-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R1e5oHju6KkDa8fHT7URVmo/QUev/EFC6gD1h0kYuYYnzJB7PZQk3kJxqaHlwKYI kMrBCgJZbSzWU3iMYUjSOA== 0000948830-98-000304.txt : 19981104 0000948830-98-000304.hdr.sgml : 19981104 ACCESSION NUMBER: 0000948830-98-000304 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980908 ITEM INFORMATION: FILED AS OF DATE: 19981103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S TRUCKING INC CENTRAL INDEX KEY: 0000820408 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 680133692 STATE OF INCORPORATION: CO FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 033-16417-LA FILM NUMBER: 98737074 BUSINESS ADDRESS: STREET 1: 10602 TIMBERWOOD CIRCLE STREET 2: SUITE 9 CITY: LOUISVILLE STATE: KY ZIP: 40223 BUSINESS PHONE: 5023394000 MAIL ADDRESS: STREET 1: 10602 TIMBERWOOD CIRCLE STREET 2: SUITE 9 CITY: LOUISVILLE STATE: KY ZIP: 40223 FORMER COMPANY: FORMER CONFORMED NAME: NORTHERN DANCER CORP DATE OF NAME CHANGE: 19930723 8-K/A 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 September 8, 1998 ------------------------------------------------ Date of Report (date of earliest event reported) U. S. Trucking, Inc. ----------------------------------------------------- Exact Name of Registrant as Specified in its Charter Colorado 33-9640-LA 68-0133692 - --------------------------- --------------- ---------------------- State or Other Jurisdiction Commission File IRS Employer Identifi- of Incorporation Number cation Number 10602 Timberwood Circle #9, Louisville, Kentucky 40223 --------------------------------------------------------- Address of Principal Executive Office, Including Zip Code (502) 339-4000, Ext. 3006 -------------------------------------------------- Registrant's Telephone Number, Including Area Code ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. The following financial statements for U.S. Trucking, Inc. and its subsidiaries are filed herewith: INDEX PAGE 1) AUDITED FINANCIAL STATEMENTS OF U.S. TRUCKING, INC. FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 ............................................ F-1 Report of Independent Certified Public Accountants ............ F-2 Consolidated Balance Sheet as of December 31, 1997 ............ F-3 Consolidated Statement of Operations and Accumulated Deficit for the period from inception (January 30, 1997) to December 31, 1997 ......................................... F-5 Consolidated Statement of Stockholders' Equity for the period from inception (January 30, 1997) to December 31, 1997 ......................................................... F-6 Consolidated Statement of Cash Flows for the period from inception (January 30, 1997) to December 31, 1997 ............ F-7 Notes to the Consolidated Financial Statements ................ F-8 2) AUDITED FINANCIAL STATEMENTS OF GULF NORTHERN TRANSPORT, INC. FOR THE THIRTY DAYS ENDED JANUARY 30, 1997 ...................... F-20 Report of Independent Certified Public Accountants ............ F-21 Balance Sheet as of January 30, 1997 .......................... F-22 Statement of Operations and Accumulated Deficit for the period from January 1, 1997 to January 30, 1997 ...... F-24 Statement of Cash Flows for the period from January 1, 1997 to January 30, 1997 .......................................... F-25 Notes to Financial Statements ................................. F-27 3) AUDITED FINANCIAL STATEMENTS OF MENCOR, INC. FOR THE THIRTY DAYS ENDED JANUARY 30, 1997 ..................................... F-36 Report of Independent Certified Public Accountants ............ F-37 Balance Sheet as of January 30, 1997 .......................... F-38 Statement of Earnings and Retained Earnings for the period ending January 30, 1997 ............................... F-40 Statement of Cash Flows for the period ending January 30, 1997 ......................................................... F-41 Notes to Financial Statements ................................. F-42 2 4) AUDITED FINANCIAL STATEMENTS OF MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 ................................................... F-47 Report on Independent Certified Public Accountants ............ F-48 Consolidated Balance Sheets as of December 31, 1996 and 1995... F-49 Consolidated Statements of Operations and Retained Earnings for the years ending December 31, 1996 and 1995 .............. F-51 Consolidated Statements of Cash Flows for the years ending December 31, 1996 and 1995 ................................... F-52 Notes to the Consolidated Financial Statements ................ F-54 5) AUDITED FINANCIAL STATEMENTS OF MENCOR, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 .......................... F-64 Report on Independent Certified Public Accountants ............ F-65 Balance Sheet as of December 31, 1996 and 1995 ................ F-66 Statements of Earnings and Retained Earnings for the periods ending December 31, 1996 and 1995 .................... F-68 Statements of Cash Flows for the periods ending December 31, 1996 and 1995 ................................................ F-69 Notes to Financial Statements ................................. F-71 6) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF U.S. TRUCKING, INC. AND SUBSIDIARIES AS OF AS OF JUNE 30, 1998 ................. F-77 Accountants' Compilation Report ............................... F-78 Consolidated Balance Sheet as of June 30, 1998 - Unaudited .... F-79 Consolidated Statement of Operations and Accumulated Deficit for the six months ended June 30, 1998 - Unaudited ... F-81 Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1998 - Unaudited ................... F-82 Consolidated Statement of Cash Flows for the six months ended June 30, 1998 - Unaudited .............................. F-83 Notes to Consolidated Financial Statements - Unaudited ........ F-85 (b) PRO FORMA FINANCIAL INFORMATION. Unaudited Pro Forma Financial Statements for U.S. Trucking, Inc. (formerly "Northern Dancer Corporation"), U.S. Trucking, Inc. (a Nevada corporation) and its subsidiaries, as of June 30, 1998, and for the year ended December 31, 1997 and the six months ended June 30, 1998, are filed herewith on pages F-97 to F-102. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized. U.S. TRUCKING, INC. Dated: November 3, 1998 By:/s/ W. Anthony Huff W. Anthony Huff, Executive Vice President 4 1) AUDITED FINANCIAL STATEMENTS OF U.S. TRUCKING, INC. FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Stockholders U.S. Trucking, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of U.S. Trucking, Inc. and Subsidiaries as of December 31, 1997 and the related consolidated statement of operations and accumulated deficit and cash flows for the period from inception (January 30, 1997) to December 31, 1997. 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 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated balance sheet referred to above, presents fairly, in all material respects, the consolidated financial position of U.S. Trucking, Inc. and Subsidiaries as of December 31, 1997 and the results of its operations and its cash flows for the period from inception (January 30, 1997) to December 31, 1997 in conformity with generally accepted accounting principles. Garden City, New York June 10, 1998 F-2 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 ASSETS CURRENT ASSETS Cash in banks (Note 14) $ 60,099 Restricted cash-reserves on deposit with factor (Note 15) 184,210 Accounts receivable-net of allowance for doubtful accounts of $88,000 as of December 31, 1997 (Notes 1H, 15 and 16) 2,321,180 Accounts receivable - other 60,000 Parts and supply inventory (Note 1D) 152,262 Prepaid expenses and other current assets 57,097 ----------- Total Current Assets 2,834,848 ----------- TRANSPORTATION AND OTHER EQUIPMENT - at cost, less accumulated depreciation and amortization of $1,334,899 as of December 31, 1997 (Notes 1E, 2, 4, 5 and 7) 6,818,517 ----------- OTHER ASSETS Restricted cash-owner operators (Note 12) 2,894 Restricted cash-cash held as collateral against letters of credit 10,000 Security deposits and other 12,653 Intangible assets - Net of accumulated amortization of $120,552 as of December 31, 1997 (Notes 1I, 2 and 17) 681,853 ----------- Total other assets 707,400 ----------- TOTAL ASSETS $10,360,765 =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-3 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable-trade $ 756,675 Due to factor (Note 15) 1,355,291 Accrued expenses and other 665,592 Current portion - seller's notes 118,273 Current portion - note payable 13,962 Current portion - acquisition loan payable 366,086 Current portion of equipment notes payable 689,432 Current portion of obligations under capital leases 479,093 ----------- Total Current Liabilities 4,444,404 ----------- OTHER LIABILITIES Owner-operator escrow (Note 12) 17,100 Seller's notes (Notes 4 and 5) 17,333 Note payable - (Notes 4 and 13) 40,694 Acquisition loan payable Notes 4 and 5) 1,518,818 Equipment Notes Payable-net of current portion (Note 4) 1,310,964 Obligations under capital leases net of current portion (Note 6) 228,284 ----------- Total Other Liabilities 3,133,193 ----------- TOTAL LIABILITIES 7,577,597 ----------- COMMITMENTS AND CONTINGENCIES (Notes 6, 9 10 and 18) STOCKHOLDERS' EQUITY Common Stock (no par value- 2,500 shares auth- orized, issued and outstanding (Note 2) 1,000 Additional paid in capital 4,313,368 Accumulated deficit (1,531,200) ----------- Total Stockholders' Equity 2,783,168 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,360,765 =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-4 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 Net Revenues $17,469,281 Operating expenses 16,434,514 ----------- Income from operations 1,034,767 Administrative expenses 1,999,692 ----------- Other income and (expenses) Interest income 1,332 Interest expense (656,826) Other income 101,762 Net (loss) on disposition of assets (12,543) ----------- Total other income and (expenses) (566,275) ----------- Net (loss) before taxes (1,531,200) Income tax (benefit)provision (Notes 1H and 3) -0- ----------- Net (loss) (1,531,200) Retained Earnings - January 30, 1997 -0- ----------- Accumulated deficit - December 31, 1997 $(1,531,200) =========== Net loss per share $ (612.48) =========== Weighted Average Number of Shares (Note 1B) 2,500 =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-5 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997
Common Stock Paid in Accumulated No Par Value Capital Deficit Total ------------ ---------- ------------ ------------ Sale of 2,500 Shares of Common Stock - No Par Value $1,000 $ 1,000 Acquisition of 100% Common Stock of Gulf Northern Transport, Inc. $ 225,000 225,000 Acquisition of 100% Common Stock of Mencor, Inc. 145,000 145,000 Acquisition of assets of Jay and Jay Transportation, Inc. 2,394,860 2,394,860 Acquisition of assets of Translynx, Inc. 100,546 100,546 Payment of expenses by shareholder 46,895 46,895 Advances from U.S. Transportation Systems, Inc. 1,401,067 1,401,067 Net Loss for the period (1,531,200) (1,531,200) ------ ---------- ----------- ---------- Total $1,000 $4,313,368 $(1,531,200) $2,783,168 ====== ========== =========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-6 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) $(1,531,200) ADJUSTMENTS TO RECONCILE NET (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES Depreciation & Amortization 1,455,451 Provision for doubtful accounts receivable 36,166 Loss on disposal of property and equipment 12,543 (Increase) Decrease-Assets Restricted Cash (197,104) Accounts Receivable (2,361,180) Parts and supply inventory (152,262) Prepaid expenses and other current assets (57,097) Increase (Decrease)-Liabilities Accounts payable 756,675 Accrued expenses and other current liabilities 2,020,883 ----------- Total Adjustments 1,514,075 Net cash used by operating activities (17,125) ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of transportation and other equipment (8,153,416) Security deposits (12,653) Payment for purchase of subsidiaries in excess of fair market value (664,389) Payment for refinancing of acquisition debt (138,016) Proceeds from additional paid in capital 4,313,368 ----------- Net cash used in investing activities (4,655,106) ----------- Sub Total (4,672,231) ----------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-7 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 Balance Forward $(4,672,231) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt financing 3,561,025 Acquisition indebtedness 2,284,376 Note payable 54,656 Principal payments on long-term debt (877,926) Principal payment of short-term note (12,500) Principal payments on capital lease obligations (277,301) ----------- Net Cash provided by financing activities 4,732,330 ----------- NET INCREASE IN CASH 60,099 CASH AT BEGINNING OF YEAR -0- CASH AT END OF YEAR $ 60,099 =========== Supplemental Disclosure of Cash flow information: Cash Paid during the year Interest expense $ 571,924 =========== Income taxes $ -0- =========== On January 30, 1997, the Company acquired transportation and other equipment totaling $8,153,416 as part of the acquisition of Gulf Northern Transport, Inc. and Mencor, Inc. and the assets of Jay and Jay Transportation, Inc. The Company in the acquisition of this equipment incurred long-term debt totaling $3,561,025. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-8 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Business U.S. Trucking, Inc. (USTI or "the Company") was incorporated in the State of Nevada on March 3, 1997 although USTI's consolidated group was effectively formed on January 30, 1997. From that date through December 31, 1997 the Company operated through two wholly owned subsidiaries: Gulf Northern Transport, Inc., (Gulf Northern) a Wisconsin corporation, operates as an interstate and intrastate motor carrier. Mencor, Inc. operates as a broker for interstate motor carriers. A broker serves the trucking industry by providing return hauls for truckers who have completed their initial delivery. By providing this service, trucking companies and independent contractors are able to cover the cost of returning to their home location. As a broker, Mencor is required to acquire a license which provides the authority to engage in interstate commerce. This license was acquired in April, 1994. USTI was formed by U.S. Transportation Systems, Inc. (USTS) as a wholly owned subsidiary. As part of the transaction to acquire Gulf Northern, 25% of USTI's common stock was transferred to Gulf Northern's parent (Logistics Management, LLC). The remaining 75% was conveyed to Logistics Management during 1998. The Company's corporate headquarters are located in Charleston, South Carolina with terminals and drop stations located in various states. Services are provided to customers located primarily in the central United States but include locations in virtually all 48 contiguous states. (B) - Net (Loss) per Share Net earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding during each period. Only the weighted average number of shares of common stock outstanding is used to compute loss per share in 1997, as there were no stock options, warrants, or other common stock equivalents in this year. (C) - Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents for financial statement purposes. F-9 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 (D) - Parts and Supply Inventory Inventory consists principally of parts and supplies used in maintaining its motor carrier fleet, skids used in transporting goods, and small tools and are stated at the lower-of-cost or market, determined on a first-in, first-out basis. (E) - Transportation and Other Equipment Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Accelerated methods of depreciation are followed for tax purposes and the straight-line method is used for financial reporting purposes. Transportation equipment, furniture and fixtures, and other equipment are generally depreciated over periods ranging from two to seven years. (F) - Covenants Not to Compete Covenants not to compete are amortized on a straight-line basis over the terms of the agreements. The covenants cover the period from January 1994 to December 1997 and were fully amortized by December 31, 1997. (G) - Income Taxes Taxes are provided on all revenue and expense items included in the Consolidated Statements of Operations, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. (H) - Revenue Recognition The Company recognizes revenues at the time freight is delivered to recipients. (I) - Organization Costs Subsidiary companies, Gulf Northern and Mencor incurred organization costs that are being amortized on a straight-line basis over five years. (J) - Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. F-10 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 (K) - Basis of Presentation The accompanying consolidated balance sheets and related statements of operations and accumulated deficit and cash flows includes the accounts of U.S. Trucking, Inc. and its wholly owned subsidiaries, Gulf Northern Transport, Inc. and Mencor, Inc. as of December 31, 1997 and for the period from inception (January 30, 1997) to December 31, 1997 gives effect to the acquisition of Gulf Northern and Mencor effective January 30, 1997. Intercompany transactions or balances as of and for the period ended December 31, 1997 have been eliminated. NOTE 2 - Acquisition of Subsidiaries and other Assets On January 30, 1997, the Company completed the following acquisitions: Gulf Northern Transport, Inc. USTI purchased 100% of the common stock of Gulf Northern Transport, Inc. from its stockholder (Logistics Management, LLC) for cash of $225,000 and 25% of the Company's common stock (625 shares). The acquisition was funded by an advance by USTI's parent, U.S. Transportation Systems, Inc. and was subsequently capitalized and is included in paid in capital. The transaction was valued at $790,999 and goodwill in the amount of $565,999 was recognized in the transaction. The goodwill is being amortized over six years. Mencor, Inc. USTI purchased 100% of the common stock of Mencor, Inc. from its stockholders for cash of $70,000 and 37,500 shares of the common stock of U.S. Transportation Systems, Inc. which was valued at $2.00 per share. The acquisition was funded by a cash and stock contribution to the Company by USTS. The transaction was valued at $145,000. Goodwill in the amount of $96,953 was recognized in