**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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##### **Form 10-K**

##### ** **

**SPECIAL FINANCIAL REPORT**

 

**PURSUANT TO SECTION 15d-2**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year endedJune 30, 2005**

** **

**Commission file number 0-24247**

** **

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**ATLANTICEXPRESS TRANSPORTATION CORP.**

(Exact name of Registrantas specified in its charter)

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

 

**7 NorthStreet**

**StatenIsland, New York 10302**

**(718) 442-7000**

(Address,including zip code, and telephone number, including area code,

of Registrant’sprincipal executive offices)

 

SecuritiesRegistered Pursuant to Section 12(b) of the Act:

 
| **Title of Each Class** | ** ** | **Name of Each Exchange on Which  Registered** |
|-------------------------|------------|------------------------------------------------|
| None                    |       | None                                           |

 

SecuritiesRegistered Pursuant to Section 12(g) of the Act:

**None**

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. ý

 

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

 

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

 

The aggregate market value of voting and non-voting common equity heldby non-affiliates of the Registrant on November 9, 2005 was $0.

 

ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS

 

Indicate by check mark whether the Registrant has filed all documentsand reports required to be filed by Section 12, 13, or 15(d) of theSecurities and Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court.  Yes ý   No o

 

APPLICABLE ONLY TO CORPORATE REGISTRANTS

 

The number of outstanding shares of the Registrant’s common stock, $0.01par value, as of  November 9, 2005,was 945,263.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

None.

 

This special financial report is being filed pursuant to Rule 15d-2of the Securities Exchange Act of 1934, as amended, and contains only certifiedfinancial statements as required by Rule 15d-2. This special financialreport is filed under cover of the facing sheet of the form appropriate forannual reports of the Registrant as required by Rule 15d-2.

 

 

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**ATLANTICEXPRESS TRANSPORTATION CORP.**

**TABLE OFCONTENTS**

 
| ** **                                                                                                       | **Page** |
|------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                             |     |
| Report  of Independent Registered Public Accounting Firm                                                         | F-2      |
| Consolidated  Balance Sheets                                                                                     | F-3      |
| Consolidated  Statements of Operations                                                                           | F-4      |
| Consolidated  Statements of Shareholder’s Equity                                                            | F-5      |
| Consolidated  Statements of Cash Flows                                                                           | F-6      |
| Notes to  Consolidated Financial Statements                                                                      | F-8      |
| Exhibit 31.1   Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |     |
| Exhibit 31.2   Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |     |
| Exhibit 32.1   Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |     |
| Exhibit 32.2   Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |     |

 

F-1

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**Reportof Independent Registered Public Accounting Firm**

 

Board of Directors

Atlantic Express Transportation Corp.

Staten Island, New York

 

We have audited the accompanying consolidated balancesheets of Atlantic Express Transportation Corp. and Subsidiaries as of June 30,2004 and 2005 and the related consolidated statements of operations,shareholder’s equity, and cash flow for the years then ended. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesconsideration of internal control over financial reporting as a basis ofdesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Atlantic Express Transportation Corp. and Subsidiaries at June 30,2004 and 2005, the results of their operations and their cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America.

 
|                  | /s/ BDO SEIDMAN, LLP |   |
|-----------------------|----------------------|--------|
|                  |
| New York, New York    |
| November 9, 2005 |

 

F-2

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**Atlantic Express Transportation Corp.and Subsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                               | ** ** | **June 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                                                               | ** ** | **2005**          | ** **  | **2004** | ** ** |
| **Assets**                                                                                               |       |              |        |   |   |
| Current assets:                                                                                          |       |              |        |   |   |
| Cash and cash  equivalents                                                                               |       | $                 | 6,834,961   |   | $ | 3,741,683 |   |
| Restricted cash and  cash equivalents                                                                    |       | —            |        | 1,110,516 |   |
| Accounts receivable,  net of allowance for doubtful accounts of $1,704,850 and $1,335,029,  respectively |       | 44,831,587        |        | 46,971,018 |   |
| Inventories                                                                                              |       | 2,859,415         |        | 2,799,736 |   |
| Assets of discontinued  operations                                                                       |       | —            |        | 1,550,000 |   |
| Prepaid insurance                                                                                        |       | 31,425,704        |        | 19,615,906 |   |
| Prepaid expenses and  other current assets                                                               |       | 3,222,345         |        | 2,626,106 |   |
| Total current assets                                                                                     |       | 89,174,012        |        | 78,414,965 |   |
| Property, plant and equipment, at cost, less  accumulated depreciation                                   |       | 129,938,411       |        | 149,077,523 |   |
| Other assets:                                                                                            |       |              |        |   |   |
| Restricted cash and  cash equivalents                                                                    |       | 5,263,733         |        | 4,910,810 |   |
| Restricted marketable  securities                                                                        |       | 4,560,313         |        | 4,568,224 |   |
| Transportation contract  rights, net                                                                     |       | 3,988,048         |        | 5,611,437 |   |
| Deferred financing  costs, net                                                                           |       | 9,586,228         |        | 8,936,791 |   |
| Deposits and other  noncurrent assets                                                                    |       | 4,494,719         |        | 4,810,689 |   |
| Total other assets                                                                                       |       | 27,893,041        |        | 28,837,951 |   |
|                                                                                                     |       | $                 | 247,005,464 |   | $ | 256,330,439 |   |
| **Liabilities and Shareholder’s Equity**                                                            |       |              |        |   |   |
| Current:                                                                                                 |       |              |        |   |   |
| Current portion of  long-term debt                                                                       |       | $                 | 24,820,652  |   | $ | 16,375,354 |   |
| Current portion of  capital lease obligations                                                            |       | 1,356,354         |        | 1,078,776 |   |
| Insurance financing  payable                                                                             |       | 3,984,116         |        | 3,809,504 |   |
| Controlled  disbursements account—checks issued not funded                                          |       | 4,725,722         |        | 2,585,159 |   |
| Accounts payable,  accrued expenses and other current liabilities                                        |       | 24,061,465        |        | 24,296,645 |   |
| Accrued compensation                                                                                     |       | 6,986,704         |        | 4,895,246 |   |
| Current portion of  insurance reserves                                                                   |       | 2,130,008         |        | 3,460,000 |   |
| Accrued interest                                                                                         |       | 4,406,189         |        | 3,122,944 |   |
| Payable to creditors  under the plan of reorganization                                                   |       | 1,810,085         |        | 1,513,080 |   |
| Total current liabilities                                                                                |       | 74,281,295        |        | 61,136,708 |   |
| Long-term debt, net of current portion                                                                   |       | 135,316,642       |        | 116,253,926 |   |
| Capital lease obligations, net of current portion                                                        |       | 4,966,079         |        | 5,332,901 |   |
| Insurance reserves, net of current portion                                                               |       | 1,179,807         |        | 966,076 |   |
| Deferred income, net of current portion and other  long-term liabilities                                 |       | 2,415,869         |        | — |   |
| Deferred state and local income taxes                                                                    |       | 622,000           |        | 922,000 |   |
| Payable to creditors under the plan of  reorganization, net of current portion                           |       | 3,247,270         |        | 5,238,336 |   |
| Total liabilities                                                                                        |       | 222,028,962       |        | 189,849,947 |   |
| Commitments and contingencies                                                                            |       |              |        |   |   |
| Shareholder’s equity:                                                                               |       |              |        |   |   |
| Common stock, par value  $.01 per share, authorized shares 1,303,200; issued and outstanding 651,600     |       | 6,516             |        | 6,516 |   |
| Additional paid-in  capital                                                                              |       | 110,042,001       |        | 109,142,001 |   |
| Accumulated deficit                                                                                      |       | (85,155,726       | )           | (42,629,517 | ) |
| Accumulated other  comprehensive income (loss)                                                           |       | 83,711            |        | (38,508 | ) |
| Total shareholder’s equity                                                                          |       | 24,976,502        |        | 66,480,492 |   |
|                                                                                                     |       | $                 | 247,005,464 |   | $ | 256,330,439 |   |

 

See accompanying Notes.

