SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 20, 1998
CONTINENTAL AMERICAN TRANSPORTATION, INC.
Exact name of Registrant as specified in charter)
Colorado 0-18729 84-1089599
(State or other (Commission (IRS employee
jurisdiction of file number) identification
incorporation no.)
495 Lovers Lane Road, Calhoun, Georgia 30701
- --------------------------------------------------------
(Address of principal executive office) Zip Code
Registration telephone number, including area code: (706) 629-8682
Item 7. Financial Statements and Exhibits
Registrant hereby files its Financial Statements and Report of
the Registrant's Independent Certified Public Accountants,
Grant Thornton LLP, for its fiscal year ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
CONTINENTAL AMERICAN TRANSPORTATION, INC.
By: s/Timothy Holstein
Tim Holstein, President
Dated: March 20, 1998
catfor23.8-k
2
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CONTINENTAL AMERICAN TRANSPORTATION, INC.
AND SUBSIDIARIES
June 30, 1997
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET 4
CONSOLIDATED STATEMENT OF OPERATIONS 6
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' DEFICIT 7
CONSOLIDATED STATEMENT OF CASH FLOWS 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10
2
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Continental American Transportation, Inc. and Subsidiaries
We were engaged to audit the accompanying balance sheet of Continental American
Transportation, Inc. and Subsidiaries as of June 30, 1997, and the related
statements of operations, STOCKHOLDERS' deficit, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management.
The Company's books and records were not maintained in a timely and effective
manner, and accordingly there is no assurance that all transactions during the
period were recorded. In addition, the management team that was responsible for
maintaining these books and records was no longer employed by the Company at the
time of our engagement. Because of the circumstances referred to above, we were
unable to apply adequate auditing procedures in order to satisfy ourselves as to
the accuracy of amounts reflected in the accompanying financial statements.
As discussed in Notes Q and S, the Company is a party to several lawsuits
including litigation relating to a motor vehicle accident whereby the Company
may be liable for substantial compensatory damages in excess of insurance
liability coverage.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During the year, the Company suffered
significant operating losses together with a significant erosion of the
Company's liquidity. These conditions continued subsequent to June 30, 1997
resulting in management decision to enter into a marketing agreement on October
31, 1997, whereby a third party received the right to operate certain revenue
producing assets of the Company. This agreement provides the third party with
the option to acquire the assets within nine months of the execution of the
marketing agreement under certain terms and conditions. These factors among
others, raise substantial doubt about the Company's ability to continue as a
going concern. These financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Because of the significance of the uncertainty about the outcome of the
litigation referred to above and uncertainty regarding the Company's ability to
continue as a going concern together with the Company's lack of reliable books
and records we are unable to express, and we do not express an opinion on these
financial statements.
s/Grant Thornton LLP
Atlanta, Georgia
January 19, 1998
3
Continental American Transportation, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 1997
(See Report of Independent Certified Public Accountants)
ASSETS
CURRENT ASSETS
Restricted cash (Note B) $ 959,946
Trade accounts receivable, net of allowance
of doubtful accounts of $1,077,207 8,930,547
Installments notes receivable - current portion (Note C) 448,107
Inventories 161,363
Other current assets 1,154,477
Total current assets 11,654,440
INVESTMENT IN MARKETABLE SECURITIES (Note D) -
PROPERTY, PLANT AND EQUIPMENT (Note E) 14,218,909
OTHER ASSETS
Note receivable - related party (Note D) 145,000
Installment notes receivable, excluding current portion (Note C) -
Other assets 448,527
593,527
$ 26,466,876
The accompanying notes are an integral part of this statement.