the transaction and is being amortized over six years. Jay and Jay Transportation, Inc. USTI acquired certain assets (primarily tractors and trailers) and liabilities from USTS which were valued at $2,394,860. The transaction was accomplished by way of a permanent capital contribution by USTS and the net value contributed was included in Paid in capital. Jay and Jay's dispatch office and yard is located in Savannah, New York. Office operations including accounting and management were moved to Charleston, South Carolina. The transaction was recorded as an asset purchase and no goodwill was recognized. Translynx Express, Inc. The Company acquired certain assets and liabilities from USTS that were valued at $100,546. The transaction was accomplished by way of a permanent capital contribution by USTS and the net value contributed is included in Paid in capital. Translynx's operating office is located in Orlando, Florida. Office operations including accounting and management were moved to Charleston, South Carolina. The transaction was recorded as an asset purchase and no goodwill was recognized. F-11 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 NOTE 3 - Income Taxes The Company accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). No federal income taxes were provided for the period ended December 31, 1997. Differing methods of reporting income for tax purposes as compared to financial reporting purposes resulted in net deferred income taxes of approximately -0- as of December 31, 1997. Deferred tax assets and liabilities consist of the following: Deferred tax assets- Allowance for doubtful accounts $ 88,000 Amortization of Goodwill 63,000 ---------- Net operating loss carryovers 2,327,000 2,478,000 Valuation allowance 1,723,000 ---------- $ 755,000 ========== Deferred tax liabilities- Depreciation of transportation and other and equipment $ (755,000) ---------- $ (755,000) ========== The valuation allowance provided in each of the years is based on management's valuation of the likelihood of realization. As required by SFAS 109, deferred taxes are provided based upon the tax rate at which the items of income and expense are expected to be settled in the Company's tax return. The Company has acquired the net operating losses through January 30, 1997 of $940,000 related to the operations of Gulf Northern Transport, Inc. These losses will be available to offset future income for financial reporting purposes expiring in 2012. F-12 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 NOTE 4 - Long-term Notes Payable Long-term notes payable as of December 31, 1997 consists of the following: Equipment loans secured by tractors and trailers payable at $59,848 per month including interest at rates ranging from 9-1/2% to 101/2% per annum with the final installment due April, 2001 $1,998,438 Term loan in settlement with United Acquisition II Corp.- $100,000 non interest bearing, discounted at 8% payable over 36 months beginning April 1, 1998 54,613 Acquisition loan described in Note 5 1,884,904 Seller notes described in Note 5 135,606 ---------- Total 4,073,561 Less: current maturities 1,185,795 ---------- Long-term portion $2,279,215 ========== Aggregate annual scheduled maturities of long-term debt at December 31, 1997 are as follows: 1998 $1,185,795 1999 1,157,730 2000 964,918 2001 765,118 2002 - ---------- Total $4,073,561 ========== NOTE 5 - Acquisition Loan and Seller's Notes On March 28, 1995, Gulf Northern was acquired by Mid America Transporters Group, Inc. The purchase was financed by a loan in the amount of $3,000,000 from ITT Credit Corp. The proceeds of this loan (described as "the acquisition loan") were used to refinance stockholder loans and certain other bank and lease obligations. The loan which was subsequently sold to General Electric Credit Corp., originally was payable in 60 monthly installments of $66,360 at the rate of 11.75% interest per annum with its final maturity on F-13 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 March 31, 2000. On May 25, 1997, the Company renegotiated the loan whereby the monthly payments were reduced to $45,000 with a balloon payment of $396,836 due on September 1, 2001. The interest rate remained at 11.75%. Additional fees of $138,016 were incurred to restructure the loan which were capitalized and are being amortized over the remaining life of the loan. In addition to the acquisition loan, the agreement called for payments to the three former stockholders (described as sellers notes) which included promissory notes totaling $260,000 due in 36 monthly installments totaling $8,017 at 7% due on March 1, 1998 secured by letters of credit and non interest bearing obligations (discounted at 7% per annum) totaling $104,000 payable over a one year period commencing April 1, 1998. NOTE 6 - Lease Commitments The Company leases tractors and trailers under various capital leases with interest rates ranging from 8.1% to 9.1%. Transportation and other equipment includes the following amounts for the tractor and trailer leases which are capitalized as of December 31, 1997: Tractors and trailers $1,760,669 Less: accumulated depreciation and amortization 841,381 ---------- Total $ 919,288 ========== Lease amortization is included in depreciation expense. Future minimum payments, by year and in the aggregate, under the capital leases are as follows: Years ended December 31, Amount ------------------------ ------ 1998 $ 529,647 1999 241,568 2000 - ---------- Total minimum lease payments 772,211 Less: Amount representing interest 64,834 ---------- Present value of minimum lease payments 707,377 Less-Current maturities 479,093 ---------- Long-term obligations under capital leases $ 228,284 ========== F-14 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 NOTE 7 - Transportation and Other Equipment Transportation and other equipment consists of the following as of December 31, 1997: Office equipment $ 79,300 Tractors, trailers and garage equipment 8,072,847 Transportation equipment 1,269 ----------- 8,153,416 Less: Accumulated Depreciation 1,334,899 ----------- Total $ 6,818,517 =========== Depreciation expense amounted to $1,334,899 for the period ended December 31, 1997. $1,315,796 of depreciation was included in operating expenses and $19,103 of depreciation was included in administrative expenses. The fair market value of fixed assets approximates book value. NOTE 8 - Related Party Transaction On December 23, 1996, the Company sold its Wisconsin Rapids facility, which included land, a building and improvements to its majority stockholders. The stockholders leased the property back to the Company for five years commencing January 1, 1997. See Note 10. Management believes the sale was an arms length transaction based on estimated values of the property on the date of sale. NOTE 9 - Retirement Plan The Company maintains a pension plan for eligible employees, which was established under section 401(k) of the Internal Revenue Code. Under the terms of the plan, the Company at the discretion of its Board of Directors may match employee contributions up to 3% of employee compensation. Employee contributions to the plan amounted to $50,153 for the period ended December 31, 1997. The Company's matching contributions amounted to $8,414 of which $5,745 is included in operating expenses and $2,669 is included in administrative expenses. NOTE 10 - Commitments and Contingencies Commencing on January 1, 1997, the Company agreed to rent its Wisconsin Rapids facility from certain stockholders for $7,350 per month for a period of five years under an operating lease. F-15 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 Commencing October 15, 1997, the Company leased its South Carolina corporate offices for $1,728 per month. The lease was subsequently re-negotiated whereby the Company took additional office space in the same building at a cost of $2,800 per month until June 30, 2002. Minimum rental payments under such leases follows for the years ending December 31: 1998 $140,600 1999 121,800 2000 121,800 2001 121,800 2002 33,600 -------- Total minimum payments required $539,600 ======== Rent expense for the period ended December 31, 1997 amounted to $142,013 and is included in general administrative expenses. NOTE 11 - Noncompetition Agreements As of January 3, 1994, one of the Company's subsidiaries entered into a covenant not to compete agreement with its chief executive officer that extends over four years. The agreement called for a prepayment of $115,000 in December 1993, with an additional $46,000, including interest, payable in (18) monthly installments of $2,556 commencing with the date of the agreement. Expenses under this agreement amounted to $39,999 for the period ended December 31, 1997. NOTE 12 - Restricted Cash The Company maintains cash accounts for owner-operators who perform services for the Company. These funds are accumulated, with the owner-operators consent, by withholding part of the payments due to them for services performed. The funds are used to pay for repairs of equipment, which they own directly. Further, the Company has deposited funds with a financing company to cover over the road fuel and other operating expenses for drivers in support of a letter of credit. As of December 31, 1997, the company had letters of credit outstanding totaling $10,000, which guarantee various operating and insurance activities. F-16 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 NOTE 13 - Stock Acquisition Agreement-United Acquisition II Corp. During 1996, the shareholders of Gulf Northern's parent company, Mid America Transporters Group, Inc. entered into an agreement with United Acquisition II Corp. (the acquirer) whereby they would transfer 100% of their common stock in Mid America in exchange for common and preferred stock of the acquirer. In addition, the acquirer agreed to contribute cash and notes totaling $500,000 into Mid America at closing. In January 1997 however, the acquirer conceded that it was not able to complete the transaction as agreed and withdrew from the contract. During the period from the consummation of the contract, the acquirer deposited funds to the Company in the amount of $145,000. The Company agreed to return a total of $100,000 payable in 36 installments beginning April 1, 1998 on a non-interest bearing basis. NOTE 14 - Concentration of Credit Risk - Cash The Company maintains its cash balances in two financial institutions, one located in Wisconsin Rapids, Wisconsin and the other in Charleston, South Carolina. At times, the balances may exceed federally insured limits of $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash on deposit. The fair market value of these financial instruments approximates cost. NOTE 15 - Use of Factor In April 1995, the Company entered into an agreement with a factor whereby the factor would accept the Company's receivables with full recourse. Under the agreement, the factor will advance up to 90% of those receivables submitted by the Company. Interest on funds advanced is charged at an average annual effective rate of 14.9% payable monthly. In addition, the Company must maintain funds on deposit with its factor as a reserve against uncollectible receivables. The amount of such funds on deposit as of December 31, 1997 amounted to $184,210. The uncollected balance of such receivables held by the factor amounted to $1,689,400 as of December 31, 1997. The fair market value of these balances approximate book value. F-17 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 NOTE 16 - Economic Dependency The Company's customers consist primarily of high volume shippers that have significant time sensitive and high service level traffic needs. The Company provided services to a customer, which accounted for net revenues in excess of 10% of the Company's total revenues for the period ended December 31, 1997. Consolidated Paper, Inc. accounted for 16.0% of the Company's net revenues for this period. Accounts receivable from this customer amounted to $176,449 as of December 31, 1997. Revenues from the Company's five and ten largest customers accounted for approximately 38.9% and 46.8% respectively of total net revenues for the period ended December 31, 1997. The Company considers its relationship with those major customers to be satisfactory and is committed to expanding its relationship with its other customers. The Company provides services to a number of customers in the meat packing and distribution industry. Revenues from those customers accounted for approximately 10.7% of total revenues for the period ended December 31, 1997. Accounts receivable from those customers amounted to $211,361 as of December 31, 1997. NOTE 17 - Intangible Assets Intangible assets consist of the following items as of December 31, 1997: Original Accumulated Net Book Cost Amortization Value --------- ------------ --------- Goodwill $ 662,952 $ 103,766 $ 559,186 Goodwill $ 662,952 $ 103,766 $ 559,186 Goodwill $ 662,952 $ 103,766 $ 559,186 Goodwill $ 662,952 $ 103,766 $ 559,186 Goodwill $ 662,952 $ 103,766 $ 559,186 Goodwill $ 662,952 $ 103,766 $ 559,186 Goodwill $ 662,952 $ 103,766 $ 559,186 $ 662,952 $ 103,766 $ 559,186 Debt refinancing Costs 138,016 16,237 121,779 Other intangibles 1,437 549 888 --------- ---------- --------- Total $ 802,405 $ 120,552 $ 681,853 ========= ========== ========= Amortization expense amounted to $120,552 for the period ended December 31, 1997. F-18 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1997) TO DECEMBER 31, 1997 NOTE 18 - Subsequent Event Effective June 24, 1998, the company underwent a change in its capital structure whereby it is authorized to issue 50,000,000 shares of common stock and 1,000,000 shares of preferred stock. On May 26, 1998, the Company entered into an investment consulting agreement with Joff Pollon & Associates for a period, with extensions, of up to two years. The compensation payable to the consultants under this agreement includes fees, reimbursable expenses and options to purchase up to 1,000,000 shares of the Company's common stock at $.01 per share and further fees and bonuses as determined by the Board of Directors, and is contingent upon a successful merger with a public company. The Company is presently involved with a private placement offering which, if successful, would result in the issuance of 1,000,000 shares of common stock and would raise approximately $720,000 of net-equity capital for the Company. F-19 2) AUDITED FINANCIAL STATEMENTS OF GULF NORTHERN TRANSPORT, INC. FOR THE THIRTY DAYS ENDED JANUARY 30, 1997 F-20 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Stockholder Gulf Northern Transport, Inc. We have audited the accompanying balance sheet of Gulf Northern Transport, Inc. as of January 30, 1997 and the related statement of operations and accumulated deficit and cash flows for the period from January 1, 1997 to January 30, 1997. 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 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 audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above, presents fairly, in all material respects, the financial position of Gulf Northern Transport, Inc. as of January 30, 1997 and the results of its operations and its cash flows for the period then ended in conformity with generally accepted accounting principles. Garden City, New York June 10, 1998 F-21 GULF NORTHERN TRANSPORT, INC. BALANCE SHEET JANUARY 30, 1997 ASSETS CURRENT ASSETS Cash in banks (Note 14) $ 41,270 Restricted cash-reserves on deposit with factor (Note 15) 97,179 Accounts receivable-net of allowance for for doubtful accounts of $40,000 (Notes 1H, 15 and 16) 1,047,761 Accounts receivable - affiliate (Note 18) 19,930 Accounts receivable - other 3,009 Parts and supply inventory (Note 1D) 139,472 Prepaid insurance 54,745 Prepaid expenses and other 40,929 ---------- Total Current Assets 1,444,295 ---------- PROPERTY, PLANT AND EQUIPMENT-at cost, less accumulated depreciation and amortization of $4,206,596 (Notes 1E, 2, 4, 5 and 7) 4,099,535 ---------- OTHER ASSETS Restricted cash-owner operators (Note 12) 1,760 Restricted cash-cash held as collateral against letters of credit 10,000 Covenants not to compete-net of accumulated amortization of $76,922 (Notes 1F and 11) 36,666 Security deposits and other 7,534 ---------- Total other assets 55,960 ---------- TOTAL ASSETS $5,599,790 ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. F-22 GULF NORTHERN TRANSPORT, INC. BALANCE SHEET JANUARY 30, 1997 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable-trade $ 266,118 Due to factor (Note 15) 804,601 Accrued expenses and other 698,825 Advances from affiliate (Note 19) 23,994 Note Payable - (Note 4) 70,000 Current portion - seller's notes 112,823 Current portion - acquisition loan payable 517,476 Current portion of equipment notes payable 152,439 Current portion of obligations under capital leases 275,526 ---------- Total Current Liabilities 2,921,802 ---------- OTHER LIABILITIES Owner operator escrow (Note 12) 29,672 Seller's notes (Notes 2 and 4) 127,772 Note payable - (Notes 4 and 17) 49,904 Acquisition loan payable (Notes 2 and 4) 1,617,561 Equipment Notes Payable-net of current portion (Note 4) 483,978 Obligations under capital leases net of current portion (Note 6) 710,093 ---------- Total Other Liabilities 3,018,987 ---------- TOTAL LIABILITIES 5,940,789 ---------- COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 9 10 and 17) STOCKHOLDERS' EQUITY Common Stock (no par value-10,000 shares auth- orized, 1,000 issued and outstanding) (Note 2) 100,000 Additional paid in capital 25,000 Accumulated deficit ( 465,999) ---------- Total Stockholders' Equity ( 340,999) ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,599,790 ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-23 GULF NORTHERN TRANSPORT, INC. STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT PERIOD FROM JANUARY 1, 1997 TO JANUARY 30, 1997 Net Revenues $ 854,016 Operating expenses 695,904 Income from operations 158,112 Administrative expenses 198,564 ----------- ( 40,452) Other expenses Interest expense ( 49,540) ----------- Total other expenses ( 49,540) ----------- Net loss before taxes ( 89,992) Income tax provision (Notes 1H and 3) -0- ----------- Net loss ( 89,992) Accumulated Deficit - January 1 ( 376,007) ----------- Accumulated deficit - January 30 $( 465,999) =========== Net loss per share $( 89.99) ============ Weighted Average Number of Shares (Note 1B) 1,000 ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-24 