**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**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 December 31, 2005**                                                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                         |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                         |
| **£** | ** ** | **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**

 

**Atlantic Express 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) |

 

**7 NorthStreet Staten Island, New York 10302-1205**

(Address of principal executive offices)

 

**(718) 556-8079**

(Registrant’stelephone number, including area code)

 

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Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý     No £

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes £  No ý

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes £  No ý

 

Indicate by checkmark whether the registrant has filed all documents and reports required to befiled by Section 12, 13 or 15(d) of the Securities Exchange Act of1934 subsequent to the distribution of securities under a plan confirmed by acourt. Yes ý  No £

 

The number ofoutstanding shares of the registrant’s common stock, $0.01 par value, as of February 14,2006 was 945,263

 

 

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**INDEX**

 
| ** **                         | **Page  No.**                                                                                                                      |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|
| PART I: FINANCIAL INFORMATION | 3                                                                                                                                  |
| Item 1.                            | Financial Statements                                                                                                               | 3 |
|                               | Consolidated Balance Sheets—  December 31, 2005 (unaudited) and June 30, 2005                                       | 3 |
|                               | Consolidated Statements of  Operations (unaudited) — Three Months Ended and Six Months Ended  December 31, 2005 and 2004 | 4 |
|                               | Consolidated Statements of Cash  Flows (unaudited) — Six months Ended December 31, 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                                        | 7 |
| 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

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**PART I.**

** **

**FINANCIAL INFORMATION**

 

**Item I.*  FinancialStatements***

 

**AtlanticExpress Transportation Corp. and Subsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                              | ** ** | **December 31,  2005** | ** **  | **June 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-------------------------|------------|
| ** **                                                                                              | ** ** | (unaudited)                 | ** **  | ** **              | ** ** |
| **Assets**                                                                                              |       |                        |        |                    |       |
| Current assets:                                                                                         |       |                        |        |                    |       |
| Cash and cash  equivalents                                                                              |       | $                           | 2,333,783   |                    | $          | 6,834,961 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $1,700,310 and $1,704,850, respectively |       | 45,487,951                  |        | 44,831,587              |       |
| Inventories                                                                                             |       | 2,990,775                   |        | 2,859,415               |       |
| Prepaid insurance                                                                                       |       | 23,947,125                  |        | 31,425,704              |       |
| Prepaid expenses and  other current assets                                                              |       | 4,009,733                   |        | 3,222,345               |       |
| Due from affiliates, net                                                                                |       | 230,819                     |        | —                  |       |
| Total current assets                                                                                    |       | 79,000,186                  |        | 89,174,012              |       |
| Property, plant and  equipment, at cost, less accumulated depreciation                                  |       | 115,297,719                 |        | 129,938,411             |       |
| Other assets:                                                                                           |       |                        |        |                    |       |
| Restricted cash and  cash equivalents                                                                   |       | 3,562,898                   |        | 5,263,733               |       |
| Restricted marketable  securities                                                                       |       | 4,615,442                   |        | 4,560,313               |       |
| Transportation contract  rights, net                                                                    |       | 4,885,458                   |        | 3,988,048               |       |
| Deferred financing  costs, net                                                                          |       | 7,991,296                   |        | 9,586,228               |       |
| Deposits and other  non-current assets                                                                  |       | 7,646,312                   |        | 4,494,719               |       |
| Total other assets                                                                                      |       | 28,701,406                  |        | 27,893,041              |       |
|                                                                                                    |       | $                           | 222,999,311 |                    | $          | 247,005,464 |   |
| **Liabilities and shareholder’s  equity**                                                          |       |                        |        |                    |       |
| Current liabilities:                                                                                    |       |                        |        |                    |       |
|                                                                                                    |       |                        |        |                    |       |
| Current portion of  long-term debt                                                                      |       | $                           | 22,428,511  |                    | $          | 24,820,652 |   |
| Current portion of  capital lease obligations                                                           |       | 1,429,144                   |        | 1,356,354               |       |
| Insurance financing  payable                                                                            |       | 1,191,973                   |        | 3,984,116               |       |
| Controlled  disbursements account—checks issued not funded                                         |       | 5,401,457                   |        | 4,725,722               |       |
| Accounts payable,  accrued expenses and other current liabilities                                       |       | 22,546,231                  |        | 24,061,465              |       |
| Accrued compensation                                                                                    |       | 5,086,748                   |        | 6,986,704               |       |
| Current portion of insurance  reserves                                                                  |       | 1,636,486                   |        | 2,130,008               |       |
| Accrued interest                                                                                        |       | 4,947,490                   |        | 4,406,189               |       |
| Payable to creditors  under the plan of reorganization                                                  |       | 1,517,243                   |        | 1,810,085               |       |
| Total current  liabilities                                                                              |       | 66,185,283                  |        | 74,281,295              |       |
|                                                                                                    |       |                        |        |                    |       |
| Long-term debt, net of  current portion                                                                 |       | 135,420,493                 |        | 135,316,642             |       |
| Capital lease  obligations, net of current portion                                                      |       | 4,567,873                   |        | 4,966,079               |       |
| Insurance reserves, net  of current portion                                                             |       | 794,994                     |        | 1,179,807               |       |
| Deferred income, net of  current portion and other long-term liabilities                                |       | 3,195,792                   |        | 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                          |       | 3,161,842                   |        | 3,247,270               |       |
| Total liabilities                                                                                       |       | 213,948,277                 |        | 222,028,962             |       |
|                                                                                                    |       |                        |        |                    |       |
| **Commitments and contingencies**                                                                       |       |                        |        |                    |       |
| Shareholder’s equity:                                                                              |       |                        |        |                    |       |
|                                                                                                    |       |                        |        |                    |       |
| Common stock, par value $.01 per share, authorized  shares 1,303,200; issued and outstanding 945,263    |       | 9,453                       |        | 6,516                   |       |
| Additional paid-in  capital                                                                             |       | 114,939,064                 |        | 110,042,001             |       |
| Accumulated deficit                                                                                     |       | (105,862,548                | )           | (85,155,726             | )          |
| Accumulated other  comprehensive income (loss)                                                          |       | (34,935                     | )           | 83,711                  |       |
| Total shareholder’s  equity                                                                        |       | 9,051,034                   |        | 24,976,502              |       |
| **TOTAL LIABILITIES AND  STOCKHOLDER’S EQUITY**                                                    |       | $                           | 222,999,311 |                    | $          | 247,005,464 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**AtlanticExpress Transportation Corp. and Subsidiaries**

