served as the comptroller
for a nationwide transportation company. Mr. Henninger also serves as an
officer and director of Bio-Dyne Corporation, a reporting company under the
<PAGE>
Exchange Act. Mr. Henninger also serves on the Boards of Directors for
several private companies not engaged in the transportation industry
business.
Board members are elected by the shareholders to serve until the next
annual meeting; Company officers are appointed by the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange
Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors and beneficial owners of more
than 10% of any class of equity securities of the Company registered pursuant
to Section 12 of the 1934 Act to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors,
and beneficial owners of more than 10 per cent of any class of equity
securities of the Company registered under the 1934 Act are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms
filed.
Based solely on the review of the certified list of shareholders
provided by the Company's transfer agent and on the review of the Exchange
Act forms furnished to the Company, the Company believes that the following
reporting delinquencies occurred during the Company's fiscal year ended June
30, 1996:
Section 16(a) Reporting Delinquencies
1. Form 4, Statement of Changes of Beneficial Ownership of Securities,
due on or about October 10, 1995: Erik Bailey failed to file this Form when
he sold all of his interest in Explorer Capital, Inc., the holder of record
of 180,000 shares of the Company's Series B Convertible Preferred Shares at
the time of such sale occurring on June 21, 1995.
<PAGE>
Item 10: Executive Compensation
The following table sets forth the compensation paid by the Company to its
chief exectutive officer, its two (2) other executive officers and the four (4)
highest paid employees of the Company during the fiscal year ended June 30,
1996.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation
_________________________________________________________________
(a) b) (c) (f) (i)
Name Restricted All Other
and Stock Compen-
Principal Award(s) sation
Position Year Salary ($) ($)
Timothy Holstein
CEO 1996 $ 78,800 -- --
Erik Bailey
Chief Financial
Officer 1996 $ 56,100 -- --
Brian Henninger
Comptroller 1996 $ 17,300 36,000+ $30,000*
Charles B. Prater1996 $300,000 -- -- Employee
Lynwood S.Warmack1996 $300,000 -- --
Employee
Robert Herr 1996 $ 75,000 -- --
Employee
Wayne S. Herr 1996 $ 75,000 -- --
Employee
There were no grants or exercises of stock options pursuant to the
Company's Stock Incentive Plan during the fiscal year ended June 30, 1996 to the
named officers. Stock appreciation rights are not granted under the Stock
Incentive Plan. The Company does not currently have in effect a Long-Term
Incentive Plan ("LTIP") and, consequently, no such awards were granted to
Company executives in fiscal years covered above.
<PAGE>
* The Company loaned Mr. Henninger $30,000 to cover relocation expenses;
pursuant to the terms of Mr. Henninger's agreement with the Company, $10,000 of
such principal balance shall be forgiven over the course of each of the next
three years as long as Mr. Henninger remains in the employ of the Company. The
loan does not
require Mr. Henninger to pay interest.
+ Mr. Henniniger received non-qualified stock options to purchase 36,000
Company common shares: see, "Employment Agreements" below.
<PAGE>
The Company's 1994 Stock Incentive Plan
Under the Company's 1994 Stock Incentive Plan (the "Plan")
options to purchase a maximum of 200,000 shares of the Company's
common stock may be granted to officers and employees of the
Company. Options may be granted that are deemed "Incentive Stock
Options", as defined in the applicable federal tax laws or non-
qualified stock options. All of the available 200,000 stock
options under the Plan have been granted.
The Company's 401(k) Plans
Carpet Transport, Inc. and Blue Mack Transport, Inc., two of
the Company's subsidiaries, maintain and sponsor qualified profit-
sharing plans for the benefit of their respective employees. Both
plans are qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended, and allow employees thereof to make tax
deferred contributions under the terms of the Plans. The 401(k)
Plan for Blue Mack Transport, Inc. provides that the employer shall
match employee contributions equal to 25% of such employee's
contribution to the Plan; the 401(k) Plan for Carpet Transport,
Inc. provides that the employer, in its sole and absolute
discretion, may contribute an amount equal to an employee's
contribution. No employer contributions were made under either
Plan by these employers during the fiscal year ended June 30, 1996.
The Company had no other executive officers other than Mr.
Holstein, Mr. Bailey and Mr. Henninger at June 30, 1996.
Employment Agreements
The Company signed an Employment Agreement with Brian
Henninger, dated June 15, 1996, pursuant to the general terms of
which Mr. Henninger was retained for a 3-year period to serve as
Vice President-Finance and Secretary of the Company. The Agreement
provides for annual salaries of $78,000, $104,000 and $130,000
during the first, second and third years of the Agreement,
respectively. In addition, the Company agreed to loan to Mr.
Henninger $30,000 for relocation expenses concerning his move to
Calhoun, Georgia, and to forgive $10,000 of such amount at the end
of each year of Mr. Henninger's Agreement provided he is in the
employ of the Company at such times. The Company, as a further
inducement to Mr. Henninger, included in the Agreement a non-
qualified stock option to purchase 36,000 Company common shares at
an exercise price equal to the lesser amount of (i) the trading
price of the Company's common stock on the date of exercise, less
a 20% discount, or (ii) $2.25 per share.
On September 1, 1996, the Company and Mr. Timothy Holstein
entered into a 3-year Employment Agreement providing that Mr.
Holstein would be retained as the President and Chief Executive
Officer of the Company. The Agreement provides that the Company
shall pay Mr. Holstein annual salaries of $200,000, $250,000 and
$300,000 for the first, second and third years of the Agreement,
respectively. In addition, the Agreement provides that Mr.
Holstein shall receive an incentive bonus during each year of the
Agreement equal to 5% of the first $1,000,000 of pre-tax profits;
6% of the next $500,000 of pre-tax profits, and; 7% of the pre-tax
<PAGE>
profits of the Company over $1,500,000.
The Company also entered into an Employment Agreement with Mr.
Erik Bailey on September 1, 1996, to retain his services as the
Company's Vice President and Chief Financial Officer for a 3 year
term. Mr. Bailey will receive annual salaries of $104,000,
$130,000 and $156,000 during the first, second and third years of
the term of the Agreement, respectively. The Agreement also
provides that the Company will pay Mr. Bailey an incentive bonus
equal to 5% of the first $1,000,000 of the pre-tax profit; 6% of
the next $500,000, and; 7% of the Company's pre-tax profit over
$1,500,000 for each year during the term of the Agreement the
Company earns pre-tax profits.
Director's Compensation
None of the Company's directors receive any compensation for
participation in Board of Directors meetings.
<PAGE>
Item 11: Security Ownership of Certain Beneficial Owners and
Management
Set forth below is information concerning stock ownership obtained by
Company management from the certified list of Company stockholders provided by
its transfer agent, United Stock Transfer, as of the record date of June 30,
1996, of (1) each person known by Company to own beneficially 5% or more of
Company's common stock, (2) each named director and officer and (iii) all
directors and officers of Company as a group, based upon the number of common
shares outstanding on June 30, 1996.