GULF NORTHERN TRANSPORT, INC. STATEMENT OF CASH FLOWS PERIOD FROM JANUARY 1, 1997 TO JANUARY 30, 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ ( 89,992) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES Depreciation & Amortization 79,719 (Increase) Decrease-Assets Restricted Cash 912 Accounts Receivable 261,769 Prepaid expenses and other current assets 6,170 Increase (Decrease)-Liabilities Accounts payable 82,170 Accrued expenses and other liabilities ( 330,196) ---------- Total Adjustments 100,544 Net Cash Provided by Operations 10,552 ---------- CASH FLOWS FROM INVESTING ACTIVITIES Security deposit ( 200) ---------- Net Cash Used in investing activities ( 200) ---------- Sub Total 10,352 ---------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-25 GULF NORTHERN TRANSPORT, INC. STATEMENT OF CASH FLOWS (continued) PERIOD FROM JANUARY 1, 1997 TO JANUARY 30, 1997 Balance Forward $ 10,352 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt ( 62,682) Proceeds from short-term note 57,500 Principal payments on capital lease obligations ( 24,059) ----------- Net Cash (used in) financing activities ( 29,241) ----------- NET (DECREASE) IN CASH ( 18,889) CASH AT BEGINNING OF YEAR 60,159 ----------- CASH AT END OF YEAR $ 41,270 =========== Supplemental Disclosure of Cash flow information: Cash Paid during the year Interest expense $ 49,840 =========== Income taxes $ -0- =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-26 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Business Gulf Northern Transport, Inc. (Gulf Northern) a Wisconsin corporation, operates as an interstate and intrastate motor carrier. (See Note 2). The Company's corporate headquarters are located in Charleston, South Carolina with terminals and drop stations located in various states. Services are provided to customers located primarily in the central United States but include locations in virtually all 48 contiguous states. (B) - Net Loss per Share Net loss per share is computed on the basis of the weighted average number of common shares outstanding during each period. Only the weighted average number of shares of common stock outstanding is used to compute earnings or loss per share for the period ended January 30, 1997 as there were no stock options, warrants, or other common stock equivalents during this period. (C) - Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents for financial statement purposes. (D) - Inventory Inventory consists principally of parts and supplies used in maintaining its motor carrier fleet, skids used in transporting goods, and small tools. The items are stated at the lower of cost or market, determined on a first-in, first-out basis. (E) - Property, Plant and Equipment Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Accelerated methods of depreciation are followed for tax purposes and the straight line method is used for financial reporting purposes. Transportation equipment, furniture and fixtures, and other equipment are generally depreciated over periods ranging from two to seven years. (F) - Covenants Not to Compete Covenants not to compete are amortized on a straight line basis over the terms of the agreements. The covenants cover the period from January, 1994 to December, 1997. F-27 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 (G) - Income Taxes Taxes are provided on all revenue and expense items included in the Consolidated Statements of Operations, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. (H) - Revenue Recognition The Company recognizes revenues at the time freight is delivered to recipients. (I) - Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. (J) - Basis of Presentation The accompanying balance sheet and related statements of operations and retained earnings and cash flows includes only the accounts of Gulf Northern as of January 30, 1997. Prior to January 1, 1997, the company was a wholly owned subsidiary of Mid America Transporters Group, Inc. and was included in that consolidated group. Gulf Northern was sold to Logistics Management, LLC effective January 1, 1997. On January 30, 1997, Gulf Northern was sold to U.S. Trucking Company, Inc. and was included in that consolidated group. See Note 2. NOTE 2 - Acquisition by Mid America Transporter's Group Effective January 1, 1995, Gulf Northern was acquired by Mid America Transporters Group for a total purchase price of $2,683,500. This exceeded the net asset value of Gulf Northern by approximately $1,182,000. Accordingly, the basis of certain assets included in property, plant and equipment were increased by that amount as required by purchase accounting and is being amortized over five years. The agreement includes payments to the former stockholders in the form of cash of $2,232,000 which includes the payoff of shareholder loans described in Note 5A; promissory notes totaling $260,000 due in 36 monthly installments totaling $8,017 at 7% due on March 1, 1998 secured by letters of credit in the amount of $150,000; and non interest bearing obligations (discounted at 7% per annum) totaling $104,000 payable over a one year period commencing April 1, 1998. The purchase was financed by a loan in the amount of $3,000,000 from ITT Credit Corp. which is payable in 60 monthly installments of $66,360 and is due on March 31, 2000. The loan was subsequently sold to General Electric Credit Corp and is secured by certain items of equipment. See Note 13 for description of the loan modification agreement. F-28 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 NOTE 3 - Income Taxes The Company accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). Differing methods of reporting income for tax purposes as compared to financial reporting purposes resulted in deferred income taxes of approximately -0- as of January 30, 1997. Deferred tax assets and liabilities consist of the following: Deferred tax assets- Allowance for doubtful accounts $ 13,600 Net operating loss carryover 158,000 --------- 171,600 Valuation allowance 62,600 --------- $ 109,000 ========= Deferred tax liabilities- Depreciation of property, plant and equipment $(109,000) --------- $(109,000) ========= The valuation allowance provided in each of the years is based on management's valuation of the likelihood of realization. As required by SFAS 109, deferred taxes are provided based upon the tax rate at which the items of income and expense are expected to be settled in the Company's tax return. The Company incurred a net operating loss of $910,000 available to offset future income for financial reporting purposes expiring in 2012. NOTE 4 - Long-term Notes Payable Long-term notes payable consist of the following: Equipment loans secured by ten tractors payable at $15,824 per month including interest at 10% per annum with the final installment due November, 2000 $ 636,417 Non interest bearing demand notes 70,000 Term loan in settlement with United Acquisition II Corp.- $100,000 non interest bearing, discounted at 8% payable over 36 months beginning April 1, 1998 49,904 Acquisition loan described in Note 5 2,135,037 F-29 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 Seller notes described in Note 2 240,595 ---------- Total 3,131,953 Less: current maturities 852,738 ---------- Long-term portion $2,279,215 ========== Aggregate annual scheduled maturities of long-term debt at January 30, 1997 are as follows: January 30, ----------- 1998 $ 852,738 1999 920,804 2000 917,159 2001 441,252 ---------- Total $3,131,953 ========== NOTE 5 - Debt Restructure In addition to being used to finance the acquisition described in Note 2, proceeds from the $3,000,000 acquisition loan were also used to refinance stockholder loans and certain other bank and lease obligations. As the classification of the acquisition loan is long term, those obligations restructured were also classified as long term. The loan is payable in 60 monthly installments of $66,360 at the rate of 11.75% interest per annum with its final maturity on March 31, 2000. NOTE 6 - Lease Commitments The Company leases tractors and trailers under various capital leases with interest rates ranging from 8.1% to 9.1%. Property, plant and equipment includes the following amounts for the tractor and trailer leases which are capitalized: Tractors and trailers $1,760,669 Less: accumulated amortization 611,433 ---------- Total $1,149,236 ========== Lease amortization is included in depreciation expense. F-30 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 NOTE 6 - Lease Commitments (continued) Future minimum payments, by year and in the aggregate, under the capital leases are as follows: Years ended January 30, Amount ----------------------- ---------- 1998 $ 405,446 1999 489,233 2000 221,437 ---------- Total minimum lease payments 1,116,116 Less: Amount representing interest 130,497 ---------- Present value of minimum lease payments 985,619 Less-Current maturities 275,526 ---------- Long-term obligations under capital leases $ 710,093 ========== NOTE 7 - Property, Plant and Equipment Property, plant and equipment consists of the following as of January 30, 1997: Office equipment $ 63,273 Tractors, trailers and garage equipment 8,238,378 Transportation equipment 4,480 ---------- 8,306,131 Less: Accumulated Depreciation 4,206,596 ---------- Total property, plant and equipment $4,099,535 ========== Depreciation expense amounted to $76,386 for the period ended January 30, 1997. $75,582 of depreciation was included in operating expenses and $804 of depreciation was included in administrative expenses. The fair market value of fixed assets approximates book value. NOTE 8 - Related Party Transaction On December 23, 1996, the Company sold its Wisconsin Rapids facility which included land, a building and improvements with a book value of $394,517 to its majority stockholders for $346,141 resulting in a net loss of $48,376. The transaction resulted in a gain of $231,000 for income tax purposes. The stockholders leased the property back to the Company for five years commencing January 1, 1997. See Note 10. Management believes the sale was an arms length transaction based on estimated values of the property on the date of sale. F-31 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 NOTE 9 - Retirement Plan The Company matches employee contributions up to 3% of employee compensation. Contributions to the plan amounted to $5,918 for the period ended January 30, 1997. 401K matching contributions of $1,283 are included in operating expense and $365 and of the aforementioned contributions are included in administrative expenses. NOTE 10 - Commitments and Contingencies Commencing on January 1, 1997, the Company agreed to rent its Wisconsin Rapids facility from certain stockholders for $7,350 per month for a period of five years under an operating lease. Commencing October 15, 1997, the Company leased its South Carolina corporate offices for $1,728 per month. The lease extends for a period of two years. Minimum rental payments under such operating leases follows: Year ending January 30, 1998 $ 94,248 1999 108,936 2000 102,888 2001 88,200 2002 80,850 -------- Total minimum payments required $475,122 ======== NOTE 11 - Noncompetition Agreements As of January 3, 1994, the Company entered into a covenant not to compete agreement with its chief executive officer which extends over four years. The agreement called for a prepayment of $115,000 in December, 1993, with an additional $46,000, including interest, payable in (18) monthly installments of $2,556 commencing with the date of the agreement. Expenses under this agreement amounted to $3,333. See also Note 2 for a description of the covenant not to compete related to the stock purchase agreement. NOTE 12 - Restricted Cash The Company maintains cash accounts for owner-operators who perform services for the Company. These funds are accumulated, with the owner-operators consent, by withholding part of the payments due to them for services performed. The funds are used to pay for repairs of equipment that they own directly. Further, the Company has deposited funds with a financing company to cover over the road fuel and other operating expenses for drivers in support of a letter of credit. As of January 30, 1997, the Company had letters of credit outstanding totaling $10,000 which guarantee various operating and insurance activities. F-32 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 NOTE 13 - Loan Modification Agreement In connection with the stock purchase agreement described in Note 2, the purchase was financed by a loan in the amount of $3,000,000 payable in monthly installments over five years. The original loan agreement required that the Company hold the common stock of a "small capitalization" company with a market value of at least $1,000,000. As of January 30, 1997, such stock was not held by the Company. On May 25, 1997, the Company agreed to a modification of the original loan whereby current monthly payments were reduced from $66,360 per month to $45,000 per month with a balloon payment of $396,836 due at August 31, 2001. NOTE 14 - Concentration of Credit Risk - Cash The Company maintains its cash balances in two financial institutions, one located in Wisconsin Rapids, Wisconsin and the other in Charleston, South Carolina. At times, the balances may exceed federally insured limits of $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash on deposit. The fair market value of these financial instruments approximates cost. NOTE 15 - Use of Factor In April, 1995, the Company entered into an agreement with a factor whereby the factor would accept the Company's receivables with full recourse. Under the agreement, the factor will advance up to 80% of those receivables submitted by the Company. Interest on funds advanced is charged at an average annual effective rate of 14.5% payable monthly. In addition, the Company must maintain funds on deposit with its factor as a reserve against uncollectible receivables. The amount of such funds on deposit as of January 30, 1997 amounted to $97,179. The uncollected balance of such receivables held by the factor amounted to $804,601 as of January 30, 1997. The fair market value of these balances approximate book value. NOTE 16 - Economic Dependency The Company's customers consist primarily of high volume shippers that have significant time sensitive and high service level traffic needs. The Company provided services to two customers which accounted for net revenues in excess of 10% of the Company's total revenues for the period ended January 30, 1997. Consolidated Paper, Inc. and Excel Corporation accounted for 26.4% and 10.7% of the Company's net revenues for the period ended January 30, 1997. Accounts receivable from those customers amounted to $335,513 as of January 30, 1997. Revenues from the Company's five and ten largest customers accounted for approximately 57% and 69% respectively of total net revenues for the period ended January 30, 1997. F-33 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 NOTE 16 - Economic Dependency (continued) The Company considers its relationship with those major customers to be satisfactory and is committed to expanding its relationship with its other customers. The Company provides services to a significant number of customers in the meat packing and distribution industry. Revenues from those customers accounted for approximately 14.6% of total revenues for the period ended January 30, 1997. Accounts receivable from those customers amounted to $178,700 as of January 30, 1997. NOTE 17 - Stock Acquisition Agreement - United Acquisition II Corp. On June 3, 1996, the shareholders of Mid America entered into an agreement with United Acquisition II Corp. (the acquirer) whereby they would transfer 100% of their common stock in Mid America in exchange for 31,366 shares of convertible preferred stock and 316,666 shares of common stock of the acquirer. In addition, the acquirer agreed to contribute cash and notes totaling $500,000 into Mid America at closing. In January, 1997, the acquirer conceded that it was not able to complete the transaction as agreed and withdrew from the contract. During the period from the consummation of the contract, the acquirer deposited funds to the Company in the amount of $145,000. The Company agreed to return a total of $100,000 payable in 36 installments beginning April 1, 1998 on a non interest bearing basis. NOTE 18 - Accounts Receivable - Affiliate The Company provided freight services on behalf of its affiliate, Mencor, Inc. amounting to $10,785 for the period ended January 30, 1997. The balance receivable from this affiliate as of January 30, 1997 amounted to $19,930. The fair market value of this receivable approximate book value. NOTE 19 - Advances from Affiliate The Company received advances from its affiliate, Mencor, Inc. during the period ended January 30, 1997. Those advances amounted to $23,994 and remained unpaid as of that date, are non interest bearing and are due on demand. The fair market value of these advances approximates book value. NOTE 20 - Subsequent Event - Acquisition Agreement with U.S. Trucking, Inc. On January 30, 1997, the Company entered into an agreement with U.S. Trucking, Inc. (the acquirer) whereby U.S. Trucking would acquire 100% of the common stock of the Company in exchange for 25% of it's common stock. F-34 GULF NORTHERN TRANSPORT, INC. NOTES TO THE FINANCIAL STATEMENTS JANUARY 30, 1997 NOTE 20 - Subsequent Event - Acquisition Agreement with U.S. Trucking, Inc. (continued) As part of this agreement, the Company contracted with Dan Pixler (a former stockholder of the Company) for him to provide services as president and general manager for the five years commencing from January 30, 1997 to January 30, 2002 at an annual salary of $105,000 per year. Mr. Pixler will receive annual options to purchase 12,500 shares of the common stock of the acquirer's parent company, U.S. Transportation Systems, Inc. which will be exercisable until December 31, 2002. Further, during the period of employment and for a period of two years after his termination, Mr. Pixler agreed that he will not participate in an entity which is directly competitive with the Company's present operations. F-35 3) AUDITED FINANCIAL STATEMENTS OF MENCOR, INC. FOR THE THIRTY DAYS ENDED JANUARY 30, 1997 F-36 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Stockholders Mencor, Inc. We have audited the accompanying balance sheet of Mencor, Inc. as of January 30, 1997 and the related statements of earnings and retained earnings and cash flows for the period then ended. 