**ConsolidatedStatement of Operations**

**(Unaudited)**

** **
| ** **                                                          | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                           |       |                                      |       |                                    |       |   |   |   |   |
| School bus operations                                               |       | $                                         | 98,533,740 |                                    | $          | 91,297,332 |   | $ | 154,120,401 |   | $ | 134,601,877 |   |
| Paratransit and transit operations                                  |       | 10,985,109                                |       | 11,579,773                              |       | 22,685,502 |   | 23,030,721 |   |
|                                                                |       |                                      |       |                                    |       |   |   |   |   |
| Total revenues                                                      |       | 109,518,849                               |       | 102,877,105                             |       | 176,805,903 |   | 157,632,598 |   |
|                                                                |       |                                      |       |                                    |       |   |   |   |   |
| Costs and expenses:                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Cost of operations—School bus operations                       |       | 87,192,952                                |       | 81,874,877                              |       | 142,982,164 |   | 128,708,540 |   |
| Cost of operations—Paratransit and transit  operations         |       | 9,721,440                                 |       | 10,261,433                              |       | 19,886,024 |   | 20,104,129 |   |
| General and administrative                                          |       | 4,933,621                                 |       | 4,464,916                               |       | 9,562,832 |   | 8,385,829 |   |
| Depreciation and amortization                                       |       | 5,680,015                                 |       | 6,095,328                               |       | 11,751,895 |   | 12,209,697 |   |
|                                                                |       |                                      |       |                                    |       |   |   |   |   |
| Total operating costs  and expenses                                 |       | 107,528,028                               |       | 102,696,554                             |       | 184,182,915 |   | 169,408,195 |   |
|                                                                |       |                                      |       |                                    |       |   |   |   |   |
| Income (loss) from  operations                                      |       | 1,990,821                                 |       | 180,551                                 |       | (7,377,012 | ) | (11,775,597 | ) |
| Other income (expense):                                             |       |                                      |       |                                    |       |   |   |   |   |
| Interest expense                                                    |       | (6,597,064                                | )          | (5,623,207                              | )          | (13,023,771 | ) | (10,589,411 | ) |
| Reorganization costs                                                |       | (33,224                                   | )          | (355,719                                | )          | (92,460 | ) | (695,578 | ) |
| Other income (loss)                                                 |       | (139,259                                  | )          | (108,717                                | )          | (101,179 | ) | (588,084 | ) |
|                                                                |       |                                      |       |                                    |       |   |   |   |   |
| Loss before provision for income taxes and  discontinued operations |       | (4,778,726                                | )          | (5,907,092                              | )          | (20,594,422 | ) | (23,648,670 | ) |
| Provision for income  taxes                                         |       | —                                    |       | 36,000                                  |       | — |   | 72,000 |   |
|                                                                |       |                                      |       |                                    |       |   |   |   |   |
| Loss before  discontinued operations                                |       | (4,778,726                                | )          | (5,943,092                              | )          | (20,594,422 | ) | (23,720,670 | ) |
| Loss from discontinued  operations                                  |       | (1,076                                    | )          | (32,713                                 | )          | (2,400 | ) | (167,208 | ) |
|                                                                |       |                                      |       |                                    |       |   |   |   |   |
| Net loss                                                            |       | $                                         | (4,779,802 | )                                       | $          | (5,975,805 | ) | $ | (20,596,822 | ) | $ | (23,887,878 | ) |

 

See accompanying notes toconsolidated financial statements.

 

4

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**AtlanticExpress Transportation Corp. and Subsidiaries**

