**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-KSB**

 
| **ý**                                            | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------|
|                                                  |                                                                                         |
| **For the fiscal year ended December 31, 2003.** |
|                                                  |                                                                                         |
| **o**                                                 | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from               to               **

 

**Commissionfile number: 0-30185**

 

**GaselTransportation Lines, Inc.**

(Name of small business issuer in itscharter)

 
| **Ohio**                                                         |   | **31-1239328**                       |
|------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or  organization) |   | (I.R.S. Employer Identification No.) |
|                                                             |   |                                 |
| **County Road 10, Route 4, Box 181A, Marietta, OH**              |   | **45750**                            |
| (Address of principal executive offices)                         |   | (Zip Code)                           |
|                                                             |   |                                 |
| Issuer’s telephone number  **(740) 373 - 6479**        |

 

Securities registered under Section 12(b) of the Exchange Act:

 
| **Title of  each class** | ** ** | **Name of  each exchange on which registered** |
|--------------------------|------------|------------------------------------------------|
|                     |       |                                           |
|                     |       |                                           |

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common shares, no par value

**(Titleof class)**

 

**(Titleof class)**

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.  ý  Yes  o  No

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B is not contained in this form, and no disclosurewill be contained, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. ý

 

The issuer’s revenues for its most recent fiscal year were $14,068,163.

 

The aggregate market value of voting stock held by non-affiliates ofthe registrant as of April 8, 2004, was $5,919,163 (based upon $0.70 pershare being the closing sale price on that date as reported by the NationalAssociation of Securities Dealers Automated Quotation System-Over The CounterBulletin Board.  In making this calculation, the issuer has assumed,without admitting for any purpose, that all executive officers and directors ofthe company, and no other persons, are affiliates.

 

On April 13, 2004, Gasel Transportation Lines, Inc. hadoutstanding 9,877,966 common shares, without par value, which is the issuer’sonly class of common equity.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

No documents are incorporated by reference.

 

Transitional Small Business Disclosure Format (Check one): Yes  o;  No  ý

 

 

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**PARTI**

 

**Item 1. Descriptionof Business.**

 

GENERAL

 

The Company operates primarily as a truckload contract carrier withvarious customers which ship truckload quantities of both refrigerated andnon-refrigerated commodities over various distances on a nationwidebasis.  As a contract carrier, the freight rates are negotiated with theshipper and are dependent upon competition, place of origin and destination,and the type of commodity being hauled.  Since 2003, the Company, througha subsidiary corporation, GTL Logistics, Inc., also operates as a freightbroker.  As a freight broker, the Company takes shipping orders andselects carriers other than the Company owned equipment or leasedowner/operators to transport the freight for a negotiated fee.

 

In addition to its primary business, the Company operates three drivertraining schools, located in Marietta, Nelsonville, and Lima Ohio through itswholly owned subsidiary, Gasel Driver Training Schools, Inc.  Operation ofthese schools is licensed by the Ohio Department of Highway Patrol.

 

The Company intends to continue to expand its business and operationsthrough internal growth and acquisitions.  It is primarily interested inmedium to long haul truckload carriers with compatible freight lanes andexisting business that can be integrated into the Company’s methods ofoperation.  Additionally, the Company isexpanding its operations by going into flat-bed hauling through owner/operators.  This should allow the Company to takeadvantage of an opportunity in its local market area without incurring thecosts of acquiring equipment.

 

HISTORY

 

Gasel Transportation Lines, Inc. (the “Company”) is a corporation thatwas organized under the laws of the State of Ohio on January 27,1988.  The Company was initially formed for the purpose of becoming atransportation freight broker hauling freight under the authority of othermotor carriers on a commission basis with its sole offices located in Marietta,Ohio.  Shortly after its inception, the Company evolved its business toobtain licensing with the Interstate Commerce Commission (“ICC”) as a commonand contract general commodities motor freight carrier in the 48 contiguousUnited States and Canada and to operate its own tractors and trailers.  InSeptember 1988, the Company

 

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received licensing from the ICC authorizing it to transport ininterstate commerce both as a common and contract carrier, and the Companyobtained licenses in the 48 contiguous United States to operate under suchlicenses.  Shortly thereafter, the Company sought approval, and wassubsequently granted license to operate in Canada too.  The Company alsoobtained its authority to broker freight.  In December, 1995, the ICCceased operations and its regulatory functions and jurisdiction over motorcarriers was transferred to the United States Department of Transportation.

 

In July, 1995, the Company acquired a trucking terminal and offices on741 Blue Knob Road, Marietta, Ohio.  This facility is now the principaloffice and main terminal for the Company.  The mailing address is P.O. Box1199, Marietta, Ohio 45750, and the telephone is (740) 373-6479.

 

In July, 1996, the Company acquired the assets of a Florida basedtrucking company, Earl W. Kersey Trucking, Inc. that included a terminal andoffices located on Highway 301 N, Dade City, Florida.  During 1999, theCompany purchased 5 acres of land adjoining the Dade City, Floridaterminal.  During 2001, the Company ceased its Dade City, Floridaoperations to consolidate its traffic lanes and centralize its operations, andduring 2002 sold these properties.

 

Effective December 31, 2000, the Company entered into an agreementto purchase certain assets of Eagle Transport, Inc. and Eagle TransportationServices, Inc., affiliated companies with offices in Plain City, Ohio (which isin the greater Columbus, Ohio area.)  Under the agreement, the Companypurchased the transportation equipment owned by Eagle Transport, Inc. and thefreight transportation business of Eagle Transportation Services, Inc., whichhistorically had approximately $9million in freight transportation revenuesfrom both the equipment owned by Eagle Transport, Inc. and throughowner/operators and brokered freight.  The purchase included the leasingof an office at the former Eagle offices and the hiring of some of Eagle’sformer employees, primarily those involved in freight dispatching.  Since this acquisition commencing withbusiness in 2001, the Company was unable to continue to fund the brokeragebusiness it had acquired and ceased these operations in mid-2001.  Its use of the owner/operators that it hadacquired in the transaction decreased from 10 to 1 by early 2002, when theCompany relocated its offices in Columbus, Ohio from the office it leased fromEagle.  The Company retained the highermargin customers acquired in the transaction, and has subsequently built asolid presence with a growing number of large, national customers based in theColumbus area.  During 2002, theacquired Eagle customer base was streamlined to one large shipper, and waseventually replaced by local freight for better rates and equipmentefficiencies.

 

In May 2003, the Company filed for protection from its creditors and forReorganization under Chapter 11 of the U.S. Bankruptcy Act, and underwentnumerous operating changes.  One ofthose changes has been to discontinue operations out of its Columbus, Ohiofacility and to run all of its operations out of its principal offices inMarietta, Ohio.  One of the results ofthis decision was that the business or owner/operators acquired in the EagleTransport, Inc. and Eagle Transportation Services, Inc. acquisition werediscontinued.

 

Until 2002, the Company has had a steady growth in revenues and ownedequipment over the past several years.  During that time it had increasedthe number of owned, either directly or by capital lease, tractors from 23 to117, its number as of March 31, 2002, its dry van box trailers from 31 to144, and its refrigerated climate control trailers from 11 to 104, again as ofMarch 31, 2002.  As ofMarch 18, 2003, the numbers had decreased because of a decrease in freightdemand and of various financing issues, so that it owned 101 tractors, 122 dryvan trailers, and 77 refrigerated climate control trailers.  As ofMarch 21, 2004, the Company, to bring its equipment operating expenses toa normal cost curve and its cash outlays for annual license and insurance feesto a manageable level, had decreased its tractors to 60, its dry van trailersto 120, and its refrigerated trailers to 30. The Company is replacing its lostpower units with owner/ operators and now has approximately 20 contractors inits fleet.  In addition, there were 12tractors and 11 dry van box trailers that were owned and used in the drivertraining schools.  Annual freight revenues went from $3,325,606 forcalendar year 1994 to $17,574,593 for calendar year 2001, and then decreased to$14,162,996 for the calendar year 2002 and $13,641,559 for the calendar year2003.

 

The Company has an ISO 9002 certification by American SystemsRegistrar.  This certification means that the Company has been audited andverified to have written policies and procedures for the Company’s operationsthat are designed to monitor and improve customer service through a continuousdocumentation and corrective action procedure.

 

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OPERATING STRATEGY

 

The Company is in direct competition with other motor freight carriers,including many companies that are significantly larger than the Company. Therefore, the Company focuses on providing a high level of transportationservices to its customer base with commensurate rates, rather than competingprimarily on the basis of price.  Further, the Company has been able tocompete with these other carriers because its terminal is located in Marietta,Ohio, that is an area where there are few competitors domiciled.  Also, the Company attempts to provide betterand more timely service and to cater to certain major shippers as a means ofcompeting.  The Company had a policy oftrying to operate newer late model equipment as a competitive advantage.  However, due to the continuing financiallosses suffered during the last three years, and due to new EPA engineemissions requirements and related loss of fuel efficiencies, new vehicleprices, and market loss in trade-in values, the Company, like many othertrucking operations, large and small, is running its equipment longer.  The Company is utilizing fully integratedcomputer systems with onboard communications systems as a means of tracking itsequipment and freight, which is a requirement to keep pace with the industry.

 

OPERATIONS

 

As a licensed carrier with the U. S. Department of Transportation andthe various states and Canada, the Company business is dependent uponmaintaining such operating authority.  One condition of retaining suchauthority is that the Company must maintain liability insurance for protectionof the public.  Another is that the Company meet the safety fitnessregulations as evidenced by a “satisfactory” rating by the U. S. Department ofTransportation.

 

The owned terminal in Marietta, Ohio is required to comply with variousstate and federal environmental regulations with regard to the storage of fueland oil and the disposal of waste oil and tires.  There is no significantcost associated with operating under these regulations; however, in the eventof a major fuel or oil spillage, the cost of clean up could be significant.

 

DRIVERS

 

During most of 2002, the Company did not have any employees thatdirectly worked for it because it leased them from an industry specificProfessional Employment Organization (PE0).  This arrangement included thedrivers.  Because of some financialdifficulties with the arrangement with the PEO, the lease agreement wasterminated during 2002 and the Company hired all of the personnel directly fora brief period during the 3rd and 4th quarters of 2002and the 1st quarter of 2003. On March 14, 2003, the Company again began leasing its employeesand outsourcing its related payroll/taxes processing with another PEO.  This allows the Company a savings on workerscompensation premiums and relieves it from administration of payroll andrelated tax processing.

 

All of the drivers must meet specific guidelines relating primarily tosafety record, driving experience and personal evaluation, including DOTmandated drug testing and personal background checks.  The Companyrecruits and retains drivers by offering competitive compensation packages,purchasing quality tractors and equipping them with optimal comfort and safetyfeatures, and emphasizing training and retention programs.  Drivers canearn bonuses on a per mile basis for safety, paperwork, compliance and numberof miles driven.  All employees, including drivers, are eligible toparticipate in the health and life insurance plans maintained by the Companyfor its personnel.

 

Although the Company believes that it currently has an adequate number ofdrivers, there can be no assurance that it will not be affected by a shortageof qualified drivers in the future. Significant driver turnover is a problem within the industry as a whole,and affects the Company, too.  Drivershortages were experienced periodically during 2003 and have been a periodicand continuing problem in 2004, when it has experienced a higher than normalturnover rate.  In addition, the trucking industry is experiencing adiminished workforce of qualified drivers.  As a result, the Company mustcompete with other transportation service companies for the availabledrivers.  It is anticipated that the intense competition for qualifieddrivers in the trucking industry will continue.  The Company supplementsits driver pool with inexperienced drivers through its driver training schoolsand utilizes them in conjunction with experienced drivers as teams, andultimately single drivers to help with meeting its driver needs.

 

In addition to the driver employees, the Company contracts with a limitedselect group of independent contractors who own and operate their own tractorsand trailers (referred to as “owner/operators”).  There are currently 17owner/operators.  Each owner/operator is required to enter into anowner/operator lease agreement which is cancelable by either party upon thirtydays notice.  The owner/operators provide the Company with an additionalsource of drivers and equipment.  TheCompany has, since entering Chapter 11 Reorganization (May 2003) and still iscurrently, been trying to expand its fleet by contracting with additionalowner/operators, especially in trying to commence a flat-bed

 

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trucking operation out of the Ravenswood, West Virginia area, which isnear its Marietta, Ohio terminal location. By doing so, the Company expects to increase its revenue and marginswithout any cash outlay, equipment purchase obligation, or operating costincreases.

 

**Item 2. Descriptionof Property.**

 

The principal offices and terminal for the Company are owned; they arelocated on 12.5 acres adjacent to State Route 4, approximately 4 milessouthwest of Marietta, Ohio.  The property has four buildings on it, themajor one of which is constructed of cement block and steel, is in good condition,and has the corporate offices, a drivers’ lounge, and three maintenancebays.  Other buildings include a freight transfer building made out ofsteel that is in fair to good condition, a wood building for the drivers schooland lounge that was remodeled a few years ago and is in good condition, and acement block supply storage building that is in good condition.  The lotis used for parking the Company transportation equipment and for operating adriving school practice area.  Theterminal has above ground fuel storage and a waste oil storage facility that isregulated by the EPA.

 

The property is subject to a mortgage with the usual conditions thatthe Company is entitled to use of the property for its business needs so longas it is operated in a lawful manner and the mortgage note is paid and not indefault.  There are no other operating or use restrictions.  The Company also has a second mortgage lienupon the properties that contains similar conditions.

 

**Item 3. LegalProceedings.**

 

Since May 19, 2003, the Company has been operating as a Debtor inPossession under the Bankruptcy Act. Under the provisions of the Bankruptcy Act, all actions pending at thedate of filing are stayed, and basically become issues of what constitutes debtof the Company and its classification for priority and payment.

 

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

 

No matters were submitted to a vote of security holders during thefiscal year 2003.