 

F-3

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**Atlantic Express Transportation Corp.and Subsidiaries**

**ConsolidatedStatements of Operations**

 
| ** **                                                                                  | ** ** | **Year Ended June 30,** | ** **  |
|---------------------------------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                                                  | ** ** | **2005**                     | ** **  | **2004** | ** ** |
| Revenues:                                                                                   |       |                         |        |   |   |
| School bus operations                                                                       |       | $                            | 319,604,294 |   | $ | 321,465,664 |   |
| Paratransit and transit  operations                                                         |       | 44,071,271                   |        | 42,055,023 |   |
| Total revenues                                                                              |       | 363,675,565                  |        | 363,520,687 |   |
| Costs and expenses:                                                                         |       |                         |        |   |   |
| Cost of operations—School  bus operations                                              |       | 298,907,448                  |        | 285,644,957 |   |
| Cost of operations—Paratransit  and transit operations                                 |       | 38,490,635                   |        | 35,033,632 |   |
| General and  administrative                                                                 |       | 17,457,368                   |        | 17,694,969 |   |
| Depreciation and  amortization                                                              |       | 25,028,763                   |        | 26,286,925 |   |
| Contract rights  impairment                                                                 |       | 959,468                      |        | 5,462,825 |   |
| Total operating costs and expenses                                                          |       | 380,843,682                  |        | 370,123,308 |   |
| Loss from operations                                                                        |       | (17,168,117                  | )           | (6,602,621 | ) |
| Other income (expense):                                                                     |       |                         |        |   |   |
| Interest expense  (contractual interest of $32,577,365 at June 30, 2004)               |       | (23,513,800                  | )           | (25,196,194 | ) |
| Reorganization costs                                                                        |       | (565,485                     | )           | (11,176,956 | ) |
| Forgiveness of  indebtedness income                                                         |       | —                       |        | 101,492,510 |   |
| Other                                                                                       |       | (1,096,372                   | )           | (141,766 | ) |
| Income (loss) before benefit from (provision for) income  taxes and discontinued operations |       | (42,343,774                  | )           | 58,374,973 |   |
| Benefit from (provision for) income taxes                                                   |       | 214,000                      |        | (476,800 | ) |
| Income (loss) before discontinued operations                                                |       | (42,129,774                  | )           | 57,898,173 |   |
| Loss from discontinued operations                                                           |       | (296,435                     | )           | (1,080,083 | ) |
| Net income (loss)                                                                           |       | $                            | (42,426,209 | ) | $ | 56,818,090 |   |

 

See accompanying Notes.

 

F-4

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**Atlantic Express Transportation Corp.and Subsidiaries**

**ConsolidatedStatements of Shareholder’s Equity**

 
| ** **                                                                    | ** ** | **Common  shares,  par value  $0.01** | ** ** | **Additional paid-  in capital** | ** ** | **Accumulated  deficit** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** **  | **Comprehensive  income (loss)** | ** **  | **Total**   | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------|------------|--------------------------|------------|------------------------------------------------------|-------------|----------------------------------|-------------|-------------|------------|
| Balance, June 30,  2003                                                  |       | $                                     | 6,516      |                             | $          | 62,442,001               |       | $                                                    | (99,447,607 | )                                | $           | 304,827     |       |   |   | $ | (36,694,263 | ) |
| Net income                                                                    |       | —                                |       | —                           |       | 56,818,090               |       | —                                               |        | 56,818,090                       |        | 56,818,090  |       |
| Contribution of shares  from parent                                           |       | —                                |       | 44,000,000                       |       | —                   |       | —                                               |        | —                           |        | 44,000,000  |       |
| Issuance of warrants                                                          |       | —                                |       | 2,700,000                        |       | —                   |       | —                                               |        | —                           |        | 2,700,000   |       |
| Unrealized loss on  marketable securities, net of reclassification adjustment |       | —                                |       | —                           |       | —                   |       | (343,335                                             | )           | (343,335                         | )           | (343,335    | )          |
| Comprehensive income                                                          |       |                                  |       |                             |       |                     |       |                                                 |        | $                                | 56,474,755  |        |       |   |
| Balance, June 30,  2004                                                  |       | 6,516                                 |       | 109,142,001                      |       | (42,629,517              | )          | (38,508                                              | )           |                             |        | 66,480,492  |       |
| Net loss                                                                      |       | —                                |       | —                           |       | (42,426,209              | )          | —                                               |        | (42,426,209                      | )           | (42,426,209 | )          |
| Distribution to parent  company                                               |       | —                                |       | —                           |       | (100,000                 | )          | —                                               |        | —                           |        | (100,000    | )          |
| Issuance of warrants                                                          |       | —                                |       | 900,000                          |       | —                   |       | —                                               |        | —                           |        | 900,000     |       |
| Unrealized gain on  marketable securities, net of reclassification adjustment |       | —                                |       | —                           |       | —                   |       | 122,219                                              |        | 122,219                          |        | 122,219     |       |
| Comprehensive loss                                                            |       |                                  |       |                             |       |                     |       |                                                 |        | $                                | (42,563,723 | )           |       |   |
| Balance, June 30,  2005                                                  |       | $                                     | 6,516      |                             | $          | 110,042,001              |       | $                                                    | (85,155,726 | )                                | $           | 83,711      |       |   |   | $ | 24,976,502 |   |

 

See accompanying Notes.

 

F-5

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**Atlantic Express Transportation Corp.and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                                           | ** ** | **Year Ended June 30,** | ** **  |
|------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                                                           | ** ** | **2005**                     | ** **  | **2004** | ** ** |
| **Cash flows from operating activities:**                                                            |       |                         |        |   |   |
| Net income (loss)                                                                                    |       | $                            | (42,426,209 | ) | $ | 56,818,090 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                         |        |   |   |
| Forgiveness of  indebtedness income                                                                  |       | —                       |        | (102,901,289 | ) |
| Gain on sales of  marketable securities and investments, net                                         |       | (13,725                      | )           | (167,483 | ) |
| Depreciation                                                                                         |       | 23,901,413                   |        | 23,564,883 |   |
| Fixed asset impairment                                                                               |       | —                       |        | 931,552 |   |
| Amortization                                                                                         |       | 4,163,714                    |        | 11,114,659 |   |
| Contract rights  impairment                                                                          |       | 959,468                      |        | 5,462,825 |   |
| Amortization of  original issue discount                                                             |       | 776,892                      |        | 126,087 |   |
| Reserve for doubtful  accounts receivable                                                            |       | 733,311                      |        | 241,194 |   |
| Write off of accounts  receivable                                                                    |       | (363,490                     | )           | (89,774 | ) |
| Loss on sales of fixed  assets, net                                                                  |       | 1,035,770                    |        | 34,492 |   |
| Deferred state and  local income taxes                                                               |       | (300,000                     | )           | 372,000 |   |
| Decrease (increase) in:                                                                              |       |                         |        |   |   |
| Restricted cash and  cash equivalents                                                                |       | 1,110,516                    |        | (1,036,614 | ) |
| Accounts receivable                                                                                  |       | 1,769,610                    |        | 8,096,259 |   |
| Inventories                                                                                          |       | (59,679                      | )           | 4,783,291 |   |
| Prepaid expenses and  other current assets                                                           |       | (7,356,037                   | )           | 2,271,241 |   |
| Deposits and other  non-current assets                                                               |       | 230,141                      |        | (261,446 | ) |
| Increase (decrease) in:                                                                              |       |                         |        |   |   |
| Accounts payable,  accrued expenses, other current liabilities and accrued compensation              |       | 3,188,332                    |        | 11,923,498 |   |
| Controlled disbursement  account                                                                     |       | 2,140,563                    |        | (2,254,313 | ) |
| Insurance financing  payable                                                                         |       | 174,612                      |        | 1,253,077 |   |
| Payable to creditors  under the plan of reorganization                                               |       | (1,694,061                   | )           | (856,250 | ) |
| Insurance reserve and  other long-term liabilities                                                   |       | (1,142,494                   | )           | (4,051,467 | ) |
| Net cash provided by (used in) operating activities                                                  |       | (13,171,353                  | )           | 15,374,512 |   |
| **Cash flows from investing activities:**                                                            |       |                         |        |   |   |
| Additions to property, plant and equipment                                                           |       | (5,826,822                   | )           | (11,194,364 | ) |
| Purchase of transportation contract rights                                                           |       | (377,598                     | )           | (79,154 | ) |
| Due from parent                                                                                      |       | —                       |        | (461,688 | ) |
| Proceeds from sales of fixed assets                                                                  |       | 4,853,602                    |        | 147,358 |   |
| Decrease in restricted cash and cash equivalents                                                     |       | (352,923                     | )           | (522,322 | ) |
| Purchases of marketable securities                                                                   |       | (8,183,338                   | )           | (1,153,898 | ) |
| Proceeds from sales or redemptions of marketable  securities                                         |       | 8,304,267                    |        | 2,387,766 |   |
| Net cash used in investing activities                                                                |       | (1,582,812                   | )           | (10,876,302 | ) |
|                                                                                                      |            |                              |             |  |  |  |  |

 