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 audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of Mencor, Inc. as of January 30, 1997 and the results of its operations and its cash flows for the period then ended in conformity with generally accepted accounting principles. Garden City, New York June 8, 1998 F-37 MENCOR, INC. BALANCE SHEET January 30, 1997 ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 1C and 2) $ 40,497 Accounts receivable-net of allowance for doubtful accounts of $11,834 (Notes 1F & 12) 189,605 Advances to affiliate (Note 7) 23,994 Refundable income taxes (Note 6) 860 Prepaid expenses 1,002 -------- Total Current Assets 255,958 -------- PROPERTY, PLANT AND EQUIPMENT - at cost, less accumulated depreciation of $3,950 as of January 30, 1997 (Notes 1D and 3) 7,300 -------- OTHER ASSETS Intangible asset - Net of accumulated amortization of $1,067 as of January 30, 1997 (Note 1H) 933 Security deposits 1,125 Deferred tax asset (Notes 1E and 6) 1,920 Organization costs - net of accumulated amortization of $445 at January 30, 1997 (Note 1G) 444 -------- Total other assets 4,422 -------- TOTAL ASSETS $267,680 ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-38 MENCOR, INC. BALANCE SHEET January 30, 1997 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES CURRENT LIABILITIES Accounts payable-trade $160,618 Accounts payable-affiliate (Note 8) 19,930 Advances from related party (Note 9) 33,970 Payroll taxes withheld and payable 518 Accrued expenses 2,039 Other taxes payable 1,462 Income taxes payable (Notes 1E and 6) 25 Current Portion of Equipment Notes Payable (Notes 3 and 4) 1,164 -------- Total Current Liabilities 219,726 -------- COMMITMENTS AND CONTINGENCIES (Note 5) OTHER LIABILITIES Equipment Notes Payable-net of current maturities (Notes 3 and 4) 527 -------- TOTAL LIABILITIES 220,253 -------- STOCKHOLDERS' EQUITY Common Stock (no par value-1,000 shares authorized, 300 issued and outstanding (Note 1B) 6,604 Retained Earnings 40,823 -------- Total Stockholders' Equity 47,427 -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $267,680 ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-39 MENCOR, INC. STATEMENT OF EARNINGS AND RETAINED EARNINGS Period Ending January 30, 1997 Net Revenues $115,564 Freight settlements 102,649 -------- Income from operations 12,915 General and administrative expenses 13,983 -------- Net (loss) from operations (1,068) Other income and expense -0- -------- Loss before income taxes (1,068) Income taxes (Notes 1E and 6) -0- -------- Net (loss) (1,068) Retained Earnings-Beginning of Period 41,891 -------- Retained Earnings-End of Period $ 40,823 ======== Net (loss) per Share $ (3.56) ======== Weighted Average Number of Shares (Note 1B) 300 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-40 MENCOR, INC. STATEMENT OF CASH FLOWS Period Ending January 30, 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) for the period $ (1,068) ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES (Increase) Decrease-Assets Accounts Receivable-trade 38,502 Advances to affiliate 3,359 Increase (Decrease)-Liabilities Accounts payable-trade (20,391) Accounts payable-affiliate (5,951) Payroll taxes withheld and payable (3,400) Other taxes payable 1,462 -------- Total Adjustments 13,581 Net Cash provided by Operations 12,513 -------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments to related party (50,000) -------- Net Cash (used in) financing activities (50,000) -------- NET (DECREASE) IN CASH (37,487) -------- CASH AT BEGINNING OF PERIOD 77,984 -------- CASH AT END OF PERIOD $ 40,497 ======== Supplemental Disclosure of Cash flow information: Cash paid during the year Interest expense $ -0- Income taxes $ -0- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-41 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS January 30, 1997 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Operations Mencor, Inc. was incorporated in the State of Arkansas on July 6, 1994. The Company operates as a broker for interstate motor carriers. An interstate motor carrier broker serves the trucking industry by providing return hauls for truckers who have completed their initial delivery. By providing this service, trucking companies and independent operators are able to cover the cost of returning to their home location. The Company's corporate headquarters are located in Charleston, South Carolina. As a broker, the Company is required to acquire a license which provides the authority to engage in interstate commerce. This license was acquired in April, 1994. Services are provided to customers located primarily in the central United States but include locations in virtually all 48 contiguous states. (B) - Net Loss per Share Net loss per share is computed on the basis of the weighted average number of common and common equivalent shares outstanding during each period. Only the weighted average number of shares of common stock outstanding is used to compute income per share for the period ended January 30, 1997 as there are no stock options, warrants, or other common stock equivalents in this period. (C) - Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents for financial statement purposes. (D) - Property, Plant 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 principally on an accelerated basis. Accelerated methods of depreciation are followed for substantially all assets for both financial reporting and tax purposes. Transportation equipment, furniture and fixtures, and other equipment are generally depreciated over periods ranging from two to seven years. (E) - Income Taxes Income taxes are provided on all revenue and expense items included in the statement of earnings, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. Non current deferred income taxes result from the use of accelerated methods of depreciation for income tax purposes and from the establishment of an allowance for doubtful accounts for financial reporting purposes. (F) - Revenue Recognition The Company recognizes revenues at the time the shipment is delivered to recipients. F-42 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS January 30, 1997 NOTE 1 - General and Summary of Significant Accounting Policies (continued) (G) - Organization expense As part of its initial incorporation, the company incurred organization costs amounting to $889 which is being amortized on a straight-line basis over five years. (H) - Intangible Asset As discussed in Note 1A, the Company acquired a license from the Interstate Commerce Commission which is required to allow the Company to do business as an interstate carrier broker. This license, which cost $2,000 is being amortized on a straight-line basis over five years. (I) - Concentration of Credit Risk Virtually all of the Company's customers are in the long haul trucking industry. Further, accounts receivable are uncollateralized and consist of amounts due from that industry. (J) - Offering Costs During 1996, the Company incurred certain expenses related to an equity offering in connection with its affiliate, Mid America Transporters Group, Inc. and Subsidiary. The offering was unsuccessful and, accordingly, the expense was amortized in full during 1996. (K) - Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 2 - Cash and Cash Equivalents The Company maintains its cash balances in one financial institution located in Charleston, South Carolina that at times, may exceed federally insured limits. The Company has not experienced any losses in such account and believed it is not exposed to any significant credit risk on cash and cash equivalents. F-43 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS January 30, 1997 NOTE 3 - Property, Plant and Equipment Property, plant and equipment consists of the following as of January 30, 1997: Office equipment $ 12,656 Furniture and fixtures 1,406 -------- 11,250 Less: Accumulated Depreciation 3,950 -------- Total property, plant and equipment $ 7,300 ======== No depreciation expense was recorded for the period ended January 30, 1997. NOTE 4 - Notes Payable During 1995, the Company acquired office equipment in the amount of $2,946 which was financed payable in 36 installments of $110 per month including interest at 14% per annum due June, 1998. Total principal $ 1,691 Less: current maturities 1,164 -------- Long-term portion $ 527 ======== Aggregate annual maturities of long-term debt for the five years following January 30, 1997 are as follows: January 30, 1998 $ 1,164 January 30, 1999 527 -------- Total $ 1,691 ======== NOTE 5 - Commitments and Contingencies The Company leases office space for its operating facility in Charleston, South Carolina. The current lease term commenced on May 1, 1995 and concludes on April 30, 1997. Commitments under this lease agreement amounted to $2,757 for the period ended January 30, 1998. Rent expense amounted to $919 for the period ended January 30, 1997 and is included in general and administrative expenses. F-44 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS January 30, 1997 NOTE 6 - Income Taxes The Company accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). The provision for income taxes was comprised of the following components as of January 30, 1997: Federal-current $( 160) Federal-deferred ( -0-) State-current ( 50) State-deferred ( -0-) ------- Total $( 210) ======= The income tax provision reconciled to the tax computed at the statutory Federal rate was: Tax at Statutory Rate $( 417) ( 39)% State income taxes 74 7 Effect of graduated brackets 133 12 Other ------- --- $( 210) ( 20)% Deferred tax assets and liabilities at January 30, 1997 consists of the following: Deferred tax assets Allowance for doubtful accounts $11,834 Valuation Allowance (6,679) ------- $ 5,155 ======= Deferred tax liabilities Depreciation of property & equipment $(5,155) ======= The valuation allowance provided is based on management's valuation of the likelihood of realization. Net operating loss carryovers amounting to $1,068 for federal income tax purposes are available through December 31, 2012. NOTE 7 - Advances to Affiliate The Company advanced funds and provided services to its affiliate, Gulf Northern Transport, Inc. during the years prior to the period ended January 30, 1997. Gulf Northern is related to the Company through common ownership and management. No revenues were generated by services provided during the period ended January 30, 1997. The amount of such advances which remained unpaid as of January 30, 1997 amounted to $23,994. These advances represent allocations of rent and other administrative costs and freight settlements, are non interest bearing and are due on demand. The fair market value of these advances approximate book value. F-45 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS January 30, 1997 NOTE 8 - Accounts Payable-Affiliate The Company incurred expenses for freight settlements from its affiliate, Gulf Northern Transport, Inc. which amounted to $10,785 for the period ended January 30, 1997. The remaining balance payable to the affiliate for such expenses as of January 30, 1997 amounted to $19,930. NOTE 9 - Advances from Related Party During 1996, a shareholder advanced funds totaling $123,397 to the Company. Repayments through January 30, 1997 amounted to $89,427 with the remaining balance remitted during February, 1997. The advances were payable on demand with no stated interest. NOTE 10 - Economic Dependency The Company's customers consist primarily of high volume shippers that have significant time sensitive and high service level traffic needs. The Company provided services to three customers which accounted for net revenues in excess of 10% of the Company's total revenues for the period ended January 30, 1997. Tamco Distributors, Vista Corrugated and Continental Sprayers accounted for 33.5%, 24.1% and 10.6% of the Company's net revenues for the period ended January 30, 1997. Accounts receivable from those customers amounted to $104,311 as of January 30, 1997. Revenues from the Company's five and ten largest customers accounted for approximately 83% and 91% respectively of total net revenues for the period ended January 30, 1997. NOTE 11 - Definitive stock sale to U.S. Trucking, Inc. On January 30, 1997, the stockholders sold their interests in Mencor, Inc. to U.S. Trucking, Inc. (the buyer) for $75,000. The transaction was in conjunction with the sale of Gulf Northern Transport, Inc. Also in connection with the sale, the Company agreed to continue the employment of Michael Menor (a former shareholder of Mencor, Inc.) as the president of the Company for the period from the date of enactment to January 30, 2000 at an annual salary of $60,000 per year. Further, during the period of employment and a period of two (2) years after his termination, Mr. Menor agreed that he will not participate in an entity which directly performs truck brokerage services for those customers currently serviced by the Company. Also on the date of enactment, the buyer contracted with Roxanne Pixler, (a former shareholder of Mencor, Inc.) for her to provide consulting services to the Company. Pixler will receive 18,750 shares of U.S. Transportation Systems, Inc. as compensation for her services. The contracted obligation will commence from the date of enactment to December 31, 1998. F-46 4) AUDITED FINANCIAL STATEMENTS OF MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 F-47 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Stockholders Mid America Transporters Group, Inc. and Subsidiary We have audited the accompanying consolidated balance sheets of Mid America Transporters Group, Inc. and Subsidiary as of December 31, 1996 and 1995 and the related consolidated statements of operations and retained earnings and cash flows for the years then ended. 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 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 balance sheets referred to above, present fairly, in all material respects, the consolidated financial position of Mid America Transporters Group, Inc. and Subsidiary as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Garden City, New York November 7, 1997 F-48 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 1996 1995 ---------- ---------- ASSETS CURRENT ASSETS Cash in banks (Note 14) $ 60,159 $ 311,842 Restricted cash-reserves on deposit with factor (Note 15) 97,179 179,615 Accounts receivable-net of allowance for doubtful accounts of $40,000 and $12,000 as of December 31, 1996 and 1995 respectively (Notes 1H, 15 and 16) 1,309,529 1,295,451 Accounts receivable - affiliate (Note 18) 25,881 14,150 Accounts receivable - other 3,068 34,613 Parts and supply inventory (Note 1D) 139,472 112,464 Prepaid insurance 54,745 53,412 Prepaid expenses and other 41,089 49,106 ---------- ---------- Total Current Assets 1,731,122 2,050,653 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT - at cost, less accumulated depreciation and amortization of $4,130,210 and $3,313,632 as of December 31, 1996 and 1995, respectively (Notes 1E, 2, 4, 5 and 7) 4,175,921 4,697,569 ---------- ---------- OTHER ASSETS Restricted cash-owner operators (Note 12) 2,672 46,332 Restricted cash-cash held as collateral against letters of credit 10,000 88,000 Covenants not to compete-net of accum- ulated amortization of $73,589 and $33,590 as of December 31, 1996 and 1995, respectively (Notes 1F and 11) 39,999 79,998 Security deposits and other 7,334 6,260 Organization costs - net of accumul- ated amortization of $5,000 and $4,000 as of December 31, 1996 and 1995, respectively (Note 1I) - 1,000 ---------- ---------- Total other assets 60,005 221,590 ---------- ---------- TOTAL ASSETS $5,967,048 $6,969,812 ========== ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-49 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ---------- ---------- CURRENT LIABILITIES Accounts payable-trade $ 207,941 $ 424,283 Due to factor (Note 15) 1,133,731 950,390 Accrued expenses and other 672,545 445,216 Advances from affiliate (Note 19) 27,353 17,910 Note Payable - (Note 4) 12,500 - Current portion - seller's notes 112,823 84,393 Acquisition loan payable (Note 2) 569,329 551,445 Current portion of equipment notes payable (Notes 2 and 4) 163,268 37,973 Current portion of obligations under capital leases (Note 6) 299,585 263,907 ---------- ---------- Total Current Liabilities 3,199,075 2,775,517 ---------- ---------- OTHER LIABILITIES Deferred taxes (Notes 2 and 3) - 388,000 Owner operator escrow (Note 12) 29,672 82,936 Seller's notes (Notes 2 and 4) 127,772 226,117 Note payable - (Notes 4 and 17) 49,904 - Acquisition loan payable (Notes 2 and 4) 1,617,561 2,141,947 Equipment Notes Payable-net of current portion (Note 4) 483,978 319,564 Obligations under capital leases net of current portion (Note 6) 710,093 998,816 ---------- ---------- Total Other Liabilities 3,018,980 4,157,380 ---------- ---------- TOTAL LIABILITIES 6,218,055 6,932,897 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 9 10 and 17) STOCKHOLDERS' EQUITY Common Stock (no par value-10,000 shares authorized, 1,000 issued and outstanding) (Note 2) 100,000 100,000 Additional paid in capital 25,000 - Accumulated deficit ( 376,007) ( 63,085) ---------- ---------- Total Stockholders' Equity ( 251,007) 36,915 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,967,048 $6,969,812 ========== ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-50 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS YEARS ENDING DECEMBER 31, 1996 AND 1995 1996 1995 ----------- ----------- Net Revenues $12,620,435 $12,374,563 Operating expenses 10,966,125 10,505,303 ----------- ----------- Income from operations 1,654,310 1,869,260 Administrative expenses 1,807,186 1,290,716 ----------- ----------- Other income and expenses Interest income 7,046 10,507 Interest expense ( 648,993) ( 665,515) Other income 141,498 4,673 Net gain (loss) on disposition of assets ( 47,597) 9,104 ----------- ----------- Total other income and (expenses) ( 548,046) ( 641,231) ----------- ----------- Net loss before taxes ( 700,922) ( 62,687) Income tax (benefit) provision (Notes 1H and 3) ( 388,000) 398 ----------- ----------- Net loss ( 312,922) ( 63,085) Accumulated Deficit - January 1 ( 63,085) - ----------- ----------- Accumulated deficit - December 31 $( 376,007) $( 63,085) =========== =========== Net loss per share $( 312.92) $( 63.09) =========== =========== Weighted Average Number of Shares (Note 1B) 1,000 1,000 =========== =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-51 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDING DECEMBER 31, 1996 AND 1995 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net Earnings (Loss) $ (312,922) $ ( 63,085) ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES Depreciation & Amortization 956,717 794,756 Deferred income taxes (388,000) - Loss(Gain) on disposal of property and equipment 47,597 ( 9,104) (Increase) Decrease-Assets Restricted Cash 204,096 - Accounts Receivable ( 22,264) (295,267) Parts and supply inventory ( 27,008) ( 43,955) Prepaid expenses and other current assets 6,610 (255,111) Increase (Decrease)-Liabilities Accounts payable ( 33,001) 27,984 Accrued expenses and other current liabilities 183,508 129,375 ----------- ----------- Total Adjustments 928,255 348,678 Net Cash Provided by Operations 615,333 285,593 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (787,407) (567,372) Proceeds from disposal of equipment 372,740 81,500 Proceeds from additional paid in capital 25,000 - ----------- ----------- Net Cash Used in investing activities (389,667) (485,872) ----------- ----------- Sub Total 225,666 (200,279) ----------- ----------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-52 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY STATEMENTS OF CASH FLOWS (continued) YEARS ENDING DECEMBER 31, 1996 AND 1995 1996 1995 ----------- ----------- Balance Forward $ 225,666 $( 200,279) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (1,007,286) (4,707,108) Proceeds from short-term note 12,500 - Proceeds from long-term debt financing 770,482 5,527,017 Principal payments on capital lease obligations (253,045) ( 307,788) ----------- ----------- Net Cash provided by (used in) financing activities (477,349) 512,121 ----------- ----------- NET INCREASE (DECREASE) IN CASH (251,683) 311,842 CASH AT BEGINNING OF YEAR 311,842 - ----------- ----------- CASH AT END OF YEAR $ 60,159 $ 311,842 =========== =========== Supplemental Disclosure of Cash flow information: Cash Paid during the year Interest expense $ 650,158 $ 690,813 =========== =========== Income taxes $ -0- $ 1,845 =========== =========== Capital lease obligations totaling $508,800 for the year ended December 31, 1995 were incurred when the Company entered into leases for new tractors and trailers. Long-term debt totaling $720,578 was incurred by the Company during 1996 when the Company acquired 10 tractors with a total cost of $745,578. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-53 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Business Mid America Transporters Group, Inc. (Mid America or, "the Company") was incorporated in the State of Arkansas on February 14, 1994. The Company, through its wholly-owned subsidiary, Gulf Northern Transport, Inc., (Gulf Northern) a Wisconsin corporation, operates as an interstate and intrastate motor carrier. (See Note 2). The Company's corporate headquarters are located in Charleston, South Carolina with terminals and drop stations located in various states. Services are provided to customers located primarily in the central United States but include locations in virtually all 48 contiguous states. (B) - Net Earnings (Loss) per Share Net earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding during each period. Only the weighted average number of shares of common stock outstanding is used to compute earnings or loss per share in 1996 and 1995, as there were no stock options, warrants, or other common stock equivalents in those years. (C) - Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents for financial statement purposes. (D) - Inventory Inventory consists principally of parts and supplies used in maintaining its motor carrier fleet, skids used in transporting goods, and small tools and are stated at the lower-of-cost or market, determined on a first-in, first-out basis. (E) - Property, Plant and Equipment Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Accelerated methods of depreciation are followed for tax purposes and the straight line method is used for financial reporting purposes. Transportation equipment, furniture and fixtures, and other equipment are generally depreciated over periods ranging from two to seven years. The building is depreciated over a thirty year period. A provision has been made for deferred income taxes relating to depreciation temporary differences. See Note 2. (F) - Covenants Not to Compete Covenants not to compete are amortized on a straight line basis over the terms of the agreements. The covenants cover the period from January, 1994 to December, 1997. F-54 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (G) - Income Taxes Taxes are provided on all revenue and expense items included in the Consolidated Statements of Operations, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. (H) - Revenue Recognition The Company recognizes revenues at the time freight is delivered to recipients. (I) - Organization Costs Gulf Northern incurred organization costs of $5,000 in 1992 which is being amortized on a straight line basis over five years. (J) - Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. (K) - Basis of Presentation The accompanying consolidated balance sheets and related statements of operations and retained earnings and cash flows includes the accounts of Mid America Transporters Group, Inc. and its wholly owned subsidiary, Gulf Northern Transport, Inc. as of December 31, 1996 and 1995 and gives effect to the acquisition of Gulf Northern by Mid America effective January 1, 1995 pursuant to an agreement dated March 28, 1995, and reflects the acquisition as a purchase as more fully described in Note 2. There were no intercompany transactions or balances as of and for the years ended December 31, 1996 and 1995. NOTE 2 - Definitive Stock Purchase Agreement Effective January 1, 1995 to an agreement dated March 28, 1995, Mid America signed a definitive stock purchase agreement with Gulf Northern and its individual shareholders. Under the terms of the agreement, Mid America purchased all shares of Gulf Northern's common stock for a total purchase price, as finally determined, of $2,683,500 which exceeded the net asset value of Gulf Northern by approximately $1,182,000. The transaction has been accounted for as a purchase effective on December 31, 1994. Note (1K). As discussed in Note 1G and 3, prior to the implementation of this agreement, the Company elected to be an S Corporation for tax purposes. Due to differences in the computation of depreciation for book purposes as compared to tax purposes, taxes were deferred in the amount of $388,000. On the date of this agreement, the Company no longer qualified to file its tax returns as an S Corporation, therefore, deferred taxes were established as an increase to the acquisition cost. F-55 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 2 - Definitive Stock Purchase Agreement (continued) As noted above, the acquisition has been accounted for as a purchase. Purchase accounting requires that the cost of the acquisition be allocated to the net assets acquired up to their fair market value. Accordingly, property, plant and equipment was increased by $1,162,184 to $5,390,503 which is less than its appraised value. No goodwill was recorded by this transaction. In addition, the stockholder's equity section as reported prior to the purchase is eliminated. The agreement includes payments to the former stockholders in the form of cash of $2,232,000 which includes the payoff of shareholder loans described in Note 5A; promissory notes totaling $260,000 due in 36 monthly installments totaling $8,017 at 7% due on March 1, 1998 secured by letters of credit in the amount of $150,000; and non interest bearing obligations (discounted at 7% per annum) totaling $104,000 payable over a one year period commencing April 1, 1998. The purchase was financed by a loan in the amount of $3,000,000 from ITT Credit Corp. which is payable in 60 monthly installments of $66,360 and is due on March 31, 2000. The loan was subsequently sold to General Electric Credit Corp and is secured by certain items of equipment. See Note 13 for description of the loan modification agreement. NOTE 3 - Income Taxes The Company accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). At December 31, 1996 a recovery of prior years deferred taxes of $388,000 was provided. No federal income taxes were provided for the year ended December 31, 1995. Differing methods of reporting income for tax purposes as compared to financial reporting purposes resulted in deferred income taxes of approximately -0- and $388,000 as of December 31, 1996 and 1995, respectively. Deferred tax assets and liabilities consist of the following: 1996 1995 --------- --------- Deferred tax assets- Allowance for doubtful accounts $ 15,600 $ 4,680 Net operating loss carryover 196,000 - --------- --------- 211,600 4,680 Valuation allowance 16,600 - --------- --------- $ 195,000 $ 4,680 ========= ========= Deferred tax liabilities- Depreciation of property, plant and equipment $(195,000) $(392,680) --------- --------- $(195,000) $(392,680) ========= ========= F-56 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 3 - Income Taxes (continued) The valuation allowance provided in each of the years is based on management's valuation of the likelihood of realization. As required by SFAS 109, deferred taxes are provided based upon the tax rate at which the items of income and expense are expected to be settled in the Company's tax return. The Company incurred a net operating loss of $503,000 available to offset future income for financial reporting purposes expiring in 2011. NOTE 4 - Long-term Notes Payable 1996 1995 ---------- ---------- Long-term notes payable as of December 31, 1996 and 1995 consists of the following: Equipment loans secured by ten tractors payable at $15,824 per month including interest at 10% per annum with the final installment due November, 2000 $ 647,246 - Mortgage note, Prime + .5%; (9.0% at December 31, 1995 secured by real estate, payable at $5,000 per month including interest, due March 7, 1995. The bank has committed to renew this note beyond December 31, 1995. - 357,537 Demand note - Sebrite Agency, Inc. - non interest bearing 12,500 - Term loan in settlement with United Acquisition II Corp.- $100,000 non interest bearing, discounted at 8% payable over 36 months beginning April 1, 1998 49,904 - Acquisition loan described in Note 5 2,186,890 2,693,392 Seller notes described in Note 2 240,595 310,510 ---------- ---------- Total 3,137,135 3,361,439 Less: current maturities 857,920 673,811 ---------- ---------- Long-term portion $2,279,215 $2,687,628 ========== ========== F-57 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 4 - Long-term Notes Payable (continued) Aggregate annual scheduled maturities of long-term debt at December 31, 1996 are as follows: 1997 $ 857,920 1998 910,804 1999 917,159 2000 441,791 2001 9,461 ---------- Total $3,137,135 ========== NOTE 5 - Debt Restructure In addition to being used to finance the acquisition described in Note 2, proceeds from the $3,000,000 acquisition loan were also used to refinance stockholder loans and certain other bank and lease obligations. As the classification of the acquisition loan is long term, those obligations restructured were also classified as long term. The loan is payable in 60 monthly installments of $66,360 at the rate of 11.75% interest per annum with its final maturity on March 31, 2000. NOTE 6 - Lease Commitments The Company leases tractors and trailers under various capital leases with interest rates ranging from 8.1% to 9.1%. Property, plant and equipment includes the following amounts for the tractor and trailer leases which are capitalized as of December 31, 1996 and 1995: Tractors and trailers $1,760,669 $1,760,669 Less: accumulated amortization 589,913 331,673 ---------- ---------- Total $1,170,756 $1,428,996 ========== ========== F-58 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 6 - Lease Commitments (continued) Lease amortization is included in depreciation expense. Future minimum payments, by year and in the aggregate, under the capital leases are as follows: Years ended December 31, Amount ------------------------ ------ 1997 $ 394,791 1998 522,657 1999 241,568 2000 - ---------- Total minimum lease payments 1,159,016 Less: Amount representing interest 149,338 ---------- Present value of minimum lease payments 1,009,678 Less-Current maturities 299,585 ---------- Long-term obligations under capital leases $ 710,093 ========== NOTE 7 - Property, Plant and Equipment Property, plant and equipment consists of the following as of December 31: 1996 1995 ---------- ---------- Land $ - $ 127,719 Building - 303,350 Office equipment 63,273 58,576 Tractors, trailers and garage equipment 8,238,378 7,517,076 Transportation equipment 4,480 4,480 ---------- ---------- 8,306,131 8,011,201 Less: Accumulated Depreciation 4,130,210 3,313,632 ---------- ---------- Total property, plant and equipment $4,175,921 $4,697,569 ========== ========== Depreciation expense amounted to $882,797 and $754,130 for the years ended December 31, 1996 and 1995, respectively. $873,148 and $732,921 of depreciation was included in operating expenses for 1996 and 1995, respectively and $9,649 and $21,209 of depreciation was included in administrative expenses for 1996 and 1995, respectively. The fair market value of fixed assets approximates book value. F-59 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 8 - Related Party Transaction On December 23, 1996, the Company sold its Wisconsin Rapids facility which included land, a building and improvements with a book value of $394,517 to its majority stockholders for $346,141 resulting in a net loss of $48,376. The loss is included in other income and expenses. The transaction resulted in a gain of $231,000 for income tax purposes. The stockholders leased the property back to the Company for five years commencing January 1, 1997. See Note 10. Management believes the sale was an arms length transaction based on estimated values of the property on the date of sale. Interest expense at December 31, 1995 includes $6,857 attributable to stockholder loans. The loans were repaid during 1995. NOTE 9 - Retirement Plan The Company matches employee contributions up to 3% of employee compensation. Contributions to the plan amounted to $65,123 and $41,264 for the years ended December 31, 1996 and 1995, respectively. 401K matching contributions of $23,100 and $29,710 are included in operating expenses for 1996 and 1995, respectively and $8,589 and $21,209 of the aforementioned contributions are included in administrative expenses for 1996 and 1995, respectively. NOTE 10 - Commitments and Contingencies Commencing on January 1, 1997, the Company agreed to rent its Wisconsin Rapids facility from certain stockholders for $7,350 per month for a period of five years under an operating lease. Commencing October 15, 1997, the Company leased its South Carolina corporate offices for $1,728 per month. The lease extends for a period of two years. Minimum rental payments under such operating leases follows: Year ending December 31, 1997 $ 92,520 1998 108,936 1999 104,616 2000 88,200 2001 88,200 -------- Total minimum payments required $482,472 ======== F-60 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 11 - Noncompetition Agreements As of January 3, 1994, the Company entered into a covenant not to compete agreement with its chief executive officer which extends over four years. The agreement called for a prepayment of $115,000 in December, 1993, with an additional $46,000, including interest, payable in (18) monthly installments of $2,556 commencing with the date of the agreement. Expenses under this agreement amounted to $39,999 and $39,698 for 1996 and 1995, respectively. See also Note 2 for a description of the covenant not to compete related to the stock purchase agreement. NOTE 12 - Restricted Cash The Company maintains cash accounts for owner-operators who perform services for the Company. These funds are accumulated, with the owner-operators consent, by withholding part of the payments due to them for services performed. The funds are used to pay for repairs of equipment that they own directly. Further, the Company has deposited funds with a financing company to cover over the road fuel and other operating expenses for drivers in support of a letter of credit. As of December 31, 1996 and 1995, the Company had letters of credit outstanding totaling $10,000 and $88,000 respectively which guarantee various operating and insurance activities. NOTE 13 - Loan Modification Agreement In connection with the stock purchase agreement described in Note 2, the purchase was financed by a loan in the amount of $3,000,000 payable in monthly installments over five years. The original loan agreement required that the Company hold the common stock of a "small capitalization" company with a market value of at least $1,000,000. As of December 31, 1996 and 1995, such stock was not held by the Company. On May 25, 1997, the Company agreed to a modification of the original loan whereby current monthly payments were reduced from $66,360 per month to $45,000 per month with a balloon payment of $396,836 due at August 31, 2001. NOTE 14 - Concentration of Credit Risk - Cash The Company maintains its cash balances in two financial institutions, one located in Wisconsin Rapids, Wisconsin and the other in Charleston, South Carolina. At times, the balances may exceed federally insured limits of $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash on deposit. The fair market value of these financial instruments approximates cost. F-61 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 15 - Use of Factor In April, 1995, the Company entered into an agreement with a factor whereby the factor would accept the Company's receivables with full recourse. Under the agreement, the factor will advance up to 80% of those receivables submitted by the Company. Interest on funds advanced is charged at an average annual effective rate of 14.5% payable monthly. In addition, the Company must maintain funds on deposit with its factor as a reserve against uncollectible receivables. The amount of such funds on deposit as of December 31, 1996 and 1995 amounted to $97,179 and $179,615 respectively. The uncollected balance of such receivables held by the factor amounted to $1,133,731 and $950,390 as of December 31, 1996 and 1995 respectively. The fair market value of these balances approximate book value. NOTE 16 - Economic Dependency The Company's customers consist primarily of high volume shippers that have significant time sensitive and high service level traffic needs. The Company provided services to three and four customers, respectively which accounted for net revenues in excess of 10% of the Company's total revenues for the years ended December 31, 1996 and 1995. Consolidated Paper, Inc., Land-0-Lakes, Inc., Excel Corporation and Trane Company accounted for 24.6%, 13.8%, and 10.7% of the Company's net revenues for the year ended December 31, 1996. Consolidated Paper, Inc., Land-O-Lakes, Inc., Excel Corporation and Trane Company accounted for 17.8%, 13.5%, 10.7% and 10.2% of the Company's net revenues for the year ended December 31, 1995. Accounts receivable from those customers amounted to $486,873 and $358,319 as of December 31, 1996 and 1995 respectively. Revenues from the Company's five and ten largest customers accounted for approximately 57% and 69% respectively of total net revenues for the year ended December 31, 1996. Revenues from the Company's five and ten largest customers accounted for approximately 57% and 73% respectively of total net revenues for the year ended December 31, 1995. The Company considers its relationship with those major customers to be satisfactory and is committed to expanding its relationship with its other customers. The Company provides services to a significant number of customers in the meat packing and distribution industry. Revenues from those customers accounted for approximately 16.3% of total revenues for the year ended December 31, 1996 and 30% of total revenues for the year ended December 31, 1995. Accounts receivable from those customers amounted to $117,600 and $375,000 as of December 31, 1996 and 1995 respectively. F-62 MID AMERICA TRANSPORTERS GROUP, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 17 - Stock Acquisition Agreement - United Acquisition II Corp. On June 3, 1996, the shareholders of Mid America entered into an agreement with United Acquisition II Corp. (the acquirer) whereby they would transfer 100% of their common stock in Mid America in exchange for 31,366 shares of convertible preferred stock and 316,666 shares of common stock of the acquirer. In addition, the acquirer agreed to contribute cash and notes totaling $500,000 into Mid America at closing. In January, 1997, the acquirer conceded that it was not able to complete the transaction as agreed and withdrew from the contract. During the period from the consummation of the contract, the acquirer deposited funds to the Company in the amount of $145,000. The Company agreed to return a total of $100,000 payable in 36 installments beginning April 1, 1998 on a non interest bearing basis. The settlement resulted in a gain to the company of $105,096 which is included in other income. NOTE 18 - Accounts Receivable - Affiliate The Company provided freight services on behalf of its affiliate, Mencor, Inc. amounting to $340,822 and $119,045 for the years ended December 31, 1996 and 1995 respectively. The balance receivable from this affiliate as of December 31, 1996 and 1995 amounted to $25,881 and $14,150. The fair market value of this receivable approximate book value. NOTE 19 - Advances from Affiliate The Company received advances from its affiliate, Mencor, Inc. during 1996 and 1995. Those advances which amounted to $27,353 and $17,910 remained unpaid as of December 31, 1996 and 1995, are non interest bearing and are due on demand. The fair market value of these advances approximates book value. NOTE 20 - Subsequent Event - Acquisition Agreement with U.S. Trucking, Inc. On January 30, 1997, the Company entered into an agreement with U.S. Trucking, Inc. (the acquirer) whereby U.S. Trucking would acquire 100% of the common stock of the Company in exchange for 25% of it's common stock. As part of this agreement, the Company contracted with Dan Pixler (a former stockholder of the Company) for him to provide services as president and general manager for the five years commencing from January 30, 1997 to January 30, 2002 at an annual salary of $105,000 per year. Mr. Pixler will receive annual options to purchase 12,500 shares of the common stock of the acquirer's parent company, U.S. Transportation Systems, Inc. which will be exercisable until December 31, 2002. Further, during the period of employment and for a period of two years after his termination, Mr. Pixler agreed that he will not participate in an entity which is directly competitive with the Company's present operations. F-63 5) AUDITED FINANCIAL STATEMENTS OF MENCOR, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 F-64 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Stockholders Mencor, Inc. We have audited the accompanying balance sheets of Mencor, Inc. as of December 31, 1996 and 1995 and the related statements of earnings and retained earnings and cash flows for the years then ended. 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 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 provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of Mencor, Inc. as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Farmingdale, New York November 3, 1997 F-65 MENCOR, INC. BALANCE SHEETS December 31, 1996 1995 ---------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 1C and 2) $ 77,984 $ 34,726 Accounts receivable-net of allowance for doubtful accounts of $11,834 as of December 31, 1996 and 1995 (Notes 1F & 12) 228,107 218,219 Advances to affiliate (Note 7) 27,353 17,910 Refundable income taxes (Note 6) 860 Prepaid expenses 1,002 1,078 ---------- ---------- Total Current Assets 335,306 271,933 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT - at cost, less accumulated depreciation of $3,950 and $2,025 as of December 31, 1996 and 1995, respectively (Notes 1D and 3) 7,300 6,552 ---------- ---------- OTHER ASSETS Intangible asset - Net of accumulated amortization of $1,067 and $667 as of December 31, 1996 and 1995, respectively. (Note 1H) 933 1,333 Security deposits 1,125 1,125 Deferred tax asset (Notes 1E and 6) 1,920 1,000 Organization costs - net of accumulated amortization of $445 and $267 at December 31, 1996 and 1995, respectively (Note 1G) 444 622 ---------- ---------- Total other assets 4,422 4,080 ---------- ---------- TOTAL ASSETS $ 347,028 $ 282,565 ========== ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-66 MENCOR, INC. BALANCE SHEETS December 31, 1996 1995 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES CURRENT LIABILITIES Accounts payable-trade $ 181,009 $ 197,015 Accounts payable-affiliate (Note 8) 25,881 14,150 Advances from related party (Note 9) 83,970 Payroll taxes withheld and payable 3,918 Accrued expenses 2,039 Income taxes payable (Notes 1E and 6) 25 14,840 Current Portion of Equipment Notes Payable (Notes 3 and 4) 1,071 878 ---------- ---------- Total Current Liabilities 297,913 226,883 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 5) OTHER LIABILITIES Equipment Notes Payable-net of current maturities (Notes 3 and 4) 620 1,691 ---------- ---------- TOTAL LIABILITIES 298,533 228,574 ---------- ---------- STOCKHOLDERS' EQUITY Common Stock (no par value-1,000 shares authorized, 300 issued and outstanding (Note 1B) 6,604 6,604 Retained Earnings 41,891 47,387 ---------- ---------- Total Stockholders' Equity 48,495 53,991 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 347,028 $ 282,565 ========== ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-67 MENCOR, INC. STATEMENTS OF EARNINGS AND RETAINED EARNINGS Periods Ending December 31, 1996 1995 ----------- ---------- Net Revenues $ 2,226,900 $1,486,293 Freight settlements 2,007,651 1,294,550 ----------- ---------- Income from operations 219,249 191,743 General and administrative expenses 225,685 167,598 ----------- ---------- Net income (loss) from operations ( 6,436) 24,145 Other expense Interest expense ( 1,815) ( 279) ----------- ---------- Earnings (loss) before income taxes ( 8,251) 23,866 Income taxes (Notes 1E and 6) 2,755 ( 6,035) ----------- ---------- Net earnings (loss) ( 5,496) 17,831 Retained Earnings-Beginning of Year 47,387 29,556 ----------- ---------- Retained Earnings-End of Year $ 41,891 $ 47,387 =========== ========== Net income (loss) per Share $( 18.32) $ 57.94 =========== ========== Weighted Average Number of Shares 300 300 (Note 1B) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-68 MENCOR, INC. STATEMENTS OF CASH FLOWS Periods Ending December 31, 1996 1995 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (loss) $( 5,496) $ 17,831 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES Depreciation & amortization 5,850 1,911 Allowance for doubtful accounts 7,610 Deferred tax benefit ( 920) ( 1,000) (Increase) Decrease-Assets Accounts Receivable-trade ( 9,888) (109,343) Advances to affiliate ( 9,443) ( 17,910) Refundable income taxes ( 860) Prepaid expenses 76 22 Increase (Decrease)-Liabilities Accounts payable-trade ( 16,006) 11,569 Accounts payable-affiliate 11,731 14,150 Payroll taxes withheld and payable 3,918 Accrued expenses 2,039 Income taxes payable ( 14,815) 7,035 ----------- ---------- Total Adjustments ( 28,318) ( 85,956) Net Cash Provided (used) by Operations ( 33,814) ( 68,125) ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Offering costs ( 3,346) Purchases of equipment ( 2,674) ( 620) Security deposits ( 1,125) ----------- ---------- Net Cash Used in Investing Activities ( 6,020) ( 1,745) ----------- ---------- Subtotal $ ( 39,834) $ ( 69,870) ----------- ---------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-69 MENCOR, INC. STATEMENTS OF CASH FLOWS (CONTINUED) Periods Ending December 31, 1996 1995 ----------- ---------- Balance brought forward $ ( 39,834) $ ( 69,870) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Advances from related party 123,397 Repayments to related party ( 39,427) Principal payments on equipment loan ( 878) ( 377) ----------- ---------- Net Cash provides by (used in) financing activities 83,092 ( 377) ----------- ---------- NET INCREASE (DECREASE) IN CASH 43,258 ( 70,247) ----------- ---------- CASH AT BEGINNING OF PERIOD 34,726 104,973 ----------- ---------- CASH AT END OF PERIOD $ 77,984 $ 34,726 =========== ========== Supplemental Disclosure of Cash flow information: Cash Paid during the year Interest expense $ 1,815 $ 279 Income taxes $ 14,840 $ -0- The Company purchased office equipment during the year ended December 31, 1995. The purchase price of the equipment amounted to $2,946 and was financed through the vendor. See Note 4. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-70 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Operations Mencor, Inc. was incorporated in the State of Arkansas on July 6, 1994. The Company operates as a broker for interstate motor carriers. An interstate motor carrier broker serves the trucking industry by providing return hauls for truckers who have completed their initial delivery. By providing this service, trucking companies and independent operators are able to cover the cost of returning to their home location. The Company's corporate headquarters are located in Charleston, South Carolina. As a broker, the Company is required to acquire a license which provides the authority to engage in interstate commerce. This license was acquired in April, 1994. Services are provided to customers located primarily in the central United States but include locations in virtually all 48 contiguous states. (B) - Net Earnings (Loss) per Share Net earnings per share is computed on the basis of the weighted average number of common and common equivalent shares outstanding during each period. Only the weighted average number of shares of common stock outstanding is used to compute income per share in 1996 and 1995 as there are no stock options, warrants, or other common stock equivalents in these years. (C) - Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents for financial statement purposes. (D) - Property, Plant 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 principally on an accelerated basis. Accelerated methods of depreciation are followed for substantially all assets for both financial reporting and tax purposes. Transportation equipment, furniture and fixtures, and other equipment are generally depreciated over periods ranging from two to seven years. (E) - Income Taxes Income taxes are provided on all revenue and expense items included in the statement of earnings, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. Non current deferred income taxes result from the use of accelerated methods of depreciation for income tax purposes and from the establishment of an allowance for doubtful accounts for financial reporting purposes. F-71 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 1 - General and Summary of Significant Accounting Policies (continued) (F) - Revenue Recognition The Company recognizes revenues at the time the shipment is delivered to recipients. (G) - Organization expense As part of its initial incorporation, the company incurred organization costs amounting to $889 which is being amortized on a straight-line basis over five years. (H) - Intangible Asset As discussed in Note 1A, the Company acquired a license from the Interstate Commerce Commission which is required to allow the Company to do business as an interstate carrier broker. This license, which cost $2,000 is being amortized on a straight-line basis over five years. (I) - Concentration of Credit Risk Virtually all of the Company's customers are in the long haul trucking industry. Further, accounts receivable are uncollateralized and consist of amounts due from that industry. (J) - Offering Costs During 1996, the Company incurred certain expenses related to an equity offering in connection with its affiliate, Mid America Transporters Group, Inc. and Subsidiary. The offering was unsuccessful and, accordingly, the expense was amortized in full during 1996. (K) - Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 2 - Cash and Cash Equivalents The Company maintains its cash balances in one financial institution located in Charleston, South Carolina which at times, may exceed federally insured limits. The Company has not experienced any losses in such account and believed it is not exposed to any significant credit risk on cash and cash equivalents. F-72 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 3 - Property, Plant and Equipment Property, plant and equipment consists of the following as of December 31,: 1996 1995 -------- -------- Office equipment $ 12,656 $ 7,171 Furniture and fixtures 1,406 1,406 -------- -------- 11,250 8,577 Less: Accumulated Depreciation 3,950 2,025 -------- -------- Total property, plant and equipment $ 7,300 $ 6,552 ======== ======== Depreciation expense amounted to $1,925 and $1,333 for the years ended December 31, 1996 and 1995, respectively and is included in general and administrative expenses. NOTE 4 - Notes Payable During 1995, the Company acquired office equipment in the amount of $2,946 which was financed payable in 36 installments of $110 per month including interest at 14% per annum due June, 1998. Total principal $ 1,691 Less: current maturities 1,071 -------- Long-term portion $ 620 ======== Aggregate annual maturities of long-term debt for the five years following December 31, 1996 are as follows: 1997 $ 1,071 1998 620 -------- Total $ 1,691 ======== NOTE 5 - Commitments and Contingencies The Company leases office space for its operating facility in Charleston, South Carolina. The current lease term commenced on May 1, 1995 and concludes on April 30, 1997. Commitments under this lease agreement amounted to $3,675 in 1997. Rent expense amounted to $6,000 and $9,440 for the periods ended December 31, 1996 and 1995, respectively and is included in general and administrative expenses. F-73 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 6 - Income Taxes The Company accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). The provision for income taxes was comprised of the following components as of December 31. 