 

**PARTII**

 

**Item 5. Market forCommon Equity and Related Stockholder Matters.**

 

**MarketInformation.**

 

(A)  During the past threeyears, the common shares of the Company have been traded in theover-the-counter market and been included on the OTC Bulletin Board under thetrading symbol GSEL.  The following table sets forth the range of the highand low bid prices for the common shares of the Company for each quarter duringthe past two years, as reported by The NASDAQ Stock Market, Inc.  Theseprices reflect inter-dealer prices, without retail mark-up, mark-down, or commissionand may not represent actual transactions.

 
|               |   | **Bid Prices** |   |
|--------------------|--------|----------------|--------|
|               |   | **High**       |   | **Low** | ** ** |
| Calendar Year 2003 |   |           |   |   |   |
|               |   |           |   |   |   |
| First Quarter      |   | $              | 1.01   |   | $ | 0.40 |   |
|               |   |           |   |   |   |
| Second Quarter     |   | $              | 0.86   |   | $ | 0.25 |   |
|               |   |           |   |   |   |
| Third Quarter      |   | $              | 0.75   |   | $ | 0.25 |   |
|               |   |           |   |   |   |
| Fourth Quarter     |   | $              | 0.80   |   | $ | 0.30 |   |
|               |   |           |   |   |   |
| Calendar Year 2002 |   |           |   |   |   |
|               |   |           |   |   |   |
| First Quarter      |   | $              | 0.75   |   | $ | 0.35 |   |
|               |   |           |   |   |   |
| Second Quarter     |   | $              | 0.45   |   | $ | 0.20 |   |
|               |   |           |   |   |   |
| Third Quarter      |   | $              | 0.35   |   | $ | 0.20 |   |
|               |   |           |   |   |   |
| Fourth Quarter     |   | $              | 0.79   |   | $ | 0.30 |   |

 

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(B)  On April 9, 2004,there were 73 shareholders of record of the common shares.  There are alsoan estimated 375 beneficial shareholders who hold their shares in street name.

 

(C)  The Company has neverdeclared a cash dividend on its common shares and no assurance can be giventhat the Company will declare any cash dividend on its common shares in thefuture.  Payments of dividends are within the discretion of the Company’sBoard of Directors and depend upon the earnings, capital requirements, andoperating and financial condition of the Company, among other factors. The Company currently expects to retain its earnings to finance the growth ofthe Company and does not expect to pay cash dividends in the foreseeable future.

 

**RecentSales of Unregistered Securities.**

 

(A)  The following table setsforth information relating to sales of unregistered securities made by theCompany during the last quarter of 2002 and through the 24th ofMarch, 2003.  All of the sales were forcash.  There were no underwritingcommissions paid.  The securities weresold to Starz Investments Limited, a Belize corporation, pursuant to a contractentitled Regulation S Stock Purchase Agreement, under which it was to purchasethe shares at a discount of 65% of the closing bid price on the day prior to asale. The offering was made in reliance upon Regulation S adopted under TheSecurities Act of 1933, as amended (the “Act”), and resale of the shares isrestricted in accordance with the provisions of Regulation S, which restrictsresale for a period of one year after the purchase dates in the United Statesor to any person who is not a U.S. Person as defined in Regulation S.

 
| **Date of Sale**       |   | **Class of  Securities**    |       | **Number of  Shares  Sold** |       | **Price per  share** |       | **Total Amount  Received** |             |
|------------------------|--------|-----------------------------|------------|-----------------------------|------------|----------------------|------------|----------------------------|------------------|
| December 3, 2002  |   | Common shares, no par value |       | 800,840                     |       | $                    | 0.1225     |                       | $                | 98,077.90 |   |
| December 6, 2002  |   | Common shares, no par value |       | 647,971                     |       | $                    | 0.1225     |                       | $                | 79,351.45 |   |
| December 19, 2002 |   | Common shares, no par value |       | 300,709                     |       | $                    | 0.1225     |                       | $                | 36,836.85 |   |
| December 19,2002  |   | Common shares, no par value |       | 674,903                     |       | $                    | 0.1050     |                       | $                | 70,864.82 |   |
| January 10, 2003  |   | Common shares, no par value |       | 452,458                     |       | $                    | 0.1050     |                       | $                | 47,483.09 |   |
| January 31, 2003  |   | Common shares, no par value |       | 2,091,373                   |       | $                    | 0.1482     |                       | $                | 309,980.00 |   |
| February 18, 2003 |   | Common shares, no par value |       | 371,052                     |       | $                    | 0.1482     |                       | $                | 55,000.00 |   |
| February 18, 2003 |   | Common shares, no par value |       | 115,793                     |       | $                    | 0.1750     |                       | $                | 20,238.78 |   |
| March  5, 2003    |   | Common shares, no par value |       | 715,229                     |       | $                    | 0.1995     |                       | $                | 142,688.19 |   |
| March 19, 2003    |   | Common shares, no par value |       | 482,912                     |       | $                    | 0.1995     |                       | $                | 96,340.94 |   |
| March 31, 2003    |   | Common shares, no par value |       | 63,218                      |       | $                    | 0.1995     |                       | $                | 12,611.99 |   |
| March 31, 2003    |   | Common shares, no par value |       | 283,542                     |       | $                    | 0.1995     |                       | $                | 56,566.63 |   |
| Total                  |   | Common shares, no par value | ** ** | **7,000,000**               | ** ** |                 | ** ** | **$**                      | **1,026,040.64** | ** ** |

 

The following sets forth the approximate use of proceeds by theCompany from these sales of shares:

 
| 1.     | Consulting fee to 1st SB Partners, Ltd. for preparation of  offering document and arranging sale of shares |   | $      | 86,118  |
|--------|------------------------------------------------------------------------------------------------------------|--------|--------|---------|
|   |                                                                                                       |   |   |
| 2.     | Balance of amounts due to State of Ohio for license tags for tractors  and trailers                        |   | $      | 135,000 |
|   |                                                                                                       |   |   |
| 3.     | Reimburse PeopLease Corporation for payroll paid by it during 2002                                         |   | $      | 113,000 |
|   |                                                                                                       |   |   |
| 4.     | Past due payroll taxes                                                                                     |   | $      | 100,000 |
|   |                                                                                                       |   |   |
| 5.     | Settle past due vendor and insurance payables                                                              |   | $      | 52,200  |
|   |                                                                                                       |   |   |
| 6.     | Working capital                                                                                            |   | $      | 539,723 |

 

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(B)  The following table setsforth information regarding issuance of shares made by the Company during thelast quarter of 2002 and 2003, without use of an underwriter to persons inexchange for services:

 
| **Date of Sale**       |   | **Class of  Securities**    |   | **Number of  Shares  Issued** |   | **To Whom  Issued**         |
|------------------------|--------|-----------------------------|--------|-------------------------------|--------|-----------------------------|
| December 11, 2002 |   | Common shares, no par value |   | 30,000                        |   | Market Pathways (1)         |
| December 19, 2002 |   | Common shares, no par value |   | 200,000                       |   | Sarah R. Speno, Trustee (2) |
| February 7, 2003  |   | Common shares, no par value |   | 100,000                       |   | Sarah R. Speno, Trustee (2) |
| April 21, 2003    |   | Common shares, no par value |   | 100,000                       |   | Sarah R. Speno, Trustee (2) |
| April 25, 2003    |   | Common shares, no par value |   | 10,000                        |   | Douglas Rogers (3)          |
| Total                  |   | Common shares, no par value |   | 440,000                       |   |                        |

 

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(1)          Market Pathways provided shareholderrelations services and marketing reports that it disseminated to securitiesbroker/dealers and as part of its compensation, it received the shares in anon-public offering.  The shares werenot registered in reliance upon Section 4(2) of the Act in that they werenot made available for sale to the public and are restricted against resaleuntil they are registered under the Act or sold under an exemption fromregistration.

 

(2)          Sarah R. Speno, Trustee of The SRS Trust,received these shares as the nominee for 1st SB Partners, Ltd., acompany that performed consulting services for the Company in the preparationof the offering of its shares under Regulation S and in negotiating theRegulation S Stock Purchase Agreement that the Company executed with StarzInvestments, Ltd..  The shares were notregistered in reliance upon Section 4(2) of the Act in that they were notmade available for sale to the public and are restricted against resale untilthey are registered under the Act or sold under an exemption from registration.

 

(3)          Douglas A. Rogers received these shares ascompensation for assisting the Company in the preparation of press releases andthe dissemination of the information in such reports to securitiesbroker/dealers, and the providing of advice to the Company with respect to thedevelopment of a shareholder relations program.  The shares were not registered in reliance upon Section 4(2)of the Act in that they were not made available for sale to the public and arerestricted against resale until they are registered under the Act or sold underan exemption from registration.

 

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**Item 6. Management’sDiscussion and Analysis or Plan of Operation.**

 

OVERVIEW.

 

The following discussion should be read in conjunction with theFinancial Statements, including footnotes, contained herein. The discussion isqualified in its entirety by the foregoing. Historical results of operations and the percentage relationships amongany amounts in the Financial Statements, and any trends that may appear to beinferable therefrom, should not be taken as necessarily indicative of trends ofoperations or results of operations for any future periods.

 

Except for certain historical information contained herein, thefollowing discussion contains forward-looking statements that involve risks,assumptions and uncertainties which are difficult to predict.  All statements, other than statements ofhistorical fact, are statements that could be deemed forward-lookingstatements, including any projections of earnings, revenues, or other financialitems, any statement of plans, strategies, and objectives of management forfuture operations; any statements concerning proposed new services ordevelopments; any statements regarding future economic conditions orperformance; and any statements of belief and any statement of assumptionsunderlying any of the foregoing.  Wordssuch as “believe,” “may,” “could,” “expects,” “hopes,” “anticipates,” and“likely,” and variations of these words, or similar expressions, are intendedto identify such forward-looking statements.  The Company’s actual resultscould differ materially from those discussed here.  Factors that couldcause or contribute to such differences include, but are not limited to, thewar in Iraq, adverse changes in general economic conditions, including adverseconditions to the companies that are the Company’s core of shippers, fuelprices, driver costs, the ability to finance equipment, interest rates, theability to borrow working capital, and other factors.  The Company doesnot assume, and specifically disclaims, any obligation to update anyforward-looking statement contained in this annual report.

 

RESULTS OF OPERATIONS

 

Freight revenues for the twelve months ended December 31, 2003,decreased $521,437 (3.7%) to $13,641,559 from $14,162, 996 for the year ended2002.  Training school revenues for the twelve months endedDecember 31, 2003, also decreased going from $479,802 to $426,604, adecrease of $53,198 (11.1%) for the twelve months period endedDecember 31, 2002.  The decrease infreight revenues was basically because the Company had difficulty in keepingits entire fleet operating at any one time. This was generally due to having some equipment inoperable because ofaccidents or because of breakdowns resulting from extending the trade cycle,and because there were not always drivers available for all of the equipmentthat was operable.  Under normaloperating circumstances, the Company would have traded its older equipment andobtained new equipment.  However, whileoperating as a Debtor in Possession, it was not able to make suchchanges.  Training school revenue decreases were due primarily to areduction in average enrollment per facility which was primarily the result ofa lack of funding agencies to finance student enrollments.

 

Operating loss for the twelve months ended December 31, 2003, was($1,921,277), which was an increase in the loss of ($1,396,847) (266.36%) froma loss of ($524,430) for the same period in 2002.  The gross profit margindecreased from 12.9% in 2002 to 4.2% in 2003.  Primary factors for thegross margin decrease were an increase in fuel prices, an increase in fuelconsumption rates due to equipment age and prolonged cold weather, an increasein insurance premiums, loss of freight opportunities due to an insufficienttrailer pool and unmanned power units, and an increase in dead-head miles.  The increase in dead-head miles resultedfrom closing down the Columbus, Ohio terminal, where a significant portion ofthe Company freight was initiated, and servicing that freight base out of theMarietta, Ohio terminal**. ** Profitability was further adverselyaffected by increased garage expenses of $55,394, and impairment in asset lossof $443,582.  There was a decrease inthe general and administrative expenses from $2,093,268 in 2002 to $1,706,009in 2003, which helped to offset these other increased costs.

 

Other Income (Expense) showed an improvement in 2003 as it went downfrom a net expense of ($1,237,125) in 2002 to a net expense of ($542,574).  This was due to a reduction in interestexpense of

 

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$546,818 (49.6%) from $1,103,143 in 2002 to $556,325 in 2003.  This was due to the Company not having tomake payments for a period of time after filing its Chapter 11 petition, andthen having the amount that it paid reduced under the Chapter 11provisions.  Losses from the disposal ofassets for 2003 was only ($58,223) compared to losses of ($231,101) for2002.  This represented a reduction of$172,878 (74.8%).

 

The results of operations before tax provisions and reorganizationitems were that the Company incurred a net loss for the twelve months periodended December 31, 2003 of ($2,463,851) compared to a net loss of($1,761,555) for the same period in 2002, an increase of ($702,296) (39.9%)from the prior years loss.

 

There were also costs incurred during 2003 from operating under Chapter11 Reorganization that the Company did not have during 2002.  These expenses were for professional andbankruptcy fees and from the loss on the disposition of equipment after thefiling of the Chapter 11 Petition. These items combined to add $408,729 in additional expenses.

 

The total loss for the year 2003 was ($2,872,580) compared to a loss in2002 of ($1,761,155), an increased loss of ($1,111,425) (63.1%).  Much of this net loss is the result of theChapter 11 Reorganization costs, the impairment in asset loss, again resultingfrom the Reorganization filing, and the inability of the Company to generate anadequate gross profit.

 

CAPITAL AND LIQUIDITY

 

Management believes that by reorganizing it can get the Company’soperating expenses in line with operating revenues so that it will be able tomanage its cash flow and, hopefully, with the other changes being implemented,reverse its loss trend and get back to operating profitably.  However,until the Company completes arrangements in the Bankruptcy Court with itssecured lenders, there can be no assurances that it will be able to operateprofitably or be able to remain in business.

 

In the two months following filing Chapter 11, the Company did not haveto make payments on its operating equipment or the majority of its contractualdebt service.  As a result, the Company was able to utilize the cash flowthat normally would have been used to make those payments and pay the annuallicense plate fees, insurance and other expenses in order for it to be able tocontinue operating under judicial protection.

 

Management continues to adjust its corrective actions to bring profitsand cash flow positive.  Currently, there is a strong push to improvegross revenues and rates with additional Ohio Valley outbound customers, andreplacing discounted inbound brokered freight with direct freight business.

 

There is also a focus to keep the Company’s full fleet of equipmentoperable.  The Company recently agreedto turn in 38 power units to one of its creditors, so keeping the balance ofthe fleet operable is more critical.  It has been costly for the Company to maintain its equipment as it reachesthe mid to upper portion of its life cycle, and while it has gotten rid of theequipment that was most costly to maintain, it will experience increased costsas the retained equipment ages.  Also,the Company has been focusing its efforts to add owner/operators to provideincremental revenues and margins without the cash outlay and long-term debtobligations associated with adding company-owned equipment.

 

Key strategic actions required to put the Company in a profitableformula would include replacing its lost power units, which it still hopes toaccomplish by adding more owner/operators to its existing base of approximatelytwenty (20) contractors.