F-6

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| ** **                                                              | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| **Cash flows from financing activities:**                               |       |                         |       |   |   |
| Payment of GSCP DIP loan                                                |       | $                            | —     |   | $ | (10,000,000 | ) |
| Proceeds from senior secured notes                                      |       | —                       |       | 115,000,000 |   |
| Proceeds from new senior credit facility                                |       | 5,138,816                    |       | 14,269,937 |   |
| Revolving line of credit                                                |       | —                       |       | (103,466,184 | ) |
| Proceeds from senior unsecured notes                                    |       | 4,900,000                    |       | — |   |
| Proceeds from third priority senior secured notes                       |       | 14,925,000                   |       | — |   |
| Distribution to parent company                                          |       | (100,000                     | )          | — |   |
| Principal payments on borrowings and capital lease  obligations         |       | (3,428,499                   | )          | (4,727,379 | ) |
| Deferred financing costs                                                |       | (3,587,874                   | )          | (14,933,989 | ) |
| Net cash provided by (used in) financing activities                     |       | 17,847,443                   |       | (3,857,615 | ) |
| Net increase in cash and cash equivalents                               |       | 3,093,278                    |       | 640,595 |   |
| Cash and cash equivalents, beginning of year                            |       | 3,741,683                    |       | 3,101,088 |   |
| Cash and cash equivalents, end of period                                |       | $                            | 6,834,961  |   | $ | 3,741,683 |   |
| **Supplemental disclosures on cash flow  information:**                 |       |                         |       |   |   |
| Cash paid during the period for:                                        |       |                         |       |   |   |
| Interest                                                                |       | $                            | 18,391,418 |   | $ | 13,188,615 |   |
| Income taxes                                                            |       | $                            | 139,665    |   | $ | 247,287 |   |
| **Supplemental disclosure of noncash financing  activities:**           |       |                         |       |   |   |
| Contribution of shares from parent                                      |       | $                            | —     |   | $ | 44,000,000 |   |
| Original issue discount associated with the issuance  of warrants       |       | $                            | 900,000    |   | $ | 2,700,000 |   |
| Capital lease obligations incurred for purchases of  vehicles           |       | $                            | 1,115,874  |   | $ | 7,529,216 |   |
| Loans incurred for purchases of vehicles                                |       | $                            | 1,266,878  |   | $ | 511,596 |   |
| Deferred financing costs paid from third priority  senior secured notes |       | $                            | 75,000     |   | $ | — |   |
| Letter of credit advance for insurance loss fund                        |       | $                            | 3,500,000  |   | $ | — |   |

 

See accompanying Notes.

 

F-7

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**Atlantic Express Transportation Corp.and Subsidiaries**

**Notesto Consolidated Financial Statements**

 

**1.****                                      Business**

 

Atlantic Express Transportation Corp. (“AETC” or the “Company”),a wholly owned subsidiary of Atlantic Express Transportation Group Inc. (“AETG”),is one of the largest providers of school bus transportation in the UnitedStates, providing services currently to various municipalities in New York,Missouri, Massachusetts, California, Pennsylvania, New Jersey andIllinois. In addition to its school bus transportation operations, AETC alsoprovides services to public transit systems for physically or mentallychallenged passengers, fixed route transit, express commuter line charter andtour services, and through May 2004 sold school buses and commercialvehicles in New Jersey and various counties in New York (Note 2). Since1998, GSC NJ through its affiliates Greenwich Street Capital (“GSC”) has beenthe majority holder of AETG.

 

**2.****                                      Summaryof Significant Accounting Policies**

 

**Basis of Presentation**

 

For the year ended June 30, 2005, the Companyincurred a net loss of $42,426,209 and for the year ended June 30, 2004had net income of $56,818,090. The net income for the year ended June 30,2004 includes forgiveness of indebtedness income of $101,492,510 fromcontinuing operations and $1,408,779 from discontinued operations related tothe plan of reorganization (the “POR”) becoming effective. On August 16,2002, the Company filed a voluntary petition for reorganization under Chapter11 of the United States Bankruptcy Code (Note 3). The Company operatedunder a debtor-in-possession financing facility, for the period from August 16,2002 until December 24, 2003, when it obtained exit financing as the PORbecame effective.

 

The consolidated financial statements include theaccounts of AETC and its subsidiaries. All significant intercompanytransactions and balances have been eliminated.

 

**Discontinued Operations**

 

During the fiscal year ended June 30, 2003, theCompany decided to sell certain assets of Central New York Coach Sales &Service, Inc. (“CNY”) and Jersey Bus Sales, Inc. (“JBS”), the Company’sbus sales subsidiaries. The assets of CNY were sold August 18, 2003. TheCompany sustained a net loss on the sale of these assets of approximately$59,000. Following that sale, the Company’s bus sales operations were conductedby JBS. The Company ceased the JBS operations in May 2004. Theseoperations have been reported in the Company’s bus sales operation segment andhave been accounted for as discontinued operations in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 144.  For the year ended June 30, 2004, theCompany recorded an additional after tax charge of $1,298,104 to adjust thevalue of assets to be sold to net realizable value. Interest expense of  $912,421 and $17,568 was allocated todiscontinued operations for the years ended June 30, 2004 and 2005,respectively. The Company allocated interest expense and deferred financingcosts, attributable to its senior secured debt, revolving line of credit andnew senior credit facility (Note 10), on the basis of the monthly netintercompany liability balances, which reflect and represent the debt thatwould be required by the discontinued operations. These charges are included inthe net loss from discontinued operations for the years ended June 30,2004 and 2005. Loss from discontinued operations for the year ended June 30,2004 included $1,408,779 million of forgiveness of indebtedness income.

 

Summary results of the bus sales operations, which have been classifiedseparately as discontinued operations, were as follows:

 
| ** **                        | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Revenue—Bus sales operations |       | $                            | —     |   | $ | 29,495,138 |   |
| Loss before income tax            |       | (294,435                     | )          | (1,074,083 | ) |
| Provision for income taxes        |       | 2,000                        |       | 6,000 |   |
| Loss from discontinued operations |       | $                            | (296,435   | ) | $ | (1,080,083 | ) |

 

Assets of discontinued operations were reclassifiedfrom the following accounts:

 
| ** **             | ** ** | **June 30,** | ** ** |
|------------------------|------------|-------------------|------------|
| ** **             | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Property and equipment |       | $                 | —     |   | $ | 1,550,000 |   |
|                        |            |                   |            |  |  |  |  |

 

The remaining balance of assets of discontinuedoperations at June 30, 2004 was sold in September 2004 forapproximate net book value.

 

F-8

----

 

**Use of Estimates**

 

The preparation of financial statements and relateddisclosures in conformity with accounting principles generally accepted in theUnited States requires management to make judgments, estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amount of revenues and expenses and the accompanying notes. Actualresults could differ from those estimates.

 

The Company bases its estimates and judgments onhistorical experience and on various other assumptions that it believes arereasonable under the circumstances. Amounts reported based upon theseassumptions, include but are not limited to insurance reserves, allowance fordoubtful accounts, income taxes, claims by creditors, forgiveness ofindebtedness income, goodwill and other long-lived assets.

 

**Revenue Recognition**

 

Revenues from school bus and paratransit and transitoperations are recognized when services are provided. The Company billscustomers on a monthly basis based upon the completion of bus routes to allschool bus customers and service hours completed to all paratransit customers,which in most cases are based upon contracts with customers.

 

**Cash Equivalents**

 

Cash equivalents consist of short-term, highly liquidinvestments with maturities of 90 days or less when purchased, which arereadily convertible into cash.

 

**Marketable Securities**

 

In accordance with Financial Accounting StandardsBoard Statement No. 115, AETC determines the classification of securitiesas held-to-maturity or available-for-sale at the time of purchase, andreevaluates such designation as of each balance sheet date. Securities areclassified as held-to-maturity when AETC has the positive intent and ability tohold the securities to maturity. Held-to-maturity securities are stated atcost, adjusted for amortization of premiums and discounts to maturity.Marketable securities not classified as held-to-maturity are classified asavailable-for-sale. Available-for-sale securities are carried at fair value,with unrealized gains and losses, reported as a separate component ofshareholder’s equity. The cost of securities sold is based on the specificidentification method.

 

**Inventories**

 

Inventories primarily consist of fuel, parts andsupplies, which are valued at the lower of cost or market value. Cost isdetermined using the first-in, first-out method.

 

**Property, Plant and Equipment**

 

Property, plant and equipment are stated at cost anddepreciated utilizing the straight-line method over the lives of the relatedassets. The useful lives of property, plant and equipment for purposes ofcomputing depreciation are as follows:

 
| ** **                | ** ** | **Years**           | ** ** |
|---------------------------|------------|---------------------|------------|
| Building and improvements |       | 15 - 31.5 |       |
| Transportation equipment  |       | 5 - 15    |       |
| Other                     |       | 3 - 7     |       |

 

Maintenance costs are expensed as incurred and renewals andimprovements are capitalized.

 

**Long-Lived Assets**

 

Long-lived assets, such as intangible assets andproperty, plant and equipment, are evaluated for impairment when events orchanges in circumstances indicate that the carrying amounts of the assets maynot be recoverable through the estimated undiscounted future cash flows fromthe use of these assets. When any such impairment exists, the related assetswill be written down to their fair value.