4
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Lines of credit (Note F) $ 5,639,482
Current maturities of long-term debt (Note G) 5,593,024
Current maturities of capital lease obligations (Note H) 24,546
Accounts payable - trade 5,166,353
Accounts payable u shareholders 285,903
Accrued expenses 4,396,040
Total current liabilities 21,105,348
LONG-TERM DEBT, excluding current maturities (Note G) 13,864,955
CAPITAL LEASE OBLIGATIONS, excluding current maturities
(Note H) 207,453
STOCKHOLDER'S DEFICIT
Preferredstock, $1 par value, 200,000 sharesauthorized
And issued, 125,000 shares outstanding (Note J) 125,000
Common stock, no par value, 20,000,000 shares authorized,
5,383,224 shares issued (Notes K and L) 10,205,361
Accumulated deficit (18,895,154)
Treasury stock, 60,000 shares, at cost (146,087)
(8,710,880)
$ 26,466,876
5
Continental American Transportation, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended June 30, 1997
(See Report of Independent Certified Public Accountants)
Operating revenues $ 101,256,345
Operating expenses
Salaries and benefits 32,385,284
Purchased transportation 14,794,260
Operating supplies and expenses 32,610,203
Depreciation and amortization 5,223,958
Loss on impairment of goodwill 4,105,035
Claims and insurance 4,815,267
Operating taxes and licenses 918,395
Communications and utilities 1,487,393
General and administrative 15,137,824
111,477,619
Loss from operations (10,221,274)
Other income (expenses)
Interest and other income 74,044
Net gain on disposal of equipment 1,065,190
Unrealized loss on marketable securities (360,000)
Interest expense (6,263,294)
(5,484,060)
Loss before income taxes (15,705,334)
Provision for income taxes (Note M) -
Net loss $ (15,705,334)
Net loss per share $ (3.13)
Weighted average common shares outstanding $ 5,009,617
The accompanying notes are an integral part of this statement.
6
Continental American Transportation, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(See Report of Independent Certified Public Accountants)
Year ended June 30, 1997
Demand notes
Preferred stock Common stock receivable from
Series A Series B exercise of
Number of Number of Number of Accumulated Treasury stock options
shares Amount shares Amount shares Amount deficit stock and Warrants Total
Balance, June 30, 1996, as
previously reported - $ - - $ - 4,407,544 $8,428,106 $(1,617,848) $(100,781) $(233,890) $6,475,587
Prior period adjustment
(Note R) - - - - - - (1,571,972) - - (1,571,972)
Balance June 30, 1996,
as restated - - - - 4,407,544 8,428,106 (3,189,820) (100,781) (233,890) 4,903,615
Issuance of common stock to
various shareholders - - - - 35,000 66,875 - - - 66,875
Payments received on demand
notes receivable from
exercise of
stock options - - - - - - - - 233,890 233,890
Exercise of stock warrants - - - - 415,000 941,250 - - - 941,250
Issuance of preferred
stock - Series A 200,00 200,000 - - - - - - - 200,000
Conversion of preferred
stock - Series A (75,000) (75,000) - - 74,602 75,000 - - - -
Conversion of a convertible
promissory note - - - - 451,078 694,130 - - - 694,130
Acquisition of 30,000
shares of treasury stock - - - - - - - (45,306) - (45,306)
Net loss for year ended
June 30, 1997 - - - - - - (15,705,334) - - (15,705,334)
Balance, June 30, 1997 125,000 $ 125,000 - $ - $ 5,383,224 $10,205,361$ (18,895,154)$(146,087) $ - $(8,710,880)
The accompanying notes are an integral part of this statement.
7
Continental American Transportation, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended June 30, 1997
(See Report of Independent Certified Public Accountants)
Cash flows from operating activities:
Net loss $ (15,705,334)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 5,223,958
Loss on impairment of goodwill 4,105,035
Gain on sale of equipment (1,065,190)
Unrealized loss on marketable securities 360,000
Allowance for losses 1,055,620
Deferred income taxes 677,059
Decrease in accounts receivable and other assets 3,289,473
Increase in accounts payable and other liabilities 1,998,272
Decrease in taxes payable (572,258)
15,071,969
Net cash used in operating activities (633,365)
Cash flows from investing activities:
Principal payments received on notes receivable 234,180
Proceeds from sale of property and equipment 1,373,236
Loans made to related party (55,000)
Net cash provided by investing activities
1,552,416
Cash flows from financing activities:
Principal payments on notes payable (1,729,405)
Proceeds from issuance of preferred
and common stock 430,221
Net cash used in financing activities (1,299,184)
Net decrease in cash and cash equivalents,
including restricted cash (380,133)
Cash and cash equivalents, including
restricted cash, beginning of year 1,340,079
Cash and cash equivalents, including
restricted cash, end of year $ 959,946
8
Continental American Transportation, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended June 30, 1997
(See Report of Independent Certified Public Accountants)
Supplemental Disclosures of Cash Flow Information Cash paid during the year for:
Interest $ 5,188,294
Income taxes $ -
Supplemental Schedule of Non-Cash Investing and Financing
During to the year ended, the Company converted $360,000 of a $450,000 note
receivable from a related party to nine million shares of common stock (see Note
D).