 

Since filing Chapter 11 in May 2003, the Company had been negotiatingwith its secured lenders payments on the use of the equipment and other assets. As of October 15, 2003, the Company had settled the adequate protectionpayments and terms with all secured equipment lenders, giving the Company afull complement of revenue generating equipment (tractors and trailers) at asignificantly reduced debt service compared to the full contractualpayments.  This allowed the Company to take advantage of a stronglyimproving freight demand, higher rates, and better equipment productivity, andnewly acquired customers developed in the late third quarter of 2003 andcontinuing on into the fourth quarter of the year.

 

9

----

 

Management started in the autumn of 2003 changing the Company’s salesmix to increase its revenue and reduce its empty miles simultaneously by limitingits freight volume with its top twenty customers, and one major customer inparticular.  This plan was also designed to improve equipment productivityand reduce driver turnover (through better driver pay) and as part of anaggressive and detailed recovery plan that management expects to show continuedand measurable improved financial performance.

 

Management continued in late 2003 to cut its administrative costs byclosing its Columbus terminal and centralizing its operations (dispatch) atCompany headquarters in Marietta, Ohio, resulting in reduced staff, decreasedlease costs, and better operational control.

 

Efforts to reduce the Company’s equipment maintenance costs to a normalcost curve were significantly increased.  The Company upgraded and addedto the maintenance crew with the goal of eliminating costly outside servicesand returning all equipment back into service, and transitioning back to a“preventive” maintenance profile (from an excessively costly “demand”maintenance condition).  While Managementbelieves that this improved the situation, it nevertheless was not able tosuccessfully continue to keep the equipment operating at a reasonablecost.  Management recently concluded toreturn the 38 least cost effective, from a maintenance standpoint, tractors tothe secured lender in the hope that the remaining fleet can more costeffectively be maintained.

 

Initially after filing for Chapter 11 Reorganization, the Companyretained its insurance coverage at existing premium rates, which met the riskrequirements necessary to operate under judicial protection.  OnOctober 1, 2003, the Company renewed its annual equipment insurance with asix-month extension of its liability coverage with the existing insurancecarrier, Clarendon National Insurance Company, and a twelve-month renewal ofits physical damage, cargo, and general liability through other major nationalinsurance carriers.  The premiums were increased a modest amount comparedto industry standards, increasing by 9 % for the current coverage year (2003 /2004) in contrast to the prior policy period.

 

The Company renewed its auto liability insurance for a period of twelvemonths, effective April 1, 2004 with a new insurance carrier, LincolnGeneral Insurance Company, replacing the defunct Clarendon National Insuranceprogram.  Premiums on the new policycoverage were slightly reduced compared to the prior year and the relatedpremium financing is being provided by Baytree Finance Company, pending court approvalon April 12, 2004.

 

In addition, during the mid part of 2003, the Company implemented anenhanced driver and owner/operator recruiting effort led by one of its seniormanagers.  It was designed to staff all trucks and reduce the turnover tobelow industry standards.  Likewise, the operations’ department wasreorganized to a central dispatch format supported by customer servicepersonnel to improve service performance levels back to above industry norm(98+ %) and push equipment/driver productivity to profitable levels.

 

In early May 2003, the Company entered into a new receivables-basedline of credit agreement with Systran Financial Services, a division of TextronFinancial Corporation, which significantly increased its cash flow throughhigher advance rates with lower financing costs, and expanded its availablecredit by $1.5 million to $2.5 million.  This credit facility continued after the filing of the Chapter 11petition with only a slight increase in the rate paid by the Company, and withthe Company retaining the additional credit capacity of $1.5 million.

 

In April 2003, the Company returned to the cost advantages ofoutsourcing its payroll and related tax processing.  This employee leasingplan continued after the Company filed for creditor protection under Chapter11.

 

Management continues to seek growth opportunities to expand the numberof power units and trailers it is operating in order to reach a revenue levelthat will generate sufficient margins to support its fixed costs and generate anet profit.  The Company was near completing an asset acquisition in lateApril 2003 that would have increased the number of power units byapproximately 65 (65 % increase in fleet size), but the problems with cash flowthat surfaced at that time caused that transaction to be put off at least temporarily

 

10

----

 

until the sellers saw how the Company performed in Chapter 11Reorganization.  While there are nocurrent discussions ongoing related to such an acquisition, the prospectivesellers have indicated that they were willing to look at the possibility againafter the Company gets out of Reorganization.

 

Management hopes to be able to emerge from the Chapter 11Reorganization in the 3rd quarter of 2004 with a stronger balancesheet, increased liquidity, and a scale of operations that will fostersustained earnings and growth.  The next step is for the Company todevelop and file a formal business plan (the Plan of Reorganization) and seekits approval with the creditors and the Bankruptcy Court.  At this time,the Company expects to submit its reorganization plan in the second quarter of2004.

 

In summary, operating losses accelerated during the first and secondquarters of 2003, largely due to the same industry pressures suffered since2000, and specifically increased by abnormally high equipment maintenance costsfrom an aging fleet in general, and particular to a group (38) of the Company’soldest power units, loss of the use of equipment out of action for repairs,unusually high receivable write-offs from major customers, and due to inclementweather slowing freight movements significantly during the 1stquarter of 2003.

 

In addition, losses were enlarged due to recording a big impairmentloss related to the loss of a customer from a prior acquisition and due toasset write downs resulting from expected market value losses in equipmentturned back to creditors in an effort to improve (reduce) the Company operatingcosts.

 

Due to the accumulated and accelerated operating losses and its effecton the Company’s liquidity, the Company failed to meet some of its debtobligations in the 2nd quarter of 2003, resulting in loan defaultsto be issued from a few lenders, and ultimately entering into Chapter 11bankruptcy protection on May 19, 2003. This situation was also aggravated by a significant cash outlay to oneparticular equipment lender required to release its claim on the Company’sreceivables to complete a transition to a much improved receivable financingfacility important to the Company’s reorganization plan.

 

Since entering Chapter 11 Reorganization, the Company has madeadjustments to increase its revenues and decrease costs by adding largenational customers and pulling-in its customer base to around the Company’sequipment/driver domicile in Marietta, Ohio. Higher freight rates and better equipment productivity are expected fromthis adjustment in the Company’s sales mix and geographic relocation.

 

In addition, the Company has shifted some of its senior management toimprove driver recruiting/retention and equipment maintenance to address driverturnover and equipment down-time and operating costs.

 

Recently, as stated above, the Company decided to down-size its fleetby voluntarily turning in a group (38) of its oldest tractors in a response toa lender default claim dispute, and in an effort to eliminate the relatedexcessive operating costs for such equipment, and to further reduce costs bymaking a commensurate reduction in its trailer pool, which decreased itstrailer lease expense.  This adjustmentin the Company’s fleet is expected to allow management to improve the Company’searnings by pairing-down to its best core customers, drivers, andequipment.  It also significantlyreduces the operating capital necessary to annually license and insure thefleet.

 

The Company is successfully adding owner/ operators to replace the lostpower units and avoid the cash outlays associated with purchasingequipment.  Also, to increase revenuesand margins, the Company is adding a flat bed operation through leasingowner/operators with their own trailers and assuming a customer base that hasbecome available near its home operations.

 

11

----

 

**Item 7. FinancialStatements.**

 

INDEPENDENT AUDITORS’ REPORT

 

Tothe Board of Directors and Stockholders

GaselTransportation Lines, Inc.

Marietta,Ohio

 

Wehave audited the accompanying consolidated balance sheets of GaselTransportation Lines, Inc., and its subsidiaries, as of December 31, 2003and the related statements of consolidated operations, stockholders’ equity(deficit) and cash flows for the year ended December 31, 2003.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audit.

 

Weconducted our audit in accordance with U.S. generally accepted auditingstandards.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Gasel TransportationLines, Inc., and its subsidiaries, as of December 31, 2003 and the resultsof their consolidated operations and their cash flows for the year endedDecember 31, 2003 in conformity with U.S. generally accepted accountingprinciples.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As described in Note 1, on May 19, 2003 the Company filed avoluntary petition for reorganization under Chapter 11 of the FederalBankruptcy Code and was authorized to continue managing and operating thebusiness as a debtor in possession subject to the control and supervision ofthe Bankruptcy Court. Those conditions raise substantial doubt about theCompany’s ability to continue as a going concern. The financial statements donot include any adjustments that might result from the outcome of thisuncertainty.

 

Goff, Backa, Alfera, and Company, LLC

 

 

Pittsburgh, Pennsylvania

March 10, 2004

 

12

----

 

To the Board of Directors and Stockholders

Gasel Transportation Lines, Inc.

Marietta, Ohio

 

INDEPENDENT AUDITOR’S REPORT

 

We have audited the accompanying consolidated balance sheet of GaselTransportation Lines, Inc., and its subsidiaries, as of December 31, 2002,and the related statements of consolidated operations, stockholders’ equity(deficit) and cash flows for the year then ended.  These financial statements are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these financial statements based on our audits.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of GaselTransportation Lines, Inc., and its subsidiaries, as of December 31, 2002,and the results of their operations and their cash flows for the year thenended in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company hassuffered recurring losses from operations and has a net capital deficiency,which raise substantial doubt about its ability to continue as a goingconcern.  Management’s plans regardingthose matters also are described in Note 1. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

Van Krevel & Company

 

 

Dublin, Ohio

February 28, 2003

 

13

----

 

TABLE OF CONTENTS

 
| CONSOLIDATED FINANCIAL STATEMENTS                                                                                   |   |
|---------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                |   |
| Independent Auditor’s Report                                                                                   |   |
|                                                                                                                |   |
| Consolidated Balance Sheet At December 31, 2003                                                                |   |
|                                                                                                                |   |
| Statements of Consolidated Operations for  the Years Ended December 31, 2003 and 2002                          |   |
|                                                                                                                |   |
| Statements of Consolidated Stockholders’  Equity (Deficit) for the Years Ended December 31, 2003 and 2002 |   |
|                                                                                                                |   |
| Statements of Consolidated Cash Flows for  the Years Ended December 31, 2003 and 2002                          |   |
|                                                                                                                |   |
| Notes to Consolidated Financial Statements                                                                          |   |

 

14

----

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 2003

 
| ASSETS                                                                                               |   |       |      |
|------------------------------------------------------------------------------------------------------|--------|------------|-----------|
|                                                                                                 |   |       |      |
| Current Assets                                                                                       |   |       |      |
| Cash and Cash Equivalents                                                                            |   | $          | 13,420    |   |
| Accounts Receivable-Trade, Net of Amounts  Sold With Recourse of $1,237,542 and Allowance of $50,000 |   | 438,242    |      |
| Inventory                                                                                            |   | 102,177    |      |
| Prepaid Expenses and Other Current Assets                                                            |   | 260,191    |      |
|                                                                                                 |   |       |      |
| Total Current Assets                                                                                 |   | 814,030    |      |
|                                                                                                 |   |       |      |
| Property and Equipment                                                                               |   |       |      |
| Land and Buildings                                                                                   |   | 770,054    |      |
| Tractors                                                                                             |   | 11,516,671 |      |
| Trailers                                                                                             |   | 2,944,977  |      |
| Shop Equipment                                                                                       |   | 408,962    |      |
| Office Equipment                                                                                     |   | 221,719    |      |
|                                                                                                 |   | 15,862,383 |      |
| Less Accumulated Depreciation                                                                        |   | 10,471,397 |      |
|                                                                                                 |   |       |      |
| Net Property and Equipment                                                                           |   | 5,390,986  |      |
|                                                                                                 |   |       |      |
| Other Assets                                                                                         |   |       |      |
| Other                                                                                                |   | 7,683      |      |
|                                                                                                 |   |       |      |
| Total Other Assets                                                                                   |   | 7,683      |      |
|                                                                                                 |   |       |      |
| TOTAL ASSETS                                                                                         |   | $          | 6,212,699 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

15

----

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

CONSOLIDATEDBALANCE SHEET

December 31, 2003

 
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT)                                                          |   |       |      |
|-------------------------------------------------------------------------------------------------------|--------|------------|-----------|
|                                                                                                  |   |       |      |
| Current Liabilities                                                                                   |   |       |      |
| Cash Overdraft                                                                                        |   | $          | 238,419   |   |
| Accounts Payable-Trade                                                                                |   | 293,367    |      |
| Accrued Contract Labor and Other Expenses                                                             |   | 148,895    |      |
|                                                                                                  |   |       |      |
| Total Current Liabilities Not Subject to  Compromise                                                  |   | 680,681    |      |
|                                                                                                  |   |       |      |
| Liabilities Subject to Compromise                                                                     |   | 8,675,004  |      |
|                                                                                                  |   |       |      |
| Total Liabilities                                                                                     |   | 9,355,685  |      |
|                                                                                                  |   |       |      |
| Redeemable Warrants                                                                                   |   | 50,000     |      |
|                                                                                                  |   |       |      |
| Stockholders’(Deficit)                                                                           |   |       |      |
| Common Stock, no par value, 10,000,000  shares authorized, 9,877,966 issued and 9,870,066 outstanding |   | 2,543,481  |      |
| Additional Paid in Capital                                                                            |   | 102,786    |      |
| Accumulated Deficit                                                                                   |   | (5,821,420 | )         |
| Less: Treasury Stock, at cost, 7,900 shares                                                           |   | (17,833    | )         |
|                                                                                                  |   |       |      |
| Total Stockholders’ (Deficit)                                                                    |   | (3,192,986 | )         |
|                                                                                                  |   |       |      |
| TOTAL LIABILITIES AND STOCKHOLDERS’  (DEFICIT)                                                   |   | $          | 6,212,699 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

16

----

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

Years Ended December 31, 2003 and 2002

 
|                                                                                                  |   | **2003**   |             | **2002**   |   |
|-------------------------------------------------------------------------------------------------------|--------|------------|------------------|------------|--------|
| Revenues                                                                                              |   |       |             |       |   |
| Freight Income                                                                                        |   | $          | 13,641,559       |       | $      | 14,162,996 |   |
| Training School Revenue                                                                               |   | 426,604    |             | 479,802    |   |
|                                                                                                  |   | 14,068,163 |             | 14,642,798 |   |
| Cost of Revenue                                                                                       |   | 13,473,500 |             | 12,754,005 |   |
|                                                                                                  |   |       |             |       |   |
| Gross Profit (Loss)                                                                                   |   | 594,663    |             | 1,888,793  |   |
|                                                                                                  |   |       |             |       |   |
| Operating Expenses                                                                                    |   |       |             |       |   |
| Garage Expenses                                                                                       |   | 375,349    |             | 319,955    |   |
| General and Administrative Expenses                                                                   |   | 1,706,009  |             | 2,093,268  |   |
| Impairment Loss                                                                                       |   | 434,582    |             | —     |   |
|                                                                                                  |   | 2,515,940  |             | 2,413,223  |   |
|                                                                                                  |   |       |             |       |   |
| Operating (Deficit)                                                                                   |   | (1,921,277 | )                | (524,430   | )      |
|                                                                                                  |   |       |             |       |   |
| Other Income (Expense)                                                                                |   |       |             |       |   |
| Other Income                                                                                          |   | 63,211     |             | 110,177    |   |
| Interest Income                                                                                       |   | 8,823      |             | 9,641      |   |
| Interest Expense, Net (Contractual interest  of $1,021,522 for the year ended December 31, 2003) |   | (556,325   | )                | (1,103,143 | )      |
| (Loss) on Disposition of Assets-  Pre-petition                                                        |   | (58,283    | )                | (253,800   | )      |
|                                                                                                  |   | (542,574   | )                | (1,237,125 | )      |
|                                                                                                  |   |       |             |       |   |
| (Loss) From Operations Before Reorganization  Items and Tax Provision                                 |   | (2,463,851 | )                | (1,761,555 | )      |
|                                                                                                  |   |       |             |       |   |
| Reorganization Items                                                                                  |   |       |             |       |   |
| Professional and Bankruptcy Fees                                                                      |   | (81,830    | )                | —     |   |
| Loss on Disposition of Assets-  Post-petition                                                         |   | (326,899   | )                | —     |   |
|                                                                                                  |   | (408,729   | )                | —     |   |
| Loss From Operations Before Tax Provision                                                             |   | (2,872,580 | )                | (1,761,555 | )      |
|                                                                                                  |   |       |             |       |   |
| Provision for Income Taxes                                                                            |   | —     |             | —     |   |
| Net (Loss)                                                                                            |   | $          | (2,872,580  | )          | $      | (1,761,555 | ) |

 

See accompanying notes to consolidatedfinancial statements.