 

**Transportation Contract Rights**

 

Transportation contract rights primarily represent thevalue the Company assigned to the cost of investments in certain of our schoolbus subsidiaries in excess of the book value of the companies acquired. Inaddition, AETC has purchased from unrelated third parties certaintransportation contract rights with respect to revenue contracts and travelroutes. Using earnings before interest, income

 

F-9

----

 

taxes, depreciation and amortization (“EBITDA”) as a measurement tool,the Company reviews the financial performance of its subsidiary bus companiesthat have transportation contract rights, annually. If this review indicatesthat the transportation contract rights are likely to be impaired in value, theCompany projects the future undiscounted cash flows attributable to suchsubsidiary bus company and compares it to the carrying value of thetransportation contract rights assets. The major impacts to the future undiscounted cash flows are either areduction of service requirements (e.g., routes) that decrease revenue, anincrease in costs and expenses at a rate greater than the correspondingcontractual revenue increase, or a combination of both factors.  If this comparison indicates that the futureundiscounted cash flows attributable to the underlying assets are unlikely toexceed the carrying value of the transportation contract rights, an impairmentcharge is taken based on the difference between the estimated future cashflows, determined to be the estimated fair value, and the carrying value of thetransportation contract rights. Using this methodology, it was determined thatimpairment charges of $5,462,825 and $959,468 for the fiscal years ended June 30,2004 and 2005, respectively, were necessary to adjust the transportationcontract rights to fair value. The majority of the impairment charges in bothfiscal years ended June 30, 2004 and 2005 were in subsidiary bus companiesin Massachusetts.

 

Transportation contract rights are amortized on astraight-line basis over a twelve-year period, which represents the Company’sestimate of the average length of the contracts and expected renewal periods.

 

Transportation contract rights are comprised of thefollowing:

 
| ** **                          | ** ** | **June 30,** | ** ** |
|-------------------------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Gross carrying amount               |       | $                 | 19,698,470 |   | $ | 25,013,789 |   |
| Less accumulated amortization       |       | 15,710,432        |       | 19,402,352 |   |
| Transportation contract rights, net |       | $                 | 3,988,038  |   | $ | 5,611,437 |   |
| Amortization expense recorded       |       | $                 | 1,041,519  |   | $ | 1,890,081 |   |

 

Estimated amortizationexpense for the year ending June 30,

 
| 2006 |   | $       | 850,490 |   |
|------|--------|---------|---------|--------|
| 2007 |   | 681,036 |    |
| 2008 |   | 681,036 |    |
| 2009 |   | 681,036 |    |
| 2010 |   | 530,198 |    |

 

**Deferred Financing Costs**

 

Deferred financing costs are amortized on astraight-line basis, which approximates the effective interest rate method,over the term of the financing to which the costs relate, which range fromthree to four years because outstanding balances of debt remain substantiallyunchanged.

 

**Insurance Coverage and Reserves**

 

The Company self-insures its obligations that mayarise under workers compensation and automobile liability claims. Provisionsfor such obligations are provided for as follows:

 

A.                                   Reservesrequirements for deductible amounts, for fiscal years 2004, and 2005 were basedupon actuarial valuations supplied by an insurance company. Such valuationscomputed reserve requirements based upon estimated ultimate claim losses,including those incurred but not reported. Charges to operations are adjusted,annually if necessary, to reflect these valuations.

 

The following table reflects the activity in thisaccount for the years ended June 30, 2004 and 2005:

 
| ** **                             | ** ** | **Total Reserve** | ** ** |
|----------------------------------------|------------|-------------------|------------|
| Balance, June 30, 2003            |       | $                 | 8,477,543  |   |
| Expense                                |       | (1,042,015        | )          |
| Payments against the reserve           |       | (3,009,452        | )          |
| Balance, June 30, 2004            |       | 4,426,076         |       |
| Expense                                |       | 728,191           |       |
| Payments against the reserve           |       | (1,844,452        | )          |
| Balance, June 30, 2005            |       | $                 | 3,309,815  |   |
| Current portion of insurance reserve   |       | $                 | 2,130,008  |   |
| Long term portion of insurance reserve |       | 1,179,807         |       |
| Total insurance reserve                |       | $                 | 3,309,815  |   |

 

F-10

----

 

B.                                     Automobileliability commencing July 1, 2001 and workers compensation subsequent to December 31,2002, were administered through a third party insurance company. Under theterms of such arrangements, the Company funds, through monthly installments,loss funds specified by the insurance company. For the current insuranceperiods, these loss funds will total $10.2 million and $11.0 million forautomobile liability and workers compensation claims, respectively. Inaddition, the Company pays fronting charges consisting of claims handling,administration, risk transfer charges and taxes. Payments made are charged to aprepaid asset account. Operating costs are charged, and prepaids are reduced,by estimated claim loss costs and amortization of fronting charges.Periodically, the Company receives from the insurance company a calculation ofultimate claims liability based upon actuarially computed reserves using adevelopment factor taking into consideration claims history to arrive atincurred but not reported amounts. Charges to operations are adjusted toreflect these calculations.

 

Automobile liability andworkers compensation payments made for loss funds and fronting charges of $33.8million and $36.9 million were made for fiscal years 2004 and 2005,respectively. Charges based upon estimates of total losses and amortization offronting charges, were made in such years and applied against the prepaidbalance. In addition, based upon statistical information received from theinsurance company, or third party actuary, adjustments for prior and currentyears insurance claim expenses were made. Such adjustments resulted in areduction to insurance expense of $1.5 million in fiscal year 2004 and anincrease to insurance expense of $2.3 million for the year ended June 30,2005.   As of June 30, 2004 and2005, the balances in the prepaid account were $14.3 million and$26.6 million respectively. For each policy year, an adjustment based upona calculation of ratable incurred losses valued as of a date 30 or54 months after the rating period, will be made by the insurance carrier.

 

The above charges tooperations are based upon estimated ultimate liability related to these claimsand could differ from period to period due to claims payment and settlementpractices as well as changes in development factors due to assumed future costincreases and discount rates.

 

In February 2003,the New York City Department of Education (the “DOE”) entered into a Memorandumof Understanding (the “MOU”) with the Company and other school bustransportation providers, under which the DOE assumed certain vehicle insuranceobligations. In addition, under the MOU, the Company is not responsible for theadministration or payment of insurance claims arising after April 1, 2003.The Company is not aware of any factors that might impair the DOE’s ability orintent to pay claims under this program. The accompanying financial statementsdo not reflect reserves for such claims arising after April 1, 2003.

 

**Income Taxes**

 

AETC follows the liability method under Statement ofFinancial Accounting Standards (“SFAS”) No. 109, “Accounting for IncomeTaxes.” The primary objectives of accounting for taxes under SFAS No. 109are to (a) recognize the amount of tax payable for the current year and (b) recognizethe amount of deferred tax liability or asset for the future tax consequencesattributable to temporary differences between the financial statements’carrying amounts of existing assets and liabilities and their respective taxbases and of events that have been reflected in AETC’s financial statements ortax returns. When the realization of a deferred tax asset is not considered tobe more likely than not, a valuation allowance is recorded against thatdeferred tax asset.

 

AETC files consolidated federal, state and localincome tax returns with its parent and affiliates. The income tax charge orbenefits allocated to AETC is based upon an allocation method determined by thegroup under a tax sharing agreement. The balance identified as deferred taxassets and liabilities can, in substance, be considered the equivalent toamounts due from and due to this affiliated group based upon the application ofthis method.

 

**Fair Value of Financial Instruments**

 

The carrying value of financial instruments includingcash and cash equivalents, accounts receivable including retainage, notesreceivable, accounts payable, and short term debt approximated their fair valueas of June 30, 2004 and 2005, due to either their short maturity or termssimilar to those available to similar companies in the open market. Marketablesecurities, classified as available-for-sale, are valued at quoted marketvalue.  At June 30, 2004, the fairvalue of the Company’s 12% Senior Secured Notes and Senior Secured FloatingRate Notes was approximately $113.9 million compared to the carrying valueof $115.0 million (before original issue discount) (Note 3).  At June 30, 2005, the fair value of theCompany’s 12% Senior Secured Notes, Senior Secured Floating Rate Notes and the10%

 

F-11

----

 

Third Party Senior Secured Notes was approximately $124.8 millioncompared to the carrying value of $130.0 million (before original issue discount)(Note 3).

 

**Recent Accounting Pronouncements**

 

In December 2004, theFASB issued SFAS 153, “Exchanges of Nonmonetary Assets,” (SFAS 153) anamendment of APB Opinion No. 29. SFAS 153 addresses the measurement ofexchanges of nonmonetary assets and redefines the scope of transactions thatshould be measured based on the fair value of the assets exchanged. SFAS 153 iseffective for nonmonetary asset exchanges beginning in our first quarter offiscal 2006. We do not expect the adoption of SFAS 153 to have a materialimpact on our results of operations or financial condition.

 

**3.****                                      ReorganizationUnder Chapter 11**

 

On August 16, 2002, AETG, the Company and most ofits wholly owned subsidiaries (the “Debtors”) filed a voluntary petition forreorganization under Chapter 11 of the United States Bankruptcy Code (the “Code”)in the United States Bankruptcy Court (the “Bankruptcy Court”).