During the year ended, $410,000 of 7% and 10% subordinate debentures were
converted to 53,258 shares of common stock in the Company.
The accompanying notes are an integral part of these statements.
9
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
1. 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), and Carpet Transport, Inc. (CTI) 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.
2. 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.
3. 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.
4. Credit Risk
The Company extends credit in the form of equipment financing notes and trade
accounts receivable. A substantial portion of the trade receivables are to
customers operating in the carpet industry and repayment is dependent upon this
industry's economic performance. 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 the specific obligations,
adequacy of collateral and other pertinent information.
5. 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.
10
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
6. 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. Tires on 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.
7. 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.
During the year management determined that intangible assets associated with
acquisition made had become impaired due to excessive operating losses incurred,
and accordingly, has written-off the remaining value attributable to these
assets.
8. 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.
11
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
9. Claims and Insurance Accruals
The Company provides for the estimated cost of claims insured but not paid for
which it retains a portion of the risk under workmen's compensation, health
care, liability and property damage programs.
10. Earnings Per Share
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.
11. Revenue Recognition
Revenues consist principally of freight revenues. Freight revenues are
recognized as earned when freight is shipped from the terminal. This method is
not materially different from either recognizing all revenues and expenses at
the time of delivery or recognizing revenues and expenses on a pro rata basis.
12. 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
13. 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. As of June
30, 1997, the Company has determined that such an impairment has occurred. This
is primarily attributable to $4,105,035 of goodwill associated with acquisitions
of CTI, A&P, Chase, and the net assets of Herr Motor Express resulting from
continued operating losses.
12
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
14. Fair Value
Statement of Financial Accounting Standards 107, Disclosures about Fair Value of
Financial Instruments (SFAS 107), requires disclosure of the estimated fair
value of an entity's financial assets and liabilities. Management believes the
carrying value approximates fair market value for cash, receivables, property,
accounts payable, capital leases and long-term debt.
NOTE B - RESTRICTED CASH
CTI has entered into an agreement with the Georgia State Board of Workmen's
Compensation whereby CTI pays worker's compensation claims as a self insurer.
The agreement is collateralized by certificates of deposit amounting to
$750,000. CTI's specific excess insurance self retention is $250,000 per
occurrence.
Additionally at June 30, 1997, 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.
NOTE C - 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 12 to 48 months with interest ranging principally from 15%
to 20% per annum. These notes mature on various dates within the next two years.
Title to such revenue equipment is retained by the Company until the note is
paid in full. The payments received by the Company for the year ended June 30,
1997 reduced the receivable by $234,180. At June 30, 1997, an allowance has been
reserved equal to 100% of the long-term portion based on the lack of expected
future collections by the Company. (see Note S).
Total notes receivable $ 896,213
Less current portion (448,106)
Long-term portion 448,107
Less reserve (448,107)
Net long-term portion $ -
13
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE D - 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 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 $145,000 at June 30, 1997. Prior to year end, $360,000 of
outstanding principal under this financing arrangement was converted into
approximately nine million shares of Bio-Dyne Common stock. Management has
questioned the value of these shares and, accordingly, written-off the value
attributable to these securities.
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including assets under capital leases, consist of
the following at June 30, 1997:
Land $ 3,045,200
Buildings 2,869,123
Leasehold improvements 2,289,470
Revenue equipment 13,386,861
Other operating equipment 1,542,142
Shop, furniture and office equipment 919,174
24,051,970
Accumulated depreciation and amortization (9,833,061)
Net book value $ 14,218,909
Depreciation charged to expense for the years ended June 30, 1997 was
$3,869,952.
14
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE F - LINES OF CREDIT
Three subsidiaries of the Company have revolving credit agreements, which CAT
and two of its officers have guaranteed. 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. On
December 17, 1996, CTI, A&P and Chase received notice of termination from the
lender. The lender, at the request of all three subsidiaries continued to
advance funds under modified terms. Effective January 17,1997, the terms of the
agreement allowed for funds to be advanced at a rate of prime plus 7.75% based
on a percentage of qualified accounts receivable starting at 75% and reducing by
1% for each subsequent weekly period. At June 30, 1997, borrowings under the
above credit facility amounted to $4,771,021.
