**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**Form 10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|------------|----------------------------------------------------------------------------------------------------------|
|       | ** **                                                                                               |
|       | **For the quarterly period ended September 30, 2005**                                               |
|       | ** **                                                                                               |
|       | **OR**                                                                                                   |
| ** ** | ** **                                                                                               |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|       | ** **                                                                                               |
|       | **For  the transition period from          to**             |

 

**CommissionFile Number:     0-24247**

 

**AtlanticExpress Transportation Corp.**

(Exact name of registrant as specified in itscharter)

 
| **New  York**                                                  | ** ** | **13-392-4567**                  |
|----------------------------------------------------------------|------------|----------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (IRS Employer Identification No) |

 

**7North Street Staten Island, New York 10302-1205**

(Address of principal executive offices)

 

**(718)556-8079**

(Registrant’s telephone number, including area code)

 

----

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý     No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes o  No ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No ý

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court. Yes ý  No o

 

Thenumber of outstanding shares of the registrant’s common stock, $0.01 par value,as of November 9, 2005 was 945,263

 

 

----

 

**INDEX**

 
| ** **                         | ** **                                                                                                    | **Page  No.** |
|------------------------------------|---------------------------------------------------------------------------------------------------------------|---------------|
| PART I: FINANCIAL INFORMATION | 3                                                                                                             |
| Item 1.                            | Financial Statements                                                                                          | 3             |
|                               | Consolidated Balance Sheets— September 30,  2005 (unaudited) and June 30, 2005                 | 3             |
|                               | Consolidated Statements of  Operations (unaudited) — Three Months Ended September 30, 2005 and 2004 | 4             |
|                               | Consolidated Statements of  Cash Flows (unaudited) — Three months Ended September 30, 2005 and 2004 | 5             |
|                               | Notes to Consolidated  Financial Statements (unaudited)                                                       | 6             |
| Item 2.                            | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                   | 8             |
| Item 3.                            | Quantitative and Qualitative  Disclosures about Market Risk                                                   | 14            |
| Item 4.                            | Controls and Procedures                                                                                       | 14            |
|                               |                                                                                                          |          |
| PART II: OTHER INFORMATION    | 16                                                                                                            |
| Item 1.                            | Legal Proceedings                                                                                             | 16            |
| Item 2.                            | Unregistered Sales of Equity  Securities and Use of Proceeds                                                  | 16            |
| Item 3.                            | Defaults upon Senior  Securities                                                                              | 16            |
| Item 4.                            | Submission of Matters to a  Vote of Security Holders                                                          | 16            |
| Item 5.                            | Other Information                                                                                             | 16            |
| Item 6.                            | Exhibits and Reports on Form 8-K                                                                         | 16            |

 

2

----

 

**PART I.**

 

**FINANCIALINFORMATION**

 

**Item I.*  FinancialStatements***

 

**Atlantic Express Transportation Corp. andSubsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                               | ** ** | **September 30,  2005** | ** **  | **June 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-------------------------|------------|
| ** **                                                                                               | ** ** | **(unaudited)**              | ** **  | ** **              | ** ** |
| **Assets**                                                                                               |       |                         |        |                    |       |
| Current assets:                                                                                          |       |                         |        |                    |       |
| Cash and cash  equivalents                                                                               |       | $                            | 1,215,192   |                    | $          | 6,834,961 |   |
| Accounts receivable,  net of allowance for doubtful accounts of $1,734,850 and $1,704,850,  respectively |       | 44,468,436                   |        | 44,831,587              |       |
| Inventories                                                                                              |       | 3,169,753                    |        | 2,859,415               |       |
| Prepaid insurance                                                                                        |       | 28,159,644                   |        | 31,425,704              |       |
| Prepaid expenses and  other current assets                                                               |       | 5,108,055                    |        | 3,222,345               |       |
| Due from affiliates ,  net                                                                               |       | 277,508                      |        | —                  |       |
| Total current assets                                                                                     |       | 82,398,588                   |        | 89,174,012              |       |
| Property, plant and  equipment, at cost, less accumulated depreciation                                   |       | 120,981,172                  |        | 129,938,411             |       |
| Other assets:                                                                                            |       |                         |        |                    |       |
| Restricted cash and  cash equivalents                                                                    |       | 5,194,260                    |        | 5,263,733               |       |
| Restricted marketable  securities                                                                        |       | 4,636,393                    |        | 4,560,313               |       |
| Transportation contract  rights, net                                                                     |       | 5,169,228                    |        | 3,988,048               |       |
| Deferred financing  costs, net                                                                           |       | 8,894,628                    |        | 9,586,228               |       |
| Deposits and other  non-current assets                                                                   |       | 5,037,000                    |        | 4,494,719               |       |
| Total other assets                                                                                       |       | 28,931,509                   |        | 27,893,041              |       |
|                                                                                                     |       | $                            | 232,311,269 |                    | $          | 247,005,464 |   |
| **Liabilities  and shareholder’s equity**                                                           |       |                         |        |                    |       |
| Current liabilities:                                                                                     |       |                         |        |                    |       |
| Current portion of  long-term debt                                                                       |       | $                            | 24,946,901  |                    | $          | 24,820,652 |   |
| Current portion of  capital lease obligations                                                            |       | 1,392,270                    |        | 1,356,354               |       |
| Insurance financing  payable                                                                             |       | 2,203,925                    |        | 3,984,116               |       |
| Controlled  disbursements account—checks issued not funded                                          |       | 2,684,721                    |        | 4,725,722               |       |
| Accounts payable,  accrued expenses and other current liabilities                                        |       | 26,304,021                   |        | 24,061,465              |       |
| Accrued compensation                                                                                     |       | 5,265,092                    |        | 6,986,704               |       |
| Current portion of  insurance reserves                                                                   |       | 1,757,774                    |        | 2,130,008               |       |
| Accrued interest                                                                                         |       | 8,523,286                    |        | 4,406,189               |       |
| Payable to creditors  under the plan of reorganization                                                   |       | 1,526,133                    |        | 1,810,085               |       |
| Total current  liabilities                                                                               |       | 74,604,123                   |        | 74,281,295              |       |
|                                                                                                     |       |                         |        |                    |       |
| Long-term debt, net of  current portion                                                                  |       | 135,497,098                  |        | 135,316,642             |       |
| Capital lease  obligations, net of current portion                                                       |       | 5,100,298                    |        | 4,966,079               |       |
| Insurance reserves, net  of current portion                                                              |       | 1,179,807                    |        | 1,179,807               |       |
| Deferred income, net of  current portion and other long-term liabilities                                 |       | 3,142,597                    |        | 2,415,869               |       |
| Deferred state and  local income taxes                                                                   |       | 622,000                      |        | 622,000                 |       |
| Payable to creditors  under the plan of reorganization, net of current portion                           |       | 3,214,648                    |        | 3,247,270               |       |
| Total liabilities                                                                                        |       | 223,360,171                  |        | 222,028,962             |       |
|                                                                                                     |       |                         |        |                    |       |
| **Commitments  and contingencies**                                                                       |       |                         |        |                    |       |
| Shareholder’s equity:                                                                               |       |                         |        |                    |       |
|                                                                                                     |       |                         |        |                    |       |
| Common stock, par value  $.01 per share, authorized shares 1,303,200; issued and outstanding 651,600     |       | 6,516                        |        | 6,516                   |       |
| Additional paid-in  capital                                                                              |       | 110,042,001                  |        | 110,042,001             |       |
| Accumulated deficit                                                                                      |       | (101,082,746                 | )           | (85,155,726             | )          |
| Accumulated other  comprehensive income (loss)                                                           |       | (15,073                      | )           | 83,711                  |       |
| Total shareholder’s  equity                                                                         |       | 8,950,698                    |        | 24,976,502              |       |
| **TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY**                                                     |       | $                            | 232,311,269 |                    | $          | 247,005,464 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