 

Subsequent to the filing, the Company continued tooperate its business under the Code as a debtor-in-possession (“DIP”).

 

The Bankruptcy Court confirmed the Debtor’s Plan ofReorganization (“POR”) on September 4, 2003. On December 24, 2003 theDebtors POR became effective and the Company emerged from bankruptcyprotection. As part of the emergence from Chapter 11, the Company obtained exitfinancing of approximately $145 million, including a $100 millionrevolving line of credit and a senior secured note of $45 million.

 

On April 23, 2004 the exit financing was repaidin full from the net proceeds of $105.0 million 12% Senior Secured Notesand the $10.0 million Senior Secured Floating Rate Notes (collectively the“Notes”) and $6.6 million from the Company’s new senior credit facility(Note 10).

 

As a result of the POR becoming effective, theBankruptcy Court approved the settlement of liabilities that were subject tocompromise based upon the terms of the POR. The settlement resulted in therecognition of forgiveness of indebtedness income, based upon estimatedsettlement amounts, of approximately $102.9 million (including $1.4 millionreflected in loss from discontinued operations) as follows:

 

 
| ** **                           | ** ** | **Liabilities  subject to  compromise at  June 30, 2003** | ** **  | **Consideration** | ** ** | **Forgiveness of  indebtedness  income** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------|-------------|-------------------|------------|------------------------------------------|------------|
| Under secured debt                   |       | $                                                              | 128,240,000 |              | $          | 44,500,000                               | (1)        | $ | 83,740,000 |   |
| Secured debt                         |       | 20,582,771                                                     |        | 20,582,771        |       | —                                   |       |
| Accrued interest                     |       | 7,039,288                                                      |        | —            |       | 7,039,288                                |       |
| Trade and other miscellaneous claims |       | 14,103,665                                                     |        | 1,981,664         | (2)        | 12,122,001                               |       |
| Priority tax claims                  |       | 5,626,002                                                      |        | 5,626,002         | (3)        | —                                   |       |
|                                 |       | $                                                              | 175,591,726 |              | $          | 72,690,437                               |       | $ | 102,901,289 |   |

 

----

(1)                                  Aspart of the Company’s emergence from Chapter 11 and in accordance with the POR,the Company paid $500,000 and issued 100% of the outstanding common shares ofAETG to holders of its $120.0 million outstanding 103/4% Senior Secured Notes due 2004 andthe holder of an $8.2 million supplemental loan (GSC). The distribution ofstock was treated as a contribution of capital from AETG to the Company. Thevaluation of the shares was determined by using the enterprise value of theCompany calculated by an independent financial institution in connection withits valuation of warrants issued with the Notes. (Note 10) The valuationof the Company was determined using both the market multiple and discountedcash flow methods. The market multiple method used the actual EBITDA for thelast fiscal year along with the projected EBITDA for the next two fiscal years.Each EBITDA was factored by a selected EBITDA multiple range (approximately4.5x to 6.1x), as used in representative financial transactions. The discountedcash flow method used projected financial information through fiscal year 2008,a weighted average cost of capital of approximately 16% and terminal valuescalculated using an EBITDA multiple of 5.0x to arrive at a calculatedenterprise value range.

 

These calculated values (from the market multiple anddiscounted cash flow methods) were averaged to determine an enterprise valuerange, and the midpoint of this range, plus non-operating assets, is theconcluded point estimate of the enterprise value, which was approximately$175 million. The Company’s total debt was deducted from this point

 

F-12

----

 

estimate of enterprise value to arrive at a net equityvalue. The concluded equity value estimate was calculated at $44 millionby taking the $175 million enterprise value less total debt as of December 23,2003, which is the day preceding the effective date of the Debtors’ POR,increased by a control premium of 30%. The Company believes that AETG’senterprise value is approximately equal to the Company’s enterprise value, asthe Company represents substantially all of AETG’s operations. The concludedvalue of the warrants was calculated at $2.7 million by first taking the$175 million enterprise value less total debt as of April 23, 2004,which is the day preceding issuance of the Notes, which resulted in a concludedequity value estimate of approximately $20 million. This $20 millionwas then multiplied by the warrants percentage of 15% and decreased by a 10%marketability discount (since the warrants represent a minority equityposition).

 

(2)                                  Includes$1.1 million payable to general unsecured creditors in four equal annualinstallments, which commenced in January 2004.

 

(3)                                  Payableover six years from the date of the assessment of these taxes, for whichpayment commenced May 2005.

 

In addition, certain claims in the Chapter 11bankruptcy case remain unsettled and are subject to ongoing negotiation andpossible litigation. As of June 30, 2005, the Company had recordedapproximately $7.0 million for outstanding administrative priority claimsthat the Company is aware of, as of that date, as accounts payable, accruedexpenses and other liabilities.

 

Costs resulting from reorganization are reportedseparately in the statements of operations as reorganization costs. For theyear ended June 30, 2004, these costs were $11,176,956 includingapproximately $3,000,000 of success fees to professionals and $976,000 of exitbonuses to management and key employees. For the year ended June 30, 2005, these costs were $565,485.

 

The impact of the accounting for the POR did notresult in the holders of existing equity shares receiving less then 50% of theequity shares post bankruptcy in either AETC or AETG, and accordingly, basedupon the guidance in SOP 90-7, the Company is not subject to fresh startaccounting. Liabilities were reduced and a gain as a result of settlement ofliabilities subject to compromise was recognized. The Company’s ability tofully utilize its tax operating losses was impacted as a result of the debtcancellation.

 

**4.****                                      ReceivableAgreement**

 

In June 2004, the Company entered into anagreement (the “Receivable Agreement”) with Congress Financial Corporation (“Congress”),as predecessor to Wachovia Bank, National Association (“Wachovia”) to sellWachovia, without recourse, up to a maximum $5.9 million of accountsreceivable of the Company. Under the Receivable Agreement, Wachovia purchasesreceivables at the gross amount of such accounts (less three and one-quarter percentpurchase commission) and immediately credits 85% of this amount against theCompany’s debt under the new senior credit facility with the balance creditedupon Wachovia receiving cumulative collections on all receivables purchased inexcess of the purchase price previously credited. This agreement expiresconcurrently with the expiration of the new senior credit facility(Note 11). In connection with the Company entering into the ReceivableAgreement, the President and Chief Executive Officer of the Company hasprovided a  personal guarantee in fullsupport of the agreement, as required by Wachovia, for which he received a$125,000 guarantee fee (Note 13). This fee is being amortized over theterm of the agreement. As of June 30, 2004 the Company had soldapproximately $5.9 million of receivables and received cash proceeds of$4.8 million, net of applicable commissions.  As of June 30, 2005 the Company had soldapproximately $5.8 million of receivables and had received cash proceeds of$4.7 million, net of applicable commissions.

 

On November 2, 2005 the Company amended thisagreement with Wachovia, to sell Wachovia, without recourse, up to a maximum$8.2 million of accounts receivable. This increased amount is available to the Company from November 2,2005 through July 1, 2006.  ThePresident and Chief Executive Officer of the Company increased his personalguarantee to the new maximum and received an additional $50,000 guaranteefee.  As of November 2, 2005 theCompany sold cumulatively $8.0 million of receivables and received cashproceeds of $6.6 million, net of applicable commissions.

 

**5.****                                      Retainage**

 

Pursuant to certain municipal school bus contracts andparatransit and transit contracts, certain contractual amounts (retainage) arewithheld by customers from billings as a guarantee of performance by AETC. At June 30,2004 and 2005 retainage of $8,201,964 and 2,262,238 (net of $5,770,638, whichwas sold to Wachovia June 28, 2005, without recourse under the receivableagreement (Note 4) the total retainage was 8,032,876 prior to the sale toWachovia), respectively, are classified as current accounts receivable, as theyare normally paid within one year.

 

F-13

----

 

**6.****                                      RestrictedCash and Cash Equivalents**

 

Restricted cash and cash equivalents of $6,021,326 at June 30,2004 represents cash equivalents of a captive insurance company subsidiary,that were only available for use by that subsidiary.  In October 2004 this subsidiary wasliquidated and these assets were transferred to AETC. Restricted cash and cashequivalents of $5,263,733 at June 30, 2005 are pledged as collateralsecurity for letters of credit outstanding in the amount of $8,843,851.