Title of Name and Address of Amount and Nature of Percent of
Class Beneficial Owner Beneficial Ownership Class
Common
Stock
Timothy Holstein 739,521 16.93%
c/o Continental American
Transportation, Inc.
Chief Executive Officer
President and Director
175 Hammon Road
Calhoun, GA 30701
Erik Bailey 519,897 11.90%
Chief Financial Officer
and Director
1039 Legacy Walk
Woodstock, GA 30189
Brian Henninger 46,300* 1.06%
Vice President-Secretary
and Director
275 Saddlebrook Drive
Calhoun, GA 30701
Charles B. Prater 500,000 11.45%
877 Plainville Road
Plainville, GA 30733
Robert Herr 257,500+ 5.89%
349 Buck Road
Quarryville, PA 17566
Wayne S. Herr 257,500+ 5.89%
349 Buck Road
Quarryville, PA 30733
All directors and
officers as a group 1,805,718 41.34%
* Includes non-qualified stock options to purchase 36,000 common
shares, see, "Employment Agreements" above.
+ Includes 51,500 common shares held of record by each of Robert
Herr and Wayne S. Herr as well as 154,500 common shares held by
Herr's Motor Express, Inc., a company owned and controlled by these
persons.
<PAGE>
Item 12: Certain Relationships and Related Transactions
(1) On October 15, 1995, the Company entered into a Finder's Fee
Agreement with Knobloch Bay Cove Trust, an offshore entity. The Trustee
and Director of Knobloch Bay Cove Trust ("Bay Cove") is Herbert Bailey,
the father of Erik Bailey, an officer and director of the Company.
Pursuant to the terms of the Finder's Fee Agreement, the Company
authorized Bay Cove to identify potential acquisition candidates in the
transportation industry. In the event that the Company consummated an
acquisition brought to its attention through the efforts of Bay Cove,
the Agreement provided that the Company would pay to Bay Cove
compensation equal to the traditional Lehman Formula, plus various costs
and expenses, at the closing of any such transaction.
On November 29, 1995, Bay Cove executed and submitted an Offshore
Securities Subscription Agreement, which was accepted by the Company on
that date, and pursuant to which the Company sold 600,000 of its common
shares to Bay Cove for $1,200,000. Bay Cove paid the purchase price by
delivering its promissory note in the principal amount of the purchase
price, accruing interest at 7% per annum, with the outstanding principal
balance and accrued interest due on November 29, 1997.
Subsequently, Bay Cove acted as the finder and proposed Carpet
Transport, Inc., A&P Transportation, Inc. and Chase Brokerage, Inc. (the
"CTI Companies") as acquisition candidates to the Company. Pursuant to
a certain Restated Stock and Assets Purchase Agreement, dated February
29, 1996, the Company acquired the CTI Companies. In accordance with
the aforementioned Finder's Fee Agreement, Bay Cove claimed a finder's
fee in the amount of $910,000 and expenses of $290,000. After
negotiations, the Company agreed to forgive Bay Cove's $1,200,000
promissory note as payment of this finder's fee and expenses due under
the subject Agreement.
(2) On September 15, 1995, the Company entered into an Investment
Advisor Agreement with Explorer Financial Services, Inc. ("Explorer").
Pursuant to the terms of this Agreement, the Company appointed Explorer
as its non-exclusive agent to seek and identify potential sources of
capital as well as potential acquisition candidates in the
transportation industry for the Company. The Agreement authorized
Explorer, among other things, to negotiate and present to the Company
the proposed terms of any equity or debt financings and/or the terms of
any acquisition proposal. In the event the Company closes any equity or
debt financing proposal or consummates an acquisition identified and
provided to it by Explorer, the Company agreed to pay to Explorer a fee
equal to the amount of 2% of the amount of any such financing and/or the
value of any such transaction consummated, at the closing of any such
transactions. Mr. Christopher Bailey is the sole owner of Explorer and
is the brother of Erik Bailey, an officer and director of the Company.
<PAGE>
(3) On June 30, 1996, the Company entered into a $1,000,000
Revolving Credit Agreement with Bio-Dyne Corporation, a Georgia
corporation havinig its principal offices located at 5400 Bucknell
Drive, S.W., Atlanta, Georgia 30336 ("Bio-Dyne"), pursuant to the
principal terms of which the Company agreed to provide a $1,000,000
facility over a two-year period. Interest accrues on any amount of the
outstanding principal balance at the rate of 12%, per annum, with
interest payable monthly and accrued interest, if any, together with the
unpaid principal balance due at the end of the term. As part of this
Agreement, the Company had the right to designate up to three (3)
members of Bio-Dyne's five (5) member Board of Directors and has
designated three (3) members to date, Messrs. Timothy Holstein, Erik
Bailey and Brian Henninger, representing all of the members of the
Company's current Board of Directors. As of June 30, 1996, Bio-Dyne has
drawn down an aggregate of $450,000 against this credit facility.
(4) On August 22, 1995, the Company purchsed certain assets of
Herr's Motor Express, Inc. and all of the issued and outstanding shares
of HMX, Inc., corporations owned and controlled by Robert Herr and Wayne
S. Herr, for (i) the issuance of 200,000 common shares of the Company
(ii) the assumption of debt associated with certain of the assets
purchased in the aggregate amount of $1,103,567 (iii) the delivery of
Company promissory notes in the aggregate principal amount of
$1,268,927, and (iv) the assumption of shareholder loans in the amount
of $208,000. The Company granted the sellers certain "piggy-back"
registration rights in connection with the Company's common shares
delivered as practical consideration in the transaction. The aggregate
amount of Company common shares issued to Robert Herr, Wayne S. Herr and
Herr's Motor Express, Inc., a company owned and controlled by the
sellers, rendered these persons as a group, a beneficial owner of more
than 5% of the Company's issued and outstanding common shares at June
30, 1996. In addition, each of Robert Herr and Wayne S. Herr entered
into a two-year term Employment Agreement with the Company providing for
the payment to each of them of an annual salary in the amount of $75,000
and which provides an incentive bonus in the amount of 1% of the pre-tax
profits of the Company during such term.
(5) Blue Mack, the Company's wholly owned Pennsylvania subsidiary,
leases approximately 4.5 acres containing a building consisting of 4,000
square feet of office space, a 10-bay maintenance facility and a 2,000
square foot warehouse located in Pottstown, Pennsylvania from Mr.
Timothy Holstein, an officer and director of the Company, pursuant to a
5-year lease on a triple net basis, with monthly rental payments of
$5,200 per month.
(6) Mrs. Linda Bailey paid and or loaned certain funds and
securities to and/or on behalf of the Company and Blue Mack Transport,
Inc. in the aggregate amount of $150,000 as of June 30, 1996.
<PAGE>
(7) Carpet Transport, Inc. has a receivable due from All Carpet,
Inc., a corporation in which employee Charles Prater has an ownership
interest, in the amount of $149,000. This receivable existed on the
books of Carpet Transport, Inc. prior to the acquisition by the Company
of the CTI Companies.