**Consolidated Statement of CashFlows**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Six Months Ended  December 31,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2005**                                | ** **  | **2004** | ** ** |
|                                                                                       |       |                                    |        |   |   |
| **Cash flows from operating  activities**                                                  |       |                                    |        |   |   |
| Net loss                                                                                   |       | $                                       | (20,596,822 | ) | $ | (23,887,878 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                    |        |   |   |
|                                                                                       |       |                                    |        |   |   |
| Gain on sales of marketable securities and  investments                                    |       | 6,836                                   |        | (10,793 | ) |
| Depreciation                                                                               |       | 10,775,713                              |        | 11,631,441 |   |
| Fixed asset impairment                                                                     |       | 445,137                                 |        | — |   |
| Amortization                                                                               |       | 2,406,130                               |        | 1,889,083 |   |
| Original issue discount interest                                                           |       | 487,075                                 |        | 339,132 |   |
| Reserve for doubtful accounts receivable                                                   |       | 60,000                                  |        | 360,000 |   |
| (Gain) loss on sales of fixed assets                                                       |       | 97,062                                  |        | 503,585 |   |
|                                                                                       |       |                                    |        |   |   |
| Decrease (increase) in:                                                                    |       |                                    |        |   |   |
| Restricted cash and cash equivalents                                                       |       | —                                  |        | 1,039,219 |   |
| Accounts receivable                                                                        |       | (716,364                                | )           | (568,740 | ) |
| Inventories                                                                                |       | (131,360                                | )           | (46,107 | ) |
| Prepaid expenses and other current assets                                                  |       | 6,628,087                               |        | 1,927,948 |   |
| Due from affiliates, net                                                                   |       | (230,819                                | )           | — |   |
| Deposit and other non-current assets                                                       |       | (3,158,276                              | )           | (320,508 | ) |
| Increase (decrease) in:                                                                    |       |                                    |        |   |   |
| Accounts payable, accrued expenses, accrued  compensation and other current liabilities    |       | (2,872,215                              | )           | 181,990 |   |
| Controlled disbursement account                                                            |       | 675,735                                 |        | 1,933,562 |   |
| Insurance financing payable                                                                |       | (2,792,142                              | )           | (3,554,429 | ) |
| Payable to creditors under plan of reorganization                                          |       | (378,270                                | )           | (187,990 | ) |
| Insurance reserve and other long-term liabilities                                          |       | (696,505                                | )           | (1,034,027 | ) |
| Net cash used in  operating activities                                                     |       | (9,990,998                              | )           | (9,804,512 | ) |
|                                                                                       |       |                                    |        |   |   |
| **Cash flows from investing  activities**                                                  |       |                                    |        |   |   |
| Additions to property,  plant and equipment                                                |       | (2,988,440                              | )           | (2,201,443 | ) |
| Purchase of  transportation contract rights                                                |       | (1,421,772                              | )           | — |   |
| Proceeds from sales of  fixed assets                                                       |       | 7,045,453                               |        | 286,676 |   |
| (Increase) decrease in  restricted cash and cash equivalents                               |       | 1,700,835                               |        | (868,383 | ) |
| Purchases of marketable  securities                                                        |       | (2,738,990                              | )           | (4,850,883 | ) |
| Proceeds from sales or  redemptions of marketable securities                               |       | 2,555,399                               |        | 5,561,866 |   |
|                                                                                       |       |                                    |        |   |   |
| Net cash provided by  (used in) investing activities                                       |       | 4,153,174                               |        | (2,072,167 | ) |
| ** **                                                                                 |       |                                    |        |   |   |
| **Cash flows from financing  activities**                                                  |       |                                    |        |   |   |
| Proceeds from (payment  to) senior credit facility                                         |       | $                                       | (1,607,947  | ) | $ | 5,650,747 |   |
| Proceeds from sale of  common stock                                                        |       | 4,900,000                               |        | — |   |
| Proceeds from Senior  Unsecured Notes                                                      |       | —                                  |        | 4,900,000 |   |
| Distributions to parent  company                                                           |       | (110,000                                | )           | (100,000 | ) |
| Principal payments on  borrowings and capital lease obligations                            |       | (1,568,234                              | )           | (1,100,482 | ) |
| Deferred financing                                                                         |       | (277,173                                | )           | (889,267 | ) |
| Net cash provided by  financing activities                                                 |       | 1,336,646                               |        | 8,460,998 |   |
| Net decrease in cash  and cash equivalents                                                 |       | (4,501,178                              | )           | (3,415,681 | ) |
| Cash and cash  equivalents, beginning of year                                              |       | 6,834,961                               |        | 3,741,683 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                       | 2,333,783   |   | $ | 326,002 |   |
| **Supplemental disclosures of  cash flow information**                                     |       |                                    |        |   |   |
| Cash paid during the  period for:                                                          |       |                                    |        |   |   |
| Interest                                                                                   |       | $                                       | 10,047,887  |   | $ | 8,362,455 |   |
|                                                                                       |       |                                    |        |   |   |
| Income taxes                                                                               |       | $                                       | 69,842      |   | $ | 75,145 |   |
|                                                                                       |       |                                    |        |   |   |
| Capital lease obligations incurred for purchase of  vehicles                               |       | —                                  |        | $ | 376,050 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**AtlanticExpress Transportation Corp. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

** **

**1.                Basis of Accounting**

 

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the financial statements of Atlantic Express Transportation Corp. (“we” or the “Company”) 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**.                **C****ontributionof Capital**

 

On October 17, 2005, the Company sold 293,663 shares of its commonstock, par value $0.01 per share, to Atlantic Express Transportation Group, Inc.(“AETG”) for an aggregate purchase 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 Greenwich Street Capital (“GSC”) and $1.2 millionfrom the holder of the Company’s 10% Third Priority Notes due 2008.

 

**3.                Amended Receivable Agreement**

 

On November 2, 2005 the Company amended its receivable agreement(the “Receivable Agreement”)  with WachoviaBank, National Association (“Wachovia”), to sell Wachovia, without recourse, upto a maximum $8.2 million (previously $5.9 million) of accountsreceivable.  This increased amount isavailable to the Company from November 2, 2005 through July 1, 2006,at which time the maximum receivables able to be sold will revert back to theprior maximum of $5.9 million.  ThePresident and Chief Executive Officer of the Company increased his existingpersonal guarantee in full support of the agreement and received an additional$50,000 guarantee fee.  As of December 31,2005 the company had no sold receivables

 

**4.                New Accounting Standards**

 

There have been no new accounting pronouncements or significant changesto accounting pronouncements during the quarter ended December 31, 2005that the Company expects will have a material impact on the Company’s financialstatements. See Note 2 to Notes to Consolidated Financial Statements includedin the Company’s Special Financial Report on Form 15d-2 for the fiscalyear ended June 30, 2005.

 

**5.                Vehicle Lease Facilities**

 

The Company obtained vehicle operating lease facilities totalingapproximately $31.5 million.  The largestwas a $20.0 million, two year facility with CEF 2002, LLC which is an affiliateof GE Capital.  The operating leases havevarious terms and require minimum down payments of twenty percent.  In connection with these facilities theCompany incurred costs of approximately $0.5 million.

 

**6.                SubsequentEvents**

 

On January 11,2006, Midway Leasing, Inc., a subsidiary of Atlantic ExpressTransportation Corp. (“Midway Leasing”), completed the sale and leaseback ofits owned real property located in Staten Island, New York.  Pursuant to the Contract of Sale, MidwayLeasing sold to the purchaser its owned real property in Staten Island, NewYork for a gross purchase price of $4.2 million.  In connection with thesale of the real property, the Company agreed to leaseback the premises fromthe purchaser for a term of ten years.  The triple net lease calls formonthly payments of $29,750 with annual increases of 2.0%, beginning November 30,2006. The Company will be responsible for all real property taxes, certaininsurance costs and utilities.  The Company incurred a loss on the sale ofapproximately $0.8 million, which will be amortized as rent expense monthlystarting January 2006 over the leaseback period on a straight-line basis.

 

As a result of the new contract between the New YorkCity Department of Education (the”DOE”) and the United Federation of Teachers(the “UFT”), the Company was awarded an additional 140 routes (the “UFT Routes”)

 

6

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commencing February 6, 2006. The Company estimates that the UFT Routes will increase revenue byapproximately $13.5 million on an annual basis.

 

**7.                Reclassification**

 

Certain December 31, 2004amounts have been reclassified to conform to the current year presentation.

