ZAR TRAN, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Condition and Basis of Presentation
Financial condition:
As shown in the accompanying financial statements, Zar Tran, Inc. (the “Company”) has incurred net losses of approximately $505,000, $277,000 and $167,000 for 2005, 2004 and 2003, respectively. In addition, at December 31, 2005 and 2004, working capital deficits were approximately $2,887,000 and $1,345,000, respectively, and deficits in stockholder’s equity were approximately $1,626,000 and $1,121,000, respectively. A number of factors contributed to the losses in 2003 through 2005, including substantial increases in key operating costs such as payroll and fuel.
As discussed in Note 3, the Company is substantially dependent on Zartic, Inc. (“Zartic”), a related party. While Zartic management has confirmed to the Company that it intends to continue providing as-needed financial support of the Company’s operations, Zartic’s financial condition is similarly challenged.
Management’s plans to improve its financial condition include continued growth of “outside” (non-Zartic) business, increased efforts to manage key costs, including passing on fuel cost increases via surcharges, and possible inclusion of the Company in a Zartic refinancing transaction, as discussed in Note 3.
Basis of presentation:
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This assumption is largely based on Zartic’s planned continuing support and on the overall success of management’s plans as discussed above. If Zartic’s support were reduced or withdrawn, and/or management’s plans were not successful, the Company would not be able to meet its obligations without liquidating certain assets and/or attracting other sources of capital.
Note 2. Nature of Business and Significant Accounting Policies
Nature of business:
The Company is engaged in interstate transportation of frozen and perishable food products primarily for Zartic, as discussed in Note 3.
Significant accounting policies relative to the business are:
Revenue recognition:
Revenues are recorded generally when transportation services are rendered.
Fair value of financial instruments:
The carrying amounts reported in the balance sheets for accounts and notes receivable, accounts payable, accruals and checks issued in excess of bank balance approximate their fair values due to the short-term nature of these financial instruments. The carrying amounts of the Company’s long-term debt and capital lease obligations, including current maturities, approximate fair value due primarily to variable interest rates and/or short terms to maturity.
Accounts receivable:
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management believes that all end-of-year accounts receivable are collectible; accordingly, there is no reserve for bad debts in the balance sheets. Accounts deemed uncollectible are written off when that determination is made.
Property and equipment:
Property and equipment are stated at cost. The Company computes depreciation (including amortization of assets acquired via capitalized leases) by the straight-line method over estimated useful lives as follows:
| ·Building improvements | | 15-39 years |
| ·Executive coach | | 5-7 years |
| ·Transportation and related equipment | | 3-7 years |
Amortization expense on assets acquired via capitalized leases is included in depreciation expense.
S corporation - income tax status:
The Company, with the consent of its stockholder, has elected under federal and state income tax
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laws to be an S corporation. In lieu of corporation income taxes, S corporation stockholders are taxed on their proportionate share of the Company’s taxable income. Therefore, no provision or liability for income taxes has been included in the financial statements.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash. The Company’s policy is to invest its cash only in high credit quality financial institutions. At times such investments may be in excess of the FDIC insurance limit.
Use of estimates:
The preparation of financial statements in conformity with U. S. 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. Due to their prospective nature, actual results could differ from those estimates.
Note 3. Related Party Activity
Zartic, Inc.:
The Company and Zartic are related parties under common ownership and control. Due to the nature of this relationship, transactions between the entities may not necessarily be consummated on terms that would have been obtained if the entities were autonomous.
As discussed below, the Company is substantially dependent on Zartic, whose management has confirmed that it intends to continue providing as-needed financial support of the Company’s operations. At December 31, 2005 and continuing into 2006, Zartic was and is in default under the loan agreement with its primary lender and had/has a substantial net worth deficit. As part of its plan to overcome these and other negative attributes of its financial condition, Zartic has engaged a financial services firm to market a refinancing of Zartic, with an expectation of closing such a transaction before October 1, 2006. Due to the business relationship between the Company and Zartic, it is likely that such a refinancing would also include the Company.
During the years ended December 31, 2005, 2004 and 2003, revenues from freight services provided to Zartic totaled approximately $8,073,000, $6,692,000 and $6,551,000, respectively, which accounted for approximately 78% of transportation revenues for the year ended December 31, 2005, 72% for the year ended December 31, 2004, and 81% for the year ended December 31, 2003.
At December 31, 2005 and 2004, the Company had $593,822 and $716,757, respectively, of accounts receivable due from Zartic and $1,927,052 and $807,896, respectively, of accounts payable due to Zartic, which are presented in the accompanying balance sheets as a component of accounts receivable and accounts payable, respectively.
Certain executive compensation and other administrative costs of the Company were borne by Zartic in 2005, 2004 and 2003. In addition, the Company paid or owed Zartic for group health insurance, employee 401(k) profit sharing contributions, workman’s compensation and vehicle insurance coverage totaling $1,213,788, $935,638 and $1,056,242, respectively, for the years ended December 31, 2005, 2004 and 2003.
At December 31, 2005, the Company had an unsecured note receivable due from Zartic totaling $391,703 ($489,683 at December 31, 2004). Monthly principal installments of $8,165 plus interest at prime plus 1.0% are due through January 2008, when the unpaid principal balance of $195,743 is due. The note is subordinate to Zartic’s loan agreement with its primary lender.
