Exhibit 7.1 - Financial Statements of Service Express, Inc.
SERVICE EXPRESS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
Report Of Independent Accountants
July 8, 1997, except as to Note 9 which
is as of August 15, 1997
To the Board of Directors and Shareholders of
Service Express, Inc.
In our opinion, the accompanying balance sheet and the related
statement of income and retained earnings and of cash flows presents
fairly, in all material respects, the financial position of Service
Express, Inc. at December 31, 1996 and the results of its operations
and its cash flows for the year then ended in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
SERVICE EXPRESS, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current assets
Cash $ 186,295
Accounts receivable (net of allowance
for doubtful accounts of $30,064) 365,325
Prepaid expenses 68,742
----------
Total current assets 620,362
Property and equipment, net 1,346,523
----------
Total assets $1,966,885
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable and accrued expenses $ 51,216
Current maturity of long-term debt 438,091
----------
Total current liabilities 489,307
Long term liabilities
Deferred tax liability 179,780
Long term debt 708,463
----------
Total liabilities 1,377,550
Stockholder's equity
Common stock, 75 shares $100 par issued and outstanding $ 7,500
Paid-in capital 7,500
Retained earnings 574,335
----------
Total stockholder's equity 589,335
----------
Total liabilities and stockholder's equity $1,966,885
==========
The accompanying notes are an integral part of these financial statements.
SERVICE EXPRESS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
Revenues
Freight revenue $4,380,099
Other operating revenue 47,894
----------
Total revenues 4,427,993
Carrier operating expenses
Salaries and benefits 1,262,679
Repairs and drivers expense 456,681
Operating taxes and licenses 498,699
Insurance 474,237
Facilities expense 11,699
Depreciation 619,737
Equipment rent 447,997
Fuel 471,322
Selling and administrative expense 225,459
----------
Total operating expenses 4,468,510
----------
Operating (loss) (40,517)
Interest expense 114,180
Other income (32,990)
----------
(Loss) before income taxes (121,707)
Benefit for income taxes 19,094
----------
Net (loss) (102,613)
Retained earnings, beginning of year 676,948
----------
Retained earnings, end of year $ 574,335
==========
The accompanying notes are an integral part of these financial statements.
SERVICE EXPRESS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
Cash flows from operating activities
Net loss $ (102,613)
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 619,737
(Gain) on sale of equipment (24,325)
Increase in allowance for bad debt 30,064
Decrease in trade receivables 38,757
Decrease in prepaid expenses 3,012
Increase in accounts payable and accrued expenses 4,491
Increase in deferred income taxes 24,352
----------
Net cash provided by operating activities 593,475
----------
Cash flows from investing activities
Purchase of equipment (356,408)
Proceeds from sale of equipment 42,515
----------
Net cash used in investing activities (313,893)
----------
Cash flows from financing activities
Net repayment of notes payable (399,970)
----------
Net cash used in financing activities (399,970)
----------
Net decrease in cash (120,388)
Cash, beginning of year 306,683
----------
Cash, end of year $ 186,295
==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 114,180
Income taxes -
The accompanying notes are an integral part of these financial statements.
SERVICE EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of operations
Service Express, Inc. (the "Company") is engaged in the freight
transportation business, serving customers primarily located in
the southern United States.
Revenues and receivables
Revenues are recognized upon delivery of freight.
Accounts receivable is primarily concentrated with various commercial
customers. The Company performs on-going credit evaluations of its
customers and believes that accounts receivable is well diversified,
thereby reducing potential credit risk.
Property and equipment
Property and equipment are stated at cost and are depreciated over
estimated useful lives ranging from 3 to 7 years using the straight
-line method. Expenditures for maintenance and repairs are charged
against income as incurred. The asset cost and related accumulated
depreciation of assets sold, or otherwise disposed of, are removed
from the related accounts and any gain or loss is included in
operations.
Income taxes
The company accounts for income taxes in accordance with Statement of
Financial Standards No. 109 "Accounting for Income Taxes: (SFAS 109).
Deferred income taxes are provided for the differences in the treatment
of income and expense items for financial reporting and income tax
purposes. A valuation allowance is provided for deferred income taxes
for which the future utilization is not assured.
Use of estimates
The preparation of the 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.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
1996
Trucks, tractors, and autos $3,683,314
Shop equipment 40,271
Office furniture and fixtures 14,920
Other 17,958
----------
3,756,463
Less: Accumulated depreciation 2,409,940
----------
Net property and equipment $1,346,523
==========
3. LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
Bank term loan, secured by tractors and trailers,
payable in monthly installments of principal and
interest of $43,020, with principal and interest due
February 5, 2000, bearing interest at 8.25% $1,146,554
Aggregate principal payments on borrowing for each of
the next five years are estimated as follows:
1997 $ 438,091
1998 355,204
1999 318,392
2000 34,867
----------
Total debt $1,146,554
==========
4. INCOME TAXES
For federal income tax purposes, the Company files a consolidated
federal income tax return with its parent company, Industrial Warehouse
Services, Inc.
The components of the provision (benefit) for income
taxes is summarized as follows:
December 31,
1996
Current:
Federal $ (36,930)
State (6,516)
-----------
(43,446)
-----------
Deferred:
Federal 20,700
State 3,652
-----------
24,352
-----------
Total $ (19,094)
===========
The benefit for income taxes differs from the federal statutory
income tax rate as follows:
December 31,
1996
Benefit at federal statutory rate $ (41,380)
Non-deductible expenses 23,834
Other (1,548)
-----------
Net provision for income taxes $ (19,094)
===========
A net deferred income tax liability results from temporary differences
in recognition of certain items for tax and financial statement purposes.
The primary sources of these differences and the (asset) liability
at December 31, 1996 consists of the following:
December 31,
1996
Depreciation methods $ 179,450
Allowance for doubtful accounts (11,125)
Other 11,455
-----------
Totals $ 179,780
===========
5. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) plan for all eligible employees. The
Company matches 50% of the employee's contribution, limited to 4% of
their gross salary. The employee vests in the Company's contributions
based on years of service.
6. RELATED PARTY TRANSACTIONS
The Company leases its terminal on a month-to month basis from a
stockholder. Lease payments of $30,000 were paid for the year ended
December 31, 1996.
The company paid $28,000 to Independent Warehouse Services (IWS),
owned by one of the Company's stockholders, for administrative fees
for the year ended December 31, 1996.
In the course of business, the Company has transactions with IWS and
one of its subsidiaries, Tuscaloosa Warehouse (TW). At December 31, 1996,
the Company has accounts receivable for freight services of $2,051 and
$4,799 from IWS and TW, respectively,
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under operating
leases which expire at various dates through 2002. The minimum rental
obligations under these leases are as follows:
1997 $ 12,500
1998 30,000
1999 30,000
2000 17,500
----------
$ 90,000
==========
Rent expense totaled $30,000 in 1996.
The Company has certain contingent liabilities resulting from litigation
and claims incident to the ordinary course of business. Management
believes that the probable resolution of such contingencies will not
materially affect the financial position or results of operations of
the Company.
8. PRINCIPAL CUSTOMERS
Twelve customers account for approximately 80% percent of the Company's
revenues for the year ended December 31, 1996.
9. SUBSEQUENT EVENTS
On August 15, 1997 all outstanding stock of the Company was acquired
by Transit Group, Inc. for a purchase price of approximately $3.5 million
consisting of the issuance of 903,226 shares of Transit Group, Inc. stock
for all issued and outstanding common stock of the Company.