ITEM 13: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K: See Exhibit Index on page 38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONTINENTAL AMERICAN TRANSPORTATION, INC.
By: s/Timothy Holstein
Timothy Holstein, President and Director
ated: October 15, 1996
By: s/Erik Bailey
Erik Bailey, Vice President,
Chief Financial Officer and Director
Dated: October 15, 1996
By: s/Brian Henninger
Brian Henninger, Secretary and Director
Dated: October 15, 1996
CAT9610.KSB upd. 10/15/96
<PAGE>
EXHIBIT INDEX
cat9610.KSB upd 10/15/96
<PAGE>
Independent Auditors' Consent
We consent to the incorporation by reference in this
Annual Report (Form 10-KSB) of Continental American
Transportation, Inc. of our report dated October 11,
1996.
s/Rosenber Rich Baker Berman & Co.
Bridgewater, New Jersey
October 15, 1996
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Continental American Transportation, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Continental
American Transportation, Inc. and Subsidiaries as of June 30, 1996 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended June 30, 1996 and 1995. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Continental American Transportation, Inc. and Subsidiaries as of June 30, 1996
and the results of its operations, changes in stockholders' equity and cash
flows for the years ended June 30, 1996 and 1995 in conformity with generally
accepted accounting principles.
Bridgewater, New Jersey
October 11, 1996
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1996
Assets
Current Assets
Cash and cash equivalents $ 640,079
Restricted cash 700,000
Trade accounts receivable, net of allowance for
doubtful accounts of $924,958 11,120,874
Installments notes receivable - current portion 695,087
Inventories 335,612
Other current assets 2,161,918
Deferred income tax benefit - current portion 677,059
---------------
Total Current Assets 16,330,629
---------------
Property, plant and equipment 57,008,832
---------------
Other Assets
Note receivable - related party 450,000
Installment notes receivable, excluding
current portion 435,306
Excess of purchase price over fair value
of net assets acquired, net 4,535,564
Other assets 540,232
Deferred income tax benefits - noncurrent portion 177,387
---------------
Total Other Assets 6,138,489
---------------
Total Assets 79,477,950
===============
Liabilities and Stockholders' Equity
Current Liabilities
Lines of credit 4,834,378
Current maturities of long-term debt 3,822,762
Current maturities of capital lease obligations 10,768,645
Accounts payable 5,417,982
Accrued expenses 2,146,138
Income taxes payable 572,258
---------------
Total Current Liabilities 27,562,163
Long-Term Debt, excluding current maturities 17,364,622
Capital Lease Obligations, excluding current maturities 28,075,578
---------------
Total Liabilities 73,002,363
---------------
Stockholders' Equity
Preferred stock, $1 par value, 10,000,000 shares
authorized, 0 shares issued and
outstanding -
Common stock, no par value, 20,000,000 shares
authorized, 4,407,544 shares issued,
4,377,544 shares outstanding 8,428,106
Retained earnings (deficit) (1,617,848)
Demand notes receivable from exercise of stock
options and warrants (233,890)
Treasury stock, 30,000 shares, at cost (100,781)
---------------
Total Stockholders' Equity 6,475,587
---------------
Total Liabilities and Stockholders' Equity $ 79,477,950
===============
See notes to the consolidated financial statements.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended June 30,
-----------------------------------
1996 1995
--------------- ---------------
Operating Revenues $ 36,801,423 $ -
--------------- ---------------
Operating Expenses
Salaries and benefits 10,920,292 -
Purchased transportation 3,180,456 -
Operating supplies and expenses 13,541,344 -
Depreciation and amortization 4,568,109 -
Claims and insurance 1,654,116 -
Operating taxes and licenses 333,684 -
Communications and utilities 734,887 -
General and administrative 2,422,063 171,196
Net gain on disposal of equipment (189,934) -
--------------- ---------------
Total Operating Expenses 37,165,017 171,196
--------------- ---------------
(Loss) from operations (363,594) (171,196)
--------------- ---------------
Other Income (Expenses)
Interest and other income 828,743 -
Interest expense (500,920) -
Interest expense - TRAC leases (1,115,198) -
--------------- ---------------
Total Other Income (Expense) (787,375) -
--------------- ---------------
(Loss) Before Income Taxes (1,150,969) (171,196)
Benefit from income taxes 477,755 -
--------------- ---------------
Net (Loss) (673,214) (171,196)
=============== ===============
Net (Loss) Per Share $ (.21) $ (.21)
=============== ===============
Weighted Average Common Shares Outstanding 3,228,717 825,668
=============== ===============
See notes to the consolidated financial statements.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
From June 30, 1994 Through June 30, 1996
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------------
Series A Series B
---------------------------------- ----------------------------------
Number of Number of
Shares Amount Shares Amount
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 - $ - - $ -
Issuance of shares to related party
creditor of blue Mack Transport, Inc. - - - -
Reverse stock split, 1 for 25 shares - - - -
Exchange of shares to acquire 100% of
Buckhead Transport, Inc. and
Subsidiary 800,000 800,000 255,000 255,000
Exchange of shares to acquire 100% of
HMX, Inc. - - - -
Issuance of shares relating to acquisition
of Herr's Mortor Express, Inc. fixed
assets - - - -
Exercise of stock options - - - -
Net Loss, Year Ended June 30, 1995 - - - -
--------------- -------------- -------------- ---------------
Balance, June 30, 1995 800,000 800,000 255,000 255,000
Prior period adjustments - - - -
--------------- -------------- -------------- ---------------
Balance June 30, 1995, as adjusted 800,000 800,000 255,000 255,000
Issuance of common stock to various
shareholders - - - -
Cancellation of various shareholder's
common stock - - - -
Payments received on demand notes
receivable from exercise of stock
options - - - -
Exercise of stock options - - - -
Exercise of stock warrants - - - -
Issuance of preferred stock - Series A 700,000 700,000 - -
Conversion of preferred stock -
Series A&B (1,500,000) (1,500,000) (255,000) (255,000)
Issuance of common stock to employees - - - -
Issuance for common stock relating to
acquisition of CTI, A&P and Chase - - - -
Issuance of 3% common stock dividend - - - -
Conversion of a convertible promissory
note - - - -
Acquisition of 30,000 shares of treasury
stock - - - -
Net Loss, Year Ended June 30, 1996 - - - -
--------------- -------------- -------------- ---------------
Balance, June 30, 1996 - $ - - $ -
=============== ============== ============== ===============
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Demand
Notes
Receivable
From
Exercise of Demand
Stock Notes
Retained Options Receivable
Earnings Treasury and From Sale of
Common Stock (Deficit) Stock Warrants Stock
---------------------------------- --------------- --------------- ------------- ---------------
Number of
Shares Amount
-------------- -------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
20,100,000 $ 384,620 $ (488,559) $ - $ - $ -
750,000 52,000 - - - -
(20,015,990) - - - - -
1,075,000 17,266 - - - -
50,000 208,000 - - - -
150,000 1,529,958 - - - -
120,000 206,250 - - (206,250) -
- - (171,196) - - -
-------------- -------------- --------------- --------------- ------------- ---------------
2,229,010 2,398,094 (659,755) - (206,250) -
- - 66,010 - - -
-------------- -------------- --------------- --------------- ------------- ---------------
2,229,010 2,398,094 (593,745) - (206,250) -