Other:
At December 31, 2005 and 2004, the Company had an unsecured, due on demand loan from its sole stockholder totaling $24,635.
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Note 4. Long-Term Debt
Long-term debt at December 31, 2005 and 2004 consists of the following:
| | 2005 | | 2004 | |
Note payable, bank, due in monthly payments of $8,165, plus interest at prime plus 1.0%, through January 2008 when remaining balance of $195,743 is due; collateralized by substantially all property and equipment not already pledged on other debt. | | $ | 391,703 | | $ | 489,683 | |
| | | | | |
Note payable, other financial institution, due in monthly payments of $4,164, including interest at 9.49%, through June 2010; collateralized by an executive coach. | | 187,752 | | 218,220 | |
| | | | | |
Note payable, other financial institution, due in monthly payments of $1,641, including interest at 8.0%, through August 2010; collateralized by transportation equipment. | | 76,174 | | — | |
| | 655,629 | | 707,903 | |
| | | | | |
Less current maturities | | 151,521 | | 133,769 | |
| | | | | |
Long-term portion | | $ | 504,108 | | $ | 574,134 | |
At December 31, 2005, payments due on the above-described notes were as follows:
2006 | | $ | 151,521 | |
2007 | | 150,753 | |
2008 | | 253,501 | |
2009 | | 63,217 | |
2010 | | 36,637 | |
| | $ | 655,629 | |
Note 5. Capital Lease Obligations
During 2003, the Company acquired twenty-one used trailers under a capital lease agreement, and added ten more units in 2004. Obligations under the lease have been recorded in the balance sheets at the present value of the future minimum lease payments, discounted at an interest rate of 4.5%. The capitalized cost/accumulated depreciation of these trailers at December 31, 2005 and 2004 totaled $1,204,170/$495,284 and $1,204,170/$254,450, respectively.
In 2004, the Company acquired forty-four Mobile Max tracking units under another capital lease agreement. Obligations under this lease have been recorded in the balance sheet at the present value of the future minimum lease payments, discounted at an interest rate of 5.5%. The capitalized cost and accumulated depreciation of these units at December 31, 2005 and 2004 totaled $95,200/$38,080 and $95,200/$19,040, respectively.
In 2005, the Company acquired four tractors under a capital lease agreement. Obligations under this lease have been recorded in the balance sheet at the present value of the future minimum lease payments, discounted at an interest rate of 6.75%. The capitalized cost and accumulated depreciation of these units at December 31, 2005 totaled $424,596 and $49,536, respectively.
Also in 2005, the Company acquired an additional thirty-six tractors under a capital lease agreement. Obligations under this lease have been recorded in the balance sheet at the present value of the future minimum lease payments, discounted at an interest rate of 4%. The capitalized cost and accumulated depreciation of these units at December 31, 2005 totaled $3,661,660 and $302,081, respectively.
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At December 31, 2005, future minimum payments under these capital leases were as follows:
Year ending December 31: | | | |
2006 | | $ | 1,371,563 | |
2007 | | 1,363,247 | |
2008 | | 1,328,785 | |
2009 | | 696,217 | |
2010 | | 91,859 | |
Thereafter | | 30,932 | |
| | | |
Total future payments | | 4,882,603 | |
Less amount representing interest | | 412,464 | |
| | | |
Present value of future payments | | 4,470,139 | |
Less current portion | | 1,193,302 | |
| | | |
Non-current portion | | $ | 3,276,837 | |
Note 6. Lease Commitments
The Company leases office equipment under a non-cancelable operating lease which provides for monthly rent of $370. The lease expires in June 2010.
Lease expense for the lease described above and other expired/cancelled leases for the years ended December 31, 2005, 2004 and 2003, was $926,068, $1,370,385 and $1,323,951, respectively.
Future minimum rentals under the lease agreement described above are as follows:
2006 | | $ | 4,435 | |
2007 | | 4,435 | |
2008 | | 4,435 | |
2009 | | 4,435 | |
2010 | | 2,217 | |
| | $ | 19,957 | |
Additionally, the Company has a cancelable tire lease and maintenance agreement that provides for monthly fees based on operational trailer miles as determined by the lessor and the Company.
Note 7. Employee Benefit Plan
The Company participates in the Zartic, Inc. Savings Investment Plan (the “Plan”). The Plan is a defined contribution 401(k) plan covering substantially all employees of Zartic and the Company. Contributions by the Company to the Plan are discretionary. No such contributions were made to the Plan for the years ended December 31, 2005, 2004 or 2003.
Note 8. Reclassification
Certain items in the 2004 financial statements have been reclassified to agree with classifications adopted in 2005.
Note 9. Subsequent Event
Effective December 11, 2006, pursuant to an Asset Purchase Agreement dated November 3, 2006, Pierre Foods, Inc. through its wholly-owned subsidiaries, Pierre Newco I, LLC and Pierre Newco II, LLC, acquired substantially all of the assets and assumed certain liabilities of Zartic, Inc. and Zar Tran, Inc., respectively, and acquired certain assets of their affiliates. The preliminary aggregate purchase price was approximately $91.6 million, which included $1.2 million of transaction costs incurred by Pierre Foods, Inc. The liabilities assumed by the buyers included, among other things, $4.1 million in capital lease obligations. An aggregate of $5.5 million of the cash portion of the purchase price was placed in escrow at the closing to satisfy certain indemnification and severance obligations of the Company.
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