 

**7.****                                      Property,Plant and Equipment**

 

Property, plant and equipment consists of thefollowing:

 
| ** **                                              | ** ** | **June 30,** | ** **  |
|---------------------------------------------------------|------------|-------------------|-------------|
| ** **                                              | ** ** | **2005**          | ** **  | **2004** | ** ** |
| Land                                                    |       | $                 | 8,619,429   |   | $ | 9,128,258 |   |
| Building and improvements                               |       | 23,661,457        |        | 25,551,401 |   |
| Transportation equipment                                |       | 227,029,061       |        | 246,289,944 |   |
| Transportation equipment acquired under capital  leases |       | 10,738,151        |        | 9,411,511 |   |
| Machinery and equipment                                 |       | 38,802,761        |        | 38,549,330 |   |
| Furniture and fixtures                                  |       | 4,839,680         |        | 4,616,623 |   |
|                                                    |       | 313,690,539       |        | 333,547,067 |   |
| Less accumulated depreciation                           |       | (183,752,128      | )           | (184,469,544 | ) |
|                                                    |       | $                 | 129,938,411 |   | $ | 149,077,523 |   |

 

On April 26, 2005, the Company sold a facilityfor a gross purchase price of $4,460,000 and leased back the same property fora period of approximately twenty years. The triple net lease, which is being accounted for as an operatinglease, calls for monthly payments of $36,667 with annual increments of twopercent.  The gain on the transaction was$2,465,150 and is being amortized over the leaseback period on a straight-linebasis.

 

Accumulated depreciation of assets under capitalleases was $1,119,634 and $355,506 as of June 30, 2005 and 2004,respectively.

 

**8.****                                      MarketableSecurities—Restricted**

 

The amortized cost and estimated fair value of themarketable securities are as follows:

 
| ** **                                        | ** ** | **June 30, 2004** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Cost**               | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair value** | ** ** |
| Available for sale:                               |       |                   |       |   |   |   |   |
| US Treasury and other  government debt securities |       | $                      | 4,606,732  |   | $ | (38,508 | ) | $ | 4,568,224 |   |
| Total marketable securities                       |       | $                      | 4,606,732  |   | $ | (38,508 | ) | $ | 4,568,224 |   |

 
| ** **                                        | ** ** | **June 30, 2005** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Cost**               | ** ** | **Gross  Unrealized  Gain** | ** ** | **Fair value** | ** ** |
| Available for sale:                               |       |                   |       |   |   |   |   |
| US Treasury and other  government debt securities |       | $                      | 4,476,602  |   | $ | 83,711 |   | $ | 4,560,313 |   |
| Total marketable securities                       |       | $                      | 4,476,602  |   | $ | 83,711 |   | $ | 4,560,313 |   |

 

At June 30, 2004, the above marketable securitieswere held by a captive insurance company subsidiary and were available for useonly by that company.  At June 30,2004 restricted cash and cash equivalents of approximately $4.9 million andmarketable securities of $4.6 million were pledged as collateral for $8.8million of letters of credit issued by the captive insurance company.  Restricted cash (representing unpledged cash)of $1,110,516 has been classified as current and was available for payment ofclaims.  In October 2004 thissubsidiary was liquidated and these assets were transferred to AETC.  As of June 30, 2005 restricted cash andcash equivalents of approximately $5.3 million and marketable securities ofapproximately $4.6 million, are pledged as collateral for$8.8 million of letters of credit issued by AETC.

 

F-14

----

 

 

Net realized gainson marketable securities for the years ended June 30, 2004 and 2005 were$167,483 and $3,277 respectively, and are included in the net revenues of thecaptive insurance company, which is considered a part of the school busoperations segment.  Net realized gainson marketable securities for the year ended June 30, 2005 of $10,448 areincluded in other income (expense) also in the school bus operations segment.

 

Contractual maturity dates of the above securities areas follows:

 
| ** **            | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|-----------------------|------------|------------------------|------------|------------------------|------------|
| ** **            | ** ** | **Cost**               | ** ** | **Fair Value**         | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| 2005                  |       | $                      | —     |                   | $          | — |   | $ | 889,829 |   | $ | 893,333 |   |
| 2006                  |       | 407,333                |       | 407,697                |       | 2,400,498 |   | 2,342,864 |   |
| 2007 – 2011 |       | 2,255,937              |       | 2,330,514              |       | 703,622 |   | 702,385 |   |
| 2012 – 2031 |       | 1,813,332              |       | 1,822,102              |       | 612,783 |   | 629,642 |   |
| Total                 |       | $                      | 4,476,602  |                   | $          | 4,560,313 |   | $ | 4,606,732 |   | $ | 4,568,224 |   |

 

**9.****                                      AccountsPayable, Accrued Expenses and Other Liabilities**

 

Accounts payable, accrued expenses and otherliabilities consist of the following:

 
| ** **                                                                | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Outstanding  administrative priority claims (primarily professional fees) |       | $                 | 7,012,813  |   | $ | 6,991,523 |   |
| Accounts payable                                                          |       | 4,308,940         |       | 7,605,966 |   |
| Payroll taxes withheld  and accrued                                       |       | 2,488,484         |       | 2,310,308 |   |
| Other accrued expenses  and taxes                                         |       | 5,327,000         |       | 3,220,219 |   |
| Accrued employee  benefits                                                |       | 4,924,228         |       | 4,168,629 |   |
| Total                                                                     |       | $                 | 24,061,465 |   | $ | 24,296,645 |   |

 

**10.****                               Debt**

 

The following represents the debt outstanding at June 30,2004 and 2005:

 
| ** **                                                                                                              | ** ** | **June 30,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                                                                              | ** ** | **2005**          | ** **  | **2004** | ** ** |
| 12% Senior Secured Notes, due 2008 with cash  interest payable October 15th and April 15th(a)                 |       | $                 | 105,000,000 |   | $ | 105,000,000 |   |
| Senior Secured Floating Rate Notes, due 2008 with  cash interest payable October 15th and April 15th(a)       |       | 10,000,000        |        | 10,000,000 |   |
| Less: original issue discount associated with the  issuance of warrants, net (a)                                        |       | (1,895,651        | )           | (2,573,913 | ) |
| New senior credit facility (b)                                                                                          |       | 19,408,752        |        | 14,269,937 |   |
| GSC 15% senior unsecured term note (c)                                                                                  |       | 4,900,000         |        | — |   |
| Letter of credit advance                                                                                                |       | 3,500,000         |        | — |   |
| 10% Third Priority Senior Secured Notes due 2008  with cash interest payable October 15, and April 15th  (d)  |       | 15,048,809        |        | — |   |
| Less: original issue discount associated with the  issuance of warrants, net (d)                                        |       | (801,371          | )           | — |   |
| Various notes payable, primarily secured by  transportation equipment, with interest rates ranging from 8% - 10.3% |       | 4,976,755         |        | 5,933,256 |   |
|                                                                                                                    |       | 160,137,294       |        | 132,629,280 |   |
| Less current portion                                                                                                    |       | 24,820,652        |        | 16,375,354 |   |
| Long-term debt, net of current portion                                                                                  |       | $                 | 135,316,642 |   | $ | 116,253,926 |   |

 

A summary of interest expense is as follows:

 
| ** **                                        | ** ** | **June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Continuing operations:                            |       |              |       |   |   |
| Interest expense, including pre-payment penalties |       | $                 | 19,723,472 |   | $ | 16,027,615 |   |
| Amortization of deferred financing expense        |       | 3,013,437         |       | 9,044,351 |   |
| Amortization of original issue discount           |       | 776,891           |       | 124,228 |   |
| Subtotal                                          |       | 23,513,800        |       | 25,196,194 |   |
| Discontinued  operations:                         |       |              |       |   |   |
| Interest expense, including pre-payment penalties |       | 15,184            |       | 804,686 |   |
| Amortization of deferred financing expense        |       | 1,831             |       | 105,876 |   |
| Amortization of original issue discount           |       | 553               |       | 1,859 |   |
| Subtotal                                          |       | 17,568            |       | 912,421 |   |
| Total                                             |       | $                 | 23,531,368 |   | $ | 26,108,615 |   |
| Total Contractual  Interest                       |       | $                 | 23,531,368 |   | $ | 32,577,365 |   |

 

F-15

----

 

----

(a)                                  OnApril 22, 2004 AETC issued the Notes (Note 3).  The net proceeds from the sale of the Notes,along with $6.6 million from our new senior credit facility (see “d”below) were used to repay in full our exit financing facilities. The Notes wereissued as part of an investment unit consisting of $1,000 principal amount ofthe outstanding Notes and one warrant (the “Warrants”) to purchase one share ofour common stock at an exercise price of $0.01 per share. $2.7 million ofthe purchase price of the units was allocated to the Warrants based upon avaluation by an independent financial institution. The original issue discount(the “OID”) is being amortized over the life of the Notes.

 

Annual interest on the Senior Secured Floating RateNotes is equal to the applicable LIBOR rate plus a margin of 9.2%. Theapplicable LIBOR rate at June 30, 2005 was 3.41%. Interest payments on theNotes, which are required semi-annually through their maturity date, commencedon October 15, 2004. In addition, from and after September 30, 2006,in the event the Company does not satisfy certain leverage tests it will berequired to pay additional payment in kind (“PIK”) interest on the Notes of 2%per annum.

 

In connection with the issuance of the Notes, theCompany incurred $10.3 million of transaction costs, including$3.9 million of prepayment penalties, to repay the exit financingfacilities.