 

17

----

 
|                                        |   | **2003**  |       | **2002**  |   |
|---------------------------------------------|--------|-----------|------------|-----------|--------|
|                                        |   |      |       |      |   |
| Net (Loss)                                  |   | $         | (2,872,580 | )         | $      | (1,761,555 | ) |
|                                        |   |      |       |      |   |
| Basic (Loss) Per Share                      |   | $         | (.310      | )         | $      | (.685 | ) |
| Diluted (Loss) Per Share                    |   | $         | (.310      | )         | $      | (.685 | ) |
|                                        |   |      |       |      |   |
| Weighted Average Common Shares Outstanding: |   |      |       |      |   |
|                                        |   |      |       |      |   |
| Basic                                       |   | 9,272,749 |       | 2,569,976 |   |
| Diluted                                     |   | 9,272,749 |       | 2,569,976 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

18

----

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

STATEMENTS OF CONSOLIDATED STOCKHOLDERS’(DEFICIT)

Years Ended December 31, 2003 and 2002

 
|                                  |   | **Gross  Common Stock** |   | **Additional  Paid in  Capital** |       | **Accumulated  (Deficit)** |   | **Treasury  Stock** |   | **Notes  Receivable  Stock  Issuance** |             |
|---------------------------------------|--------|-------------------------|--------|----------------------------------|------------|----------------------------|--------|---------------------|--------|----------------------------------------|------------------|
|                                  |   | **Shares**              |   | **Amount**                       | ** ** |                       |   |                |   |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Balances, December 31, 2001      |   | 2,412,966          |   | $                                | 1,539,640  |                       | $      | 223,229             |   | $                                      | (1,187,285  | ) | $ | (17,833 | ) | $ | (46,893 | ) |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Net (Loss)                            |   |                    |   |                             |       |                       |   | (1,761,555          | )      |                                   |             |   |   |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Cost of Increase in Authorized Shares |   |                    |   |                             |       | (17,550                    | )      |                |   |                                   |             |   |   |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Issuance of Common Stock Shares       |   | 2,679,483               |   | 300,334                          |       | (28,000                    | )      |                |   |                                   |             |   |   |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Write-off Receivable Stock Issuance   |   |                    |   |                             |       | (46,893                    | )      |                |   |                                   |             | 46,893 |   |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Balances, December 31, 2002      |   | 5,092,449               |   | 1,839,974                        |       | 130,786                    |   | (2,948,840          | )      | (17,833                                | )                | — |   |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Net (Loss)                            |   |                    |   |                             |       |                       |   | (2,872,580          | )      |                                   |             |   |   |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Issuance of Common Stock Shares       |   | 4,785,517               |   | 703,507                          |       | (28,000                    | )      |                |   |                                   |             | — |   |
|                                  |   |                    |   |                             |       |                       |   |                |   |                                   |             |   |   |
| Balances, December 31, 2003      |   | 9,877,966          |   | $                                | 2,543,481  |                       | $      | 102,786             |   | $                                      | (5,821,420  | ) | $ | (17,833 | ) | $ | — |   |

 

See accompanying notes to consolidatedfinancial statements.

 

19

----

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

Years Ended December 31, 2003 and 2002

 
|                                                                         |   | **2003**   |       | **2002**   |   |
|------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| Cash Flows From Operating Activities:                                        |   |       |       |       |   |
| Net (Loss)                                                                   |   | $          | (2,872,580 | )          | $      | (1,761,555 | ) |
| Adjustments to Reconcile Net Loss to Cash  Provided by Operating Activities: |   |       |       |       |   |
| Reorganization Items                                                         |   | 81,830     |       | —     |   |
| Depreciation and Amortization                                                |   | 1,869,491  |       | 2,199,172  |   |
| (Loss)on Disposition of Assets-Pre-petition                                  |   | 58,284     |       | 253,800    |   |
| (Loss)on Disposition of  Assets-Post-petition                                |   | 326,898    |       | —     |   |
| Impairment Loss                                                              |   | 434,583    |       | —     |   |
| Common Stock Issued as Compensation                                          |   |       |       | 12,950     |   |
| Bad Debt                                                                     |   | 61,199     |       | 259,160    |   |
| (Increase) Decrease in:                                                      |   |       |       |       |   |
| Accounts Receivable-Trade                                                    |   | 1,446,824  |       | (131,704   | )      |
| Inventory                                                                    |   | 64,225     |       | 36,471     |   |
| Prepaid Expenses and Other Assets                                            |   | 211,911    |       | (25,307    | )      |
| Increase (Decrease) in:                                                      |   |       |       |       |   |
| Accounts Payable and Accrued Expenses                                        |   | 348,986    |       | 656,518    |   |
| Net Cash Provided by Operating Activities  Before Reorganization Items       |   | 2,031,651  |       | 1,499,505  |   |
|                                                                         |   |       |       |       |   |
| Operating Cash Flows Used in Reorganization Items:                           |   |       |       |       |   |
| Professional Fees Paid in Connection with  Chapter 11 Proceedings            |   | (73,830    | )          | —     |   |
|                                                                         |   |       |       |       |   |
| Net Cash Used in Reorganization Items                                        |   | (73,830    | )          | —     |   |
|                                                                         |   |       |       |       |   |
| Net Cash Provided By Operating Activities                                    |   | 1,957,821  |       | 1,499,505  |   |
|                                                                         |   |       |       |       |   |
| Cash Flows From Investing Activities                                         |   |       |       |       |   |
| Purchases of Property and Equipment                                          |   | (89,971    | )          | (400,074   | )      |
| Proceeds from Sales of Assets                                                |   | 40,387     |       | 276,429    |   |
| Net Cash Provided (Used) by Investing  Activities                            |   | (49,584    | )          | (123,645   | )      |
|                                                                         |   |       |       |       |   |
| Cash Flows From Financing Activities                                         |   |       |       |       |   |
| Line of Credit (Net)                                                         |   | (1,692,873 | )          | 219,895    |   |
| Repayment of Note and Mortgage Receivables                                   |   | 2,783      |       | 2,649      |   |
| Proceeds from Borrowings-Related Parties                                     |   | —     |       | —     |   |
| Payment on Notes Payable-Related Parties                                     |   | (29,427    | )          | (43,146    | )      |
| Proceeds from Long Term Borrowings                                           |   | —     |       | 89,763     |   |
| Proceeds from Capital Lease Obligations                                      |   | —     |       | 50,970     |   |
| Principal Payments on Long Term Borrowing                                    |   | (795,180   | )          | (1,219,107 | )      |
| Principal Payments Under Capital Lease  Agreements                           |   | (199,521   | )          | (321,841   | )      |
| Proceeds from Issuance of Common Stock                                       |   | 675,507    |       | 161,418    |   |
| Decrease in Additional Paid in Capital                                       |   | —     |       | (17,550    | )      |
|                                                                         |   |       |       |       |   |
| Net Cash Used by Financing Activities                                        |   | (2,038,711 | )          | (1,076,949 | )      |
|                                                                         |   |       |       |       |   |
| Net Increase (Decrease) in Cash                                              |   | (130,474   | )          | 298,911    |   |
| Net Cash & Cash Equivalents  (Overdraft)-Beginning of Year               |   | (94,525    | )          | (393,436   | )      |
|                                                                         |   |       |       |       |   |
| Net Cash & Cash Equivalents  (Overdraft)-End of Year                     |   | $          | (224,999   | )          | $      | (94,525 | ) |

 

The net cash and cash equivalents (overdraft) are presented in thebalance sheet as follows:

 
|                                        |   | **2003** |     | **2002** | ** ** |
|---------------------------------------------|--------|----------|----------|----------|------------|
| Cash and Cash Equivalents                   |   | $        | 13,420   |     | $          | 44,205 |   |
| Cash Overdraft                              |   | (238,419 | )        | (138,730 | )          |
|                                        |   |     |     |     |       |
| Net Cash & Cash Equivalents (Overdraft) |   | $        | (224,999 | )        | $          | (94,525 | ) |

 

See accompanying notes to consolidatedfinancial statements.

 

20

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|                                                                                    |   | **2003** |      | **2002** |   |
|-----------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
| Supplemental Disclosures:                                                               |   |     |      |     |   |
|                                                                                    |   |     |      |     |   |
| Interest Paid                                                                           |   | $        | 635,444   |     | $      | 984,030 |   |
|                                                                                    |   |     |      |     |   |
| Non-Cash Investing and Financing  Activities:                                           |   |     |      |     |   |
|                                                                                    |   |     |      |     |   |
| Increase in Mortgage Receivable Upon Sale  of Land and Building                         |   | $        | —    |     | $      | 179,142 |   |
|                                                                                    |   |     |      |     |   |
| Payoff of Mortgage Receivable by Mortgagee  and Payoff of Related Mortgage Payable      |   | $        | 173,711   |     | $      | — |   |
|                                                                                    |   |     |      |     |   |
| Purchase of Property and Equipment with  Direct Financing                               |   | $        | —    |     | $      | 248,930 |   |
|                                                                                    |   |     |      |     |   |
| Notes Payable and Capital Lease Obligation  Reductions Upon Disposition Of Fixed Assets |   | $        | 1,257,993 |     | $      | 271,378 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

21

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GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003

 

**NOTE 1 - PROCEEDINGSUNDER CHAPTER 11 OF THE BANKRUPTCY CODE**

 

On May 19, 2003 (“Petition Date”), Gasel Transportation Lines, Inc.,filed a voluntary petition for reorganization under Chapter 11 of the Federalbankruptcy laws (“Bankruptcy Code”) in the United States Bankruptcy Court forthe Southern District of Ohio (“Bankruptcy Court”).  Since 2000, the Company has experienced a decline inprofitability and liquidity as a result of a general economic downturn,historically high fuel prices, and sharp declines in overall freight shipmenttonnage.  The accumulated losses havestrained the Company’s ability to meet some of its long term equipment loanobligations. Although the Company was continuing to work with the majority ofits lenders to rectify the situation, a few equipment lenders recently issued loandefaults to the Company.  The defaults,plus a significant lump sum payment demanded by one particular lender,precipitated the need to seek protection under Chapter 11 in order to retainthe use of revenue generating equipment and to reorganize the Company.

 

Included in the Consolidated Financial Statements are subsidiaries(Gasel Driver Training Schools, Inc. and GTL Logistics, Inc.) that have notcommenced Chapter 11 cases or other similar proceedings, and are notdebtors.  The assets and liabilities ofthe non-filing subsidiaries are not considered material to the ConsolidatedFinancial Statements.

 

As a Debtor-in-Possession, Gasel is authorized to continue to operateas an ongoing business but may not engage in transactions outside the ordinarycourse of business without the approval of the Court, after notice and anopportunity for a hearing.  Under theBankruptcy Code, actions to collect pre-petition indebtedness, as well as mostother pending litigation, are stayed, and other contractual obligations againstthe Company may not be enforced.  Inaddition, under the Bankruptcy Code, the Company may assume or reject executorycontracts, including lease obligations. Parties affected by these rejections may file claims with the Court, inaccordance with the reorganization process. Absent an order of the Court, substantially all pre-petition liabilitiesare subject to settlement under a plan of reorganization to be voted upon bycreditors and equity holders and approved by the Court.

 

22

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Following the filing, the Company obtained, and received Court approvalof the Systran Financial Services Corporation (“Systran”, a subsidiary ofTextron Financial Corporation) receivable-based post-petition factoring agreementincreasing the financing of accounts receivable by $1.5 million to $3.5 millionand improving the terms and costs compared to the replaced receivable financingarrangement and approval of an advance from Systran and Company related partiesin the amount of $147,000 to fund the Company’s annual license fees due in May,2003.  Additionally, as ofOctober 15, 2003, the Company settled the adequate protection payments andterms with all equipment lenders, giving Gasel a full complement of revenuegenerating equipment (tractors and trailers).

 

In a more recent development, on or about April 1, 2004, theCompany decided to voluntarily turn in a group (38) of its oldest power unitsto the related lender, CitiCapital Commercial Corporation, in lieu ofchallenging an adequate protection payment default dispute, and in the interestof avoiding an upcoming scheduled and substantial increase in the monthlyamount of adequate protection payments.

 

The decision to downsize the tractor fleet gives the Company a number ofsignificant and immediate economic advantages including: elimination ofexcessive equipment repair costs associated with the group of high mileage,worn tractors, a commensurate reduction of the Company’s trailer fleet (alsothe oldest units) and its related repair/tire and lease costs, adjustment ofthe driver pool selectively to the most productive operators, a change in thesales mix to the most profitable shippers and freight (increasing revenues,equipment productivity, and driver satisfaction), and a substantial decrease inthe cash outlays necessary to annually insure and license the tractors andtrailers, due in April 2004.

 

Upon completion of the collateral return, the related secured debt ofapproximately $ 1.5 million will become an unsecured obligation under Chapter11 proceedings.

 

Adequate protection payments are designed to fairly compensate thelender for any loss of value in its collateral for its continued use and to fitthe Company’s cash flow projections until the plan of reorganization is filedand accepted.

