Exhibit 7.2 - Financial Statements of Capital Warehouse, Inc.
CAPITAL WAREHOUSE, INC.
FINANCIAL STATEMENTS
FEBRUARY 29, 1997 AND FEBRUARY 28, 1996
Report of Independent Accountants
August 22, 1997
To the Board of Directors and Stockholder of
Capitol Warehouse, Inc.
In our opinion, the accompanying balance sheets and the
related statements of income and retained earnings and of
cash flows present fairly, in all material respects, the
financial position of Capitol Warehouse, Inc. at
February 29, 1997 and February 28, 1996, and the results
of its operations and its cash flows for the years 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 audits. We conducted our audits
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 audits provide a reasonable basis for the opinion
expressed above.
/S/ PRICE WATERHOUSE LLP
CAPITAL WAREHOUSE, INC.
Balance Sheets
February 29, February 28,
1997 1996
Assets
Current assets
Cash and cash equivalents $ 26,989 $ 92,188
Accounts receivable, trade (net of
allowance of $65,275 and $0 respectively) 1,559,488 1,309,357
Other current assets 94,525 86,547
------------ ------------
Total current assets 1,681,002 1,488,092
Long term assets
Equipment, at net book value 13,732,911 11,136,476
Other assets 68,612 174,564
------------ ------------
Total assets $ 15,482,525 $ 12,799,132
============ ============
Liabilities and Stockholder's Equity
Current Liabilities
Current obligations under lease $ 3,553,927 $ 2,702,182
Accounts payable 757,369 533,548
Accrued expenses 348,778 589,566
------------ ------------
Total current liabilities 4,660,074 3,825,296
Long term liabilities
Deferred Taxes 433,810 419,065
Long term obligations under capital
lease 8,733,492 6,883,055
Other long term liabilities 59,775 79,374
------------ ------------
Total liabilities 13,887,151 11,206,790
Stockholder's equity
Common stock , no par value; 2000
shares authorized, 301 shares issued 105,198 105,198
Retained earnings 1,574,241 1,571,209
------------ ------------
1,679,439 1,676,407
Less: Treasury stock, at cost -
200 shares 84,065 84,065
------------ ------------
Total stockholders' equity 1,595,374 1,592,342
------------ ------------
Total liabilities and stockholder's
equity $ 15,482,525 $ 12,799,132
============ ============
The accompanying notes are an integral part of these financial statements.
CAPITAL WAREHOUSE, INC.
Statements of Income
February 29, February 28,
1997 1996
Revenue $ 16,919,893 $ 13,514,852
Operating expenses
Operations salaries and benefits 4,660,551 3,985,729
Fuel 3,081,206 2,086,867
Equipment rental 841,956 523,517
Insurance 1,032,059 789,938
Tires and maintenance 1,087,128 473,601
Depreciation 2,511,525 2,272,716
Terminal expense 11,501 31,410
Purchased transportation 976,630 737,283
Other operating costs 1,685,852 685,469
Selling and administrative expenses 432,814 967,023
------------ ------------
Total costs and expenses 16,321,222 12,553,553
Income from operations 598,671 961,299
Other income (expense)
Other income, net 485,716 178,077
Interest income 994 3,431
Interest expense (1,067,604) (882,762)
----------- ------------
Income before income taxes 17,777 260,045
Provision for income taxes 14,745 105,388
----------- ------------
Net income $ 3,032 $ 154,657
=========== ============
The accompanying notes are an integral part of these financial statements.
CAPITAL WAREHOUSE, INC.
Statements of Retained Earnings
February 29, February 28,
1997 1996
Balance at beginning of year $ 1,571,209 $ 1,416,552
Net Income 3,032 154,657
------------ ------------
Balance at end of year $ 1,574,241 $ 1,571,209
============ ============
The accompanying notes are an integral part of these financial statements.
CAPITAL WAREHOUSE, INC.
Statements of Statements of Cash Flows
February 29, February 28,
1997 1996
Cash flows from operating activities
Net income $ 3,032 $ 154,657
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 2,511,525 2,272,716
Deferred income taxes 14,745 59,485
Changes in operating assets and liabilities
Accounts receivable (250,131) (432,730)
Other current assets (7,978) (10,413)
Other assets 105,952 (51,498)
Accounts payable 223,821 (35,368)
Accrued expenses (240,788) 445,882
Other liabilities (19,598) (20,536)
------------ ------------
Net cash provided by operating
activities 2,340,580 2,382,195
------------ ------------
Cash flows from investing activities
Purchases of equipment (2,481,041) (4,130,916)
------------ ------------
Cash flows from financing activities
Net financing of capital lease obligations 75,262 1,696,790
------------ ------------
Decrease in cash and cash equivalents (65,199) (51,931)
Cash and cash equivalents, beginning of year 92,188 144,119
------------ ------------
Cash and cash equivalents, end of year $ 26,989 $ 92,188
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 860,721 $ 765,433
Income taxes - -
The accompanying notes are an integral part of these financial statements.
CAPITAL WAREHOUSE, INC.
Notes to Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Nature of operations
The Company is engaged in the transportation and warehousing business,
serving customers located primarily in the eastern half of the United
States. The ability of the Company's customers to honor their
obligations is greatly dependent upon the manufacturing economy.
Revenues and receivables
Revenues are recognized upon delivery of freight or upon services
rendered. 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.
Basis of presentation
Certain prior year accounts have been reclassified to conform
with current year classifications.
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.
Fair value of financial instruments
The carrying amounts of financial instruments including cash,
accounts receivable, accounts payable and accrued expenses approximate
fair value at February 29, 1997 due to the relatively short period
to maturity of these instruments. Long-term purchase obligations
with fixed interest rates are recorded at face value (see Note 4):
however, the obligations' fair values at February 29, 1997 are not
practicable to estimate.