----

 

**Atlantic Express Transportation Corp. andSubsidiaries**

**Consolidated Statement of Operations**

**(Unaudited)**

 
| ** **                                                          | ** ** | **Three Months Ended  September 30,** | ** **  |
|---------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                          | ** ** | **2005**                                   | ** **  | **2004** | ** ** |
| Revenues:                                                           |       |                                       |        |   |   |
| School bus operations                                               |       | $                                          | 55,586,660  |   | $ | 43,304,544 |   |
| Paratransit and transit  operations                                 |       | 11,700,394                                 |        | 11,450,949 |   |
|                                                                |       |                                       |        |   |   |
| Total revenues                                                      |       | 67,287,054                                 |        | 54,755,493 |   |
|                                                                |       |                                       |        |   |   |
| Costs and expenses:                                                 |       |                                       |        |   |   |
| Cost of operations—School  bus operations                      |       | 55,789,208                                 |        | 46,833,663 |   |
| Cost of operations—Paratransit  and transit operations         |       | 10,164,588                                 |        | 9,842,696 |   |
| General and  administrative                                         |       | 4,629,211                                  |        | 3,920,913 |   |
| Depreciation and  amortization                                      |       | 6,071,880                                  |        | 6,114,369 |   |
|                                                                |       |                                       |        |   |   |
| Total operating costs and expenses                                  |       | 76,654,887                                 |        | 66,711,641 |   |
|                                                                |       |                                       |        |   |   |
| Loss from operations                                                |       | (9,367,833                                 | )           | (11,956,148 | ) |
| Other income (expense):                                             |       |                                       |        |   |   |
| Interest expense                                                    |       | (6,426,707                                 | )           | (4,966,204 | ) |
| Reorganization costs                                                |       | (59,236                                    | )           | (339,859 | ) |
| Other income (loss)                                                 |       | 38,080                                     |        | (479,367 | ) |
|                                                                |       |                                       |        |   |   |
| Loss before provision for income taxes and  discontinued operations |       | (15,815,696                                | )           | (17,741,578 | ) |
| Provision for income taxes                                          |       | —                                     |        | 36,000 |   |
|                                                                |       |                                       |        |   |   |
| Loss before discontinued operations                                 |       | (15,815,696                                | )           | (17,777,578 | ) |
| Loss from discontinued operations                                   |       | (1,324                                     | )           | (134,495 | ) |
|                                                                |       |                                       |        |   |   |
| Net loss                                                            |       | $                                          | (15,817,020 | ) | $ | (17,912,073 | ) |

 

See accompanyingnotes to consolidated financial statements.

 

4

----

 

**Atlantic Express Transportation Corp. andSubsidiaries**

**ConsolidatedStatement of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended  September 30,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2005**                                   | ** **  | **2004** | ** ** |
|                                                                                       |       |                                       |        |   |   |
| **Cash  flows from operating activities**                                                  |       |                                       |        |   |   |
| Net loss                                                                                   |       | $                                          | (15,817,020 | ) | $ | (17,912,073 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                       |        |   |   |
|                                                                                       |       |                                       |        |   |   |
| Gain on sales of  marketable securities and investments                                    |       | (5,582                                     | )           | (3,277 | ) |
| Depreciation                                                                               |       | 5,379,468                                  |        | 5,825,241 |   |
| Fixed asset impairment                                                                     |       | 445,137                                    |        | — |   |
| Amortization                                                                               |       | 1,175,404                                  |        | 947,188 |   |
| Original issue discount  interest                                                          |       | 243,537                                    |        | 169,566 |   |
| Reserve for doubtful  accounts receivable                                                  |       | 30,000                                     |        | 30,000 |   |
| (Gain) loss on sales of  fixed assets                                                      |       | (33,648                                    | )           | 375,667 |   |
|                                                                                       |       |                                       |        |   |   |
| Decrease (increase) in:                                                                    |       |                                       |        |   |   |
| Restricted cash and  cash equivalents                                                      |       | —                                     |        | 950,033 |   |
| Accounts receivable                                                                        |       | 333,151                                    |        | 6,829,077 |   |
| Inventories                                                                                |       | (310,337                                   | )           | (41,594 | ) |
| Prepaid expenses and  other current assets                                                 |       | 1,317,246                                  |        | (2,140,490 | ) |
| Due from affiliates,  net                                                                  |       | (277,508                                   | )           | — |   |
| Deposit and other  non-current assets                                                      |       | (548,964                                   | )           | (196,461 | ) |
| Increase (decrease) in:                                                                    |       |                                       |        |   |   |
| Accounts payable,  accrued expenses, accrued compensation and other current liabilities    |       | 4,601,968                                  |        | 8,151,283 |   |
| Controlled disbursement  account                                                           |       | (2,041,000                                 | )           | 579,761 |   |
| Insurance financing  payable                                                               |       | (1,780,191                                 | )           | (1,991,568 | ) |
| Payable to creditors  under plan of reorganization                                         |       | (316,574                                   | )           | (14,365 | ) |
| Insurance reserve and  other long-term liabilities                                         |       | (259,961                                   | )           | (433,064 | ) |
|                                                                                       |       |                                       |        |   |   |
| Net cash provided by  (used in) operating activities                                       |       | (7,864,874                                 | )           | 1,124,924 |   |
|                                                                                       |       |                                       |        |   |   |
| **Cash  flows from investing activities**                                                  |       |                                       |        |   |   |
| Additions to property,  plant and equipment                                                |       | (1,860,523                                 | )           | (1,188,098 | ) |
| Purchase of  transportation contract rights                                                |       | (1,421,772                                 | )           | — |   |
| Proceeds from sales of  fixed assets                                                       |       | 5,778,089                                  |        | 102,445 |   |
| Increase (decrease) in  restricted cash and cash equivalents                               |       | 69,473                                     |        | (87,288 | ) |
| Purchases of marketable  securities                                                        |       | (1,470,702                                 | )           | — |   |
| Proceeds from sales or  redemptions of marketable securities                               |       | 1,299,708                                  |        | 41,313 |   |
|                                                                                       |       |                                       |        |   |   |
| Net cash provided by  (used in) investing activities                                       |       | 2,394,273                                  |        | (1,131,628 | ) |
| ** **                                                                                 |       |                                       |        |   |   |
| **Cash flows from financing activities**                                                   |       |                                       |        |   |   |
| Proceeds from (payments of) senior credit facility                                         |       | $                                          | 539,910     |   | $ | (2,647,180 | ) |
| Proceeds from Senior Secured Notes                                                         |       | —                                     |        | 4,900,000 |   |
| Distributions to parent company                                                            |       | (110,000                                   | )           | (100,000 | ) |
| Principal payments on borrowings and capital lease  obligations                            |       | (344,261                                   | )           | (46,747 | ) |
| Deferred financing                                                                         |       | (234,817                                   | )           | (586,526 | ) |
|                                                                                       |       |                                       |        |   |   |
| Net cash provided by (used in) financing activities                                        |       | (149,168                                   | )           | 1,519,547 |   |
|                                                                                       |       |                                       |        |   |   |
| Net increase (decrease) in cash and cash equivalents                                       |       | (5,619,769                                 | )           | 1,512,843 |   |
| Cash and cash equivalents, beginning of year                                               |       | 6,834,961                                  |        | 3,741,683 |   |
|                                                                                       |       |                                       |        |   |   |
| Cash and cash equivalents, end of period                                                   |       | $                                          | 1,215,192   |   | $ | 5,254,526 |   |
|                                                                                       |       |                                       |        |   |   |
| **Supplemental disclosures of cash flow  information**                                     |       |                                       |        |   |   |
| Cash paid during the period for:                                                           |       |                                       |        |   |   |
| Interest                                                                                   |       | $                                          | 931,867     |   | $ | 408,361 |   |
|                                                                                       |       |                                       |        |   |   |
| Income taxes                                                                               |       | $                                          | 51,892      |   | $ | 26,220 |   |