 

The Company has retained its insurance coverage at existing premiumrates, which meet the insurance requirements necessary to operate under theChapter 11 proceedings.  As ofOctober 1, 2003, the Company renewed its annual equipment insurance with asix-month extension of its liability coverage through the existing insurancecarrier, Clarendon National Insurance Company, and a twelve-month renewal ofits physical damage, cargo and general liability through other major nationalinsurance companies.

 

The premiums renewed in October 2003 were increased a modestamount compared by industry standards, increasing by 9% to approximately$682,000 for the current coverage year (2003/2004) compared to the last policyyear.  The liability premium is due infour equal payments of $65,000, beginning in October, 2003.  The other premiums were financed with a 40%downpayment and seven installments of approximately $14,000, beginning inNovember, 2003.

 

As Clarendon National Insurance Company discontinued its liabilityprogram nation-wide, Gasel secured a twelve-month renewal with Lincoln GeneralInsurance Company effective April 1, 2004 at a lower premium and favorablefinancing terms.

 

Upon emergence from bankruptcy, the amounts reported in subsequentfinancial statements may materially change due to the restructuring of theCompany’s assets and liabilities as a result of the Plan of Reorganization andthe application of the provisions of Statement of Position 90-7, “FinancialReporting by Entities in Reorganization under the Bankruptcy Code,” (SOP 90-7),with respect to reporting upon emergence from Chapter 11 (“Fresh-Start”accounting).  Changes in accountingprinciples required under generally accepted accounting principles within 12months of emerging from bankruptcy are required to be adopted at the date ofemergence.  Additionally, the Companymay choose to make changes in accounting practices and policies at thattime.  For all of these reasons,financial statements for periods subsequent to emergence from Chapter 11 maynot be comparable with those of prior periods.

 

23

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The accompanying Consolidated Financial Statements have been preparedon a going concern basis, which assumes continuity of operations andrealization of assets and satisfaction of liabilities in the ordinary course ofbusiness, and in accordance with SOP-7. Accordingly, all pre-petition liabilities subject to compromise havebeen segregated in the Consolidated Balance Sheet and classified as LiabilitiesSubject to Compromise, at the estimated amount of allowable claims.  Liabilities not subject to compromise areseparately classified as current and non-current.  Revenues, expenses, realized gains and losses, and provisions forlosses resulting from the reorganization are reported separately asReorganization Items.  Cash used forreorganization items is disclosed separately in the Consolidated Statements ofCash Flows.

 

The ability of the Company to continue as a going concern is predicatedupon numerous issues, including its ability to achieve the following:

 

• havingthe Plan of Reorganization confirmed by the Court in a timely manner;

 

• beingable to successfully implement its business plans;

 

• beingable to obtain additional equity funding and to increase its revenue andequipment productivity, while containing costs.

 

In a recent “Status Hearing” held on April 1, 2004, the Companypresented a summary of its progress to the Court and attendant lenders.  The status report indicated that the Companyhad made consistent and measured progress in turning its earnings aroundcomparing the pre-petition operating losses to post-petition earnings, whichhave recently turned positive, as shown in the Company’s 2004 interim financialstatements.  The report was wellreceived and a commitment was made by the Company to submit a formal plan ofreorganization to the Court and lenders by May 15, 2004.

 

**NOTE 2 - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

General

 

This summary of significant accounting policies of Gasel TransportationLines, Inc., and its subsidiaries, Gasel Driver Training Schools, Inc., and GTLLogistics, Inc., is presented to assist in understanding the Company’sfinancial statements. The financial statements and notes are representations ofthe Company’s management who is responsible for their integrity andobjectivity.  These accounting policiesconform to generally accepted accounting principles and have been consistentlyapplied in the preparation of the financial statements.

 

24

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Nature of Operations

 

The Company is engaged in the interstate trucking industry.  Gasel holds Federal authority as a motorfreight common carrier, contract carrier, and freight broker.  Its authority includes the continentalUnited States and Canada.  Principaloffices of the Company are located in Marietta, Ohio.  In addition, the Company has motor terminal and maintenancefacilities in Marietta, Ohio, and a terminal in Columbus, Ohio.  One of its subsidiaries is a state-licensedClass A truck driver training school.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts andoperations of the Company and its wholly owned subsidiaries.  All significant inter-company accounts andtransactions have been eliminated.

 

Bankruptcy Accounting

 

As discussed in Note 1, for financial reporting purposes, theconsolidated financial statements have been prepared on a going concernbasis.  In addition, the Debtor hasapplied the provisions of the American Institute of Certified PublicAccountants Statement of Position 90-7, “Financial Reporting by Entities inReorganization under the Bankruptcy Code” (“SOP 90-7”).  Accordingly, all pre-petition liabilitiessubject to compromise have been segregated in the Balance Sheet and classifiedas Liabilities Subject to Compromise, at the estimated amount of allowableclaims.  Liabilities not subject tosettlement are classified as current and non-current.  Revenues, expenses, realized gains and losses, and provisions forlosses resulting from the reorganization are reported separately asReorganization Items.  Cash used forreorganization items is disclosed separately in the Statements of ConsolidatedCash Flows.

 

The Company discontinued accruing interest on their pre-petition debtobligations as of May 19, 2003.  Theultimate adequacy of security for any collateralized pre-petition debtobligations cannot be determined until a plan of reorganization is confirmed.

 

25

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Cash and Cash Equivalents

 

For purposes of the statement of cash flows, the Company considers allhighly liquid debt instruments purchased with a maturity of three months orless to be cash equivalents.

 

Revenue Recognition

 

The Company recognizes revenue and direct shipment costs upon shipmentof the related freight.  Direct shipmentcosts generally include the driver costs. These costs are recorded as an expense and as accrued payroll orcontract labor upon shipment of the related freight.  Driver training school revenues and rental income are recognizedwhen earned.

 

Accounts Receivable-Trade

 

Trade receivables are carried at original invoice amount less anestimate made for doubtful receivables based on a review of all outstanding amountson a monthly basis.  Managementdetermines the allowance for doubtful accounts by regularly evaluatingindividual customer receivables and considering the customer’s financialcondition, credit history and current economic conditions.  Trade receivables are written off whendeemed uncollectible.  Recoveries oftrade receivables previously written off are recorded when received.  The Company does not charge interest on tradereceivables. (See Note 4).

 

Credit Risk

 

The Company maintains cash in demand deposit accounts with Federallyinsured banks.  At times, the balancesin the accounts may be in excess of Federally insured limits.

 

Financial instruments that potentially subject the Company toconcentrations of credit risk consist principally of trade receivables.  Credit risk is generally diversified due tothe large number of entities comprising the Company’s customer base and theirdispersion across many different industries and geographic regions.

 

26

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Fair Value of Financial Instruments

 

The Company’s financial instruments include cash, cash equivalents, andlong term debt.  The carrying amounts ofthese financial instruments, excluding long term debt, have been estimated bythe Company to approximate fair value. Fair market value for long term debtclassified in liabilities subject to compromise cannot be reasonably estimatedat December 31, 2003

 

Inventory

 

Inventories consist primarily of maintenance supplies and fuel and arestated at the lower of cost (first-in, first-out) or market value.

 

Property and Equipment

 

Property and equipment are recorded at cost.  For financial reporting purposes, the cost of such property isdepreciated principally by the straight-line method over the estimated usefullives of 3-10 years for tractors and trailers, 40 years for buildings and 3-10years for shop and office equipment. Amortization of equipment purchased under capitalized lease obligationsis included in depreciation expense. For tax reporting purposes, accelerated depreciation or applicable costrecovery methods are used.  Gains andlosses are recognized in the year of disposal. Tires purchased with tractors and trailers are capitalized as a part ofthe cost of such equipment, with replacement tires being inventoried andexpensed when placed in service.

 

The Company reviews long-lived assets to assess recoverability usingundiscounted cash flows.  Whennecessary, charges for impairments of long-lived assets are recorded for theamount by which the present value of future cash flows is less than thecarrying value of these assets.

 

Impairment of property and equipment was $81,145 and $0 for the yearsended December 31, 2003 and 2002, respectively.

 

27

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Goodwill

 

During 2000, the Company purchased an existing freight transport andfreight brokerage business in the Columbus, Ohio area.  Goodwill represents the excess of thepurchase price over the fair market value of the net assets acquired at thedate of acquisition.

 

Prior to January 1, 2002, the Company’s effective date forimplementation of SFAS No. 142, *Goodwill and Other Intangible Assets*,goodwill was amortized using the straight line method over a forty year period.

 

Under SFAS No. 142, *Goodwill and Other Intangible Assets*,goodwill is no longer amortized. Rather, goodwill is tested at least annually for impairment.  Impairment exists when the carrying amountof goodwill exceeds its implied fair value. If the carrying amount exceeds the implied fair value, an impairmentloss is recognized.  Subsequent reversalof previously recognized goodwill impairment loss is prohibited.

 

At June 30, 2003, the Company recorded an impairment of goodwillin the amount of $353,438 due to the effect of increased operating losses onthe Company’s intangible valuation model and the lack of retention of theacquired customer base, including a major customer.

 

Advertising

 

All advertising costs are expensed as incurred.  Advertising expense was $50,879 and $44,531for the years ended December 31, 2003 and 2002, respectively.

 

Stock Options

 

The Company has elected to account for the stock option plan underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB 25) and related Interpretations in accounting.  The alternative fair value accountingprovided under FASB Statement No. 123, “Accounting for Stock-BasedCompensation,” (SFAS No. 123) requires use of option valuation models that werenot developed for use in valuing employee stock options.  Under APB 25, when the exercise price of theCompany’s stock options equals the market price of the underlying stock on thedate of grant, no compensation expense is recognized.

 

28

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Use of Estimates in the Financial Statements

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect certain reported amounts and disclosures.  Accordingly, actual results, particularlywith respect to matters impacted by the Chapter 11 proceedings, could differfrom those estimates.

 

Reorganization Items

 

Included in Reorganization Items are professional fees and otherexpenses directly related to Bankruptcy Proceedings.

 

Reclassifications

 

Certain reclassifications of prior year amounts have been made toconform to the current year presentation.

 

Income Taxes

 

Deferred income taxes are reported using the liability method.  Deferred tax assets are recognized for deductibletemporary differences and deferred tax liabilities are recognized for taxabletemporary differences.  Temporarydifferences are the changes between the reported amounts of assets andliabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance, when in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.

 

29

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**NOTE 3 - LIABILITIESSUBJECT TO COMPROMISE**

 

Pursuant to Section 362 of the Bankruptcy Code, the commencementof the Chapter 11 Case imposed an automatic stay, applicable generally tocreditors and other parties of interest, of: (1) the commencement orcontinuation of a judicial, administrative or other action or proceedingagainst the Debtor that was or could have been commenced prior to commencementof the Chapter 11 Case or to recover for a claim that arose prior tocommencement of the Chapter 11 Case; (2) the enforcement against the Debtor orits property of any judgments obtained prior to commencement of the Chapter 11Case; (3) the taking of any action to obtain possession of property of theDebtor or to exercise control over property of the Debtor; (4) the creation,perfection or enforcement of any lien against the property of the Debtor’sbankruptcy estate; (5) any act to create, perfect or enforce against property ofthe Debtor any lien that secures a claim that arose prior to the commencementof the Chapter 11 Case; (6) the taking of any action to collection, assess orrecover claims against the Debtor that arose before commencement of the Chapter11 Case; (7) the offset of any debt owing to the Debtor that arose prior tocommencement of the Chapter 11 Case against any claim against the Debtor; or(8) the commencement or continuation of a proceeding before the United StatesTax Court concerning the Debtor.  Anyentity may apply to the Bankruptcy Court, upon an appropriate showing of cause,for relief from the automatic stay to exercise the foregoing remedies.  As of October 14, 2003, all equipmentlenders have been relieved of the automatic stay and “adequate protectionpayments” have been negotiated between the Debtor and each lender and approvedby the Court for the continued use of the Company’s revenue generatingequipment (tractors and trailers) at significantly reduced monthly paymentscompared to the full contractual debt service. Enforcement of judgments entered on these claims, if any, is expresslyprohibited without further Bankruptcy Court approval.

 

Under Section 365 of the Bankruptcy Code, the Debtor may rejectexecutory contracts, including unexpired leases.  Except with respect to certain lessors who have, from time totime, sought to cause the Debtor to move to assume or reject their leases, theDebtor has through the date of confirmation of a plan of reorganization todetermine whether to assume or reject a given lease.

 

The Company has made certain adequate protection payments on itssecured debt since filing for Reorganization on May 19, 2003.  In addition, monthly payments due on anoperating lease with an officer of the Company for 20 trailers financed by anunrelated lending institution have been made since entering Chapter 11protection (see Note 16).

 

30

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In October of 2003, the Company exercised its right to terminate athree year property lease with Viking Properties for its Columbus officefacility and equipment parking lot, as a step towards consolidating itsoperations and reducing operating costs. In addition, the Company entered into a new 112 month property leaseagreement for an equipment “drop lot” at a cost of $1,500 per month in order tomaintain a presence in the Columbus, Ohio area and properly service theCompany’s growing Central Ohio customer base.

 

Petition Date liabilities that are expected to be settled as part of aplan of reorganization are separately classified in the consolidated balancesheet and include the following (all or a portion of which may be disputed bythe Debtor):

 
|                                 |   | **December 31,  2003** |      |
|--------------------------------------|--------|-----------------------------|-----------|
| Demand Notes Payable                 |   | $                           | 180,866   |   |
| Accounts Payable-Trade               |   | 874,995                     |      |
| Accrued Interest                     |   | 214,428                     |      |
| Accrued Brokerage and Contract Labor |   | 169,296                     |      |
| Accrued Payroll Taxes                |   | 315,740                     |      |
| Mortgages Payable                    |   | 868,362                     |      |
| Notes Payable                        |   | 6,009,664                   |      |
| Capital Lease Obligations            |   | 41,653                      |      |
|                                 |   |                        |      |
|                                 |   | $                           | 8,675,004 |   |

 

31

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**NOTE 4 - FACTORINGAGREEMENT**

 

On April 10, 2003, the Company entered into a one year factoringagreement with Systran Financial Services Corporation (Systran) whereby theCompany may sell its trade receivables, with recourse.  The agreement includes the  Company presenting, on a monthly basis, aminimum anticipated volume of bills for financing through Systran in the amountof $1,000,000. In addition, the Company may receive an advance rate of 90% ofeligible receivables financed with a 10% deposit withheld and subsequently paidto the Company as receivables are collected. The credit limit under the factoring agreement is $3,500,000.  The agreement also includes a rate ofinterest equal to 2% over prime and has replaced a line of credit arrangementwith CitiCapital (see Note 7).