Property and equipment
The Company uses the straight-line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable
assets over their estimated useful lives.
Items capitalized as part of property and equipment are valued at cost.
Maintenance and repairs are expensed 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
Deferred income tax assets and liabilities are computed for differences
between the financial reporting basis and income tax basis of assets and
liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods
in which the differences are expected to affect taxable income.
The provision for income taxes is the tax payable or refundable for
the period plus or minus the change during the period in deferred tax
assets and liabilities.
2. Prepaid Lease
The Company has $48,552 in prepaid lease expense representing the
remaining basis of transportation equipment traded from transportation
equipment lease under an operating lease. The prepaid expense is
being amortized over the remaining life of the lease. The amount to
be amortized in the next twelve months is included in prepaid expenses
on the financial statements as a current asset.
3. Retirement Plan
On March 1, 1995, The Company established a salary reduction
retirement savings plan covering substantially all employees.
Under the plan, the Company will match 10% of the first 5%
contributed by the employee. Employees are fully vested after
6 years of service. During the years ended 1997 and 1996,
related contributions charged to expense were $10,627 and $9,088,
respectively.
4. Long-Term Debt
Long-term debt at February 29, 1997 and February 28,
1996 consists of the following:
1997 1996
7.84% to 14.015% equipment purchase
obligations payable in monthly,
instalments, including interest $ 8,733,492 $ 6,883,055
Lease payments due in one year 3,553,927 2,702,182
------------ ------------
Total long-term debt $ 12,287,419 $ 9,585,237
============ ============
Future minimum lease payments on initial or remaining term capital
lease obligations at February 29, 1997 consists of the following:
Year ending
February 29,
1998 $ 4,745,662
1999 4,025,462
2000 3,670,066
2001 2,631,898
2002 1,517,819
------------
Total capital leases 16,590,907
Less: Amount representing
interest (4,303,488)
------------
$ 12,287,419
============
In addition, the Company leases various equipment on a monthly
basis under non-cancelable operating leases. Rent expense for
1997 and 1996 amounted to $521,642 and $381,509, respectively.
5. Income Taxes
The components of the provision for income taxes is summarized
as follows:
1997 1996
Current:
Federal $ $ 39,018
State 6,885
------------ ------------
45,903
------------ ------------
Deferred:
Federal 12,535 50,560
State 2,210 8,925
------------ ------------
14,745 59,485
------------ ------------
$ 14,745 $ 105,388
============ ============
The provision for income taxes differed from the federal statutory
income tax rate as follows:
1997 1996
Provision at federal statutory rate $ 6,044 $ 88,415
State and local income taxes-
net of federal tax benefit 800 11,702
Non-deductible expenses 8,197 5,879
Other (296) (608)
----------- ------------
Net provision for income taxes $ 14,745 $ 105,388
=========== ============
A net deferred income tax liability results from temporary
differences in recognition of differences for tax and financial
statement purposes. The sources of these differences and the
(asset) liability at February 29, 1997 and February 28, 1996
from each were as follows:
1997 1996
Depreciation methods $ 1,895,140 $ 1,505,468
Allowance for doubtful accounts (25,457) -
Utilization of carryovers
Net operating loss (1,312,053) (962,578)
Alternative minimum tax (103,742) (103,742)
Investment tax credit (18,320) (18,320)
Other (1,758) (1,763)
------------ ------------
Totals $ 433,810 $ 419,065
============ ============
For income tax purposes, the Company has available net operating
loss carryovers of $3,364,238 which may be used to reduce taxable
income of the Company for subsequent years. The carryovers expire
as follows:
February 28, 2002 $ 30,918
February 28, 2005 11,428
February 28, 2009 120,974
February 28, 2010 425,416
February 28, 2011 545,217
February 28, 2012 2,230,285
-----------
$ 3,364,238
===========
6. Related Party Transactions
The Company leases its warehouses and terminal on a month-to-month
basis from its sole stockholder. Rentals of $481,722 and $381,509
on these properties were paid for the years ended 1997 and 1996,
respectively.
A life insurance policy with cash surrender value of $68,600 at
February 29, 1997 is pledged as security on a mortgage loan on
property owned by the sole stockholder which is rented to the
Company. The cash surrender value has been recorded in other
assets on the accompanying balance sheet. The Company also leases
a tractor from its sole stockholder; rental of $12,000 was paid
for the years ended 1997 and 1996.
The Company leases trailers from a company which is owned by the
sole stockholder's spouse. Rent expense on these trailers was
approximately $31,400 for the years ended 1997 and 1996, respectively.
7. Workers' Compensation Claims Payable
The Company has settled workers' compensation claims related to
prior years and continues to make periodic payments. At February 29,
1997, the balance sheet reflects future minimum payments on these
settlements as follows:
Year ending
February 28,
1998 $ 24,893
1999 20,389
2000 20,389
2001 18,369
2002 628
------------
$ 84,668
============
8. Contingent Liabilities
The Company has certain contingent liabilities resulting from
litigation and claims incident to the ordinary course of business.
Management believes the ultimate result of these legal actions and
proceedings will not have a material adverse affect upon the
financial position of the Company.
9. Principal Customers
The Company serves six customers which were responsible for
approximately 63 percent of revenues for the years ended
February 29, 1997 and February 28, 1996.
10. Subsequent Event
On August 15, 1997, all outstanding stock of the Company was
acquired by Transit Group, Inc. for a purchase price of
approximately $4.3 million consisting of the issuance of 641,283
shares of Transit Group, Inc. stock for all issued and outstanding
common stock of the Company.