Another subsidiary of the Company also has a revolving credit agreement which
CAT and two of its officers have guaranteed. 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 interest in
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, 1997,
borrowings under the above credit facility exceeded the maximum amount.
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following:
Convertible promissory notes bearing interest 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 closing average bid price of the
Company's shares for the five trading days
prior to conversion or 120% of the closing average
bid price of the Company's 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, 1997, $3,770,000 of notes were
issued with $510,000 having been converted into
59,258 shares of common stock. $ 3,260,000
15
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE G - LONG-TERM DEBT - Continued
Notes payable to shareholder, bearing interest 8% Per annum, due September
1, 1997, secured
by real estate and improvements. 11,790,000
Various notes payable to finance institutions and other credit providers
with combined monthly payments of $166,051 including interest at
rates ranging from 7.5% to 14% per annum. These notes mature from
September 1997 through April 2001 and are collateralized by specific
equipment
having a net book value of $7,223,630 4,372,096
Other 35,883
19,457,979
Less current maturities (5,593,024)
Total long-term debt, net of current maturities $13,864,955
Total maturities of long-term debt areas follows:
Year ending June 30,
1998 $ 5,593,024
1999 1,093,024
2000 1,093,024
2001 1,093,024
2002 10,585,883
$ 19,457,979
16
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE H - 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 approximately 5% to
15%, and are imputed based on the lower of the Company's incremental borrowing
rate at the inception date of the lease or the lessor's implicit rate of return.
Net minimum lease payments $ 362,556
Less amount representing interest (130,557)
Present value of net minimum lease payments 231,999
Current maturities of capital lease obligations (24,546)
Total long-term lease obligation $ 207,453
Minimum future obligations on all capital leases in effect as of June 30, 1997
are as follows:
Year ending June 30,
1998 $ 40,284
1999 40,284
2000 40,284
2001 40,284
2002 40,284
Thereafter 161,136
Net minimum lease payments $ 362,556
Following is a summary of property held under capital leases included in
property, plant and equipment as of June 30, 1997:
Office Equipment $ 7,028
Revenue Equipment 1,481,074
Subtotal 1,488,102
Less accumulated amortization (923,727)
$ 564,375
Amortization on assets under capital leases charged to expense for the years
ended June 30, 1997 was $297,620.
17
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE I - OPERATING LEASES
The Company leases warehouse terminal facilities and revenue equipment in
various states under noncancelable operating leases with lease terms ranging
from two to seven 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, 1997 amounted to $9,129,120.
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, 1997:
Year ending June 30,
1998 $ 9,129,120
1999 9,129,120
2000 9,129,120
2001 3,374,542
2002 3,374,542
Thereafter 3,374,542
$37,510,986
NOTE J - 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, payable quarterly.
Dividends on Series A shares are cumulative and rank in priority over dividends
on the Company's 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 Company's common shares for the
20 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.
18
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE J - PREFERRED STOCK - Continued
Series B, $1.00 per share, 0 shares authorized, issued and outstanding. These
shares are entitled to a dividend at the rate of seven percent payable quarterly
but commencing to accrue only 30 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 Company's 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 Company's common shares for the 20
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.
NOTE K - WARRANTS
The Company issued seven common stock purchase warrants on September 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
27,1997. As of June 30, 1997, 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 Company's common stock as follows:
Exercise
No. of Price Exercise Term
Shares Per Share 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
19
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE K u WARRANTS - Continued
Management Agreement - Global Financial Group
On December 10, 1996 and May 8, 1997, the Company entered into Consulting
Agreements with Global Financial Group to provide financial and public relations
services to the Company. On June 4, 1997, the Board of Directors resolved to
issue Global Financial Group 70,000 restricted shares of the Company's common
stock in settlement of the account. Despite its best efforts, the Company was
unable to register the 238,441 warrants which the Company had issued as
compensation to Global Financial Group for their prior services. The 70,000
shares also represents compensation for additional services provided by Global
Financial Group but not included in the initial compensation.