 

See accompanyingnotes to consolidated financial statements.

 

5

----

 

**Atlantic Express Transportation Corp. andSubsidiaries**

**Notes toConsolidated Financial Statements**

 

**1.****                                                Basisof Accounting**

 

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s financial statements as of and for the year ended June 30, 2005 as filed on the Company’s Special Financial Report on Form 15d-2.  In the opinion of management, all adjustments and accruals, (consisting only of normal recurring adjustments) which are necessary for a fair presentation of operating results are reflected in the accompanying financial statements.  Operating results for the periods presented are not necessarily indicative of the results for the full fiscal year.

 

**2.****                                                Salesand Leaseback Transaction**

 

On July 6, 2005, 201West Sotello Realty Inc., a subsidiary of the Company, completed the sale andleaseback of its owned real property located in Los Angeles, California. The sale and lease back was pursuant to the Agreement and Escrow Instructionsfor Purchase of Real Estate (the “Agreement and Escrow Instructions”) with S.R.Partners (the “Buyer”).  Pursuant to the Agreement and EscrowInstructions, 201 West Sotello Realty Inc. sold to the Buyer its owned realproperty located in Los Angeles, California for a gross purchase price of$5,000,000.  In connection with the sale of the property, Atlantic Expressof L.A. Inc., a subsidiary of the Company, agreed to leaseback the premisesfrom the Buyer for a term of approximately ten years.  The triple netlease called for monthly payments of $39,583 with annual increments of 2.5%. Atlantic Express of L.A. Inc. is responsible for all real property taxes andcertain insurance costs under the lease. The gain on this transaction was $737,268 and is being amortized overthe leaseback period on a straight-line basis.

 

**3.****                                               ****Exchange Offer**

 

On August 3, 2005,the Company announced its offer to exchange up to (i) $105.0 million inaggregate principal amount of its 12% Series B Senior Secured Notes due2008, which have been registered under the Securities Act of 1933, as amended,for its outstanding unregistered 12% Series A Senior Secured Notes due2008 and (ii) $10.0 million in aggregate principal amount of its Series BSenior Secured Floating Rate Notes due 2008, which have been registered underthe Securities Act of 1933, as amended, for its outstanding unregistered Series ASenior Secured Floating Rate Notes due 2008. On August 31, 2005, AtlanticExpress Transportation Corp. announced the successful completion of thisexchange offer.

 

**4.****                                               ****New Accounting Standards**

 

There have been no new accountingpronouncements or significant changes to accounting pronouncements during thequarter ended September 30, 2005 that the Company expects will have amaterial impact on the Company’s financial statements. See Note 2 to Notes toConsolidated Financial Statements included in the Company’s Special FinancialReport on Form 15d-2.

 

**5.****                                                EmploymentAgreements**

 

An executive was eligibleto receive a performance bonus of $500,000, in relation to the contract withthe Department of Education of the City of New York (“DOE”) for 2006.  As of September 30, 2005, the Companyhas paid out $250,000 of this bonus and expects to pay the balance by June 30,2006.

 

**6.****                                                Duefrom Affiliates**

 

The Company and itsaffiliates have common insurance policies covering vehicle loss, umbrella,general liability, building and contents and workers compensation.  The Company pays the entire premium amountsand charges a pro-rata share of these costs to its affiliates based on apercentage of fleet, revenue, or payrolls of the affiliate to total fleet,revenue or payrolls.  The Company alsoallocates a portion of employee health benefit costs based on a monthly numberof covered employees.

 

6

----

 

**7.****                                                Purchaseof Transportation Contract Rights**

 

The Company entered intoan agreement on June 17, 2005 to purchase 105 transportation routes (the “AssignedRoutes”) pursuant to the DOE contract. On September 15, 2005 the transaction was consummated and theCompany paid $1,417,500 for the Assigned Routes.