 

On May 1, 2003, proceeds of $1,300,000 were used to repay the existingline of credit with CitiCapital Business Credit, in the amount of $1,200,000and $100,000 was disbursed to one of the Company’s lenders having certaincollateral rights to the Company’s trade receivables.  In May, 2003, the Bankruptcy Court approved this agreement as apost-petition obligation.

 

**NOTE 5 - MORTGAGERECEIVABLE**

 

The Company sold a facility located in Dade City, Florida, inJune of 2002, to an unrelated party. A portion of the sales price was received in a promissory note at theproperty sale closing.  The Companyretained a mortgage payable against this property.  By June 30, 2003, the balances due on the mortgagereceivable and the related mortgage payable had been paid in full.

 

**NOTE 6 - LONG TERMDEBT**

 

Long-term debt, substantiallyall pre-petition (see Note 3), consists of the following:

 
|                               |   | **December 31,  2003** |      |
|------------------------------------|--------|-----------------------------|-----------|
| Mortgages Payable                  |   | $                           | 868,362   |   |
| Notes Payable                      |   | 6,009,664                   |      |
| Capital Lease Obligations          |   | 41,653                      |      |
|                               |   | $                           | 6,919,679 |   |
| Less Amounts Subject to Compromise |   | (6,919,679                  | )         |
|                               |   |                        |      |
| Long Term Debt                     |   | $                           | —    |   |

 

32

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Notes payable and capitalized lease obligations are collateralized byproperty and equipment having a net book value of $4,565,011 atDecember 31, 2003. The mortgages payable are collateralized by land andbuilding, with a net book value of $667,869 at December 31, 2003, as wellas a first security interest in all shop and office equipment.  One of the mortgages is personallyguaranteed by an officer and his wife. Certain other notes are personally guaranteed by this officer. (See Note16). Interest rates range from 3.90%****to 15.95% during 2003 for the notes. Ratesfor the mortgages ranged from 8.25% to 9.0% for 2003.

 

Annual maturities under original long-term debt agreements, excludingcapital lease obligations, for the five years ending after December 31,2003, are as follows:

 
| 2004                |   | $         | 4,645,657 |   |
|---------------------|--------|-----------|-----------|--------|
| 2005                |   | 1,673,813 |      |
| 2006                |   | 196,408   |      |
| 2007                |   | 30,240    |      |
| 2008 and thereafter |   | 331,908   |      |
|                |   | $         | 6,878,026 |   |

 

At December 31, 2003, the Company had negotiated adequateprotection payments until such time as the plan of reorganization is approvedby the Court.  Adequate protectionpayments made were $226,663 for 2003. Monthly adequate protection payments of approximately $85,065 willcontinue until the plan of reorganization is approved.  These payments may be subject to change as aresult of bankruptcy proceedings under Chapter 11 of the Bankruptcy Code.

 

Included in the foregoing amounts are significant pre-petitionobligations. Under the Bankruptcy Code, actions to collect pre-petitionindebtedness, as well as most other pending litigation, are stayed and othercontractual obligations against the Company may not be enforced. Therefore, thecommitments shown above may not reflect actual cash outlays in the futureperiod.

 

33

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**NOTE 7 - NOTESPAYABLE**

 

Prior to September 11, 2002, the Company had a line of creditagreement with CitiCapital Business Credit, expiring in May, 2003.  The agreement allowed the Company to borrowup to $2,000,000, subject to borrowing base restrictions.  Interest was due monthly at 1% overprime.  The outstanding balance wassecured by accounts receivable.

 

During 2002, the Company received advances in excess of the amountavailable under the borrowing base. CitiCapital notified the Company of its default under the line of creditagreement and indicated its right to terminate the relationship.  On September 11, 2002, the Companyentered into a Forbearance Agreement with CitiCapital, which established termsfor the issuance of a new line of credit agreement.  The terms included the assignment of accounts receivable andestablishment of a collection agreement.

 

Under the collection agreement, CitiCapital collected and processed theassigned accounts receivable for a fee of .7% of invoiced amounts.  The funds collected were used to makepayments on the CitiCapital over advance. The Company received a weekly allowance for budgeted and necessary itemsas approved by CitiCapital and described in the Forbearance Agreement.

 

This line of credit was canceled May 1, 2003 (see Note 4).

 

At December 31, 2003, the Company had a demand note (secured bystock of Gasel Driver Training School, Inc.) payable to a stockholder, in theamount of $53,631. (See Note 16). In addition, at December 31, 2003, notespayable include an unsecured note payable to a bank in the amount of $82,236,and an unsecured related party note payable in the amount of $45,000.  (See Note 3.)

 

34

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**NOTE 8 - CAPITALLEASE OBLIGATION**

 

The Company leases a tractor under a capital lease agreement thatexpires in 2004.  This asset is includedin property and equipment as follows:

 
|                                                      |   | **2003** |    |
|-----------------------------------------------------------|--------|----------|---------|
| Tractors                                                  |   | $        | 119,582 |   |
| Less Accumulated Depreciation and Reserve  for Impairment |   | (119,582 | )       |
|                                                      |   |     |    |
|                                                      |   | $        | —  |   |

 

Future minimum annual lease payments as of December 31, 2003,under original capital lease obligation agreement terms are as follows:

 
| 2004                                        |   | $       | 44,105 |   |
|---------------------------------------------|--------|---------|--------|--------|
| Less amount representing interest           |   | (2,452  | )      |
|                                        |   |    |   |
| Present value of net minimum lease payments |   | 41,653  |   |
| Less current portion                        |   | (41,653 | )      |
|                                        |   |    |   |
| Long Term Portion                           |   | $       | — |   |

 

No post-petition payments have been made for the period from thePetition Date to December 31, 2003. These payments may be subject to change as a result of bankruptcyproceedings under Chapter 11 of the Bankruptcy Code.

 

35

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**NOTE 9 – DISPOSITIONOF EQUIPMENT**

 

During 2003, the Company returned 78 trailers and 5 tractors held undercapital leases to the lessors.  Thecapital lease obligation relating to each trailer and tractor was reduced andthe remaining obligation was reclassified to accounts payable (liabilitiessubject to compromise) at December 31, 2003.

 

The following is a summary of those transactions.

 
|                                                                     |   | **Pre-Petition** |     | **Post-Petition** |   |
|--------------------------------------------------------------------------|--------|------------------|----------|-------------------|--------|
| Reduction in Trailers held under Capital  Lease                          |   | $                | —   |              | $      | (1,123,350 | ) |
| Reduction in Capital Lease Obligations                                   |   | —           |     | 1,125,091         |   |
| Increase in Accounts Payable- Trade  (Liabilities Subject to Compromise) |   | —           |     | (260,518          | )      |
| Loss on Disposition of Assets                                            |   | $                | —   |              | $      | (258,777 | ) |
|                                                                     |   |             |     |              |   |
| Reduction in Tractors held under Capital  Lease                          |   | $                | (124,702 | )                 | $      | (90,382 | ) |
| Reduction in Capital Lease Obligations                                   |   | 106,136          |     | 102,742           |   |
| Increase in Accounts Payable- Trade  (Liabilities Subject to Compromise) |   | (24,392          | )        | (57,241           | )      |
| Loss on Disposition of Assets                                            |   | $                | (42,958  | )                 | $      | (44,881 | ) |

 

The following is a summary of other dispositions of equipment, notrelated to capital lease obligations.

 
| Proceeds from Disposition of Equipment              |   | $       | —  |    | $      | 40,387   |   |
|-----------------------------------------------------|--------|---------|---------|---------|--------|----------|--------|
| Cost of Equipment, Net of Accumulated  Depreciation |   | (15,326 | )       | (63,627 | )      |
| Loss on Disposition of Assets                       |   | (15,326 | )       | (23,240 | )      |
|                                                |   |    |    |    |   |
| Total Losses on Disposition of Assets               |   | $       | (58,284 | )       | $      | (326,898 | )      |

 

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**NOTE 10 - OPERATINGLEASES**

 

The Company leases a terminal and school facilities at three separatelocations in Ohio on a one year basis. Rent expense paid during the years ended December 31, 2003 and2002, was $76,635 and $58,457, respectively.

 

During 2002, the Company leased a terminal and sales office in PlainCity, Ohio, from ETS, a company owned by a stockholder of Gasel.  The Company paid rent expense during theyear ended December 31, 2002, of $9,715 to this related party.

 

The Company began on March 14, 2003 leasing its employees under aone-year employee leasing agreement with Innovative Personnel Solutions, Inc.(IPS).  IPS provides the Company withall of its drivers, mechanics and office workers.  The Company paid $4,108,434 during the year endedDecember 31, 2003, for its leased employees.  Accrued contract labor to IPS at December 31, 2003, was$124,967.

 

From August 31, 2002 through a portion of March, 2003, the Companypaid employees through its own payroll system, including appropriate payrolltaxes.

 

During 2002, the Company leased its employees under a one year employeeleasing agreement with PeopLease Corporation, a South Carolina Corporation.  PeopLease provided the Company with all ofits drivers, mechanics and office workers. The Company paid $3,318,165 for its leased employees in 2002.  Accrued contract labor to PeopLease atDecember 31, 2003 (see liabilities subject to compromise) and 2002 was$108,392 and $169,887, respectively.

 

The Company leases trailers and other equipment under long-termoperating leases.  The Company incurred$481,537 and $258,581 for its operating leases in 2003 and 2002.  Future minimum rental payments requiredunder operating leases that have noncancellable lease terms in excess of oneyear as of December 31, 2003 are as follows:

 

| 2004   |   | $       | 935,753   |   |
|--------|--------|---------|-----------|--------|
| 2005   |   | 643,780 |      |
| 2006   |   | 442,009 |      |
| 2007   |   | 108,549 |      |
|   |   | $       | 2,130,091 |   |

 

37

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**NOTE 11 - INCOMETAXES**

 

Income tax expense (benefit) consists of:

 
|      |   | **December 31,** |   |
|-----------|--------|-----------------------|--------|
|      |   | **2003**              |   | **2002** |   |
| Current:  |   |                  |   |   |   |
| Federal   |   | $                     | — |   | $ | — |   |
| State     |   | —                |   | — |   |
|      |   | $                     | — |   | $ | — |   |
| Deferred: |   |                  |   |   |   |
| Federal   |   | $                     | — |   | $ | — |   |
| State     |   | —                |   | — |   |
|      |   | $                     | — |   | $ | — |   |

 

A reconciliation of the total provision for income taxes with amountsdetermined by applying the statutory U.S. Federal income tax rates to incometax provisions is as follows:

 
|                                            |   | **December 31,** |     |
|-------------------------------------------------|--------|-----------------------|----------|
|                                            |   | **2003**              |     | **2002** |   |
| Income tax at statutory rates                   |   | $                     | (977,000 | ) | $ | (599,000 | ) |
| Add:   Tax effect of Permanent differences |   | —                |     | — |   |
| Increase in valuation allowance                 |   | 977,000               |     | 599,000 |   |
| Total income tax provision                      |   | $                     | —   |   | $ | — |   |

 

38

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The effects of temporary differences that give rise to significantportions of the deferred tax assets and deferred tax liabilities are presentedbelow:

 
|                                                                    |   | **December 31,  2003** |      |
|-------------------------------------------------------------------------|--------|-----------------------------|-----------|
| Deferred tax assets:                                                    |   |                        |      |
| Net operating loss carryforward                                         |   | $                           | 2,358,000 |   |
| Contribution carryover                                                  |   | 2,000                       |      |
| Deferred tax asset valuation allowance                                  |   | (954,000                    | )         |
| Total deferred tax assets                                               |   | $                           | 1,406,000 |   |
|                                                                    |   |                        |      |
| Deferred tax liabilities:                                               |   |                        |      |
| Property and equipment, principally due to  differences in depreciation |   | $                           | 1,406,000 |   |
|                                                                    |   |                        |      |
| Total deferred tax liabilities                                          |   | $                           | 1,406,000 |   |

 

These amounts are presented in the accompanying consolidated balancesheet as follows:

 
| Noncurrent deferred tax assets    |   | $          | 1,406,000 |   |
|-----------------------------------|--------|------------|-----------|--------|
| Noncurrent deferred tax liability |   | (1,406,000 | )         |
| Net deferred tax asset            |   | $          | —    |   |

 

At December 31, 2003, the Company has net operating losscarryforwards of $6.9 million for income tax purposes that expire in years 2009through 2023.

 

**NOTE 12 - EARNINGSPER COMMON SHARE AND COMMON EQUIVALENT SHARE**

 

Earnings (loss) per common and common equivalent share were computed bydividing net income (loss) by the weighted average number of shares of commonstock outstanding during the period.  AtDecember 31, 2003 and 2002, the number of common shares was increased bythe number of shares issuable on the exercise of outstanding stock options and warrantswhen the market price of the common stock exceeds the exercise price of theoptions and warrants.  This increase inthe number of common shares was reduced by the number of common shares that areassumed to have been purchased with the proceeds from the exercise of theoptions; those purchases were assumed to have been made at the average price ofthe common stock during that part of the year when the market price of thecommon stock exceeded the exercise price of the options.

 

39

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The following data shows the amounts used in computing earnings pershare (EPS) and the effect on income and the weighted average number of sharesof dilutive potential common stock.

 
|                                                                                              |   | **December 31,** |       |
|---------------------------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                                              |   | **2003**              |       | **2002** |   |
|                                                                                              |   |                  |       |   |   |
| Income (loss) available to common  stockholders used in basic EPS and diluted EPS                 |   | $                     | (2,872,580 | ) | $ | (1,761,555 | ) |
|                                                                                              |   |                  |       |   |   |
| Weighted average number of common shares  used in basic EPS                                       |   | 9,272,749             |       | 2,569,976 |   |
|                                                                                              |   |                  |       |   |   |
| Effect of dilutive securities:                                                                    |   |                  |       |   |   |
| Stock options and warrants                                                                        |   | —                |       | — |   |
|                                                                                              |   |                  |       |   |   |
| Weighted average number of common shares  and dilutive potential common stock used in diluted EPS |   | 9,272,749             |       | 2,569,976 |   |
|                                                                                                   |        |                       |            |  |  |  |  |

 

At December 31, 2003 and 2002, options on 182,522 and 149,053shares of common stock were not included in computing diluted EPS because theireffects were anti-dilutive.