801,937 1,642,023 - - (125,000) (1,200,000)
(136,460) - - - - -
- - - - 193,750 -
44,000 100,000 - - (60,000) -
160,000 400,000 - - (36,390) -
- - - - - -
635,757 1,755,000 - - - -
30,000 182,100 - - - -
500,000 1,500,000 - - - 1,200,000
100,254 350,889 (350,889) - - -
43,046 100,000 - - - -
- - - (100,781) - -
- - (673,214) - - -
-------------- -------------- --------------- --------------- ------------- ---------------
4,407,544 $ 8,428,106 $ (1,617,848) $ (100,781) $ (233,890) $ -
============== ============== =============== =============== ============= ===============
</TABLE>
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Consolidated Statements 1f Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1996 1995
--------------- ---------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net (Loss) $ (673,214) $ (171,196)
--------------- ---------------
Adjustments to Reconcile Net Income to Net Cash (Used in) Operating
Activities
Depreciation and amortization 4,568,109 -
Gain on sale of equipment (189,934) -
Deferred income taxes (477,755) -
Increase in accounts receivable and other assets (7,374,579) -
Increase in accounts payable and other liabilities 2,826,627 32,000
Increase in taxes payable (49,113) -
--------------- ---------------
Total Adjustments (696,645) 32,000
--------------- ---------------
Net Cash (Used in) Operating Activities (1,369,859) (139,196)
--------------- ---------------
Cash Flows From Investing Activities:
Cash received in purchase of subsidiaries 324,285 480
Cash paid in purchase of subsidiaries (1,300,000) -
Principal payments received on notes receivable 310,476 -
Proceeds from sale of property and equipment 1,519,963 -
Purchases of equipment 26,719 -
Loans made to related party (450,000) -
--------------- ---------------
Net Cash Provided by (Used in) Investing Activities 431,443 480
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from new borrowings 6,486,581 139,196
Principal payments on notes payable (1,739,104) -
Principal payments on obligations under capital leases (3,568,502) -
Proceeds from issuance of preferred and common stock 1,100,000 -
--------------- ---------------
Net Cash Provided by Financing Activities 2,278,975 139,196
--------------- ---------------
Net Increase in Cash and Cash Equivalents, Including Restricted Cash 1,340,559 480
Cash and Cash Equivalents, Including Restricted Cash - Beginning of Year 480 -
--------------- ---------------
Cash and Cash Equivalents, Including Restricted Cash - End of Year $ 1,340,079 $ 480
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 1,616,118 $ -
Income taxes $ 225,100 $ -
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
The Company acquired equipment aggregating $267,767 and $0 in satisfaction of
defaulted notes receivable for the years ended June 30, 1996 and 1995,
respectively.
On February 29, 1996, the Company purchased CTI, A&P and Chase. In
connection with the acquisition, the Company assumed long-term
debt and issued notes payable and common stock, and paid cash.
Fair value of assets acquired $ 75,644,048
Long-term debt assumed (58,654,048)
Notes payable issued (14,190,000)
Fair value of common stock issued (1,500,000)
---------------
Cash Paid $ 1,300,000
===============
On June 30, 1995, the Company purchased Buckhead Transport, Inc. and its wholly
owned subsidiary, Blue Mack Transport, Inc. In connection with the acquisition,
the Company assumed long-term debt and issued preferred and common stock.
Fair Value of assets acquired $ 3,031,185
Liabilities assumed (2,251,634)
---------------
Fair value of assets in excess of liabilities
assumed 779,551
Fair value of preferred stock - Series A,
Series B, and common stock
issued to shareholders of Buckhead Transport, Inc. (779,551)
---------------
$ -
===============
On June 30, 1995, the Company acquired property and equipment. In conjunction
with the acquisition, the Company assumed long-term debt, issued notes payable
and issued common stock.
Fair value of property and equipment acquired $ 3,841,525
Long-term debt assumed (1,103,567)
Notes payable issued (1,208,000)
Fair value of common stock issued (1,529,958)
---------------
$ -
===============
See notes to the consolidated financial statements.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF ACCOUNTING POLICIES
Nature of Organization
Continental American Transportation, Inc. (CAT) (the
Company), was incorporated in the State of Colorado in 1983. The Company is
engaged, through its wholly owned subsidiaries consisting of Blue Mack
Transport, Inc. (Blue Mack), HMX, Inc. (HMX), Carpet Transport, Inc. (CTI)
and A&P Transportation, Inc. (A&P), in the transportation industry as a
full truckload carrier operating throughout the contiguous United States.
The Company is also engaged in the common carrier freight brokerage and
logistics business through its wholly owned subsidiary, Chase Brokerage,
Inc.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of CAT and those of its wholly owned subsidiaries as
of and from the effective date of their acquisition. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Equivalents
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Credit Risk
The Company maintains cash balances in numerous financial
institutions. Amounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. At June 30, 1996, the
Companys uninsured cash balances total $402,903.
The Company extends credit in the form of equipment financing notes and trade
accounts receivable. Such amounts due the Company are subject to ongoing
credit evaluations and allowances are maintained for doubtful accounts
based on factors surrounding the credit risk of specific obligations,
adequacy of collateral and other pertinent information.
Inventories
Inventories for transportation operations, consisting primarily of
spare and replacement parts and supplies, are valued at the lower of cost
(first-in, first-out) or market.
Property and Equipment
Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives. Leased property under capital leases is
amortized over the lives of the respective leases or over the service lives
of the assets for those leases which substantially transfer ownership. The
straight-line method of depreciation is followed for all assets for
financial reporting purposes, but accelerated methods are used for tax
purposes.
Tireson new revenue equipment are capitalized as a component of the related
equipment. The cost of replacement tires is expensed as incurred.
Maintenance and repairs are charged to operations currently; replacements
and improvements are capitalized in the property and equipment accounts.
Intangible Assets
Intangible assets primarily represent the excess of the
purchase price of acquired companies over the fair value of the assets
acquired. Such excess costs are being amortized on a straight-line basis
over 15 to 40 years.
<PAGE>
The realizability of such intangible assets is evaluated periodically as
events or circumstances indicate a possible inability to recover their
carrying value. Such evaluation, which necessarily involves significant
management 46 judgment, is based upon the estimated economic benefit to be
derived in future periods as a result of such acquisitions.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF ACCOUNTING POLICIES, Continued
Income Taxes The Company and its wholly-owned subsidiaries file consolidated
Federal corporation income tax returns.
The Company accounts for income taxes in accordance with Statement of
Financial Standards No. 109, Accounting for Income Taxes which
requires the use of the liability method of accounting for income
taxes. Accordingly, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates for the year in
which the differences are expected to reverse.