 

The Notes and Warrants were not separately transferableuntil the earliest to occur of 180 days after their issuance, or the dateon which a registration statement for a registered exchange offer with respectto the Notes is declared effective under the Securities Act.  The Notes were required to be registered withthe Securities and Exchange Commission (the “SEC”) by October 19, 2004.Since they were not registered by its given deadline, AETC was required to payliquidated damages until such registration became effective.  As of June 30, 2005, the amount ofliquidated damages payable was approximately $177,000.  On September 1, 2005, the exchange offerwas completed and the liquidated damages ended.

 

The indenture governing the Notes provides foroptional redemption, a repurchase provision upon the existence of excess cashflow, as defined therein, and contains covenants typical of such arrangementsincluding restrictions on capital expenditures and acquisitions of indebtednessas well as a covenant on the maintenance of a minimum trailing twelve monthsEBITDA (“LTM EBITDA”) as defined therein, of $23 million determinedquarterly to begin with the quarter ending March 31, 2006.

 

The Company believes that it will have sufficient LTMEBITDA computed quarterly to meet the covenant requirement at June 30,2006.  However based on currentprojections, the Company may not have sufficient LTM EBITDA computed quarterlyto meet the requirement at March 31, 2006 and may therefore be in defaultof the indenture.  The Company believesthat if this EBITDA shortfall should occur, it will be able to obtain a waiverof this covenant from the requisite percentage of bondholders.  As the Company believes it is probable thatthey can obtain such a waiver within the grace period, it has not reclassifiedthe long-term notes to short term as of June 30, 2005.

 

The Notes and related subsidiary guarantees are seniorsecured obligations and will rank equal in right of payment to all otherexisting and future senior indebtedness and senior in right of payment to allof the Company’s and its guarantor subsidiaries’ existing and futuresubordinated indebtedness. The Notes are secured by a first priority lien onsubstantially all of the Company’s and its guarantor subsidiaries’ unencumberedowned real properties and on substantially all of the Company’s and itsguarantor subsidiaries’ owned motor vehicles, and a second priority lien on theCompany’s and its guarantor subsidiaries’ assets that secure their obligationsunder the new senior credit facility on a first priority basis.

 

(b)                                 Concurrentlywith the issuance of the Notes, the Company entered into a senior creditfacility with Wachovia with up to $20.0 million of borrowing availabilityunder a revolving credit facility. In addition there was initially a$10.0 million letter of credit facility. The senior credit facility issecured by a first priority lien on substantially all of the Company’s and allof its guarantor subsidiaries’ assets, other than the first lien collateral andcertain excluded assets, and by a second priority lien on the first lien realproperty.

 

F-16

----

 

The borrowing capacity under the revolving creditfacility is based on 85% of the net amount of our eligible accounts receivable.Loans under the revolving credit facility bear interest at prime rate (theprime rate on June 30, 2005 was 6.00%) plus 1% per annum or, if we elect,the LIBOR rate (the 3-month LIBOR rate on June 30, 2005 was 3.12%) plus3.25% per annum. However, the $3.5 million portion of the senior creditfacility, which is the supplemental loan amount, bears interest at 12% perannum. Letters of credit are subject to a fee of 2% per annum, payable monthlyin arrears, and any amounts paid by lenders for a letter of credit will bearthe same rate as loans under our revolving facility. The Company paid a closingfee of $600,000 and is required to pay a servicing fee of $10,000 per month,plus pay Wachovia a monthly fee of 0.5% on any unused portion of its seniorcredit facility. The senior credit facility contains an EBITDA maintenancecovenant,  limitations on capitalexpenditures, as well as other events of default. From September 30, 2004and through November 30, 2004, the Company was in default of this EBITDAmaintenance covenant. However, on January 5, 2005, the Company received awaiver from Wachovia of this EBITDA maintenance covenant under the seniorcredit facility for the period from September 30, 2004 through November 30,2004. On March 3, 2005, April 15, 2005 and August 15, 2005 thesenior credit facility was amended to reset the EBITDA covenant through the endof the loan term to $23 million.  ThroughJune 30, 2005 the Company was in compliance with this EBITDA covenant.

 

 On October 14,2004, Wachovia amended its senior credit facility to allow Wachovia to makenon-revolving supplemental loans to the Company of up to $3.5 million.These supplemental loans, which are not subjected to borrowing baseavailability, do not increase the amount of the $20.0 million seniorcredit facility. The $3.5 million loan, which bears interest at 12% perannum, was funded by GSC, the junior participant to the supplemental loan, on October 14,2004. Under the terms of the definitive documentation of the supplemental loan,GSC may receive payment of the outstanding principal balance of thesupplemental loans if the Company’s excess availability, as defined in thesenior credit facility, is not less than $5.0 million for the 30 dayperiod immediately prior to the repayment of these loans and for each of thethree business days immediately prior to the date of repayment of theloans.  No principal payments have beenmade to GSC under the supplement loans.

 

The senior credit facility will terminate on its thirdanniversary. The borrowings under the senior credit facility have beenclassified as current. Early termination by us prior to the first, second andthird anniversaries of our senior credit facility will be subject to earlytermination fees of 3%, 2% and 1% of the maximum credit under the senior creditfacility, respectively.

 

(c)                                  OnAugust 5, 2004 the Company received $4,900,000 from GSC and signed asenior unsecured term note (the “GSC Note”). The GSC Note bears interest at 15%per annum and is payable monthly, in arrears, commencing August 31, 2004until September 2004 and quarterly, in arrears, thereafter. The GSC Notecontains identical covenants as the senior credit facility and matures theearlier of April 23, 2007 or such date as excess availability as definedby the senior credit facility is in excess of $7.0 million, after givingeffect to the repayment of principal of the GSC Note. In connection with thistransaction, GSC, Wachovia and the Company signed a subordination agreement,whereby the parties agree that the Company may pay interest if excessavailability is not less than $1.0 million and pay principal if excessavailability is in excess of $7.0 million, after giving effect to therespective repayments and no event of default (as defined in the senior creditfacility) shall exist or have occurred and be continuing.  No principal payments have been made to GSCunder the senior unsecured term note.

 

(d)                                 OnMarch 3, 2005, concurrently with the execution of the supplementalindenture to the indenture governing the Notes, the Company issued$15.0 million of third priority senior secured notes due 2008 (the “AdditionalIndebtedness”). The Additional Indebtedness was issued with warrants to acquire40,752 shares, or 5%, of the Company’s common stock (the “Additional Warrants”).$0.9 million of the purchase price was allocated to the AdditionalWarrants, which was based upon a valuation model prepared by an independentfinancial institution that was used for the Warrants issued with the Notes. Theoriginal issue discount is being amortized over the life of the AdditionalIndebtedness. In connection with the offering of the Additional Indebtedness,the Company incurred $2.3 million of transaction costs. Interest on theAdditional Indebtedness is 10% per annum in cash and PIK interest of 1% perannum, payable semi-annually in arrears on April 15 and October 15,which commenced on April 15, 2005. The Additional Indebtedness is securedby a third priority lien on all of the Company’s and its guarantor subsidiaries’real property and a third priority lien on those assets that secure the Companyand its guarantor subsidiaries’ obligations under the senior credit facility ona first priority basis. The holders of the Additional Indebtedness are allowedto vote and consent together as one class with the holders of the Notes, exceptin matters regarding the registration rights agreement. Although the AdditionalIndebtedness is not and will not be registered with the SEC, the AdditionalWarrants have registration rights.

 

Aggregate yearly maturities of long-term debt basedupon payment terms as of June 30, 2005, are as follows:

 
| 2006                                      |   | $           | 24,820,652  |   |
|-------------------------------------------|--------|-------------|-------------|--------|
| 2007                                      |   | 768,753     |        |
| 2008                                      |   | 135,507,121 |        |
| 2009                                      |   | 607,908     |        |
| 2010                                      |   | 559,929     |        |
| Thereafter                                |   | 569,952     |        |
| Subtotal                                  |   | 162,834,315 |        |
| Less unamortized  original issue discount |   | (2,697,021  | )           |
|                                      |   | $           | 160,137,294 |   |

 

F-17

----

 

**11.****                               ObligationsUnder Capital Leases**

 

During the year ended June 30, 2004, AETC enteredinto a Master Lease Agreement to acquire 161 vehicles for use in its school bustransportation operations. Assets under this lease aggregated $9,411,511.Payment terms range from 60 to 72 months, with skip payments in July, August andSeptember each year, with interest added to the debt in the same months.

 

In October 2004, an additional nine vehicles wereacquired at a cost of $401,850 and in February 2005, an additional fifteenvehicles were acquired at a cost of $924,790 for use in its school bustransportation operations.