1996 and 1995: 1996 1995 -------- -------- Federal-current $( 860) $ 5,276 Federal-deferred ( 1,586) (1,000) State-current 25 1,759 State-deferred ( 334) -0- -------- -------- Total $( 2,755) $ 6,035 ======== ======== The income tax provision reconciled to the tax computed at the statutory Federal rate was: 1996 1995 ---------------- ---------------- Tax at Statutory Rate $( 3,218) (39)% $ 9,308 39 % State income taxes 1,759 7 Benefit of graduated brackets 463 6 ( 5,728) (24) Other 696 3 -------- -- -------- -- $( 2,755) (33)% $ 6,035 25 % ======== == ======== == Deferred tax assets and liabilities at December 31, 1996 and 1995 consist of the following: 1996 1995 -------- -------- Deferred tax assets Allowance for doubtful accounts $ 11,834 $ 11,834 Deferred tax liabilities Depreciation of property & equipment ( 5,155) ( 6,545) -------- -------- Net Total $ 6,679 $ 5,289 ======== ======== Net operating loss carryovers amounting to $5,733 for state income tax purposes are available through December 31, 2011. F-74 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 7 - Advances to Affiliate The Company advanced funds and provided services to its affiliate, Gulf Northern Transport, Inc. during 1996 and 1995. Gulf Northern is related to the Company through common ownership and management. Total revenues generated by services provided during 1996 and 1995, respectively amounted to $6,465 and $2,601. The amount of such advances which remained unpaid as of December 31, 1996 and 1995 amounted to $27,353 and $17,910, respectively. These advances represent allocations of rent and other administrative costs and freight settlements, are non interest bearing and are due on demand. The fair market value of these advances approximate book value. NOTE 8 - Accounts Payable-Affiliate The Company incurred expenses for freight settlements from its affiliate, Gulf Northern Transport, Inc. which amounted to $340,822 and $119,045 for the years ended December 31, 1996 and 1995. The remaining balance payable to the affiliate for such expenses as of December 31, 1996 and 1995 amounted to $25,881 and $14,150, respectively. NOTE 9 - Advances from Related Party During August and September 1996, a shareholder advanced funds totaling $123,397 to the Company. Repayments during the year amounted to $39,427 with the remaining balance remitted by February, 1997. The advances were payable on demand with no stated interest. NOTE 10 - Economic Dependency The Company's customers consist primarily of high volume shippers that have significant time sensitive and high service level traffic needs. The Company provided services to three and two customers respectively which accounted for net revenues in excess of 10% of the Company's total revenues for the years ended December 31, 1996 and 1995 respectively. Tamco Distributors, OK Grocery and McCrory Stores accounted for 24.8%, 17.1% and 13.8% of the Company's net revenues for the year ended December 31, 1996. Tamco Distributors and OK Grocery accounted for 30.1% and 22.8% of the Company's net revenues for the year ended December 31, 1995. Accounts receivable from those customers amounted to $82,926 and $94,594 as of December 31, 1996 and 1995 respectively. Revenues from the Company's five and ten largest customers accounted for approximately 66% and 81% respectively of total net revenues for the year ended December 31, 1996. Revenues from the Company's five and ten largest customers accounted for approximately 71% and 87% respectively of total net revenues for the year ended December 31, 1995. F-75 MENCOR, INC. NOTES TO THE FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 11 - Subsequent Event On January 30, 1997, the stockholders sold their interests in Mencor, Inc. to U.S. Trucking, Inc. (the buyer) for $75,000. The transaction was in conjunction with the sale of Gulf Northern Transport, Inc. Also in connection with the sale, the Company agreed to continue the employment of Michael Menor (a former shareholder of Mencor, Inc.) as the president of the Company for the period from the date of enactment to January 30, 2000 at an annual salary of $60,000 per year. Further, during the period of employment and a period of two (2) years after his termination, Mr. Menor agreed that he will not participate in an entity which directly performs truck brokerage services for those customers currently serviced by the Company. Also on the date of enactment, the buyer contracted with Roxanne Pixler, (a former shareholder of Mencor, Inc.) for her to provide consulting services to the Company. Pixler will receive 18,750 shares of U.S. Transportation Systems, Inc. as compensation for her services. The contracted obligation will commence from the date of enactment to December 31, 1998. F-76 6) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF U.S. TRUCKING, INC. AND SUBSIDIARIES AS OF JUNE 30, 1998 F-77 ACCOUNTANTS' COMPILATION REPORT The Stockholders U.S. Trucking, Inc. and Subsidiaries We have compiled the accompanying consolidated balance sheet of U.S. Trucking, Inc. and Subsidiaries as of June 30, 1998 and the related consolidated statement of operations and accumulated deficit and cash flows for the six months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. Garden City, New York August 18, 1998 F-78 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1998 See Accountants' Compilation Report ASSETS CURRENT ASSETS Cash in banks (Note 14) $ 18,341 Restricted cash-reserves on deposit with factor (Note 15) 251,210 Restricted cash-insurance premiums (Note 11) 150,000 Accounts receivable-net of allowance for doubtful accounts of $88,000 (Notes 1H, 15 and 16) 2,295,678 Accounts receivable - other 7,432 Parts and supply inventory (Note 1D) 162,002 Prepaid expenses and other current assets 189,286 ----------- Total Current Assets 3,073,949 ----------- TRANSPORTATION AND OTHER EQUIPMENT - at cost, less accumulated depreciation and amortization of $2,053,724 (Notes 1E, 2, 4, 5 and 7) 6,207,979 ----------- OTHER ASSETS Restricted cash-owner operators (Note 12) 6,494 Restricted cash-cash held as collateral against letters of credit (Note 12) 10,000 Security deposits and other 12,603 Intangible assets - net of accumulated amortization of $207,020 (Notes 1I, 2 and 17) 650,659 ----------- Total other assets 679,756 ----------- TOTAL ASSETS $ 9,961,684 =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-79 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1998 See Accountants' Compilation Report LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable-trade $ 592,915 Due to factor (Note 15) 1,440,068 Accrued expenses and other 709,268 Sellers' notes (Notes 4 and 5) 104,000 Current portion - note payable 34,342 Current portion - acquisition loan payable 369,449 Current portion - equipment notes payable 723,922 Current portion - obligations under capital leases 374,131 ----------- Total Current Liabilities 4,348,095 ----------- OTHER LIABILITIES Owner-operator escrow (Note 12) 25,000 Note payable - net of current portion (Notes 4 and 13) 29,458 Acquisition loan payable - net of current portion (Notes 4 and 5) 1,346,999 Equipment Notes Payable - net of current portion (Note 4) 1,048,802 Obligations under capital leases - net of current portion (Note 6) 172,340 ----------- Total Other Liabilities 2,622,599 ----------- TOTAL LIABILITIES 6,970,694 ----------- COMMITMENTS AND CONTINGENCIES (Notes 6, 9 10 and 18) STOCKHOLDERS' EQUITY Common Stock - .001 par value-50,000,000 shares authorized, 13,000,000 shares issued and outstanding (Notes 1 and 18) 1,000 Preferred Stock - .001 par value-1,000 shares authorized but unissued (Notes 1 and 18) - Additional paid in capital 4,328,368 Accumulated deficit (1,338,378) Total Stockholders' Equity 2,990,990 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,961,684 =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-80 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 1998 See Accountants' Compilation Report Net Revenues $10,543,383 Operating expenses 8,503,586 ----------- Income from operations 2,039,797 Administrative expenses 1,574,257 ----------- 465,540 Other income and (expense) Interest income 1,199 Interest expense ( 315,077) Other income 41,160 ---------- Total other income and (expenses) ( 272,718) ----------- Net Income before taxes 192,822 Provision for Income taxes (Notes 1H and 3) ( 83,500) Tax benefit of net operating loss carryovers 83,500 ----------- Net Income 192,822 Accumulated deficit - December 31, 1997 (1,531,200) ----------- Accumulated deficit - June 30, 1998 $(1,338,378) =========== Earnings per common and common equivalent share $ .01 =========== Weighted average number of shares (Note 1B) 13,000,000 =========== Earnings per common share assuming full dilution $ .01 =========== Weighted average number of shares-full dilution 15,500,000 =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-81 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1998
Common Stock Paid in Accumulated No Par Value Capital Deficit Total ------------ ---------- ----------- ---------- Opening balance - January 1, 1998 $ 1,000 $4,313,368 (1,531,200) $2,783,168 Fair value of options awarded under stock-based compensation plan 15,000 15,000 Net Income for the six months ended June 30, 1998 192,822 192,822 ---------- ---------- ----------- ---------- Closing balance - June 30, 1998 $ 1,000 $4,328,368 $(1,338,378) $2,990,990
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. F-82 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 See Accountants' Compilation Report CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 192,822 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES Depreciation & Amortization 805,293 Expense related to stock-based compensation plan 15,000 (Increase) Decrease-Assets Restricted Cash ( 220,600) Accounts Receivable 78,070 Parts and supply inventory ( 9,740) Prepaid expenses and other current assets ( 132,189) Increase (Decrease)-Liabilities Accounts payable and due to factor ( 78,983) Accrued expenses and other current liabilities 51,576 ----------- Total Adjustments 508,427 Net cash provided by operating activities 701,249 ----------- CASH FLOWS FROM INVESTING ACTIVITIES Reduction in security deposit 50 Purchase of transportation and other equipment ( 108,287) Payment for refinancing of acquisition debt ( 55,274) ----------- Net cash used in investing activities ( 163,511) ----------- Sub Total $ 537,738 ----------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-83 U.S. TRUCKING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 1998 See Accountants' Compilation Report Balance Forward $ 537,738 CASH FLOWS FROM FINANCING ACTIVITIES Discount on note payable 9,144 Principal payments on long-term debt ( 427,734) Principal payments on capital lease obligations ( 160,906) ----------- Net Cash used in financing activities ( 579,496) ----------- NET DECREASE IN CASH ( 41,758) CASH AT BEGINNING OF YEAR - January 1, 1998 60,099 ----------- CASH AT END OF PERIOD - June 30, 1998 $ 18,341 =========== Supplemental Disclosure of Cash flow information: Cash Paid during the year Interest expense $ 305,123 =========== Income taxes $ -0- =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-84 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Business U.S. Trucking, Inc. (USTI or "the Company") was incorporated in the State of Nevada on December 24, 1996. The Company operates through two wholly owned subsidiaries which were acquired on January 30, 1997: Gulf Northern Transport, Inc., (Gulf Northern) a Wisconsin corporation, operates as an interstate and intrastate motor carrier. Mencor, Inc. operates as a broker for interstate motor carriers. A broker serves the trucking industry by providing return hauls for truckers who have completed their initial delivery. By providing this service, trucking companies and independent contractors are able to cover the cost of returning to their home location. As a broker, Mencor is required to acquire a license which provides the authority to engage in interstate commerce. This license was acquired in April, 1994. USTI was formed by U.S. Transportation Systems, Inc. (USTS) as a wholly owned subsidiary. As part of the transaction to acquire Gulf Northern, 25% of USTI's common stock was transferred to Gulf Northern's parent (Logistics Management, LLC). The remaining 75% was conveyed to Logistics Management during 1998. The Company's corporate headquarters are located in Charleston, South Carolina with terminals and drop stations located in various states. Services are provided to customers located primarily in the central United States but include locations in virtually all 48 contiguous states. (B) - Net Income per Share Net earnings per share is computed on the basis of the weighted average number of common shares outstanding during each period. In addition to the weighted average number of shares of common stock outstanding, stock options as described in Notes 18 and 19 are included in the computation of diluted earnings per share for the six months ended June 30, 1998. (C) - Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents for financial statement purposes. (D) - Parts and Supply Inventory Inventory consists principally of parts and supplies used in maintaining its motor carrier fleet, skids used in transporting goods, and small tools and are stated at the lower-of-cost or market, determined on a first-in, first-out basis. F-85 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (E) - Transportation and Other Equipment Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Accelerated methods of depreciation are followed for tax purposes and the straight-line method is used for financial reporting purposes. Transportation equipment, furniture and fixtures, and other equipment are generally depreciated over periods ranging from two to seven years. (F) - Goodwill On January 30, 1997, the Company acquired the common stock of Gulf Northern Transport, Inc. and Mencor, Inc. (See Note 2). The acquisition resulted in the recognition of goodwill that is being amortized on a straight-line basis over six years. (G) - Income Taxes Taxes are provided on all revenue and expense items included in the Consolidated Statements of Operations, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. (H) - Revenue Recognition The Company recognizes revenue at the time freight is delivered to recipients. (I) - Organization Costs Subsidiary companies, Gulf Northern and Mencor incurred organization costs that are being amortized on a straight-line basis over five years. (J) - Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. (K) - Basis of Presentation The accompanying consolidated balance sheets and related statements of operations and accumulated deficit and cash flows includes the accounts of U.S. Trucking, Inc. and its wholly owned subsidiaries, Gulf Northern Transport, Inc. and Mencor, Inc. as of March 31, 1998 and for the three months then ended. Intercompany transactions or balances as of and for the period ended March 31, 1998 have been eliminated. F-86 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 2 - Acquisition of Subsidiaries and other Assets On January 30, 1997, the Company completed the following acquisitions: Gulf Northern Transport, Inc. - USTI purchased 100% of the common stock of Gulf Northern Transport, Inc. from its stockholder (Logistics Management, LLC) for cash of $225,000 and 25% of the Company's common stock (625 shares). The acquisition was funded by an advance by USTI's parent, U.S. Transportation Systems, Inc. and was subsequently capitalized and is included in paid in capital. The transaction was valued at $790,999 and goodwill in the amount of $565,999 was recognized in the transaction. The goodwill is being amortized over six years. Mencor, Inc. - USTI purchased 100% of the common stock of Mencor, Inc. from its stockholders for cash of $70,000 and 37,500 shares of the common stock of U.S. Transportation Systems, Inc. which was valued at $2.00 per share. The acquisition was funded by a cash and stock contribution to the Company by USTS. The transaction was valued at $145,000. Goodwill in the amount of $96,953 was recognized in the transaction and is being amortized over six years. The amortization expense is included in administrative expenses. Jay and Jay Transportation, Inc. - USTI acquired certain assets (primarily tractors and trailers) and liabilities from USTS which were valued at $2,394,860. The transaction was accomplished by way of a permanent capital contribution by USTS and the net value contributed was included in Additional paid in capital. Jay and Jay's dispatch office and yard is located in Savannah, New York. Office operations including accounting and management were moved to Charleston, South Carolina. The transaction was recorded as an asset purchase and no goodwill was recognized. Translynx Express, Inc. - The Company acquired certain assets and liabilities from USTS that were valued at $100,546. The transaction was accomplished by way of a permanent capital contribution by USTS and the net value contributed is included in Additional paid in capital. Translynx's operating office is located in Orlando, Florida. Office operations including accounting and management were moved to Charleston, South Carolina. The transaction was recorded as an asset purchase and no goodwill was recognized. F-87 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 3 - Income Taxes The Company accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). At June 30, 1998, the income tax provision was composed of the following components: Current - Federal $ 39,800 State 7,350 -------- Total Current 47,150 Deferred - Federal 30,600 State 5,750 -------- Total Deferred 36,350 Total $ 83,500 ======== The income tax provision reconciled to the tax computed at the statutory Federal rate was: Tax at Statutory Rate $ 70,660 34.0% State income tax net of federal tax benefit 8,725 4.2 Non deductible expenses 4,215 2.0 Other items ( 100) ( 0.0) -------- ---- Total $ 83,500 40.2% ======== ==== Differing methods of reporting income for tax purposes as compared to financial reporting purposes resulted in net deferred income taxes of approximately $36,350 for the six months ended June 30, 1998. Deferred tax assets and liabilities consist of the following: Deferred tax assets- Allowance for doubtful accounts $ 88,000 Amortization of Goodwill 107,200 Net operating loss carryovers 2,194,000 ---------- 2,389,200 Valuation allowance 1,689,200 ---------- $ 700,000 ========== Deferred tax liabilities- Depreciation of transportation and other and equipment $ (700,000) ---------- $ (700,000) ========== F-88 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 3 - Income Taxes (continued) The valuation allowance provided in each of the years is based on management's valuation of the likelihood of realization. As required by SFAS 109, deferred taxes are provided based upon the tax rate at which the items of income and expense are expected to be settled in the Company's tax return. The Company has acquired the net operating losses through January 30, 1997 of $940,000 related to the operations of Gulf Northern Transport, Inc. In addition, the Company incurred losses of $1,387,000 during the period through December 31, 1997. These losses will be available to offset future income for financial reporting purposes expiring in 2012. NOTE 4 - Long-term Notes Payable Long-term notes payable as of June 30, 1998 consist of the following: Equipment loans secured by tractors and trailers payable at $59,848 per month including interest at rates ranging from 9-1/2% to 10-1/2% per annum with the final installment due April, 2001 $1,772,724 Term loan in settlement with United Acquisition II Corp.