 

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

 

**General**

 

The Company is the fourth largest provider of schoolbus transportation in the United States and the leading provider in New YorkCity, the largest market in which we operate. We have contracts with112 school districts in New York, Missouri, Massachusetts, California,Pennsylvania, New Jersey, and Illinois. For fiscal 2006, we have contracts toprovide paratransit services in New York to physically and mentally challengedpassengers who are unable to use standard public transportation. We alsoprovide other transportation services, including fixed route transit, expresscommuter line and charter and tour buses through our coach services. As of December 31,2005, we had a fleet of approximately 6,000 vehicles operating fromapproximately 45 major facilities.

 

Contracts with the Company’s largestcustomer, the DOE, were extended effective July 1, 2005 for an additionalfive years through June 30, 2010.  School bus transportation servicesaccounted for 87.2% and 85.4% of our revenues from continuing operations forthe six months ended December 31, 2005 and 2004, respectively. Our schoolbus transportation contracts have provided a relatively predictable and stablestream of revenues over their terms, which generally initially range from oneto five years. Since 1979, we have achieved substantial contract renewals,which we believe is due to (1) our reputation for passenger safety andproviding efficient, on-time service, (2) our long-standing relationshipswith the school districts we service, (3) the preference of school districtsto maintain continuity of service with their current proven contractor ratherthan risk the uncertainty associated with a replacement and (4) thedisadvantage of prospective competitors, who generally would have to makesubstantially greater investments than we would in new equipment and who mayexperience difficulty obtaining suitable parking and maintenance facilities inour primary markets, especially in the New York greater metropolitan area.

 

The paratransit and transit services operations accountedfor 12.8% and 14.6% of our revenues from continuing operations for the sixmonths ended December 31, 2005 and 2004, respectively. The terms of ourparatransit and transit contracts are initially for five years. These contractsare awarded by public transit systems through a public bidding or request forproposal (“RFP”) process. We are generally entitled to a specified charge perhour of vehicle service together with other fixed charges. The method ofcontract compensation also varies.

 

**Resultsof Operations(1)**

 
| ** **                                   | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                 | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(unaudited)**                          | ** ** | **(unaudited)**                        | ** ** |
| ** **                                   | ** ** | **(in  millions, except percentages)**   | ** ** |
| Revenues                                     |       | $                                        | 109.5      |                                   | 100.0      | % | $ | 102.9 |   | 100.0 | % | $ | 176.8 |   | 100.0 | % | $ | 157.6 |   | 100.0 | % |
| Cost of operations                           |       | 96.9                                     |       | 88.5                                   | %          | 92.1 |   | 89.6 | % | 162.9 |   | 92.1 | % | 148.8 |   | 94.4 | % |
| General and  administrative                  |       | 4.9                                      |       | 4.5                                    | %          | 4.5 |   | 4.3 |   | 9.6 |   | 5.4 | % | 8.4 |   | 5.3 | % |
| Depreciation and  amortization               |       | 5.7                                      |       | 5.2                                    | %          | 6.1 |   | 5.9 | % | 11.8 |   | 6.6 | % | 12.2 |   | 7.7 | % |
| Income (loss) from  continuing operations    |       | 2.0                                      |       | 1.8                                    | %          | 0.2 |   | 0.2 | % | (7.4 | ) | (4.2 | )% | (11.8 | ) | (7.5 | )% |
| Interest expense                             |       | 6.6                                      |       | 6.0                                    | %          | 5.6 |   | 5.5 | % | 13.0 |   | 7.4 | % | 10.6 |   | 6.7 | % |
| Income (loss) before discontinued operations |       | (4.8                                     | )          | (4.4                                   | )%         | (5.9 | ) | (5.8 | )% | (20.6 | ) | (11.6 | )% | (23.7 | ) | (15.0 | )% |

 

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(1)                                  Allfigures are from continuing operations.

 

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***Results of Operations - Three Months Ended December 31,2005 Compared to Three Months Ended December 31, 2004***

 

*Revenues.*  Revenues from school bus operations were$98.5 million for the three months ended December 31, 2005 comparedto $91.3 million for the three months ended December 31, 2004, anincrease of $7.2 million, or 7.9%. This increase was due to $5.8 million of price increases due primarilyto the new DOE contract. In addition, under the terms of the current contractwith the DOE, the Company receives fullreimbursement of all escort costs plus a five percent administrative fee.  This change increased revenue by  $3.0 million. These increases were partiallyoffset by $1.0 million in lost contracts, and a $0.6 million decrease inservice requirements of existing contracts.

 

Revenues from paratransit and transit operations were$11.0 million for the three months ended December 31, 2005 comparedto $11.6 million for the three months ended December 31, 2004, adecrease of $0.6 million or 5.1%. This decrease was due to $1.2 million in lostcontracts and $0.5 million of revenue in connection with customer reimbursementof fuel charges for the three months ended December 31, 2004, compared tothe three months ended December 31, 2005 when the customer provided itsown fuel, partially offset by $1.1 million of price increases and increases inservice requirements from existing contracts.

 

*Cost of operations.*  Cost of operations of school bus operationswere $87.2 million for the three months ended December 31, 2005 comparedto $81.9 million for the three months ended December 31, 2004, an increaseof $5.3 million or 6.5%.  Salariesand wages were $49.2 million for the three months ended December 31, 2005compared to $47.6 million for the three months ended December 31, 2004, anincrease of $1.6 million or 3.5%. Salaries and wages increased primarily due to added employees needed toservice the increase of approximately 130 additional routes in New YorkCity.  As a percentage of revenues,salaries and wages decreased to 49.9% for the three months ended December 31,2005 from 52.1% for the three months ended December 31, 2004.  Employee fringe benefits increased$0.6 million for the three months ended December 31, 2005, comparedto the three months ended December 31, 2004.  This increase was due primarily to increasesin worker compensation costs and increased payroll taxes.  As a percentage of revenues, employee fringebenefits decreased to 17.9% for the three months ended December 31, 2005,from 18.7% for the three months ended December 31, 2004. Fuel expense, dueto higher fuel prices, increased $1.0 million and vehicle lease expenseincreased $0.7 million for the three months ended December 31, 2005compared to the three months ended December 31, 2004.  As a percentage of revenues, cost ofoperations decreased to 88.5% for the three months ended December 31, 2005from 89.7% for the three months ended December 31, 2004.