Claims and Insurance Accruals
The Company provides for the estimated
cost of claims incurred but not paid for which it retains a portion of
the risk under workmens compensation, health care, liability and
property damage programs.
Earnings Per Share
Earnings per share amounts are based on the
weighted average number of shares outstanding. Prior years have been
restated giving effect to a reverse stock split of 1 to 25 shares
which occurred as of June 30, 1995.
Primary and fully diluted earnings per share are the same. Common
share equivalents are not considered in computing earnings per share
as such inclusion would have an anti-dilutive effect.
Revenue Recognition Revenues consist principally of freight revenues.
Freight revenues are recognized as earned when freight is received from the
shipper. Estimated costs, consisting of all direct costs necessary to complete
delivery, are accrued at the end of each reporting period. This method is not
materially different from either recognizing all revenues and expenses at time
of delivery or recognizing revenues and expenses on a pro rata basis.
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting for Long-Lived Assets.
The Company has considered Financial Accounting Standards No. 121
Accounting for the Impairment of Long-Lived Assets which requires the Company
to compare the net carrying value of long-lived assets to the related estimates
of future cash flows, and other criteria, to determine if impairment has
occurred. The Company has determined that no such impairment has occurred and,
accordingly, the adoption of SFAS No. 121 has no effect on its financial
statements.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
BUSINESS ACQUISITIONS
Blue Mack and HMX
On June 30, 1995, the Company acquired Buckhead Transport, Inc.
(Buckhead) and its wholly-owned subsidiary, Blue Mack. Buckhead was
incorporated on April 14, 1994 and formed specifically to acquire Blue
Mack, a nationwide common carrier. On November 1, 1994, Buckhead
entered into a stock exchange agreement with Blue Mack whereby the
Blue Mack shareholder exchanged all his Blue Mack common shares for
1,000,000 common shares of Buckhead and $800,000 principal amount of
Buckhead preferred shares. Pursuant to the agreement, certain property
and equipment with a net book value of $285,257 as well as the
corresponding debt on such property and equipment in the amount of
$242,089 was excluded from the transaction and retained by the seller.
The Company exchanged 1,075,000 common shares, 800,000 Series A
preferred shares and 255,000 Series B preferred shares for all of the
issued and outstanding common and preferred stock of Buckhead in a
business combination accounted for as a purchase. Subsequent to the
business combination, Buckhead was dissolved and Blue Mack became a
direct subsidiary of the Company.
The purchase price of $779,551 equaled the fair value of the identifiable
assets acquired and liabilities assumed and therefore there was no excess of the
cost of the acquired company over the sum of amounts assigned to identifiable
assets and liabilities.
The results of operations of Blue Mack and HMX are not included in the
accompanying financial statements effective July 1, 1994.
The following summarized pro forma information assumes the acquisition had
occurred on July 1, 1994:
Year Ended
June 30, 1995
------------------
Operating revenues $ 6,696,981
Net Income (Loss) $ (104,316)
(Loss) per share $ (.13)
Also on June 30, 1995, the Company acquired HMX, a vehicle service company,
through the exchange of 50,000 CAT common shares for all the outstanding stock
of HMX in a business combination accounted for as a purchase.
The purchase price of $208,000 was greater than the fair value of the
identifiable assets acquired and liabilities assumed and therefore the excess of
the cost of the acquired company over the sum of amounts assigned to
identifiable assets and liabilities of $208,000 will be amortized over a life of
15 years.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
BUSINESS ACQUISITIONS, Continued
CTI, A&P and Chase
On April 4, 1996 CAT purchased all the issued and outstanding common stock
of CTI, A&P and Chase from their two stockholders effective as of February 29,
1996. CTI and A&P are nationwide common carriers, while Chase is engaged in the
common carrier freight broker and logistics business. This transaction was
accounted for as a business combination using the purchase method of accounting.
The total consideration was comprised thusly:
<TABLE>
<S> <C>
Cash payments $ 1,300,000
Non interest bearing unsecured demand promissory note to a former
shareholder 4,080,000
Non interest bearing unsecured demand promissory note to a former
shareholder 2,820,000
Promissory note due March 1, 2001 secured by a pledge of all common
shares of CTI Properties, Inc. (a wholly owned subsidiary of CAT
formed incidental to the above described transaction which owns real
property formerly owned by CTI) and bearing interest at 8% per
annum, payable monthly 7,290,000
Issuance to a former shareholder of 500,000 CAT common shares with
a
fair market value at date of issuance of $3 per share 1,500,000
Transfer of certain CTI, A&P and Chase assets, consisting primarily of
cash surrender value of certain life insurance policies, notes and
loans receivable and an aircraft to former shareholders 1,448,854
Payment of a finders fee amounting to $910,000 and a non-accountable
expense allowance of $290,000 by way of the issuance of 600,000
CAT common shares with a fair market value at the date that the
agreement was entered into of $2 per share (see Related Party
Transactions) 1,200,000
Capitalized acquisition costs consisting primarily of legal, accounting
and
other professional fees 479,167
------------------
$ 20,118,021
==================
</TABLE>
On August 21, 1996 CAT and the former shareholders of CTI, A&P and Chase
entered into a Debt Restructure and Waiver Agreements whereby the parties agreed
that:
a. The $2,820,000 promissory note referred to above would bear
interest at 8% per annum and become due and payable on September 1,
1997.
b. The $4,080,000 promissory note referred to above (which had
been reduced to $2,005,000) would bear interest at 8% per annum and
become due and payable on September 1, 1997.
c. One-half (50%) of interest due on the $7,290,000 promissory note
referred to above would be payable on an annual basis to one former
shareholder in CAT common shares rather than monthly cash payments of
interest.
<PAGE>
The purchase price of $20,118,021 exceeded the fair value of the
identifiable assets acquired and liabilities assumed and therefore the excess of
costs over the acquired companies over the sum of amounts assigned to
identifiable assets and liabilities of $4,437,876 will be amortized over a life
of 40 years. Continental American Transportation, Inc. and Subsidiaries Notes to
the Consolidated Financial Statements
BUSINESS ACQUISITIONS, Continued
CTI, A&P and Chase
The results of operations of CTI, A&P and Chase are included in the
accompanying financial statements effective February 29, 1996.
The following summarized proforma information assumed the acquisition
occurred on July 1, 1994:
Year Ended Year Ended
June 30, 1996 June 30, 1995
------------------ -------------------
Operating revenues $ 86,752,507 $ 95,183,893
Net Income (Loss) $ (419,025) $ 1,415,789
Income (Loss) per share $ (.13) $ 1.71
For the year ended June 30, 1996 amortization of the excess cost of the
acquired companies (HMX, CTI, A&P and Chase) amounted to $110,312 and
accumulated amortization at June 30, 1996 amounted to $110,312.
ACQUISITION OF ASSETS
On June 30, 1995, the Company purchased revenue generating equipment
consisting of tractors and trailers with an aggregate value of $3,841,525 from
Herrs Motor Express, Inc. (Herrs). In exchange, the Company assumed the debt
associated with the equipment of $1,103,567, issued promissory notes amounting
to $1,000,000, assumed future payment for shareholder loans to Herrs of
$208,000 and issued 150,000 shares of the Companys common stock.