 

**8.****                                                SubsequentEvents**

 

On October 17, 2005,the Company sold 293,663 shares of its common stock, par value $0.01 per share,to Atlantic Express Transportation Group Inc. (“AETG”) for an aggregatepurchase price of $4.9 million.  TheCompany is a wholly owned subsidiary of AETG. AETG obtained $3.7 million of the proceeds of the $4.9 millioninvestment from GSC and $1.2 million from the holder of the Company’s 10% ThirdPriority Notes due 2008.

 

On November 2, 2005the Company amended its receivable agreement (the “Receivable Agreement”)  with Wachovia Bank, National Association (“Wachovia”),to sell Wachovia, without recourse, up to a maximum $8.2 million (previously$5.9 million) of accounts receivable. This increased amount is available to the Company from November 2,2005 through July 1, 2006, at which time the maximum receivables able tobe sold will revert back to the $5.9 million. The President and Chief Executive Officer of the Company increased hisexisting personal guarantee in full support of the agreement and received anadditional $50,000 guarantee fee.

 

On November 22, 2005,Midway Leasing, Inc., (“Midway”) a subsidiary of the Company, entered intoa Contract of Sale with a third party (the “Purchaser”). Pursuant to theContract of Sale, Midway has agreed to sell to the Purchaser its owned realproperty located in Staten Island, New York for a gross purchase price of$4,200,000. In connection with the sale of the property, Midway has agreed toleaseback the premises from the Purchaser for a term of ten years. The triplenet lease calls for monthly payments of $29,750 with a 2.0% increase per year,beginning November 30, 2006. The Company will be responsible for all realproperty taxes and certain insurance costs under the lease.

 

7

----

 

**Item 2.*  Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

**General**

 

Atlantic Express Transportation Corp. (“we” or “theCompany”) is the fourth largest provider of school bus transportation in theUnited States and the leading provider in New York City, the largest market inwhich we operate. We have contracts with 112 school districts in New York,Missouri, Massachusetts, California, Pennsylvania, New Jersey, and Illinois.For fiscal 2006, we have contracts to provide paratransit services in New Yorkto physically and mentally challenged passengers who are unable to use standardpublic transportation. We also provide other transportation services, includingfixed route transit, express commuter line and charter and tour buses throughour coach services. As of September 30, 2005, we had a fleet ofapproximately 6,000 vehicles operating from approximately 45 majorfacilities.

 

Contracts with theCompany’s largest customer, the DOE, were extended effective July 1, 2005for an additional five years through June 30, 2010.  School bustransportation services accounted for 82.6% and 79.1% of our revenues fromcontinuing operations for the three months ended September 30, 2005 and2004, respectively. Our school bus transportation contracts have provided arelatively predictable and stable stream of revenues over their terms, whichgenerally initially range from one to five years. Since 1979, we have achievedsubstantial contract renewals, which we believe is due to (1) ourreputation for passenger safety and providing efficient, on-time service, (2) ourlong-standing relationships with the school districts we service, (3) thepreference of school districts to maintain continuity of service with theircurrent proven contractor rather than risk the uncertainty associated with areplacement and (4) the disadvantage of prospective competitors, whogenerally would have to make substantially greater investments than we would innew equipment and who may experience difficulty obtaining suitable parking andmaintenance facilities in our primary markets, especially in the New Yorkgreater metropolitan area.

 

The paratransit and transit services operationsaccounted for 17.4% and 20.9% of our revenues from continuing operations forthe three months ended September 30, 2005 and 2004, respectively. Theterms of our paratransit and transit contracts are initially for five years.These contracts are awarded by public transit systems through a public biddingor request for proposal (“RFP”) process. We are generally entitled to aspecified charge per hour of vehicle service together with other fixed charges.The method of contract compensation also varies.

 

**Results of Operations(1)**

 

| ** **                                    | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **(unaudited)**                           | ** ** |
| ** **                                    | ** ** | **(in millions, except  percentages)**    | ** ** |
| Revenues                                      |       | $                                         | 67.3       |   | 100.0 | % | $ | 54.8 |   | 100.0 | % |
| Cost of operations                            |       | 66.0                                      |       | 98.0 | % | 56.7 |   | 103.5 | % |
| General and  administrative                   |       | 4.6                                       |       | 6.9 | % | 3.9 |   | 7.2 | % |
| Depreciation and  amortization                |       | 6.1                                       |       | 9.0 | % | 6.1 |   | 11.2 | % |
| Income (loss) from  continuing operations     |       | (9.4                                      | )          | (13.9 | )% | (12.0 | ) | (21.8 | )% |
| Interest expense                              |       | 6.4                                       |       | 9.6 | % | 5.0 |   | 9.1 | % |
| Income (loss) before  discontinued operations |       | (15.8                                     | )          | (23.5 | )% | (17.8 | ) | (32.5 | )% |

 

----

(1)                                  Allfigures are from continuing operations.

 

8

----

 

***Results ofOperations - Three Months Ended September 30, 2005 Compared to ThreeMonths Ended September 30, 2004***

 

*Revenues.*  Revenues from school bus operations were$55.6 million for the three months ended September 30, 2005 comparedto $43.3 million for the three months ended September 30, 2004, anincrease of $12.3 million, or 28.4%. This increase was due to $1.4 million of price increases due primarilyto the new DOE contract, and service requirement increases (excluding escortrevenue) of $5.9 million due primarily to five more revenue days andapproximately 130 new routes in New York City operations, which include theAssigned Routes (see Note 7 of Notes to Consolidated Financial Statements),offset by $0.5 million in lost contracts. In addition, under the terms of its current contract with the DOE, theCompany receives full reimbursement ofall escort costs plus a five percent administrative fee.  This change increased revenue by $5.8million, which included a $1.2 million reimbursement for the July and August healthand welfare costs under the current contract with the DOE, which was expensedby the Company.  The Company previouslyexpensed these costs equally over the school year (September throughJune).

 

Revenues from paratransit and transit operations were$11.7 million for the three months ended September 30, 2005 comparedto $11.5 million for the three months ended September 30, 2004, anincrease of $0.2 million or 2.2%. This increase was due to $1.9 million ofprice increases and increases in service requirements from existing contracts,partially offset by $1.3 million in lost contracts and $0.4 million of revenuein connection with customer reimbursement of fuel charges for the three monthsended September 30, 2004, compared to the three months ended September 30,2005 when the customer provided its own fuel.