 

Cost of operations of paratransit and transitoperations were $9.7 million for the three months ended December 31,2005 compared to $10.3 million for the three months ended December 31,2004, a decrease of $0.5 million or 5.3%. This decrease was primarily dueto a decrease in salaries and wages of $0.3 million due to a lostcontract.  As a percentage of revenues,salaries and wages were 52.8% for both the three months ended December 31,2005 and for the three months ended December 31, 2004.

 

*General and administrative expenses.*  General and administrative expenses fromschool bus operations were $4.4 million for the three months ended December 31,2005 compared to $3.8 million for the three months ended December 31,2004, an increase of $0.6 million or 15.6%. This increase was primarily due to$0.3 million in costs incurred for acquiring vehicle lease facilities. (seeNote 5 to the Consolidated Financial Statements).  As a percentage of school bus operationsrevenues, general and administrative expenses increased to 4.4% for the threemonths ended December 31, 2005, from 4.1% for the three months ended and December 31,2004.

 

General and administrative expenses from paratransitand transit operations were $0.6 million for the three months ended December 31,2005 compared to $0.7 million for the three months ended December 31,2004, a decrease of $0.1 million or 17.4%. 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 5.2% for the three months ended December 31, 2005, from 6.0% for thethree months ended December 31, 2004.

 

*Depreciation and amortization.*  Depreciation and amortization expense fromschool bus operations was $5.2 million for the three months ended December 31,2005 compared to $5.6 million for the three months ended December 31,2004, a decrease of $0.4 million, or 6.5%. This decrease was primarily dueto lower depreciation expense as some of the equipment is now fully depreciatedand new equipment required has been leased.

 

Depreciation and amortization expense from paratransitand transit operations was $0.5 million for the three months ended December 31,2005 and for both the three months ended December 31, 2004, respectively.

 

*Operating income from operations.*  Operating income from school bus operationswas $1.8 million for the three months ended December 31, 2005compared to $0.1 million for the three months ended December 31,2004, an increase in income of $1.7 million,  due to the net effect of the items discussedabove.

 

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Operating income from paratransit and transitoperations was $0.2 million for the three months ended December 31,2005 compared to $0.1 million for the three months ended December 31,2004, an increase of $0.1 million, or 95.2%, due to the net effect of the itemsdiscussed above.

 

*Interest expense.*  Interest expense from continuing operationswas $6.6 million for the three months ended December 31, 2005 compared to$5.6 million for the three months ended December 31, 2004, anincrease of $1.0 million, or 17.3%. The increase was primarily due to $0.4million in interest expense on our $15.0 million of 10% third priority seniorsecured notes due 2008 (the “Additional Indebtedness”), issued in March 2005and a $0.3 million increase in deferred financing expenses.

 

*Reorganization costs.*  Reorganization costs were minimal for thethree months ended December 31, 2005 compared to $0.3 million for thethree months ended December 31, 2004, a reduction of $0.3 million.

 

*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 $4.8 million for the three months ended December 31,2005, compared to a loss of $5.9 million for the three months ended December 31,2004, a decrease in loss of $1.1 million.

 

***Results of Operations - Six Months Ended December 31,2005 Compared to Six Months Ended December 31, 2004***

 

*Revenues.*  Revenues from school bus operations were$154.1 million for the six months ended December 31, 2005 compared to$134.6 million for the six months ended December 31, 2004, anincrease of $19.5 million or 14.5%. This increase was due to $7.2 million of price increases due primarilyto the new DOE contract (excluding increases in DOE escort revenue) and servicerequirement increases of $4.9 million due primarily to more revenue days andapproximately 130 new routes in New York City operations, partially offset by$1.4 million in lost contracts.  Inaddition, under the terms of its current contract with the DOE, the Companyreceives full reimbursement of allescort costs plus a five percent administrative fee.  This change increased revenue by  $8.8 million, which included a $1.2 millionreimbursement for the July and August health and welfare costs underthe current contract with the DOE, which was expensed by the Company in thosemonths.  The Company previously expensedthese costs equally over the school year (September through June).

 

Revenues from paratransit and transit operations were$22.7 million for the six months ended December 31, 2005 compared to$23.0 million for the six months ended December 31, 2004, a decreaseof $0.3 million or 1.5%. This decrease was due to $2.5 million in lostcontracts and $0.9 million of revenue in connection with customer reimbursementof fuel charges for the six months ended December 31, 2004, compared tothe six months ended December 31, 2005 when the customer provided its ownfuel, partially offset by $3.1 million of price increases and increases inservice requirements from existing contracts.

 

*Cost of operations.*  Cost of operations of school bus operationswere $143.0 million for the six months ended December 31, 2005 compared to$128.7 million for the six months ended December 31, 2004, an increase of$14.3 million or 11.1%.  Salariesand wages were $79.3 million for the six months ended December 31, 2005compared to $73.5 million for the six months ended December 31, 2004, anincrease of $5.9 million or 8.0%. Salaries and wages increased $5.9 million primarily due to addedemployees needed to service the increase of approximately 130 additional routesand an increase in payroll days in New York City.  As a percentage of revenues, salaries andwages decreased to 51.5% for the six months ended December 31, 2005, from54.6% for the six months ended December 31, 2004.  Employee fringe benefits increased$3.2 million for the six months ended December 31, 2005, including$1.2 million of employee fringe benefits which were escort costs that werereimbursable from the DOE (see above). The balance of the increase was due primarily to increases in workercompensation costs and payroll taxes.  Asa percentage of revenues, employee fringe benefits decreased to 17.9% for thesix months ended December 31, 2005, from 18.1% for the six months ended December 31,2004. Fuel expense, due to higher fuel prices, increased $2.2 million, vehiclelease expense increased $1.4 million, and rent expense increased $0.8 millionfor the six months ended December 31, 2005, compared to the six monthsended December 31, 2004.  As a percentageof revenues, cost of operations decreased to 92.8% for the six months ended December 31,2005, from 95.6% for the six months ended December 31, 2004.