Details of promissory notes at June 30, 1996 are as follows:
Note payable, non-interest bearing, which was due August 28, 1995.
Subsequent to due date, interest shall accrue at 12% per annum on
the outstanding principal balance until paid. $ 164,927
Note payable, non-interest bearing, which was due September 11,
1995.
Subsequent to due date, interest shall accrue at 12% per annum on
the outstanding principal balance until paid. 104,000
---------------
$ 268,927
===============
As of October 11, 1996, the above obligations have not been paid by the
Company and payment has not been demanded by the payees.
<PAGE>
RESTRICTED CASH
CTI has entered into an agreement with the Georgia State Board of Workmens
Compensation whereby CTI pays workers compensation claims as a self insurer.
The agreement is collateralized by certificates of deposit amounting to
$500,000. On July 17, 1996 such collateral was increased to $750,000 and CTIs
specific excess insurance self retention was reduced from $500,000 to $250,000
per occurrence.
Additionally at June 30, 1996, CTI had two certificates of deposit, each in
the amount of $100,000, collateralizing purchasing agreements with Com Data
Network and Harold Ives Trucking Company.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INSTALLMENT NOTES RECEIVABLE
The Company finances the sale of revenue equipment to independent owner
operators. These notes require monthly payments of principal and interest over a
period ranging from twelve to forty-eight months with interest ranging
principally from 15% to 20% per annum. These notes mature on various dates
within the next five years. Title to such revenue equipment is retained by the
Company until the note is paid in full.
Total notes receivable $ 1,130,393
Less: current portion (695,087)
---------------
Long-Term Portion $ 435,306
===============
NOTE RECEIVABLE - RELATED PARTY
On May 23, 1996 CTI granted to Bio-Dyne Corporation, a two year unsecured
revolving credit facility in the maximum aggregate principal amount of
$1,000,000 with interest to be computed at the rate of twelve percent (12%) on
outstanding principal balances, payable quarterly. CTI is obligated to advance
funds five business days after a request is made by the borrower, which advances
amounted to $450,000 at June 30, 1996. Incidental to the execution of this
agreement, three directors of CTI were elected to Bio-Dyne Corporations five
member board of directors and these three same individuals were appointed
officers thereof.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including assets under capital leases,
consist of the following:
Land $ 3,045,000
Buildings 2,928,713
Leasehold improvements 2,320,505
Revenue equipment 76,298,418
Other operating equipment 1,287,122
Shop, furniture and office equipment 1,180,245
---------------
Total 87,060,003
Accumulated depreciation and amortization 30,051,171
---------------
Net Book Value $ 57,008,832
===============
Depreciatin charged to expense for the years ended June 30, 1996 and June
30, 1995 was $2,843,704 and $0, respectively.
LINES OF CREDIT
On April 8, 1996, CTI, A&P and Chase entered into a revolving credit
agreement, as to which CAT and two of its officers are guarantors. The credit
facility provides for advances not to exceed 80% of qualified accounts
receivable to a maximum amount of $5,000,000. This obligation is collateralized
by a security interest in all accounts receivable of CTI, A&P and Chase.
Interest is calculated based upon prime rate as defined in the agreement plus
4.75%. Additionally, CTI, A&P and Chase are assessed certain administrative and
service fees by the lender. At June 30, 1996, borrowings under the above credit
facility amounted to $4,384,625.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LINES OF CREDIT, Continued
On May 6, 1996, Blue Mack entered into a revolving credit agreement as to
which CAT and two of its officers are guarantors. The credit facility provides
for advances not to exceed 80% of qualified accounts receivable up to a maximum
amount of $500,000. This obligation is collateralized by a security interestin
all accounts receivable of Blue Mack. Interest is calculated based upon prime
rate as defined in the agreement plus 2.5%. Additionally, Blue Mack is
assessed certain administrative and service fees by the lender. At
June 30, 1996, borrowings under the above credit facility amounted to
$449,753.
LONG-TERM DEBT
Long-term debt consists of the following:
Convertible promissory notes bearing interest at 10% per annum with
scheduled maturities in 1999. The notes are convertible into common
stock of the Company at a conversion price of either 20% less than the
days prior to conversion or 120% of the closing average bid price of
the Companys shares for the five trading days prior to issuance .
Interest is payable to the noteholder only if the note has been held
one calendar year. If any of the notes are converted prior to one year
from the date of issuance, the Company is not obligated to pay
interest on the note. As of June 30, 1996, $2,120,000 of notes were
issued with $100,000 having been converted into 43,046 shares of
<TABLE>
<S> <C>
common stock $ 2,020,000
Promissory note payable due August 28, 1995 (see
Acquisition of Assets) 164,927
Promissory note payable due September 11, 1995 (see Acquisition of Assets). 104,000
Note payable to a former shareholder of CTI, A&P and Chase (see Business
Acquisitions). 2,495,000
Note payable to a former shareholder of CTI, A&P and Chase (see Business
Acquisitions). 3,755,000
Various notes payable to financial institutions and other credit providers with
combined monthly payments of $166,051 including interest at rates ranging
principally from 7.5% to 14% per annum. These notes mature from
September, 1996 through April, 2001 and are collateralized by specific
equipment having a net book value of $7,223,630. 5,069,165
Note payable to the former shareholders of CTI, A&P and Chase. (see Business
Acquisitions). 7,290,000
Unsecured non-interest bearing demand notes payable to related parties 289,292
---------------
21,187,384
Less: current maturities 3,822,762
---------------
Long-Term Debt, Net of Current Maturities $ 17,364,622
===============
</TABLE>
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LONG-TERM DEBT, Continued
Total maturities of long-term debt are as follows:
Year Ending June 30,
1997 $ 3,822,762
1998 6,719,067
1999 2,620,287
2000 571,495
2001 7,453,773
---------------
$ 21,187,384
===============
CAPITALIZED LEASE OBLIGATIONS
Leases meeting certain criteria are considered capital leases and the
related asset and lease obligations are recorded at their present value in the
financial statements. The interest rates of capital leases range from
incremental borrowing rate at the inception date of the lease or the lessors
implicit rate of return. Minimum future obligations on all capital leases in
effect as of June 30, 1996 are as follows:
Year Ending June 30,
1997 $ 13,290,336
1998 16,416,253
1999 10,054,800
2000 6,502,326
2001 846,823
Thereafter 2,240,361
---------------
Net Minimum Lease Payments 49,350,899
Less: Amount representing interest 10,506,676
---------------
Present Value of Net Minimum Lease Payments 38,844,223
Current maturities of capital lease obligations 10,768,645
---------------
Total Long-Term Lease Obligation $ 28,075,578
===============
Following is a summary of property held under capital leases included in
property, plant and equipment:
Office Equipment $ 214,702
Revenue Equipment 58,644,106
---------------
Subtotal 58,858,808
Less: Accumulated Amortization (19,951,268)
---------------
$ 38,907,540
===============
Amortization on assets under capital leases charged to expense for the
years ended June 30, 1996 and 1995 was $1,724,405 and $0, respectively.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
OPERATING LEASES
The Company leases warehouse terminal facilities and equipment in various
states under noncancelable operating leases with lease terms ranging from two to
five years. Certain of these leases have specific options, or if no renewal
option, certain of these leases give the Company a right of first refusal to
renegotiate the lease terms. Total rent expense for the year ended June 30, 1996
and 1995 amounted to $309,429 and $0, respectively.