 

*Cost of Operations.*  Cost of operations of school bus operationswere $55.8 million for the three months ended September 30, 2005 comparedto $46.8 million for the three months ended September 30, 2004, anincrease of $9.0 million or 19.1%. Salaries and wages were $30.1 million for the three months ended September 30,2005 compared to $25.9 million for the three months ended September 30,2004, an increase of $4.2 million or 16.4%.  Salaries and wages increased primarily due tosix more payroll days in New York City in September 2005 as compared to September 2004,which increased salaries and wages from school bus operations approximately$3.3 million, and the increase of approximately 130 new routes in New YorkCity, which required additional drivers, mechanics and operationalemployees.  As a percentage of revenues,salaries and wages decreased to 54.2% for the three months ended September 30,2005, from 59.8% for the three months ended September 30, 2004.  Employee fringe benefits increased$2.6 million including $1.5 million of employee fringe benefits which wereescort costs that were reimbursable from the DOE (see above).  The balance of the increase was due primarilyto increases in worker compensation costs and increased payroll taxes.  As a percentage of revenues, employee fringebenefits increased to 17.8% for the three months ended September 30, 2005,from 16.8% for the three months ended September 30, 2004. Fuel expense,due to higher fuel prices and extra consumption based on additional revenuedays in the current quarter, increased $1.2 million and vehicle lease expenseincreased $0.7 million for the three months ended September 30, 2005,compared to the three months ended September 30, 2004.  As a percentage of revenues, cost ofoperations decreased to 100.4% for the three months ended September 30,2005, from 108.1% for the three months ended September 30, 2004.

 

Cost of operations of paratransit and transitoperations were $10.2 million for the three months ended September 30,2005 compared to $9.8 million for the three months ended September 30,2004, an increase of $0.3 million or 3.3%. This increase was primarily dueto an increase in salaries and wages and employee fringe benefits of $0.4million, partially offset by lower fuel expense of $0.2 million, due to acustomer providing its own fuel.  As apercentage of revenues, salaries and wages increased to 49.9% for the threemonths ended September 30, 2005, from 48.7% for the three months ended September 30,2004.

 

*General and administrative expenses.*  General and administrative expenses fromschool bus operations were $4.1 million for the three months ended September 30,2005 compared to $3.3 million for the three months ended September 30,2004, an increase of $0.8 million or 22.9%. This increase was primarily due toincreases in administrative payroll, primarily $0.5 million in a performancebonus (see Note 5 of Notes to Consolidated Financial Statements) and increasesin professional fees of $0.3 million.  Asa percentage of school bus operations revenues, general and administrativeexpenses decreased to 7.4% for the three months ended September 30, 2005,from 7.7% for the three months ended and September 30, 2004.

 

General and administrative expenses from paratransitand transit operations were $0.5 million for the three months ended September 30,2005 compared to $0.6 million for the three months ended September 30,2004, a decrease of $0.1 million or 9.0%. This decrease was primarily due toreductions in administrative payroll and fringe benefits as a result of a lostcontract.  As a percentage of paratransitand transit operations revenues, general and administrative expenses decreasedto 4.6% for the three months ended September 30, 2005, from 5.2% for thethree months ended September 30, 2004.

 

*Depreciation and amortization.*  Depreciation and amortization expense fromschool bus operations was $5.7 million for the three months ended September 30,2005 compared to $5.6 million for the three months ended September 30,2004, an increase of

 

9

----

 

$0.1 million, or 2.1%. This increase was primarily due to $0.4million of impairment to fixed assets, partially offset by $0.3 million oflower depreciation expense as some of the equipment is now fully depreciated.

 

Depreciation and amortization expense from paratransitand transit operations was $0.3 million for the three months ended September 30,2005 compared to $0.5 million for the three months ended September 30,2004, a decrease of $0.2 million, or 32.1%. This decrease was due to lowerdepreciation expense as some of the equipment is now fully depreciated.

 

*Operating income (loss) fromoperations.*  Operatingloss from school bus operations was $10.0 million for the three monthsended September 30, 2005 compared to $12.5 million loss for the threemonths ended September 30, 2004, a decrease in loss of $2.5 million,or 19.6%, due to the net effect of the items discussed above.

 

Operating income from paratransit and transitoperations was $0.7 million for the three months ended September 30,2005 compared to $0.5 million for the three months ended September 30,2004, an increase of $0.1 million, or 27.8%, due to the net effect of the itemsdiscussed above.

 

*Interest expense.*  Interest expense from continuing operationswas $6.4 million for the three months ended September 30, 2005 compared to$5.0 million for the three months ended September 30, 2004, anincrease of $1.5 million, or 29.4%. The increase was primarily due to $0.6million in interest expense on our $15.0 million of 10% third priority seniorsecured notes due 2008 (the “Additional Indebtedness”), issued in March 2005,a $0.3 million increase in interest expense on our senior credit facility, dueprimarily to higher interest rates, and a $0.3 million increase in deferredfinancing expenses.

 

*Reorganization costs.*  Reorganization costs were $0.1 million forthe three months ended September 30, 2005 compared to $0.3 millionfor the three months ended September 30, 2004, a reduction of $0.3million, or 87.3%.

 

*Loss before provision for incometaxes and discontinued operations.*  Due to the net effect of the items discussedabove we experienced a loss before provision for income taxes and discontinuedoperations of $15.8 million for the three months ended September 30,2005, compared to a loss of $17.7 million for the three months ended September 30,2004, a decrease in loss of $1.9 million.

 

*Income (loss) from discontinuedoperations.*  Weexperienced a minimal loss from discontinued operations for the three monthsended September 30, 2005 compared to a loss from discontinued operationsof $0.1 million for the three months ended September 30, 2004.

 

**Liquidity and Capital Resources**

 

The statements regarding theCompany’s anticipated capital expenditures and service requirements are “forwardlooking” statements which involve unknown risks and uncertainties, such as theCompany’s ability to meet or exceed its growth plans and/or availablefinancing, which may cause actual capital expenditures to differ materiallyfrom currently anticipated amounts.

 

On September 15, 2005, the Company purchased$1.4 million of transportation contract rights, whereby they were assigned toservice 105 additional routes for the DOE (see Note 7 of Notes toConsolidated Financial Statements).

 

On November 2,2005 the Company amended its receivable agreement with Wachovia,  to sell Wachovia, without recourse, up to amaximum $8.2 million (previously $5.9 million) of accounts receivable.  This increased amount is available to theCompany from November 2, 2005 through July 1, 2006, at which time themaximum receivables to be sold will revert back to the $5.9 million.  The President and Chief Executive Officer ofthe Company increased his existing personal guarantee in full support of theagreement and received an additional $50,000 guarantee fee.  As of November 21, 2005, the Company had$4.6 million of sold receivables and received cash proceeds of $3.7 million,net of applicable commissions.