 

Cost of operations of paratransit and transitoperations were $19.9 million for the six months ended December 31,2005 compared to $20.1 million for the six months ended December 31,2004, a decrease of $0.2 million or 1.1%. This decrease was primarily dueto a decrease in fuel expense of $0.6 million, due to a customer providing itsown fuel, partially offset by $0.4 million increase in liquidated damages.  As a percentage of revenues, cost ofoperations increased to 87.7% for the six months ended December 31, 2005,from 87.3% for the six months ended December 31, 2004.

 

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*General and administrative expenses.*  General and administrative expenses fromschool bus operations were $8.5 million for the six months ended December 31,2005 compared to $7.1 million for the six months ended December 31, 2004,an increase of $1.4 million or 19.0%. This increase was primarily due toincreases in administrative payroll, including a $0.5 million performance bonusin relation to the extension agreement with the DOE, $0.5 million in costs foracquiring vehicle lease facilities. (see Note 5 to the Consolidated FinancialStatements) and increased professional fees. As a percentage of school bus operations revenues, general andadministrative expenses increased to 5.5% for the six months ended December 31,2005, from 5.3% for the six months ended and December 31, 2004.

 

General and administrative expenses from paratransitand transit operations were $1.1 million for the six months ended December 31,2005 compared to $1.3 million for the six months ended December 31, 2004,a decrease of $0.2 million or 13.5%. 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 4.9% for the six months ended December 31, 2005, from 5.6% for the sixmonths ended December 31, 2004.

 

*Depreciation and amortization.*  Depreciation and amortization expense fromschool bus operations was $11.0 million for the six months ended December 31,2005 compared to $11.2 million for the six months ended December 31,2004, a decrease of $0.2 million, or 2.2%. This decrease was primarily due$0.6 million of lower depreciation expense as some of the equipment is nowfully depreciated and new equipment required has been leased, partially offsetby $0.4 million of impairment to fixed assets.

 

Depreciation and amortization expense from paratransitand transit operations was $0.8 million for the six months ended December 31,2005 compared to $1.0 million for the six months ended December 31,2004, a decrease of $0.2 million, or 21.3%. 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 $8.3 million for the six months ended December 31,2005 compared to $12.4 million loss for the six months ended December 31,2004, a decrease in loss of $4.1 million, or 33.3%, due to the net effectof the items discussed above.

 

Operating income from paratransit and transitoperations was $0.9 million for the six months ended December 31,2005 compared to $0.6 million for the six months ended December 31,2004, an increase of $0.3 million, or 40.8%, due to the net effect of the itemsdiscussed above.

 

*Interest expense.*  Interest expense from continuing operationswas $13.0 million for the six months ended December 31, 2005 compared to$10.6 million for the six months ended December 31, 2004, an increaseof $2.4 million, or 23.0%. The increase was primarily due to $0.8 millionin interest expense on the Additional Indebtedness, $0.3 million from higherinterest rates on our $10.0 million senior secured floating rate notes, due2008 (the “Floating Rate Notes”), a $0.3 million increase in interest expenseon our senior credit facility, due primarily to higher interest rates, and a$0.6 million increase in deferred financing expenses.

 

*Reorganization costs.*  Reorganization costs were $0.1 million forthe six months ended December 31, 2005 compared to $0.7million for the sixmonths ended December 31, 2004, a reduction of $0.6 million.

 

*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 $20.6 million for the six months ended December 31,2005, compared to a loss of $23.6 million for the six months ended December 31,2004, a decrease in loss of $3.1 million.

 

*Income (loss) from discontinuedoperations.*  Weexperienced a minimal loss from discontinued operations for the six monthsended December 31, 2005 compared to a loss from discontinued operations of$0.2 million for the six months ended December 31, 2004.

 

**Liquidityand Capital Resources**

 

The statements regarding the Company’s anticipated capital expendituresand service requirements are “forward looking” statements which involve unknownrisks and uncertainties, such as the Company’s ability to meet or exceed itsgrowth plans and/or available financing, which may cause actual capitalexpenditures to differ materially from currently anticipated amounts.

 

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 prior maximum of $5.9million.  The President and ChiefExecutive Officer of the Company increased his existing personal guarantee infull support of the

 

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agreement and received anadditional $50,000 guarantee fee.  As of December 31,2005 and January 31, 2006 the company had no sold receivables.

 

The Companyentered into an agreement on June 17, 2005 to purchase 105 transportationroutes (the “Assigned Routes”) pursuant to the DOE contract.  On September 15, 2005 the transactionwas consummated and the Company paid $1,417,500 for the Assigned Routes.

 

The Company believes that it will not have sufficient LTM EBITDAcomputed quarterly to meet the EBITDA maintenance covenant in the indenturegoverning its 12% senior secured notes due 2008 and its Floating Rate Notes(collectively, the “Notes”) at March 31, 2006, and may not have sufficientLTM EBITDA to meet this covenant in subsequent quarters, beginning with thequarter ending June 30, 2006.  TheCompany believes that when an EBITDA shortfall occurs, it will be able toobtain a waiver of this covenant from the requisite percentage of bondholders.As the Company believes that it is probable that it can obtain such a waiverprior to such circumstance becoming an event of default under the indenture(including, if necessary, the applicable grace period), it has not reclassifiedthe Notes to short-term at December 31, 2005.

 

The Company operated a fleet of approximately 6,000 vehicles as of December 31,2005 and consumes substantial quantities of fuel for its operations. Based onthe Company’s current operations, an increase in fuel costs of ten cents pergallon will increase its cost of fuel purchased by approximately $1.0 millionon an annual basis.

 

The Company anticipates total capital expenditures of approximately $6.0million (primarily non-vehicle capital expenditures) in fiscal 2006, of which$3.0 million of capital expenditures were made in the six months ended December 31,2005.  The Company expects to meet itsnew vehicle requirements for the remainder of fiscal 2006 and for fiscal 2007by leasing these vehicles . (see Note 5 to the Consolidated FinancialStatements). Vehicle leaseexpense increased $1.4 million for the six months ended December 31, 2005,compared to the six months ended December 31, 2004.