The following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of June 30, 1996.
Year Ending June 30,
1997 $ 1,421,383
1998 872,430
1999 540,299
2000 375,586
2001 119,762
---------------
Total $ 3,329,460
===============
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments.
Cash and equivalents and restricted cash - the carrying amount reported in
the balance sheet approximates fair value.
Installment notes receivable - The carrying amount reported in the balance
sheet approximates fair market value inasmuch as such instruments both bear
interest rates and repayment terms consistent with the Companys present
financing practices and such terms are consistent with comparable equipment
financing transactions in the commercial marketplace.
Note receivable - related party - Given the proximity of this transaction
(May 23, 1996) to the balance sheet date, the carrying amount reported in the
balance sheet is believed to approximate fair value.
Lines of credit - Given the proximity of these transactions (April 8, 1996
and May 6, 1996) to the balance sheet date, the carrying amount reported in the
balance sheet is believed to approximate fair value.
Long-term debt
Convertible promissory notes - Given the proximity of this transaction
(March and April, 1996) to the balance sheet date, the carrying amount
reported in the balance sheet is believed to approximate fair value.
Notes payable to former shareholders of CTI, A&P and Chase - Given the
proximity of this transaction (April 4, 1996) to the balance sheet
date, the carrying amount reported in the balance sheet is believed to
approximate fair value.
Equipment notes - a reasonable estimate of fair value could not be
made without incurring excessive costs. Such obligations are carried
in the aggregate amount of $5,069,165, with interest rates ranging
from 7.5% to 14% and maturities from September, 1996 through April 1,
2001.
Capitalized lease obligations - A reasonable estimate of fair value
could not be made without incurring excessive costs. Such obligations
are carried in the aggregate amount of $38,844,223, with effective
interest rates of 5% to 15% and maturities at various dates through 1999.
Promissory note - Herrs - the carrying amount reported in the balance
sheet approximates fair value.
Related party note - Given the non-arms length nature of this
transaction, a reasonable estimate of fair value could not be made.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK
Preferred stock, 10,000,000 shares authorized, is as follows:
Series A, $1.00 per share, 0 shares issued and outstanding. These shares
are entitled to a dividend at the rate of seven percent (7%), payable quarterly.
Dividends on Series A shares are cumulative and rank in priority over dividends
on the Companys Series B preferred shares or its common shares. The Series A
preferred shares are convertible into common shares of the Company at any time
during the period commencing August 1, 1996 through July 21, 2000. The amount of
Company common shares into which Series A preferred shares shall be converted is
based upon the average bid and ask price of the Companys common shares for the
twenty business days prior to the Company receiving notice of intent to convert.
The Board of Directors has the authority to issue preferred stock in one or more
series and to fix the rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
Series B, $1.00 per shares, 0 shares authorized, issued and outstanding.
These shares are entitled to a dividend at the rate of seven percent (7%)
payable quarterly but commencing to accrue only thirty days after all
outstanding Series A shares have been converted to common shares Dividends on
Series B preferred shares are cumulative and rank in priority over the Companys
common shares. The Series B preferred shares are convertible into common shares
of the Company after the conversion of all Series A preferred shares into
Company common shares and during the period commencing August 1, 1996 through
July 31, 2000. The amount of Company common shares into which Series B preferred
shares shall be converted is based upon the average bid ask price of the
Companys common shares for the twenty business days prior to the Company
receiving notice of intent to convert. The Board of Directors has the authority
to issue preferred stock in one or more series and to fix the rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders.
WARRANTS
The Company issued seven common stock purchase warrants on Septmber 1,
1995. Each warrant may be exercised in whole or part and entitles the holder to
purchase 120,000 common shares at $2.50 per share and expires on October 27,
1996. As of October 11, 1996, warrant holders of 630,000 of 840,000 common
shares have exercised their warrants.
In addition, the Company issued one warrant to its Placing Agent (the
Agent) of the Convertible Promissory Notes. The warrant entitles the Agent to
purchase 100,000 shares of the Companys common stock as follows:
Exercise
No. of Price
Shares Per Share Exercise Term
- - ------------------ --------------- --------------------------------------
Start Expiration
_______________ __________________
60,000 $ 2.50 September 19, 1996 March 19, 1998
20,000 $ 5.00 March 19, 1997 September 19, 1998
20,000 $ 7.50 June 19, 1997 March 19, 1999
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
STOCK OPTION PLAN
On April 11, 1994, the Company adopted its Stock Incentive Plan (the
Plan). The Plan provides that certain options granted thereunder are intended
to qualify as incentive stock options within the meaning of Section 422A of
the United States Internal Revenue Code of 1986, while non-qualified options may
also be granted under the Plan. The plan provides for authorization of up to
200,000 (post-split) shares. The option price per share of Stock purchasable
under an Incentive Stock Option shall be determined at the time of grant but
shall be not less than 100% of the Fair Market Value of the Stock on such date,
or, in the case of a 10% Stockholder, the option price per share shall be no
less than 110% of the Fair Market Value of the Stock on the date an Incentive
Stock Option is granted to such 10% Stockholder.
The following is a summary of transaction:
1996 1995
---------------------
Outstanding, beginning of year 44,000 -
Granted during the year 36,000 164,000
Exercised during the year (at prices ranging from $.25 to
$3.13 per share) (44,000) 120,000
-------- ---------
Outstanding, end of year (at prices ranging from $.25 to
$3.13 per share 36,000 44,000
======== =========
Eligible, end of year for exercise currently (at prices 36,000 44,000
ranging
from $.25 to $3.13 per share)
======== ========
At June 30, 1996 and 1995, there were 0 and 80,000 shares, respectively,
reserved for future grants.