 

**NOTE 13 - COMMONSTOCK-RESTRICTED SHARES OUTSTANDING**

 

In August, 2002, the Company contracted with 1st SBPartners, Ltd, New York, NY, to provide financial planning and obtain fundingarrangements.  As part of this contract,the Company agreed to issue 400,000 shares of its restricted common stock to 1stSB Partners in exchange for successfully executing a funding agreement onbehalf of the Company.  In October,2002, a funding arrangement with Starz Investment, Ltd., a Belize internationalinvestment company, was formalized.  Inaccordance with the Company’s agreement with 1st SB Partners, inDecember, 2002, the Company issued them 200,000 shares of its restricted commonstock and recorded an increase in common stock and a decrease in additionalpaid in capital in the amount of $28,000 (35% of the current market value of$.40 times 200,000 shares).  During thethree months ended March 31, 2003, the Company issued an additional100,000 shares of common stock, which was recorded as an increase in commonstock and a decrease in additional paid in capital in the amount of$14,000.  During the three months endedJune 30, 2003, the Company issued 100,000 shares of common stock, whichwas recorded as an increase in common stock and a decrease in additional paidin capital in the amount of $14,000.

 

40

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In October, 2002, the Company entered into a Stock Purchase Agreementwith Starz Investments, Ltd., a Belize international business company, toaccept an irrevocable commitment to use its best efforts to purchase up to7,000,000 shares of the Company’s common stock in an exempt transaction subjectto Regulation S, at .35 times the closing bid price on the related purchasedates.  At December 31, 2002,2,418,399 shares were sold and issued for $259,384, net of issuance costs of$25,722. During the three months ended March 31, 2003, 4,228,817 shareswere sold and issued for the sum of $611,194, net of issuance costs of$60,497.  During the three months endedJune 30, 2003, 346,760 shares were sold and issued for the sum of $61,913,net of issuance costs of $6,226.

 

In October, 2002, the agreement with 1st SB Partners, Ltd.,was amended to include, as compensation for services, an increase of 2% for atotal of 9% cash fee compensation, payable ratably as funding occurs.  The Company paid 1st SB Partners$72,949 and $25,722 in 2003 and 2002, respectively.

 

In December, 2002, the Company issued 30,000 shares of restrictedcommon stock to Market Pathways Financial Relations, Inc. for professionalservices rendered related to promotional campaigns designed to improveshareholder value. The Company valued these shares at $4,200, (.35 of thecurrent market value of $.40 times 30,000 shares. In April of 2003, theCompany issued 10,000 shares of restricted common stock to Market PathwaysFinancial Relations, Inc., for professional services rendered related topromotional campaigns designed to improve shareholder value.  The Company valued these shares at $1,400(35% of the current market value of $.40 times 10,000 shares).

 

At December 31, 2003, 129,934 shares of common stock wereauthorized and available for exercise. Exercisable commitments exceed the authorized, net of outstandingshares, by approximately 480,000 shares at December 31, 2003.  The Company plans to obtain stockholderapproval for an increase in the number of authorized shares.

 

**NOTE 14 - STOCKOPTIONS**

 

The Company has adopted a stock option plan, which provides for thegranting of options to certain officers, directors and key employees of theCompany.  Currently, options for 410,000shares of common stock have been issued under this plan.  The option price, number of shares and grantdate are determined at the discretion of the Company’s board of directors.Grantees vest in the options at the date of the grant.  The exercise price of each option that hasbeen granted under the plan equals 100% of the market price of the Company’sstock on the date of the grant. Options under this plan vest on the grant dateand are exercisable for a period not to exceed 10 years from the option grantdate.  Options are non-transferable.

 

41

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A summary of the status of the Company’s stock option plan as ofDecember 31, 2003 and 2002, and changes during the years then ended ispresented below:

 
|                                                              |   | **2003  Weighted  Average  Exercise** | ** ** | **2002  Weighted  Average  Exercise** | ** ** |
|-------------------------------------------------------------------|--------|---------------------------------------|------------|---------------------------------------|------------|
|                                                              |   | **Options**                           | ** ** | **Price**                             |       | **Options** | ** ** | **Price** | ** ** |
| Outstanding at beginning of year                                  |   | 410,000                               |       | $                                     | .70        |   | 310,000 |   | $ | .81 |   |
| Granted                                                           |   | —                                |       |                                  |       | 100,000 |   | .35 |   |
| Exercised                                                         |   | —                                |       |                                  |       | — |   |   |   |
| Forfeited                                                         |   | —                                |       |                                  |       | — |   |   |   |
|                                                              |   |                                  |       |                                  |       |   |   |   |   |
| Outstanding at end of year                                        |   | 410,000                               |       | $                                     | .70        |   | 410,000 |   | $ | .70 |   |
|                                                              |   |                                  |       |                                  |       |   |   |   |   |
| Exercisable at end of year                                        |   | 410,000                               |       |                                  |       | 410,000 |   |   |   |
|                                                              |   |                                  |       |                                  |       |   |   |   |   |
|                                                              |   |                                  |       |                                  |       |   |   |   |   |
| Weighted average fair value of options  granted during the period |   | —                                |       | $                                     | —     |   | 100,000 |   | $ | .35 |   |

 

42

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The following table summarizes information about stock optionsoutstanding at December 31, 2003.

 
| **Range  of  Exercise  Prices** |   | **Number  Outstanding  at  12/31/03** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  at  12/31/03** | ** ** |
|---------------------------------|--------|---------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| $                               | .95    |                                  | 210,000    |                                                | 3.42       |                                   | $          | .95                                   |       | 210,000 |   |
| $                               | .50    |                                  | 100,000    |                                                | 4.75       |                                   | $          | .50                                   |       | 100,000 |   |
| $                               | .35    |                                  | 100,000    |                                                | 8.58       |                                   | $          | .35                                   |       | 100,000 |   |

 

The Black Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility.  Because the Company’s stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions may materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its stockoptions.

 

For purposes of pro forma disclosures, the estimated fair value of theoptions is amortized to expense over the options’ vesting period.  There were no options granted during theyear ended December 31, 2003; therefore, no pro forma presentations arerequired.

 

43

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**NOTE 15 - WARRANTS**

 

As part of the July, 1996 securities offering, the underwriter wasgranted a warrant to purchase 30,870 shares of common stock at a purchase priceof $1.25 per share. This warrant was exercised in August, 1999, by executing a10% cognovit note in the amount of $38,500, of which $29,078 was outstanding atJanuary 1, 2002. As of December 31, 2002, the balance had been deemeduncollectible and written off to additional paid in capital.

 

As part of a consulting agreement dated October, 1998, MerchantsFinancial acquired 80,000 shares of the company’s common stock at a purchaseprice of $1.38 per share by executing 10% cognovit demand notes totaling$110,000. At January 1, 2002, $17,815 of these cognovit notes wasoutstanding. As of December 31, 2002, the balance had been deemeduncollectible and written off to additional paid in capital.

 

As part of the December, 2000 acquisition of the freight transport andfreight brokerage business of Eagle Transportation Services, Inc., and EagleTransport, Inc., the Sellers were granted warrants to purchase 100,000 sharesof common stock at $2.50 per share and 75,000 shares of common stock at $3.00per share, exercisable after one year and expiring in 10 years.

 

On July 25, 2002, the Company issued warrants to purchase 100,000shares of common stock to CitiCapital Commercial Corporation for valuableconsideration.  The exercise price ofthe warrants is $.001 per share.  Theconsideration was an agreement by CitiCapital to defer late payments onequipment loans and two additional payments owed by the Company to the end ofthe loan terms without penalty or rewrite fees.  The warrants may not be exercised for a period of three yearsafter date of issuance and expire five years after issue date; the warrants areto be adjusted for share dividends or stock splits.  CitiCapital also has the right to require the Company to buy backthe warrants at a price of $.50 per warrant anytime between the 32ndmonth after issue date and the end of the warrant term.

 

44

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On August 5, 2002, the Company and S. Gene Thompson executed anEmployment Agreement outlining the terms and conditions of Mr. Thompson’semployment as Vice President and Chief Financial Officer.  In accordance with the terms of thisagreement, Mr. Thompson was given 25,000 shares of common stock, no par value,of the Company; warrants to purchase an additional 25,000 shares of commonstock, no par value, of the Company at an exercise price of $.35 per share; andwill receive additional warrants to purchase 50,000 shares of common stock inthe future at the market price effective on the grant dates, which are to begiven on January 1, 2003 and January 2, 2004.  The warrants may be exercised at any timewithin a 10-year period after the date of issuance.  In the event the Company shall terminate Mr. Thompson’semployment prior to the end of the three year term, or should the Company enterinto a merger or other combination with another company, then the grant date offuture warrants shall be accelerated to the date of such merger, combination ortermination.

 

A summary of the status of the Company’s warrants as ofDecember 31, 2003 and 2002, and changes during the years then ended ispresented below:

 
|                                  |   | **2003  Weighted  Average  Exercise** | ** ** | **2002  Weighted  Average  Exercise** | ** ** |
|---------------------------------------|--------|---------------------------------------|------------|---------------------------------------|------------|
|                                  |   | **Shares**                            |       | **Price**                             | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                  |   |                                  |       |                                  |       |   |   |   |   |
| Outstanding at beginning of year      |   | 300,000                               |       | $                                     | 1.61       |   | 175,000 |   | $ | 2.71 |   |
| Granted                               |   | —                                |       |                                  |       | 125,000 |   | .07 |   |
| Exercised                             |   | —                                |       |                                  |       | — |   |   |   |
| Expired                               |   | —                                |       |                                  |       | — |   |   |   |
|                                  |   |                                  |       |                                  |       |   |   |   |   |
| Outstanding at end of year            |   | 300,000                               |       | $                                     | 1.61       |   | 300,000 |   | $ | 1.61 |   |
|                                  |   |                                  |       |                                  |       |   |   |   |   |
| Warrants Exercisable At End of Period |   | 200,000                               |       |                                  |       | 200,000 |   |   |   |

 

45

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**NOTE 16 - RELATEDPARTY TRANSACTIONS**

 

The Company collateralized three loans from local banks with 1,081,408shares of Gasel’s common stock owned by an officer.  Debt associated with these loans at December 31, 2003 and2002 was $837,766 and $861,509, respectively. Certain loans made by the Companyare personally guaranteed by the officer. (See Notes 6 and 7.)

 

In October, 2002, an officer of the Company financed 20 used trailersat a cost of $248,930, for the purpose of leasing them to the Company due tothe Company’s inability to obtain favorable financing.  The Company is making monthly lease paymentsdirectly to the lender in the amount of $6,307 on the obligation.  At December 31, 2003, accounts payableincluded an obligation to this officer and third party lender in the amount of$6,307.

 

**NOTE 17 - MAJORCUSTOMERS**

 

During 2003, the Company had one major customer, sales to whichexceeded 10% of the Company’s total sales. Sales to this customer totaled$2,799,132 for the year ended December 31, 2003. Accounts receivableoutstanding relating to these sales at December 31, 2003, were $193,101,which amounted to 12% of total trade receivables.

 

During 2002, the Company had one major customer, sales to whichexceeded 10% of the Company’s total sales. Sales to this customer totaled$2,202,678 for the year ended December 31, 2002. Accounts receivableoutstanding relating to these sales at December 31, 2002, were $86,441,which amounted to 4% of total trade receivables.

 

**NOTE 18 - FUELAVAILABILITY AND COST**

 

The Company is dependent upon the availability of diesel fuel.Increases in the cost of fuel may, in the future, adversely affect theprofitability of the Company. There can be no assurance that diesel fuel priceswill not increase.  A significant portionof fuel prices above a certain pegged amount are regularly recovered in theform of fuel surcharges from major customers with whom the Company hascontracts for its freight services.

 

The Company has in place by contract with its major customers a fuel surcharge.  The fuel surcharge is an additional chargeto each customer by invoice for increases in fuel prices above a stipulatedamount and is adjusted weekly to the national fuel costs average published bythe U. S. Government Department of Energy.

 

46

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**NOTE 19 - DRIVERS**

 

The Company offers a driver-training program through one of itssubsidiary’s operations, which offers incentives to attract and retainqualified drivers.  Although the Companyhas experienced no significant downtime due to inability to secure qualifieddrivers, no assurance can be given that a shortage will not adversely affectthe Company in the future.

 

**NOTE 20 -CONTINGENCIES**

 

The Company is subject to various other claims, legal proceedings andinvestigations covering a wide range of matters that may arise in the ordinarycourse of business.  Management believesthe resolutions of claims and pending litigation will not have a materialeffect, individually or in the aggregate, to the financial position, results ofoperations and cash flows prior to contemplating potential insurance recoveriesor accruals.

 

The Company has guaranteed certain financing of trade accountsreceivables.  In connection therewith,the Company was contingently liable for approximately $1,237,542 atDecember 31, 2003, at which time the value of the underlying collateral inthe amount of $1,725,784 is, in the opinion of management, adequate to securethe guarantee.

 

47

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**Item 8. Changes Inand Disagreements With Accountants on Accounting and Financial Disclosure.**

 

(a)Van Krevel & Company, Dublin, Ohio acted as the Company’s auditor since theCompany began having its statements audited in 1995. Van Krevel & Companyis a small firm comprised of two accountants, only one of which is approved toperform audits for companies registered with the SEC. When the Company waspreparing to execute another engagement letter for Van Krevel & Company toaudit the financials for 2003, Van Krevel & Company learned that itsprofessional liability insurance premiums were going to be significantlyincreased, and then, while looking for an alternate insurer, that no insurancecompanies would underwrite its professional liability coverage for performingSEC compliant audits. The final decision of Van Krevel & Company not beingable to perform the audit was made by it only when another accounting firm wasfound that would perform the audit, which was formalized on January 8,2004. Until another principal accountant was found, Van Krevel & Companywas examining alternatives that would allow it to perform the audit. OnJanuary 16, 2004, Van Krevel & Company provided written notice to theCompany and the SEC that as far as it was concerned, the client-auditorrelationship had ceased as of December 29, 2003. The Company and VanKrevel & Company considered this decision to be a decline by Van Krevel& Company to stand for re-election as auditor for the 2003 financialstatements.

 

Therewere no adverse opinions or disclaimers of opinions made by Van Krevel &Company on the past two years audited statements for the Company. Further, theopinions expressed were not qualified or modified as to uncertainty, auditscope, or accounting principles, except that the report on the financialstatements for the year ended December 31, 2002, was modified to include agoing concern uncertainty. The reason for this modification was that theCompany had suffered recurring losses from operations and had a net capitaldeficiency which raised substantial doubt about its ability to continue as agoing concern.  Management’s plansregarding those matters were disclosed in the notes to the financialstatements.  The financial statementsdid not include any adjustments that might result from the outcome of thisuncertainty.

 

Becauseof the circumstances and the availability of another accounting firm toundertake the audit of the Company financial statements for 2003, the AuditCommittee approved the change in accounting firms.