Management Agreement - SRS
On June 28, 1996, December 10, 1996 and May 8, 1997, the Company entered into
consulting agreements with SRS Advisory Services to provide management
consulting and corporate retention services to the Company for the fiscal years
ended June 30, 1996 and 1997. On July 22, 1997, the Board of Directors resolved
to issue Scott R. Sieck, dba SRS Advisory Group, 390,000 restricted shares of
the Company's common stock in settlement of the account. Despite its best
efforts, the Company was unable to register the 650,000 warrants which the
Company had issued as compensation to Mr. Sieck for his prior services.
NOTE L - 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.
20
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE L - STOCK OPTION PLAN - Continued
The following is a summary of transactions:
Outstanding, beginning of year 36,000
Granted during the year -
Exercised during the year -
Outstanding, end of year (at prices ranging
from $.25 to $3.13 per share) 36,000
Eligible for exercise at end of year
(at prices ranging from $.25 to $3.13 per share) 36,000
At June 30, 1997, there were no shares reserved for future grants.
NOTE M - INCOME TAXES
The components which give rise to deferred income tax benefit are the following
temporary differences:
Depreciation $ 1,103,927
Net operating loss carryforwards 2,944,567
Allowance for losses 2,751,254
Installment sales 2,657
TRAC leases (1,004,650)
5,797,755
Valuation allowance (5,797,755)
$ -
A valuation allowance has been established for the full amount of the deferred
income tax benefit due to the lack of assurance that the Company will be able to
generate sufficient income in order to recognize this benefit.
The Company has a net operating loss carryforward of approximately $7,748,860
for Federal purposes expiring June 30, 2012. However, the realization of this
loss carryforward may be limit by regulations regarding equity transactions
which occurred during the year.
21
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE N - RELATED PARTY TRANSACTIONS
Blue Mack leases its facilities and office space under operating leases from a
certain shareholder of the Company who owns approximately 17% of the Company's
issued and outstanding shares.
The following is a schedule of future minimum rental payments required under
these operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of June 30, 1997.
Year ending June 30,
1998 $ 86,400
1999 86,400
2000 28,800
$ 201,600
The leases also contain provision for taxes, insurance and building maintenance
expense.
Notes Payable - Related Party
An individual related to the former Vice President, Chief Financial Officer and
Director, loaned funds and/or securities to the Company and its affiliates in
the aggregate amount of $140,000 as of June 30, 1997.
As of June 30, 1997, the Company has a note payable to a shareholder of CAT in
the amount of $150,000. In addition All-Carpet, Inc., a company in which the
above shareholder has ownership interest, is owed $149,000 by the Company.
NOTE O - EMPLOYMENT AGREEMENTS
On September 1, 1996, the Company entered into a three year employment
arrangement with the Company's President and Chief Executive Officer. The
contract provided for annual salaries of $200,000, $250,000 and $300,000 during
the first, second and third years of the agreement. The agreement also allowed
for the officer to be paid an annual incentive bonus equal to five percent of
the first $1,000,000 of the pre-tax profit, six percent of the next $500,000 and
seven percent of profits in excess of $1,500,000.
22
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE O - EMPLOYMENT AGREEMENTS - Continued
On September 1, 1996, the Company entered into a three year employment
arrangement with the Company's Vice President and Chief Financial Officer. The
contract provided for annual salaries of $104,000, $130,000 and $156,000 during
the first, second and third years of the agreement. The agreement also allowed
for the officer to be paid an annual incentive bonus equal to five percent of
the first $1,000,000 of the pre-tax profit, six percent of the next $500,000 and
seven percent of profits in excess of $1,500,000. This individual resigned as
officer and director on April 6, 1997.
On June 15, 1996, the Company entered into a three year employment arrangement
with the Company's Vice President of Finance and Secretary of the Company. The
contract provided for annual salaries of $78,000, $104,000 and $130,000 during
the first, second and third years of the agreement. In addition, this officer
was granted non-qualified stock options to purchase 36,000 shares of the
Company's common stock at $2.25 per share and a $30,000 relocation advance to be
reduced by $10,000 at the end of each year of the contract period. The loan was
later forgiven by a Board resolution. This individual was appointed as Chief
Financial Officer on April 6, 1997 and later resigned as officer and director on
July 21, 1997.
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.
NOTE P - EMPLOYEE BENEFIT PLANS
Two of the Company's subsidiaries sponsor qualified profit sharing plans for the
benefit of substantially all full-time employees. The plans qualify under
Section 401(k) of the Internal Revenue Code, thereby allowing 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 $5,308 for the year ended June
30, 1997.