 

The Company believes that it will have sufficientminimum LTM EBITDA computed quarterly to meet the EBITDA maintenance covenantof $27.0 million in the indenture governing its 12% Senior Secured Notes due2008 and its Senior Secured Floating Rate Note due 2008 (collectively, the “Notes”)at June 30, 2006.  However, based oncurrent projections, the Company may not have sufficient LTM EBITDA computedquarterly to meet the EBITDA maintenance covenant of $23.0 million at March 31,2006,  and the EBITDA maintenancecovenant at September 30, 2006 of $31.0 million. The Company believes thatif these EBITDA shortfalls should occur, it will be able to obtain a waiver ofthese covenants from the requisite percentage of bondholders. As the Companybelieves that it is probable that it can obtain such a waiver prior to suchcircumstance becoming an event of default under the indenture (including, ifnecessary, the applicable grace period), it has not reclassified the long–termnotes to short term at September 30, 2005.

 

10

----

 

The Company operates a fleet of approximately 6,000vehicles as of September 30, 2005 and consumes substantial quantities offuel for its operations. Based on the Company’s current operations, an increasein fuel costs of ten cents per gallon will increase its cost of fuel purchasedby approximately $1.0 million on an annual basis. The Company’s gross price fordiesel fuel in its largest consumption area, New York City, was approximately$3.15 per gallon at September 30, 2005 and on November 15, 2005 theprice per gallon was approximately $2.50 per gallon.

 

The Company anticipates totalcapital expenditures of approximately $6.0 million (primarily non-vehiclecapital expenditures) in fiscal 2006, of which $1.8 million of capitalexpenditures were made in the three months ended September 30, 2005.  The Company expects to meet its new vehiclerequirements for fiscal 2006 by leasing these vehicles. Vehicle leaseexpense increased $0.7 million for the three months ended September 30,2005, compared to the three months ended September 30, 2004.

 

On July 6, 2005, 201 West Sotello Realty Inc., asubsidiary of the Company, completed the sale and leaseback of its owned realproperty located in Los Angeles, California.  The sale and lease back waspursuant to the Agreement and Escrow Instructions for Purchase of Real Estate(the “Agreement and Escrow Instructions”) with S.R. Partners (the “Buyer”). Pursuant to the Agreement and Escrow Instructions, 201 West Sotello Realty Inc.sold to the Buyer its owned real property located in Los Angeles, Californiafor a gross purchase price of $5,000,000.  In connection with the sale ofthe property, Atlantic Express of L.A. Inc., a subsidiary of the Company,agreed to leaseback the premises from the Buyer for a term of approximately tenyears.  The triple net lease calls for monthly payments of $39,583 withannual increments of 2.5%.  Atlantic Express of L.A. Inc. is responsiblefor all real property taxes and certain insurance costs under the lease.  The gain on this transaction of $737,268 isbeing amortized over the leased period on a straight-line basis.****The indenture governing the Notes limits, butdoes not prohibit, the Company from selling assets, including assetsconstituting collateral securing the Notes. This transaction was made incompliance with the asset sale covenant of the indenture governing the Notes.

 

On October 17, 2005, the Company sold 293,663shares of its common stock, par value $.01 per share, to AETG, for an aggregatepurchase price of $4.9 million. The Company is a wholly owned subsidiary ofAETG. AETG obtained $3.7 million of the $4.9 million investment from GSC and $1.2million from the holder of the Additional Indebtedness.

 

On November 22, 2005, Midway entered into aContract of Sale with the Purchaser. Pursuant to the Contract of Sale, Midway has agreed to sell to thePurchaser its owned real property located in Staten Island, New York for agross purchase price of $4,200,000. In connection with the sale of theproperty, Midway has agreed to leaseback the premises from the Purchaser for aterm of ten years. The triple net lease calls for monthly payments of $29,750with a 2.0% increase per year, beginning November 30, 2006. The Companywill be responsible for all real property taxes and for certain insurance costsunder the lease.

 

The Company estimates, in addition to normal workingcapital requirements, that it will need the following cash flows to finance itsoperations in fiscal 2006: $19.5 million to service its interest obligations,$6.0 million for capital expenditures (primarily for non-vehicle capitalexpenditures) and $3.9 million for amortization of debt and capital leaseobligations. The Company believes that borrowings under its senior creditfacility and the Receivable Agreement, as amended, the proceeds from the additionalcontribution of capital from AETG, plus the proceeds from the sale andleaseback of its North Street, Staten Island New York property, together withits existing cash and cash flow from operations and the anticipated effect ofits extension agreement with the DOE, will be sufficient to fund the Company’santicipated requirements for the next year. In addition, the Company iscontinuing to pursue additional funding alternatives, including the sale ofcertain assets or operations, in order to improve its liquidity position.

 

The Company’s level of indebtedness may make it moredifficult for it to satisfy its obligations with respect to the Notes because asubstantial portion of the Company’s cash flow from operations will bededicated to debt service payments. Accordingly, the Company’s cash flowavailability to fund increases in working capital and capital expenditures maybe restricted, as will its flexibility in planning for, or reacting to, changesin its business, industry or general adverse economic conditions.

 

As of September 30,2005, total current assets were $82.4 million and total current liabilitieswere $74.6 million. At September 30, 2005, the Company’s debt under thesenior credit facility was $19.9 million, including the $3.5 million supplementalloan, and it had $0.1 million of borrowing availability, based on the Company’sborrowing base calculations. The Company’s letter of credit line was fullyutilized. On November 21, 2005, the Company’s debt under the senior creditfacility was $16.1 million (including the $3.5 million supplemental loan) andit had $3.9 million in borrowing availability, based upon the Company’sborrowing base calculations. On November 21, 2005, the Company had $115.0million outstanding of the Notes and $15.0 million outstanding of theAdditional Indebtedness.

 

*Net cash provided by (used in)operating activities.*Netcash used in operating activities was $7.9 million for the three months ended September 30,2005, resulting primarily from $17.0 million used in operating activitiespartially offset from cash provided due to changes in the components of workingcapital of $1.8 million (primarily a decrease in prepaid expenses and other

 

11

----

 

current assets of $1.3 million, and an increase of $4.6 million ofaccounts payable, accrued expenses, accrued compensation and other currentliabilities, partially offset by an increase in controlled disbursement accountof $2.0 million and an increase in insurance financing payable of $1.8million), and by non-cash items of $6.6 million of depreciation andamortization, $0.4 million of fixed asset impairment and $0.2 million ofamortization of original issue discount.

 

Net cash provided byoperating activities was $1.1 million for the three months ended September 30,2004, primarily due to cash of $12.3 million resulting from changes in thecomponents of working capital ($8.2 million of which was from increases inaccounts payable, accrued expenses, accrued compensation and other currentliabilities and $6.8 million of which was from decreases in accountsreceivable), plus $6.8 million of non-cash items of depreciation andamortization, partially offset by $18.0 million used in operating activities.