 

Therehave been no disagreements with Van Krevel & Company on any matter ofaccounting principles or practices, financial statement disclosure, or auditingscope or procedure, from the time that it commenced to audit the Companyfinancial statements until the determination that it could not perform theaudit on the 2003 statements.

 

(b)Goff Backa Alfera & Company, LLC, Pittsburgh, Pennsylvania, has beenengaged by the Company as the principal accountant to audit the Company’sfinancial statements for the year 2003. This engagement was made onJanuary 8, 2004, when the Company’s Audit Committee executed an engagementletter with that firm. The Company has had no previous relationship with GoffBacka Alfera & Company, LLC, prior to the new engagement as principalaccountant.

 

**Item 8A. Controls andProcedures**

 

Our Chief Executive Officer, President, and Chief Financial Officer(the “Certifying Officers”) are responsible for establishing and maintainingdisclosure controls and procedures for the Company. The Certifying Officershave designed such disclosure controls and procedures to ensure that materialinformation is made known to them, particularly during the period in which thisreport was prepared. The Certifying Officers have evaluated the effectiveness ofthe Company’s disclosure controls and procedures within 90 days of the date ofthis report and believe that the Company’s disclosure controls and proceduresare effective based on the required evaluation. There have been no significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of their evaluation, includingany corrective actions with regard to significant deficiencies and materialweaknesses.

 

48

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**PARTIII**

 

**Item 9. Directors,Executive Officers, Promoters and Control Persons; Compliance WithSection 16(a) of the Exchange Act.**

 

The Officers and Directors of the Company are as follows:

 
| **Name**         |   | **Age** |   | **Position  With Company**                                  |
|------------------|--------|---------|--------|-------------------------------------------------------------|
| Michael J. Post  |   | 57      |   | Chief Executive Officer, President, Treasurer, and Director |
|             |   |    |   |                                                        |
| John Jackson     |   | 58      |   | Vice President-Operations Marietta Division, and Secretary  |
|             |   |    |   |                                                        |
| S. Gene Thompson |   | 55      |   | Vice President and Chief Financial Officer                  |
|             |   |    |   |                                                        |
| Allan M. Blue    |   | 62      |   | Director and Assistant Secretary                            |
|             |   |    |   |                                                        |
| Ronald K. Bishop |   | 51      |   | Director                                                    |

 

Michael J. Post has been in all of such capacities from the formationof the Company in January 1988 to date.  He also serves as a boardmember of Selby General Hospital, Marietta, Ohio.

 

John Jackson has been involved in various executive capacities with theCompany since its formation in 1988.

 

S. Gene Thompson has been Vice President and Chief Financial Officersince May, 2001.  From early in 2000 until his election to office with theCompany, he acted as a financial consultant to the Company.  In the yearbefore that, he was a financial consultant to Sunland Distribution, atransportation company with its offices in Florida.  Before commencing hisfinancial consulting positions, he spent three years as General Manager atHoliday Island Resort, a 5,000 acre resort community, and has held managementand executive positions in operations and administration for various nationalcommon carriers over most of his career.  He has a MBA from the Universityof Arkansas.

 

Allan M. Blue has been a director since 1995 and Assistant Secretarysince 1997.  Mr. Blue is a practicing attorney in the Columbus Ohio areawhere he has been engaged in private law practice since 1971.  In additionto practicing law, Mr. Blue is actively engaged in several businesses as owner,officer, and director.  These businesses include Alden’s FurnitureCompany, Held-Team Partnership, d/b/a Hold More Self Storage, Capitol StockTransfer Company, M. B. Liquidators, Inc., and Team Investors, Ltd.

 

Ronald K. Bishop, Director since 1994.  From 1987 until 2002, hehas worked for Bennco Incorporated as General Manager of 3 radio stations,WDMX, WNUS, and WLTP, in Parkersburg, West Virginia; and he also became GeneralManager of 2 additional stations, WRVB, and WRZZ in 2000.  The stationswere sold  a couple of years ago and Mr.Bishop is currently retired.  He also serves as a board member of SelbyGeneral Hospital, Marietta, Ohio, Ohio Valley Chamber of Commerce, and for theMarietta Community Foundation, Easter Seals and the American Heart Associationin the Marietta area.

 

The position of director is for a one year term and until a successoris elected.

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

All reports required to be filed by management on Form 4 were filedtimely.

 

49

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**Item 10. ExecutiveCompensation.**

 
| **SUMMARY COMPENSATION TABLE**   |
|----------------------------------|
|                             |   |
|                             |   | **Annual  Compensation** | ** ** | **Long Term  Compensation  Awards** | ** ** |
| **Name and Principal  Position** |   | **Year** |   | **Salary** | ** ** | **Securities  Underlying Options/SAR** | ** ** |
| Michael J. Post, President       |   | 2001 |   | $ | 125,440 | (1) |   |   |
|                             |   | 2002 |   | $ | 96,400 | (2) | 100,000 options to buy common shares |   |
|                             |   | 2003 |   | $ | 88,400 | (2)(3) |   |   |

 

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(1) Includes $10,200 paid by the Company forthe 2001 Ford Expedition leased for Mr. Post to use for personal and businesspurposes and $1,630 for insurance premiums.

(2) In addition, $10,200 was paid by theCompany for the 2001 Ford Expedition leased for Mr. Post.

(3) Additional benefits included health insurancepremiums of $1,976.64, a 401(k) contribution of $260.00 and life insurancepremiums paid of $390.00

 

The Company pays its Directors’ a fee of $1,000 for each meetingattended.  The Company’s Code of Regulations authorizes the Board ofDirectors to fix Directors’ compensation without shareholder approval.

 

**Item 11. SecurityOwnership of Certain Beneficial Owners and Management.**

 

(a).  The following is a table of all persons known to the Companyto be the beneficial owner of more than 5% of the Company’s voting securitieson December 31, 2003.

 
| **Title of Class** |   | **Name and  Address of  Beneficial Owner** |   | **Amount and  Nature of  Beneficial  Owner** |   | **Percent of  Class** |   |
|--------------------|--------|--------------------------------------------|--------|----------------------------------------------|--------|-----------------------|--------|
| Common shares      |   | Michael J. Post                            |   | 1,585,794                                    | (1)    | 16.1                  |   |
|               |   | 118 Merryhill Street                       |   |                                         |   |                  |   |
|               |   | Marietta, Ohio 43750                       |   |                                         |   |                  |   |

 

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(1) Includes 4,100 shares held by the Estate of Mrs. Lee Post, themother of Michael J. Post, 7,900 shares held by the Company that is treated astreasury stock for accounting purposes, 35,250 shares held by his wife, JanetPost, and options to acquire 286,000.

 

(b)  The following is a table setting forth for management thebeneficial ownership of the voting securities of the Company as ofDecember 31, 2003.

 

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| **Title of Class** |   | **Name and  Address  of Beneficial  Owner** |   | **Amount and  Nature of  Beneficial Owner** |   | **Percent of  Class** |   |
|--------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|-----------------------|--------|
| Common shares      |   | Michael J. Post                             |   | 1,585,794                                   | (1)    | 15.2                  |   |
|               |   | 118 Merryhill Street                        |   |                                        |   |                  |   |
|               |   | Marietta, Ohio                              |   |                                        |   |                  |   |
|               |   | 45750                                       |   |                                        |   |                  |   |
|               |   |                                        |   |                                        |   |                  |   |
| Common shares      |   | Allan M. Blue                               |   | 101,673                                     | (2)    | 1.0                   |   |
|               |   | 1130 Berlin Station Rd.                     |   |                                        |   |                  |   |
|               |   | Delaware, Ohio                              |   |                                        |   |                  |   |
|               |   | 43015                                       |   |                                        |   |                  |   |
|               |   |                                        |   |                                        |   |                  |   |
| Common shares      |   | Ronald K. Bishop                            |   | 73,772                                      | (3)    | 0.7                   |   |
|               |   | 305 Ohio Street                             |   |                                        |   |                  |   |
|               |   | Marietta, Ohio                              |   |                                        |   |                  |   |
|               |   | 45750                                       |   |                                        |   |                  |   |
|               |   |                                        |   |                                        |   |                  |   |
| Common shares      |   | John Jackson                                |   | 45,780                                      |   | 0.4                   |   |
|               |   | Route 2, Box 344                            |   |                                        |   |                  |   |
|               |   | Belpre, Ohio 45714                          |   |                                        |   |                  |   |
|               |   |                                        |   |                                        |   |                  |   |
| Common shares      |   | S. Gene Thompson                            |   | 100,000                                     | (4)    | 1.0                   |   |
|               |   |                                        |   |                                        |   |                  |   |
| Common shares      |   | Directors and officers as a group           |   | 1,907,019                                   | (5)    | 18.3                  |   |

 

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(1) Includes 4,100 shares held by the Estateof Mrs. Lee Post, the mother of Michael J. Post, 7,900 shares held by theCompany, 35,250 shares held by his wife, Janet Post, and options to acquire286,000.

 

(2) Includes 15,745 shares held by Joyce M.Blue, wife of Allan M. Blue, and options to acquire 62,000 shares.

 

(3) Includes options to acquire 62,000shares.

 

(4) Includes options to acquire 75,000shares.

 

(5) Includes options and warrants to acquire485,000 shares.

 

**Item 12. CertainRelationships and Related Transactions.**

 

Michael J. Post, Director, CEO, President, Treasurer, and majorityshareholder of the Company, made a loan of $100,000 during 2001 to Gasel DriverTraining Schools, Inc.  As security for repayment of the loan, the Companypledged all of the stock in Gasel Driver Training Schools, Inc. to Mr.Post.  There is still a balance due onthis loan of $75,000 as of December 31, 2003.

 

Allan M. Blue, Director, also acts as legal counsel for theCompany.  Payment for his services is at a rate that he represents is astandard hourly rate for his services to his clients.  Mr. Blue is a 50%shareholder in Capitol Stock Transfer Company which acts as stock transferagent for the Company.

 

**Item 13. Exhibits andReports on Form 8-K.**

 

(a) Index to Exhibits.

 

21.  List of Subsidiary Corporations.

 

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31.1- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of theCompany.

31.2- Rule 13a-15(a)/15d-14(a) Certification of Chief Financial Officer of theCompany.

32.1- Section 1350 Certification by Chief Executive Officer of the Company.

32.2- Section 1350 Certification by Chief Financial Officer of the Company.

 

(b) The Company filed a report on Form 8-K onDecember 8, 2003 attaching a press release announcing results of operationsfor the 3rd quarter of 2003.

 

**Item 14. PrincipalAccountant Fees and Services.**

 

Audit and Other Fees Paid to Independent Auditors

 

The following table presents fees billed by Van Krevel & Companyfor professional services rendered to us in fiscal years endedDecember 31, 2002 and December 31, 2003.

 
| **Services Rendered** |   | **Fiscal  2003** |   | **Fiscal  2002** |   |
|-----------------------|--------|------------------|--------|------------------|--------|
| Audit Fees            |   | $                | 40,000 |             | $      | 36,999 |   |
| Audit Related Fees    |   | $                | 1,205  |             | $      | 235 |   |
| Tax Fees              |   | $                | 0      |             | $      | 0 |   |
| All Other Fees        |   | $                | 0      |             | $      | 0 |   |

 

Van Krevel & Company served as our independent auditors duringfiscal year 2002 and until December 29, 2003.  Goff Backa Alfera & Company, LLC was engaged asour new independent auditors on January 8, 2004 and performed the auditfor fiscal year 2003.  All of the feespaid for the Fiscal 2002 year were paid to Van Krevel & Company.  Of the Audit Fees paid for the Fiscal Year2003 audit, Van Krevel & Company has been paid $15,000 and Goff BackaAlfera & Company, LLC has been paid $25,000.  The audit fees paid to Goff Backa Alfera & Company for theFiscal 2003 audit were not incurred or paid until 2004.  See Item 8 -”Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure” for more details.

 

Audit Fees

 

The audit fees are billed for professional services rendered for theaudit of the Company annual financial statements and the reviews of thefinancial statements included in the Quarterly Reports on Form 10-QSB.

 

Audit-Related Fees

 

The audit-related fees from our independent auditors for fiscal years2002 and 2003 were paid to Van Krevel & Company for services in reconcilingaccounts preparatory to the audits.

 

Tax Fees

 

We did not incur any tax fees from our independent auditors for fiscalyears 2002 and 2003

 

All Other Fees

 

We did not incur any fees from our independent auditors for all otherservices (other than audit services and audit-related services) in fiscal years2002 and 2003.

 

Pre-Approval Policy for Services by Independent Auditors

 

Our Audit Committee has implemented pre-approval policies and proceduresfor our engagement of the independent auditors for both audit and permissiblenon-audit services.  Under thesepolicies and procedures, all services provided by the independent auditors mustbe approved by the Audit Committee prior to the commencement of the services,subject to certain de minimis non-audit service (as described in

 

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Rule 2-01(c)(7)(C) of Regulation S-X) that do not have to bepre-approved as long as management promptly notifies the Audit Committee ofsuch service and the Audit Committee approves it prior to the service beingcompleted.  Since May 6, 2003, theeffective date of the SEC’s rules requiring Audit Committee pre-approval of allaudit and non-audit services performed by our independent auditors, all of theservices provided by our independent auditors have been approved in accordancewith our pre-approval policies and procedures.

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Gasel Transportation Lines, Inc.  (Registrant)            |                |
|-----------------------------------------------------------|---------------------|
|                                                      |
| By                                                        | /s/ Michael J. Post |   |
| (Signature and Title) President, Treasurer, and Director* |
|                                                      |                |
|                                                      |                |
| Date April 14, 2004                                  |                |
|                                                           |                     |  |  |

 

In accordance with the Exchange Act, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.

 
| By                                                                        | /s/ Michael J. Post |   |
|---------------------------------------------------------------------------|---------------------|--------|
| (Signature and Title) Michael J. Post, President, Treasurer, and Director |
|                                                                      |

 
| Date April 14, 2004                                                         |
|----------------------------------------------------------------------------------|
|                                                                             |
|                                                                             |
| By                                                                               | /s/ Allan M. Blue |   |   |
| (Signature and Title)Allan M. Blue, Director and Assistant Secretary*            |
|                                                                             |
|                                                                             |
| Date April 14, 2004                                                         |   |
|                                                                             |   |   |
| By                                                                               | /s/ Gene Thompson |   |   |
| (Signature and Title)Gene Thompson, Vice President and Chief Financial  Officer* |
|                                                                             |
|                                                                             |
| Date April 14, 2004                                                         |   |
|                                                                                  |  |  |  |  |  |

 

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