23
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE Q - CONTINGENT LIABILITIES
Legal Matters
The Company, its subsidiaries, current and past officers, and its shareholders
are party to several claims, suits and complaints incidental to the business.
Current known legal proceedings involve activities from operations of the
Company, as well as, financing activities and issues with regulatory agencies.
The Company, including its subsidiaries and officers, have been named as
defendant in both civil and criminal proceedings including a wrongful death
accident suit and an investor seeking injunctive relief for alleged improper
refusal to convert debentures. Management believes that some, but not all, of
the matters are adequately covered by insurance or would be settled for an
immaterial amount. However, management is also currently unable to conclude as
to the potential aggregate liability resulting from these legal proceedings, or
to what extent the impact of these outcomes might effect the operating results
or the financial condition of the Company. In connection with one lawsuit, the
Company has agreed to a consent order and judgement in the amount of $525,000,
in favor of the plaintiff. However, the Company will record an accrual for this
judgment subsequent to June 30, 1997. Several of these claims against the
Company have recently been filed and therefore have not yet been fully
evaluated. Furthermore, there is a possibility of additional unasserted claims
against the Company.
NOTE R - PRIOR PERIOD ADJUSTMENTS
During the year, the management determined that leases associated with revenue
equipment (trucks and trailers) had been incorrectly accounted for as capital
leases rather than operating leases. The effect of the recharacterization of the
capital leases was to decrease property, plant and equipment by $36,201,427,
decrease capital lease obligations by $34,629,455 and increase the accumulated
deficit by $1,571,972.
NOTE S - SUBSEQUENT EVENTS
Legal Matters
Subsequent to June 30, 1997, the Company has become aware of several matters
which include notices from the Securities and Exchange Commission relating to
the full review of certain Company filings with the Commission; delinquent
payments and filings with the Internal Revenue Service; and the receipt of a
subpoena requesting documents pertaining a Grand Jury investigation of certain
former officers.
At this time, current management cannot determine the ultimate outcome of these
matters or the financial impact to operating results or the financial condition
of the Company.
24
Continental American Transportation, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997
NOTE S - SUBSEQUENT EVENTS - Continued
Delisted Common Stock
On July 8, 1997, the Allocation, Evaluation & Securities Committee of the
Philadelphia Stock Exchange took action to remove the Company's common stock
from listing and registration. The Company received notification of this
determination on July 15, 1997 and was informed via a letter dated July 28, 1997
that the securities were scheduled to be delisted effective August 1, 1997.
Reservoir Capital Corporation - Master Factoring Agreement
On September 16, 1997, the Company entered into a two year non recourse master
factoring agreement, in which two of the officers of the Company are guarantors.
The factoring agreement allows for the Company to sell their trade accounts
receivable at a price of up to 80% of the outstanding amount of these accounts.
The Company can sell qualified accounts up to an aggregate outstanding amount at
any one time of $10,000,000. The Company is also required to pay processing and
servicing fees to the factoring agent based on the value of the accounts sold,
but not in an amount less than $90,000 per month. This relationship was
effectively ended on November 1, 1997, when the marketing agreement was signed.
As of December 31, 1997, obligations under this agreement had been substantially
paid down.
Professional Transportation Group - Marketing Agreement
On September 10, 1997, the Company signed a letter agreement setting forth terms
and conditions under which an unrelated party would provide secured lending to
the Company and possibly acquire substantially all of the operating assets of
the Company. On October 31, 1997, the Company entered into a marketing
agreement, with the same party, to modify the aforementioned letter agreement.
The new agreement extended the period of time of the exclusive option to acquire
substantially all of the Company's assets from 120 days to nine months from the
date of the agreement. During this period, the agreement allows for the
acquiring company to employ the Company's personnel, to lease or sublease all of
the Company's rolling stock, and to lease or sublease all of the Company's
office and terminal facilities, including personal property, used in the
Company's business. The agreement does not relieve the Company of any debts,
liabilities, duties or obligations except those expressly provided for in the
agreement. The agreement does provide for the Company to receive by the 15th of
each month a fee equal to .67% of the monthly gross revenues actually collected
by the acquiring company during the proceeding calendar month after offset of
any funds advanced to the Company.
25