 

*Net cashprovided by(used in) investing activities.*For the three months ended September 30,2005, the net cash provided by investing activities was $2.4 million resultingprimarily from the sale and leaseback of our California facility, partiallyoffset by the purchase of $1.4 million of transportation contract rights and$1.9 million of capital expenditures, which were financed from operating cashflows.

 

For the three months ended September 30, 2004,the Company made $1.2 million of capital expenditures to acquire additionalvehicles, other property and equipment, which were financed from operating cashflows.

 

*Net cash provided by (used in)financing activities.*Netcash used in financing activities totaled $0.1 million for the three monthsended September 30, 2005 due primarily to $0.3 million in payments onborrowings under capital leases and purchase money mortgages and $0.2 millionin deferred financing costs, partially offset by $0.5 million net borrowingsunder the senior credit facility.

 

Net cash provided by financing activities totaled$1.5 million for the three months ended September 30, 2004 due primarilyto $4.9 million of new borrowing from a senior unsecured note, partially offsetby $2.6 million in net repayments under the senior credit facility and 0.6million in deferred financing costs.

 

**Commitments andContingencies**

 

Reference is made toNote 16  “Commitments and Contingencies”of Notes to the Consolidated Financial Statements in the Company’s SpecialFinancial Report on Form 15d-2 for the fiscal year ended June 30,2005 for a description of the Company’s material commitments.

 

**Critical Accounting Policies**

 

In presenting our consolidated financial statements inconformity with U.S. generally accepted accounting principles, we are requiredto make estimates and judgments that affect the amounts reported therein. Someof the estimates and assumptions we are required to make relate to matters thatare inherently uncertain as they pertain to future events. We base theseestimates on historical experience and on various other assumptions that webelieve to be reasonable and appropriate. Actual results may differsignificantly from these estimates. The following is a description of ouraccounting policies that we believe require subjective and complex judgments,and could potentially have a material effect on our reported financialcondition or results of operation.

 

*Property, Plant and Equipment.*  We depreciate our property, plant andequipment over their useful lives, which range from 3 to 31.5 years, on astraight-line basis. These useful lives are based upon our estimates of theperiods that the assets will provide economic benefit. Our policy is to reviewthe carrying value of our long-lived assets whenever events or changes incircumstances occur that indicate the carrying value may not be recoverable.Our definite life assets will continue to be depreciated or amortized overtheir estimated useful lives and are subject to the impairment criteria asrequired by SFAS No. 144.

 

*Transportation Contract Rights.*  Transportation contract rights primarilyrepresent the value we assigned to the cost of investments in school buscompanies in excess of the book value of the companies acquired. In addition,we have purchased from unrelated third parties certain transportation contractrights with respect to revenue contracts and travel routes. Transportationcontract rights are assessed for impairment at least annually and wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable. Important factors that could trigger an impairment review includesignificant underperformance relative to historical or projected futureoperating results, significant changes in the use of the acquired assets or thestrategy of the overall business, and significant negative industry or economictrends. If indicators of impairment are present, management evaluates thecarrying value of the intangibles in relation to the projection of futureundiscounted cash flows of the underlying assets. Projected cash flows arebased on historical results adjusted to reflect management’s best estimate offuture market and operating conditions, which may differ from actual cash flow.Transportation contract rights are amortized on a straight-line basis overtwelve years, which represents our company’s estimate of the average length ofthe contracts and expected renewal periods. The requirements for theseimpairment charges were

 

12

----

 

determined by management’s evaluation that the future undiscounted cashflows attributable to the underlying assets were unlikely to exceed thecarrying value of the transportation contract rights assets for certain of theschool bus companies. The impairment charges were the difference between bookvalue of the transportation contract rights and estimated fair value,determined as the estimated future cash flows.

 

*Income Taxes.*  We follow the liability method under SFAS No. 109,“Accounting for Income Taxes.” The primary objectives of accounting for taxesunder SFAS No. 109 are to (1) recognize the amount of tax payable forthe current year and (2) recognize the amount of deferred tax liability orasset for the future tax consequences attributable to temporary differencesbetween the financial statements’ carrying amounts of existing assets andliabilities and their respective tax bases and of events that have beenreflected in our financial statements or tax returns. When the realization of adeferred tax asset is not considered to be more likely than not, a valuation allowanceis recorded against that deferred tax asset.

 

We have net deferred tax assets resulting primarilyfrom net operating losses (“NOL”) that will reduce taxable income in futureperiods. SFAS No. 109 requires that a valuation allowance be establishedwhen it is “more likely than not” that all or a portion of net deferred taxassets will not be realized. A review of all available positive and negativeevidence needs to be considered, including expected reversals of significantdeductible temporary differences, a company’s recent financial performance, themarket environment in which a company operates, tax planning strategies and thelength of the NOL carryforward period. Management believes that the realizationof a portion of the deferred tax assets is not considered to be more likelythan not and accordingly, has provided a valuation allowance.

 

We file consolidated federal and state income taxreturns with our parent and its affiliates. The income tax charge or benefitsallocated to us is based upon an allocation method determined by the groupunder its tax sharing agreement. The balance identified as deferred tax assetsand liabilities can, in substance, be considered the equivalent to amounts duefrom and due to this affiliated group based upon the application of thismethod.

 

*Allowance for Doubtful Accounts.*  We maintain an allowance for estimated lossesresulting from the inability of our customers to make required payments. Weestimate uncollectible amounts based upon historical bad debts, currentcustomer receivable balances, age of customer receivable balances, the customer’sfinancial condition and current economic trends. If the actual uncollectedamounts were to significantly exceed the estimated allowance, our results ofoperations would be materially adversely affected.

 

*Revenue Recognition.*  Revenues from school bus and paratransit andtransit operations are recognized when services are provided. We bill ourcustomers on a monthly basis based upon the completion of bus routes for schoolbus operations and service hours for paratransit and transit operations, whichin both cases are typically based upon contracts or extension agreements wehave with our customers. Under our largest contract, the DOE retains 5% of ourmonthly billings (retainage), which is normally returned in August of thefollowing fiscal year based upon us completing contractual service for theprior school year. We have always collected the retained amounts in full.

 

*Insurance Coverage and Reserves.*  The Company self-insures its obligations thatmay arise under workers compensation and automobile liability claims.Provisions for such obligations are provided for as follows:

 

Reserves requirements for deductible amounts, for thethree months ended September 30, 2005 were based upon valuations suppliedby an insurance company. Such valuations computed reserve requirements basedupon estimated ultimate claim losses, including those incurred but notreported. Charges to operations are adjusted, if necessary, to reflect thesevaluations.