 

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

 

On January 11, 2006, Midway Leasingcompleted the sale and leaseback of its owned real property located in StatenIsland, New York for a gross purchase price of $4.2 million.  Inconnection with the sale of the real property, the Company agreed to leasebackthe premises from the purchaser for a term of ten years.  The triple netlease calls for monthly payments of $29,750 with annual increases of 2.0%,beginning November 30, 2006. The Company will be responsible for all realproperty taxes, certain insurance costs and utilities.  The Companyincurred a loss on the sale of approximately $0.8 million, which will beamortized as rent expense monthly starting January 2006 over the leasebackperiod on a straight-line basis.

 

Beginning February 6, 2006, the DOEincreased the number of routes under the Company’s contract by approximately140 routes.  This was the result of thecity’s contract with the UFT.  TheCompany estimates revenue will increase by approximately $13.5 million on anannual basis.

 

The Company estimates, in addition to normal working capitalrequirements, that it will need the following cash flows to finance itsoperations over the period from January to December 2006: $18.5million to service its interest obligations, $6.0 million for capitalexpenditures (primarily for non-vehicle capital expenditures) and $3.9million for amortization of debt and capital lease obligations. The Companybelieves that borrowings under its senior credit facility and the ReceivableAgreement, as amended, the proceeds from the additional contribution of capitalfrom AETG, plus the proceeds from the sale and leaseback of its North Street,Staten Island, New York property, together with its existing cash and cash flowfrom operations and the anticipated effect of its extension agreement with theDOE, plus the new UFT Routes, 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 more difficult for it tosatisfy its obligations with respect to the Notes because a substantial portionof the Company’s cash flow from operations will be dedicated to debt servicepayments. Accordingly, the Company’s cash flow availability to fund increasesin working capital and capital expenditures may be restricted, as will itsflexibility in planning for, or reacting to, changes in its business, industryor general adverse economic conditions.

 

As of December 31, 2005,total current assets were $79.0 million and total current liabilities were$66.2 million. At December 31, 2005, the Company’s debt under the seniorcredit facility was $17.8 million, including the $3.5 million supplemental

 

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loan, and it had $2.2 million of borrowing availability, based on theCompany’s borrowing base calculations. The Company’s letter of credit line wasfully utilized. On February 7, 2006, the Company’s debt under the seniorcredit facility was $3.5 million, which was the $3.5 million supplemental loan,and it had cash of $5.8 million, $16.5 million in borrowing availability and anadditional $5.9 million of availability under its Receivable Agreement based upon the Company’s borrowing basecalculations. On February 7, 2006, the Company had $115.0 millionoutstanding of the Notes and $15.0 million outstanding of the AdditionalIndebtedness.

 

*Net cash used in operating activities.*Net cash used in operating activities was$10.0 million for the six months ended December 31, 2005, resultingprimarily from $24.7 million used in operating activities partially offset fromcash provided due to changes in the components of working capital of $0.6million (primarily a decrease in prepaid expenses and other current assets of$6.6 million and an increase in controlled disbursements of $0.7 million,partially offset by a decrease $2.9 million of accounts payable, accruedexpenses, accrued compensation and other current liabilities, a decrease ininsurance financing payable of $2.8 million and an increase in accountsreceivable by $0.7 million) and by non-cash items of $13.2 million ofdepreciation and amortization, $0.4 million of fixed asset impairment and $0.5million of amortization of original issue discount.

 

Net cash used in operating activities was $9.8 million for the sixmonths ended December 31, 2004, primarily from $24.6 million used inoperating activities, partially offset from cash provided due to changes in thecomponents of working capital of  $0.9million (primarily a decrease in prepaid expenses and other current assets of$1.9 million, a decrease in restricted cash of $1.0 million and an increase incontrolled disbursements account of $1.9 million partially offset by a decreasein insurance financing payable of $3.6 million and an increase in accountsreceivable of $0.6 million), $13.5 million of depreciation and amortization and$0.3 million of amortization of original issue discount.

 

*Net cash provided by (used in) investing activities.*For the six months ended December 31,2005, the net cash provided by investing activities was $4.2 million resultingprimarily from the sale and leaseback of our Los Angeles, California facilityand the sale of property in St Louis, Missouri, partially offset by thepurchase of $1.4 million of transportation contract rights and $3.0 million ofcapital expenditures, which were financed from operating cash flows.

 

For the six months ended December 31, 2004, the Company made $2.6million of capital expenditures to acquire additional vehicles, other propertyand equipment.  Of these capitalexpenditures, $0.4 million were directly financed with capital leases and thebalance were financed from operating cash flows.

 

*Net cash provided by financing activities.*Net cash provided by financing activitiestotaled $1.3 million for the six months ended December 31, 2005 dueprimarily to $4.9 million of proceeds from the sale of 293,663 shares of ourcommon stock to AETG, partially offset by $1.6 million in payments onborrowings under capital leases and purchase money mortgages, $0.3 million indeferred financing costs and  $1.6million of net payments under the senior credit facility.

 

Net cash provided by financing activities totaled $8.5 million for thesix months ended December 31, 2004 due primarily to $4.9 million of new borrowingfrom a senior unsecured note and $5.7 million of net borrowing under the seniorcredit facility, partially offset by $1.1 million in payments on borrowingsunder capital leases and purchase money mortgages and $0.9 million in deferredfinancing costs.

 

**Commitments and Contingencies**

 

Reference is made to Note 16  “Commitments and Contingencies” of Notes tothe Consolidated Financial Statements in the Company’s Special Financial Reporton Form 15d-2 for the fiscal year ended June 30, 2005 for a descriptionof the Company’s material commitments.

 

**CriticalAccounting 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 and equipment over their useful lives,which range from 3 to 31.5 years, on a straight-line basis. These useful livesare based upon our estimates of the periods that the assets will provideeconomic

 

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benefit. Our policy is toreview the carrying value of our long-lived assets whenever events or changesin circumstances 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.