DEMAND NOTES RECEIVABLE FROM EXERCISE OF STOCK OPTIONS
In conjunction with the exercise of the non-qualified stock options,
the Company received notes amounting to $233,890 which are non-interest
bearing and payable upon demand.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INCOME TAXES
The benefit from income taxes consists of the following:
Year Ended June 30,
------------------------------------
1996 1995
--------------- ---------------
Current provision $ - $ -
Deferred provision 477,755 -
--------------- ---------------
$ 477,755 $ -
=============== ===============
The net current deferred tax and net long-term deferred tax liability as
presented in the accompanying balance sheet at June 30, 1996, consist of
the following amounts of deferred tax assets and liabilities:
Deferred Tax - Current
Deferred tax asset $ 677,059
Deferred tax liability -
---------------
Net Current Deferred Tax Asset 677,059
---------------
Deferred Tax - Long-Term
Deferred tax asset 423,178
Deferred tax liability (245,791)
---------------
Net Long-Term Deferred Tax Asset $ 177,387
===============
The components which give rise to deferred income tax benefit are temporary
differences in accumulated depreciation, net operating loss carryforwards,
allowance for losses on accounts receivable, installment sales and TRAC
leases as follows:
Year Ended June 30,
------------------------------------
1996 1995
--------------- ---------------
Depreciation $ 1,103,927 $ -
Net operating loss carryforwards 284,567 -
Allowance for losses on accounts
receivable 91,254 -
Installment sales 2,657 -
TRAC leases (1,004,650) -
--------------- ---------------
$ 477,755 $ -
=============== ===============
The Company has a net operating loss carryforward of approximately $748,861
for Federal purposes expiring June 30, 2010.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
RELATED PARTY TRANSACTIONS
On October 15, 1995 the Company entered into a finders fee agreement
pursuant to which it appointed Knoblock Bay Cove Trust (Bay Cove) as a
non-exclusive agent to seek and identify potential acquisition candidates in the
transportation industry. On November 29, 1995 Bay Cove acquired 600,000 shares
of CAT common stock by issuance to CAT of its promissory note in the principal
amount of $1,200,000. Upon Bay Coves introduction of CAT, A&P and Chase to CTI
culminating with CATs acquisition of these companies on April 4, 1996 a finders
fee of $910,000 and a non-accountable expense allowance of $290,000 became
payable to Bay Cove. The Company and Bay Cove agreed thereafter that the Company
would forgive the $1,200,000 promissory note in full and complete satisfaction
of its obligation under the finders fee agreement.
Blue Mack leases its facilities and office space under operating leases
from a certain shareholder of the Company who owns approximately 17% of the
Companys issued and outstanding shares.
The following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of June 30, 1996.
Year Ending June 30,
1997 $ 129,600
1998 86,400
1999 86,400
2000 28,800
---------------
$ 331,200
===============
The leases also contain provisions for taxes, insurance and building
maintenance expense.
EMPLOYMENT AGREEMENTS
On June 30, 1995, the Company entered into employment agreements with the
two shareholders of Herrs which provides a minimum annual salary of $75,000
each and incentives based on the Companys attainment of specified earnings. At
June 30, 1995, the total commitment, was $150,000. As part of the agreement, the
shareholders shall not directly or indirectly engaged in direct competition with
the Company in the freight transportation business for a period of two years.
The Company entered into three year employment agreements with two of its
officers effective September 1, 1996 providing for annual aggregate compensation
of $304,000, $380,000 and $456,000 for each of the ensuing three years,
respectively. Further, such officers are each entitled to an annual incentive
bonus equal to five percent (5%) of the first $1,000,000, six percent (6%) of
the net $500,000 and 7% of net income before income taxes in excess of
$1,500,000.
The Company entered into an agreement with an additional officer effective
June 15, 1996 providing for annual compensation of $78,000, $104,000 and
$130,000 for each of the ensuing three years, respectively. Further, this
officer was granted non-qualified stock options to purchase 36,000 shares of CAT
common stock and a $30,000 relocation advance to be reduced by $10,000 at the
end of each of the three years of the contract term.
EMPLOYEE BENEFIT PLANS
Two of the Companys subsidiaries sponsor qualified profit sharings for the
benefit of substantially all full-time employees. The plans qualify under
Section 401(k) of the Internal Revenue Code, thereby allowing such employees to
make tax deferred contributions to the plan. One such plan provides for an
employer match in contribution equal to 25% of the participants contribution to
the plan while the other provides for a discretionary matching contribution.
The total expense for the above plans amounted to $5,652 and $0 for the
years ended June 30, 1996 and 1995, respectively.
<PAGE>
Continental American Transportation, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
CONTINGENT LIABILITIES
The former shareholders and officers of CTI, A&P and Chase are under
indictment in a pending criminal proceeding. The indictment charges these
individuals, along with certain other parties, with the embezzlement of
approximately $3,700,000 from CTI and A&P in addition to criminal fraud and
criminal tax evasion.
While CTI and A&P were not included as named defendants in the indictment,
the indictment states among other things that the Grand Jury believes CTI and
A&P failed to report gross income as follows:
Alleged
Understated
Revenue
---------------
Year Ending June 30,
1991 $ 308,123
1992 669,897
1993 1,748,561
1994 963,838
1995 23,909
The former shareholders and officers of CTI and A&P have advised present
management of the Company that expenses exist to fully offset any revenues not
included in gross revenue of CTI and A&P for the periods reflected above. Should
this be determined not to be the case, the Company could potentially be assessed
taxes, penalties and interest which could amount to approximately $3,400,000.
On February 29, 1996, the two former stockholders of the Company sold their
shares to CAT (see Business Acquisitions). As a component of this transaction,
the two former shareholders have agreed to be responsible for and satisfy any
and all tax related liabilities that might arise as a result of the allegations
described above. Further, CAT has the right to deduct from the principal amount
of 7,290,000 promissory note payable to such former shareholders any such
liabilities paid by the Company.
On March 18, 1996, litigation against A&P was instituted relating to a
motor vehicle accident which occurred on August 24, 1995 resulting in the death
of one individual and personal injury to two others. Counsel representing A&P in
this matter has opined that A&P may be liable for compensatory damages in excess
of liability insurance coverage as well as punitive damages. Should A&P be found
liable, and be obligated to pay any such damages, CAT has the right to deduct
such sums from the $7,290,000 promissory note describe above.
The Company has learned that one of its former shareholders filed a
complaint with the Securities and Exchange Commission alleging the Company
illegally canceled his stock certificate being held in escrow. The Company has
responded to this complaint alleging, among other things, that this individual
made a claim to these shares without paying any consideration for them. On the
basis of this complaint the Securities and Exchange Commission is conducting a
preliminary investigation into the Companys stock trading activities. Company
management is fully cooperating with this preliminary investigation and intends
to vigorously defend against this action.
<PAGE>
Certain other claims, suits and complaints have been filed or are pending
against the Company. In the opinion of management, all matters are adequately
covered by insurance, or if not covered, are without merit or are of such kind,
or involved such amounts, as would not have a material effect of the results
of operations or the financial position of the Company if disposed of
unfavorably.
PRIOR PERIOD ADJUSTMENTS
The Company incurred $66,010 in prior period adjustments relating
substantially to accrued interest on a prior year loan, extinguishment of debt
and the recapture of amortization on the excess purchase price recognized on one
of its subsidiaries prior to its acquisition.
SUBSEQUENT EVENT
On or about July 23, 1996 the Company filed Form S-3 with the Security and
Exchange Commission to effect the registration of an aggregate of 1,810,000 CAT
common shares underlying 16 warrants with exercise prices ranging from $.25 to
$7.50 per share exercisable at any time through the twelve month period
commencing upon the effective date of the aforementioned registration statement
and from November 28, 1996 through the thirty six month period beginning on the
date that the aforementioned registration statement is declared effective by the
SEC.
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