- $100,000 non interest bearing, discounted at 8% payable over 36 months beginning April 1, 1998 63,800 Acquisition loan described in Note 5 1,716,448 Seller notes described in Note 5 104,000 ---------- Total 3,656,972 Less: current maturities 1,231,713 ---------- Long-term portion $2,425,259 ========== The carrying value of the Company's borrowings approximate their fair values. F-89 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 4 - Long-term Notes Payable (continued) Aggregate annual scheduled maturities of long-term debt at June 30, 1998 are as follows: 1999 $1,231,713 2000 1,170,174 2001 780,187 2002 474,898 ---------- Total $3,656,972 ========== NOTE 5 - Acquisition Loan and Sellers' Notes On March 28, 1995, Gulf Northern was acquired by Mid America Transporters Group, Inc. The purchase was financed by a loan in the amount of $3,000,000 from ITT Credit Corp. The proceeds of this loan (described as "the acquisition loan") were used to refinance stockholder loans and certain other bank and lease obligations. The loan which was subsequently sold to General Electric Credit Corp., originally was payable in 60 monthly installments of $66,360 at the rate of 11.75% interest per annum with its final maturity on March 31, 2000. On May 25, 1997, the Company renegotiated the loan whereby the monthly payments were reduced to $45,000 with a balloon payment of $396,836 due on September 1, 2001. The interest rate remained at 11.75%. Additional fees of $138,016 were incurred to restructure the loan which were capitalized and are being amortized over the remaining life of the loan. In addition to the acquisition loan, the agreement called for payments to the three former stockholders (described as sellers' notes) which included promissory notes totaling $260,000 due in 36 monthly installments totaling $8,017 at 7% due on March 1, 1998 secured by letters of credit and non interest bearing obligations (discounted at 7% per annum) totaling $104,000 payable over a one year period commencing April 1, 1998. To date no payments have been made on the non interest bearing obligations and the Company is in the process of renegotiating this portion of the debt. NOTE 6 - Lease Commitments The Company leases tractors and trailers under various capital leases with interest rates ranging from 8.1% to 9.1%. Transportation and other equipment includes the following amounts for the tractor and trailer leases which are capitalized as of June 30, 1998: Tractors and trailers $1,760,669 Less: accumulated depreciation and amortization 1,017,447 ---------- Total $ 743,222 ========== F-90 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 6 - Leas Commitments (continued) Lease amortization is included in depreciation expense. Future minimum payments, by year and in the aggregate, under the capital leases are as follows: Years ended June 30, Amount -------------------- ------ 1999 $ 405,279 2000 173,450 ---------- Total minimum lease payments 578,729 Less: Amount representing interest 32,258 ---------- Present value of minimum lease payments 546,471 Less-Current maturities 374,131 ---------- Long-term obligations under capital leases $ 172,340 ========== NOTE 7 - Transportation and Other Equipment Transportation and other equipment consists of the following as of June 30, 1998: Office equipment $ 120,120 Tractors, trailers and garage equipment 8,140,314 Transportation equipment 1,269 ----------- 8,261,703 Less: Accumulated depreciation 2,053,724 ----------- Total $ 6,207,979 =========== Depreciation expense amounted to $718,825 for the six months ended June 30, 1998. $707,968 of depreciation was included in operating expenses and $10,857 of depreciation was included in administrative expenses. The fair market value of fixed assets approximates book value. F-91 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 8 - Related Party Transactions On December 23, 1996, the Company sold its Wisconsin Rapids facility, which included land, a building and improvements to its majority stockholders. The stockholders leased the property back to the Company for five years commencing January 1, 1997. See Note 10. Management believes the sale was an arms length transaction based on estimated values of the property on the date of sale. Further, the Company leases four tractors from two of its officers under net lease agreements that specify monthly payments of $5,196 per month. See note 10. NOTE 9 - Retirement Plan The Company maintains a pension plan for eligible employees, which was established under section 401(k) of the Internal Revenue Code. Under the terms of the plan, the Company at the discretion of its Board of Directors may match employee contributions up to 3% of employee compensation. Employee contributions to the plan amounted to $18,182 for the six months ended June 30, 1998. The Company did not match employee contributions during the period. NOTE 10 - Commitments and Contingencies Commencing on January 1, 1997, the Company agreed to rent its Wisconsin Rapids facility from certain stockholders for $7,350 per month for a period of five years under an operating lease. Commencing October 15, 1997, the Company leased its South Carolina corporate offices for $1,728 per month. The lease was subsequently re-negotiated whereby the Company took additional office space in the same building at a cost of $2,800 per month until June 30, 2002. In March, 1998 the Company leased four tractors from two of its officers under net lease agreements that specify monthly payments of $5,196 and extend with renewal options until March, 2003. Minimum rental payments under such leases follows for the years ending June 30: 1999 $184,152 2000 184,152 2001 184,152 2002 140,052 2003 46,764 -------- Total minimum payments required $739,272 ======== F-92 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 10 - Commitments and Contingencies (continued) Rent expense for the six months ended June 30, 1998 amounted to $78,506 and is included in administrative expenses. NOTE 11 - Restricted Cash - Insurance Premiums Effective January 1, 1998 the Company entered into a captive insurance program agreement with an insurance company for the Company's auto liability insurance coverage which covers rolling stock. As of June 30, 1998, the claims reserve exceeded actual claims by $203,120. In addition, the Company deposited funds in the amount of $150,000 to cover future premiums. NOTE 12 - Restricted Cash - Owner Operator Escrow Accounts The Company maintains cash accounts for owner-operators who perform services for the Company. These funds are accumulated, with the owner-operators consent, by withholding part of the payments due to them for services performed. The funds are used to pay for repairs of equipment, which they own directly. Further, the Company has deposited funds with a financing company to cover over the road fuel and other operating expenses for drivers in support of a letter of credit. As of June 30, 1998, the company had letters of credit outstanding totaling $10,000, which guarantee various operating and insurance activities. NOTE 13 - Stock Acquisition Agreement-United Acquisition II Corp. During 1996, the shareholders of Gulf Northern's parent company, Mid America Transporters Group, Inc. entered into an agreement with United Acquisition II Corp. (the acquirer) whereby they would transfer 100% of their common stock in Mid America in exchange for common and preferred stock of the acquirer. In addition, the acquirer agreed to contribute cash and notes totaling $500,000 into Mid America at closing. In January 1997 however, the acquirer conceded that it was not able to complete the transaction as agreed and withdrew from the contract. During the period from the consummation of the contract, the acquirer deposited funds to the Company in the amount of $145,000. The Company agreed to return a total of $100,000 payable in 36 installments beginning April 1, 1998 on a non- interest bearing basis. To date no payments have been made on these non interest bearing obligations and the Company is in the process of renegotiating this debt. NOTE 14 - Concentration of Credit Risk - Cash The Company maintains its cash balances in two financial institutions, one located in Wisconsin Rapids, Wisconsin and the other in Charleston, South Carolina. At times, the balances may exceed federally insured limits of $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash on deposit. The fair market value of these financial instruments approximates cost. F-93 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 15 - Use of Factor In April 1995, the Company entered into an agreement with a factor whereby the factor would accept the Company's receivables with full recourse. Under the agreement, the factor will advance up to 90% of those receivables submitted by the Company. Interest on funds advanced is charged at an average annual effective rate of 14.9% payable monthly. In addition, the Company must maintain funds on deposit with its factor as a reserve against uncollectible receivables. The amount of such funds on deposit as of June 30, 1998 amounted to $251,210. The uncollected balance of such receivables held by the factor amounted to $1,440,068 as of June 30, 1998. The fair market value of these balances approximate book value. NOTE 16 - Economic Dependency The Company's customers consist primarily of high volume shippers that have significant time sensitive and high service level traffic needs. The Company provided services to a customer, which accounted for net revenues in excess of 10% of the Company's total revenues for the six months ended June 30, 1998. Consolidated Paper, Inc. accounted for 12.8% of the Company's net revenues for this period. Accounts receivable from this customer amounted to $128,354 as of June 30, 1998. Revenues from the Company's five and ten largest customers accounted for approximately 32.0% and 41.0% respectively of total net revenues for the period ended June 30, 1998. Accounts receivable as of June 30, 1998 from those customers amounted to $567,274 and $766,590 respectively. The Company considers its relationship with those major customers to be satisfactory and is committed to expanding its relationship with its other customers. The Company provides services to a number of customers in the meat packing and distribution industry. Revenues from those customers accounted for approximately 7.2% of total revenues for the six months ended June 30, 1998. Accounts receivable from those customers amounted to $131,391 as of June 30, 1998. F-94 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 17 - Intangible Assets Intangible assets consist of the following items as of June 30, 1998: Original Accumulated Net Book Cost Amortization Value --------- ------------ --------- Goodwill $ 662,952 $ 169,534 $ 493,418 Debt refinancing costs 193,290 36,558 156,732 Other intangibles 1,437 928 509 --------- ---------- --------- Total $ 857,679 $ 207,020 $ 650,659 ========= ========== ========= Amortization expense amounted to $86,995 for the six months ended June 30, 1998 and is included in administrative expenses. NOTE 18 - Stock Dividend and Change in Capital Structure Effective June 26, 1998, the company underwent a change in its capital structure whereby it is authorized to issue 50,000,000 shares of common stock and 1,000 shares of preferred stock. In connection with this change in the capital structure of the Company, a stock dividend was declared by the Board of Directors whereby, 5,199 shares of the Company's common stock was distributed to the stockholders for each one of common stock held. On May 26, 1998, the Company entered into an investment consulting agreement with Joff Pollon & Associates for a period, with extensions, of up to two years. The compensation payable to the consultants under this agreement includes fees, reimbursable expenses and options to purchase up to 1,000,000 post dividend shares of the Company's common stock at $.01 per share and further fees and bonuses as determined by the Board of Directors, and is contingent upon a successful merger with a public company. NOTE 19 - Stock Options Plan During 1998, the Company implemented a stock option plan that is accounted for under Statement of Financial Accounting Standards, SFAS 123, Accounting for Stock-Based Compensation. Under SFAS 123, the compensation cost of the issuance of stock options is measured at the grant date based on the fair value of the award. Compensation is then is recognized over the service period that is generally the vesting period. The plan allows the Company to grant options to employees for up to a total of 2,000,000 shares of common stock. Options outstanding become exercisable at the discretion of the Stock Option Committee which administers the plan and expire 10 years after the grant date. The options are exercisable at not less than the fair market value of the Company's stock on the date of the grant. Accordingly, no compensation cost has been recognized for the plan. F-95 U.S. TRUCKING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 NOTE 19 - Stock Options Plan (continued) The Committee approved the issuance of options to purchase 1,240,000 shares of the common stock of the Company to various employees for prices ranging from .14 to .30 per share for a total exercise price of $233,600. In addition, non qualifying options to purchase 260,000 shares at a price of .30 per share for a total exercise price of $78,000 were issued to various individuals. The fair market value of the options based on the minimum value method was estimated to be .01 per share and amounted to approximately $15,000. This cost is included in general and administrative costs. NOTE 20 - Subsequent Event - Definitive Share Exchange Agreement On September 4, 1998, the stockholders of Northern Dancer Corporation, a Colorado corporation signed a letter of intent with USTI, whereby USTI would acquire Northern Dancer in a reverse acquisition. Under the terms of the letter of intent, USTI would exchange 100% of its common stock for approximately 96.27% of the common stock of Northern Dancer Corp. F-96 U.S. TRUCKING, INC. AND SUBSIDIARIES PRO FORMA COMBINED FINANCIAL STATEMENTS - UNAUDITED The following unaudited pro forma financial statements are derived from the historical financial statements of U.S. Trucking, Inc. and its subsidiaries, and U.S. Trucking, Inc. (formerly named "Northern Dancer Corporation") and give pro forma effect to their combination on September 8, 1998. These pro forma statements should be read in conjunction with those historical financial statements and related notes. The pro forma financial statements do not purport to be indicative of the results that would actually have been obtained if the combination had been in effect on the dates indicated, or that may be obtained in the future. F-97 U.S. TRUCKING, INC. AND SUBSIDIARIES PROFORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1998 ASSETS CURRENT ASSETS Cash in banks $ 56,630 Restricted cash-reserves on deposit with factor 251,210 Restricted cash-insurance premiums 150,000 Accounts receivable-net of allowance for doubtful accounts of $88,000 as of December 31, 1997 2,295,678 Accounts receivable - other 7,432 Parts and supply inventory 162,002 Prepaid expenses and other current assets 189,286 ----------- Total Current Assets 3,112,238 ----------- TRANSPORTATION AND OTHER EQUIPMENT - at cost, less accumulated depreciation and amortization of $2,054,789 as of June 30, 1998 6,208,549 ----------- OTHER ASSETS Restricted cash-owner operators 6,494 Restricted cash-cash held as collateral against letters of credit 10,000 Security deposits and other 12,603 Intangible assets Net of accumulated amortization of $207,020 as of June 30, 1998 650,659 ----------- Total other assets 679,756 ----------- TOTAL ASSETS $10,000,543 =========== F-98 U.S. TRUCKING, INC. AND SUBSIDIARIES PROFORMA CONSOLIDATED BALANCE SHEET JUNE 3O, 1998 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable-trade $ 594,331 Due to factor 1,440,068 Accrued expenses and other 709,268 Current portion - seller's notes 104,000 Current portion - note payable 34,342 Current portion - acquisition loan payable 369,449 Current portion of equipment notes payable 723,922 Current portion of obligations under capital leases 374,131 ----------- Total Current Liabilities 4,349,511 ----------- OTHER LIABILITIES Owner-operator escrow 25,000 Note payable 29,458 Acquisition loan payable 1,346,999 Equipment Notes Payable-net of current portion 1,048,802 Obligations under capital leases net of current portion 172,340 ----------- Total Other Liabilities 2,622,599 ----------- TOTAL LIABILITIES 6,972,110 ----------- STOCKHOLDERS' EQUITY Common Stock (no par value 16,492,000 shares authorized, issued and outstanding 399,409 Additional paid in capital 4,419,428 Accumulated deficit (1,790,404) ----------- Total Stockholders' Equity 3,028,433 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,000,543 =========== F-99 U.S. TRUCKING, INC. AND SUBSIDIARIES PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 1998 Net Revenues $10,543,383 Operating expenses 8,503,586 ----------- Income from operations 2,039,797 Administrative expenses 1,582,294 ----------- Subtotal 457,503 Other income and (expenses) Interest income 2,846 Interest expense ( 315,077) Other income 41,160 Total other income and (expense) ( 271,071) ----------- Net Income before taxes 186,432 Income tax provision 83,500 ----------- Tax benefit of net operating loss carryovers ( 83,500) ----------- Net income 186,432 Accumulated deficit - January 1, 1998 (1,976,836) ----------- Accumulated deficit - June 30, 1998 (1,790,404) Net income per share $ .01 =========== Weighted Average Number of Shares 16,492,000 =========== F-100 U.S. TRUCKING, INC. AND SUBSIDIARIES PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1997 Net Revenues $18,428,076 Operating expenses 17,222,282 ----------- Income from operations 1,205,794 Administrative expenses 2,263,751 ----------- Subtotal ( 1,057,957) Other income and (expenses) Interest income 5,929 Interest expense ( 706,366) Other income 101,762 Net (loss) on disposition of assets ( 25,515) ----------- Total other income and (expense) ( 624,190) ----------- Net (loss) before taxes ( 1,682,147) Income tax provision -0- ----------- Net (loss) ( 1,682,147) Accumulated deficit - January 1, 1997 ( 294,689) ----------- Accumulated deficit - December 31, 1997 ( 1,976,836) ----------- Net loss per share $( .10) =========== Weighted Average Number of Shares 16,492,000 =========== F-101 U.S. TRUCKING, INC. NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - UNAUDITED NOTE A - BASIS OF PRESENTATION On September 8, 1998, U.S. Trucking, Inc. ("USTK") was acquired by Northern Dancer Corporation ("NDC"), a nonoperating public shell corporation, through exchange of 100% of the issued and outstanding shares of USTK's common stock for approximately 96% of the then issued and outstanding shares of NDC's common stock. NDC's legal name was changed to U.S. Trucking, Inc. The acquisition is considered to be a capital transaction, in substance equivalent to the issuance of stock by USTK for the net monetary assets of NDC, accompanied by a recapitalization of USTK. The accompanying pro forma combined balance sheet has been presented as if the acquisition occurred on January 1, 1997, and the accompanying pro forma combined statements of operations for the year ended December 31, 1997 and the six months ended June 30, 1998, have been prepared as if the acquisition was consummated on January 1, 1997. F-102 -----END PRIVACY-ENHANCED MESSAGE-----