 

*TransportationContract Rights.* Transportation contract rights primarily represent the value we assignedto the cost of investments in school bus companies in excess of the book valueof the companies acquired. In addition, we have purchased from unrelated thirdparties certain transportation contract rights with respect to revenuecontracts and travel routes. Transportation contract rights are assessed forimpairment at least annually and whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Important factors thatcould trigger an impairment review include significant underperformancerelative to historical or projected future operating results, significantchanges in the use of the acquired assets or the strategy of the overallbusiness, and significant negative industry or economic trends. If indicatorsof impairment are present, management evaluates the carrying value of theintangibles in relation to the projection of future undiscounted cash flows ofthe underlying assets. Projected cash flows are based on historical resultsadjusted to reflect management’s best estimate of future market and operatingconditions, which may differ from actual cash flow. Transportation contractrights are amortized on a straight-line basis over twelve years, whichrepresents our company’s estimate of the average length of the contracts andexpected renewal periods. The requirements for these impairment charges weredetermined by management’s evaluation that the future undiscounted cash flowsattributable to the underlying assets were unlikely to exceed the carryingvalue of the transportation contract rights assets for certain of the schoolbus companies. The impairment charges were the difference between book value ofthe transportation contract rights and estimated fair value, determined as theestimated future cash flows.

 

*IncomeTaxes.*  We follow theliability method under SFAS No. 109, “Accounting for Income Taxes.” Theprimary objectives of accounting for taxes under SFAS No. 109 are to (1) recognizethe amount of tax payable for the current year and (2) recognize theamount of deferred tax liability or asset for the future tax consequencesattributable to temporary differences between the financial statements’carrying amounts of existing assets and liabilities and their respective taxbases and of events that have been reflected in our financial statements or taxreturns. When the realization of a deferred tax asset is not considered to bemore likely than not, a valuation allowance is recorded against that deferredtax 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.

 

*Allowancefor Doubtful Accounts.* We maintain an allowance for estimated losses resulting from theinability of our customers to make required payments. We estimate uncollectibleamounts based upon historical bad debts, current customer receivable balances,age of customer receivable balances, the customer’s financial condition andcurrent economic trends. If the actual uncollected amounts were tosignificantly exceed the estimated allowance, our results of operations wouldbe 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 has the right toretain 5% of our monthly billings (retainage), which is normally returned in August ofthe following fiscal year based upon us completing contractual service for theprior school year. We have always collected the retained amounts in full.

 

*InsuranceCoverage and Reserves.* The Company self-insures its obligations that may arise under workerscompensation and automobile liability claims. Provisions for such obligationsare provided for as follows:

 

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Reserves requirements for deductible amounts, for thesix months ended December 31, 2005 were based upon valuations supplied byan insurance company. Such valuations computed reserve requirements based uponestimated ultimate claim losses, including those incurred but not reported.Charges to operations are adjusted, if necessary, to reflect these valuations.

 

The following table reflects the activity in thisaccount for the six months ended December 31, 2005:

 
| ** **                       | ** ** | **Total Reserve** | ** ** |
|----------------------------------|------------|-------------------|------------|
| Balance, June 30,  2005     |       | $                 | 3,309,815  |   |
| Expense                          |       | 75,149            |       |
| Payments against the  reserve    |       | (953,484          | )          |
| Balance,  December 31, 2005 |       | $                 | 2,431,480  |   |

 
| Current portion of  insurance reserve   |   | $       | 1,636,486 |   |
|-----------------------------------------|--------|---------|-----------|--------|
| Long term portion of  insurance reserve |   | 794,994 |      |
| Total insurance reserve                 |   | $       | 2,431,480 |   |

 

**DisclosureRegarding Forward-Looking Statements**

 

This reportcontains forward-looking statements. These statements relate to future eventsor our future financial performance, and involve known and unknown risks,uncertainties and other factors that may cause our actual results, levels ofactivity, performance or achievements to be materially different from anyfuture results, levels of activity, performance or achievements expressed orimplied by these forward-looking statements. In some cases, you can identifyforward-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 other comparable terminology.These statements are only predictions. Actual events or results may differmaterially.

 

Although webelieve that the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. These forward-looking statements are made as of the date ofthis report and, except as required under the federal securities laws and the rules andregulations of the SEC, we assume no obligation to update or revise them or toprovide reasons why actual results 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 December 31, 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 December 31, 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 December 31, 2005, we had approximately$17.8 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 December 31,2005, 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 Companymaintains disclosure controls and procedures (as defined in Rule 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that aredesigned to ensure that information required to be disclosed by the Company 

 

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in reports it files orsubmits under the Exchange Act reports 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 theperiod covered by this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of the Company’s disclosure controls andprocedures. Based on that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were ineffective as of the end of the period covered by thisreport.  As described in the previousquarterly report, the Company begana review of its disclosure controls and procedures in order to improve theireffectiveness.  The review process is ongoing. The****Company hasidentified a need to modify its financial period closing from a sequential to amore simultaneous process, to reduce the time necessary to properly complete itsfinancial statement preparation and review. During the period covered bythis report, the Company has made progress in these areas and has reduced thetime necessary to accomplish its financial period closing and its financialstatement preparation and review. As the review process continues, the Company may identify other areasfor improvement.  The Company has and will continue to implementimprovements****as soon aspracticable, but cannot yet determine when all improvements will be completedor have the fully intendedeffect.

 

There were no changes inour internal control over financial reporting, identified in connection withthe evaluation of such internal control that occurred during our last fiscalquarter, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II.**

 

**OTHERINFORMATION**

 

**Item 1.*  Legal Proceedings***

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.*  Other Information***

None.

 

**Item 6.*  Exhibits***

The following documents are filed as Exhibits tothis 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                  |

 

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**SIGNATURE**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, AtlanticExpress Transportation Corp. has caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|                          |    ATLANTIC EXPRESS TRANSPORTATION CORP.      |
|-------------------------------|---------------------------------------------------------|
|                          |                                                    |
|                          |                                                    |
| Date: February 14,  2006 | By:                                                     |  /s/ Domenic Gatto |   |
|                          | Domenic Gatto                                           |
|                          | Chief Executive Officer                                 |
|                          | (Principal Executive  Officer)                          |
|                          |                                                    |
|                          |                                                    |
| Date: February 14,  2006 | By:                                                     |  /s/ Neil J. Abitabilo |   |
|                          | Neil J. Abitabilo                                       |
|                          | Chief Financial Officer                                 |
|                          | (Principal Financial  and Principal Accounting Officer) |

 

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**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                  |

 

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