 

The following table reflects the activity in thisaccount for the three months ended September 30, 2005:

 

| ** **                             | ** ** | **Total Reserve** | ** ** |
|----------------------------------------|------------|-------------------|------------|
| Balance, June 30, 2005            |       | $                 | 3,309,815  |   |
| Expense                                |       | 32,021            |       |
| Payments against the reserve           |       | (404,255          | )          |
| Balance, September 30, 2005       |       | $                 | 2,937,581  |   |
|                                   |       |              |       |
| Current portion of insurance reserve   |       | $                 | 1,757,774  |   |
| Long term portion of insurance reserve |       | 1,179,807         |       |
| Total insurance reserve                |       | $                 | 2,937,581  |   |

 

13

----

 

**DisclosureRegarding Forward-Looking Statements**

 

This report contains forward-looking statements. Thesestatements relate to future events or our future financial performance, andinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, levels of activity, performance or achievements to bematerially different from any future results, levels of activity, performanceor achievements expressed or implied by these forward-looking statements. Insome cases, you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”“predicts,” “potential,” “continue” or the negative of these terms or othercomparable terminology. These statements are only predictions. Actual events orresults may differ materially.

 

Although we believe that the expectations reflected inthe forward-looking statements are reasonable, we cannot guarantee futureresults, levels of activity, performance or achievements. These forward-lookingstatements are made as of the date of this report and, except as required underthe federal securities laws and the rules and regulations of the SEC, weassume no obligation to update or revise them or to provide reasons why actualresults may differ.

 

**Item 3.*  Quantitativeand Qualitative Disclosures About Market Risk***

 

In the normal course of operations, we are exposed tomarket risks arising from adverse changes in interest rates. Market risk isdefined for these purposes as the potential change in the fair value offinancial assets or liabilities resulting from an adverse movement in interestrates.

 

We operated a fleet of approximately 6,000 vehicles asof September 30, 2005 and consume substantial quantities of fuel for ouroperations. Based on our current operations, an increase in fuel costs of tencents per gallon will increase our cost of fuel purchased by approximately$1.0 million on an annual basis. From time to time in the past, we haveentered into hedging contracts to protect ourselves from fluctuations in thecost of fuel, and we may seek to do the same in the future. We currently do nothave any fuel hedging agreements in place, but we continually evaluate enteringinto such agreements if we believe increases in fuel costs are likely. Noassurance can be given that we will be able to adequately protect ourselvesfrom fluctuating fuel costs even if we enter into hedging contracts.

 

As of September 30, 2005, our only materialvariable rate borrowings are the Senior Secured Floating Rate Outstanding Notes(LIBOR plus 9.2% interest) and $16.5 million of the $20.0 million ofborrowings under our $20.0 million senior credit facility (prime plus 1%interest). As of September 30, 2005, we had approximately$20.0 million (of which $3.5 million has a fixed interest rate of12%) of borrowings outstanding under our senior credit facility and a $3.5million advance under the letter of credit facility. A 100 basis point increasein interest rates, applied to our variable rate borrowings as of September 30,2005, would result in an annual increase in interest expense and acorresponding reduction in cash flow of approximately $0.3 million.

 

**Item 4.*  Controls andProcedures***

 

The Company maintains disclosure controls andprocedures (as defined in Rule 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) that are designed toensure that information required to be disclosed by the Company in reports itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures. Based on theforegoing, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures wereineffective as of the end of the period covered by this report, as evidenced bythe Company’s inability to timely file this report. The Company has begun areview of its disclosure controls and procedures in order to improve theireffectiveness.  Although the process isongoing, the Company has identified a need to modify its financial periodclosing from a sequential to a more simultaneous process, to reduce the timenecessary to properly complete its financial statement preparation andreview.    As the review processcontinues, the Company may identify other areas for improvement.  The Company intends to begin implementingimprovements as soon as practicable, beginning as early as the quarter ending December 31,2005, but cannot yet determine when all improvements will be completed or havethe intended effect.

 

14

----

 

There were no changes in our internal control overfinancial reporting, identified in connection with the evaluation of suchinternal control that occurred during our last fiscal quarter, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

15

----

 

**PART II.**

 

**OTHERINFORMATION**

 

**Item 1.*  LegalProceedings***

None.

 

**Item 2.*  UnregisteredSales of Equity Securities and Use of Proceeds***

None.

 

**Item 3.*  Defaults uponSenior Securities***

None.

 

**Item 4.*  Submission ofMatters to a Vote of Security Holders***

None.

 

**Item 5.*  OtherInformation***

None.

 

**Item 6.*  Exhibits***

The following documents are filed as Exhibitsto this report:

 
| **Exhibit No.** | ** ** | **Description**                                                                  |
|----------------------|------------|----------------------------------------------------------------------------------|
| 31.1                 |       | Rule 13a-14(a)/15d-14(a) Certification  of Principal Executive Officer |
| 31.2                 |       | Rule 13a-14(a)/15d-14(a) Certification  of Principal Financial Officer |
| 32.1                 |       | Section 1350  Certification of Principal Executive Officer                  |
| 32.2                 |       | Section 1350  Certification of Principal Financial Officer                  |

 

16

----

 

**SIGNATURE**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended,Atlantic Express Transportation Corp. has caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
|                         | ATLANTIC EXPRESS TRANSPORTATION CORP.                   |
|------------------------------|---------------------------------------------------------|
|                         |                                                    |
| Date: December 5,  2005 | By:                                                     | /s/ Domenic  Gatto |   |
|                         | Domenic Gatto                                           |
|                         | Chief Executive  Officer                                |
|                         | (Principal  Executive Officer)                          |
|                         |                                                    |
| Date: December 5,  2005 |                                                    |
|                         |                                                    |
|                         | By:                                                     | /s/ Neil J.  Abitabilo |   |
|                         | Neil J.  Abitabilo                                      |
|                         | Chief Financial  Officer                                |
|                         | (Principal  Financial and Principal Accounting Officer) |

 

17

----

 

**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                  |
|----------------------|------------|----------------------------------------------------------------------------------|
| 31.1                 |       | Rule 13a-14(a)/15d-14(a) Certification  of Principal Executive Officer |
| 31.2                 |       | Rule 13a-14(a)/15d-14(a) Certification  of Principal Financial Officer |
| 32.1                 |       | Section 1350  Certification of Principal Executive Officer                  |
| 32.2                 |       | Section 1350  Certification of Principal Financial Officer                  |

 

18

----