 

Future annual lease payments under capital leaseobligations as of June 30, 2005 are as follows:

 
| 2006                                               |   | $         | 1,993,303 |   |
|----------------------------------------------------|--------|-----------|-----------|--------|
| 2007                                               |   | 1,993,303 |      |
| 2008                                               |   | 1,993,302 |      |
| 2009                                               |   | 1,672,845 |      |
| 2010                                               |   | 195,825   |      |
| Thereafter                                         |   | 101,977   |      |
| Total                                              |   | 7,950,555 |      |
| Amount representing  interest                      |   | 1,628,122 |      |
| Present value of future  minimum lease payments    |   | 6,322,433 |      |
| Current portion of  capital lease obligations      |   | 1,356,354 |      |
| Capital lease  obligations, net of current portion |   | $         | 4,966,079 |   |

 

Aggregate maturities under capital lease obligationsbased upon payment terms as of June 30, 2005 are as follows:

 
| 2006       |   | $         | 1,356,354 |   |
|------------|--------|-----------|-----------|--------|
| 2007       |   | 1,505,873 |      |
| 2008       |   | 1,672,025 |      |
| 2009       |   | 1,526,336 |      |
| 2010       |   | 166,742   |      |
| Thereafter |   | 95,103    |      |
| Total      |   | $         | 6,322,433 |   |

 

**12.****                               OtherExpense**

 

Other expenses consisted of the following for the yearended June 30, 2004 and 2005.

 
| ** **                          | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Loss (gain) on sale of  fixed asset |       | $                            | 1,058,818  |   | $ | (40,451 | ) |
| Loss (gain) other                   |       | (33,497                      | )          | 15,762 |   |
| Interest (income)                   |       | (272,609                     | )          | (45,057 | ) |
| Management fee (income)             |       | (56,340                      | )          | (21,000 | ) |
| GSCP Management fee  expense        |       | 400,000                      |       | 232,512 |   |
| Other expense                       |       | $                            | 1,096,372  |   | $ | 141,766 |   |

 

F-18

----

 

**13.****                               IncomeTaxes**

 

The benefit from (provision for) income taxes consistsof the following:

 
| ** **      | ** ** | **Year Ended June 30,** | ** ** |
|-----------------|------------|------------------------------|------------|
| ** **      | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Current:        |       |                         |       |   |   |
| Federal         |       | $                            | —     |   | $ | — |   |
| State and local |       | (86,000                      | )          | (104,800 | ) |
| Deferred:       |       |                         |       |   |   |
| State and local |       | 300,000                      |       | (372,000 | ) |
|            |       | $                            | 214,000    |   | $ | (476,800 | ) |

 

A reconciliation of the statutory federal income taxrate to the effective rate is as follows:

 
| ** **                                             | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Federal income tax rate                                |       | 34.0                         | %          | 34.0 | % |
| State and local income  taxes (net of federal benefit) |       | 0.3                          | %          | 0.2 | % |
| Increase (decrease) of  valuation allowance            |       | (33.4                        | )%         | (30.2 | )% |
| Reorganization costs                                   |       | (0.4                         | )%         | 6.6 | % |
| Discount on related  party debt acquisition            |       | —                       | %          | (8.1 | )% |
| Other                                                  |       | —                       | %          | (1.7 | )% |
| Effective tax rate                                     |       | 0.5                          | %          | 0.8 | % |

 

Deferred tax assets (liabilities) are comprised of thefollowing:

 
| ** **                         | ** ** | **Year Ended June 30,** | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Deferred tax assets:               |       |                         |       |   |   |
| Allowance for doubtful receivables |       | $                            | 767,000    |   | $ | 601,000 |   |
| Loss and tax credit carry forwards |       | 76,515,000                   |       | 35,551,000 |   |
| Accrued expenses and other         |       | 3,436,000                    |       | 4,065,000 |   |
|                               |       | 80,718,000                   |       | 40,217,000 |   |
| Deferred tax  liabilities:         |       |                         |       |   |   |
| Depreciation                       |       | (31,222,000                  | )          | (27,979,000 | ) |
| Intangible assets                  |       | (921,000                     | )          | (1,527,000 | ) |
| Forgiveness of indebtedness income |       | (16,480,000                  | )          | (6,418,000 | ) |
|                               |       | (48,623,000                  | )          | (35,924,000 | ) |
| Net deferred tax asset             |       | 32,095,000                   |       | 4,293,000 |   |
| Valuation allowance                |       | (32,717,000                  | )          | (5,215,000 | ) |
| Deferred tax  liabilities (net)    |       | $                            | (622,000   | ) | $ | (922,000 | ) |

 

The Company had available, at June 30, 2005, netoperating loss (“NOL”) carry forwards for regular federal tax purposes ofapproximately $171 million (after the reduction described below) whichexpire during the years 2012 through 2025. As described in Note 3, on December 24,2003, the Company’s POR became effective and the Company emerged from bankruptcyprotection. As a result of the reorganization, for federal and state income taxpurposes, approximately $92.8 million of indebtedness was consideredcancelled. The Company believes that this cancellation and related transactionswill result in a reduction of its available net operating loss carry forwardsof approximately $39.3 million, capital loss carry forwards ofapproximately $1.8 million and tax basis of its depreciable assets of$15.1 million and non-depreciable assets of $22.4 million. Further, shoulda change in ownership, as defined in Section 382 of the Internal RevenueCode occur, the Company’s ability to utilize its remaining NOL in future yearscould be significantly limited.

 

**14.****                               RelatedParty Transactions**

 

AETC incurred rent expense of $48,000 and $35,200 forthe years ended June 30, 2004 and 2005, respectively, in connection withthe lease of real property from an affiliate.

 

F-19

----

 

Upon the effectiveness of the POR on December 24,2003, AETG and AETC entered into a management services agreement, with GSCP, Inc.,an affiliate of GSC, a principal stockholder of the Company. Under theagreement, GSCP, Inc. agrees to advise and consult with our boards ofdirectors and management on certain business, operational and financial mattersand provides other advisory services. The agreement provides that AETG and AETCwill pay to GSCP, Inc. an annual fee of $500,000 for such services,$400,000 of which was allocated to the Company. The management services agreement terminates when GSC ceases to own anyshares of common stock issued upon the effectiveness of the POR.  For the years ended June 30, 2004 and2005, the Company incurred advisory costs of $232,512 and $400,000,respectively, all of which remain unpaid.

 

On February 10, 2004, the Company entered into amanagement agreement with Atlantic Transit II Corp. (“ATC”) and Atlantic SchoolBus Corp. (“ASBC”), subsidiaries of AETG. Under the agreement, the Companyprovides certain administrative services on behalf of ATC and ASBC. Theagreement provides that ASBC will pay the Company a monthly fee of $30 perroute vehicle.  For the years ended June 30,2004 and 2005 the company has earned $21,000 and $56,340, respectively.

 

In connection with the Company entering into theReceivable Agreement, as amended, the President and Chief Executive Officer ofthe Company has provided a personal guarantee in full support of the agreement,as required by Wachovia, for which he received a $175,000 guarantee fee (see Note4).

 

CNY and JBS entered into an agreement with AtlanticBus Distributors, Inc. (“ABD”), a wholly owned subsidiary of AETG, toorder certain buses through ABD. Central is required to deposit 20% of the costof these vehicles simultaneously with ABD’s receipt of these vehicles from themanufacturers and pay the balance to ABD upon Central’s delivery of thesevehicles to its customers or within 120 days, whichever comes first. Thepurchase price of each bus equals the price at which ABD purchased such bustogether with any costs incurred by ABD in connection with the purchase of anysuch vehicles. The Company sold the assets of Central New York Coach Sales andService, Inc. on August 18, 2003 and closed Jersey Bus Sales, Inc.The Company does not anticipate ordering any buses through this agreement inthe future.

 

During the years ended June 30, 2004 and 2005,total payments made by Central under this agreement were $19,116,476 and $0,respectively.

 

**15.****                               Equity**

 

As of June 30, 2004, and 2005, the Company’sauthorized capital stock consists of 1,303,200 shares, par value $.01 pershare, based upon an amendment to its certificate of incorporation, effective April 21,2004, whereby the Company split its authorized capital stock. AETG owns 100%(651,600 shares) of the Company’s outstanding capital stock. All share amounts,except par value, have been restated and adjusted to reflect this share split.There was no net effect on total shareholder’s equity as a result of the sharesplit.

 

**16.****                               Commitmentsand Contingencies**

 

**Leases**

 

Minimum rental commitments as of June 30, 2005for noncancellable equipment and real property operating leases are as follows:

 
| ** ** | ** ** | **Year Ended June 30, 2005** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **Real  Property**                | ** ** | **Transportation and  Other Equipment** | ** ** | **Total** | ** ** |
| 2006       |       | $                                 | 4,205,791  |   | $ | 4,460,973 |   | $ | 8,666,764 |   |
| 2007       |       | 3,100,651                         |       | 4,081,499 |   | 7,182,150 |   |
| 2008       |       | 2,841,230                         |       | 3,921,571 |   | 6,762,801 |   |
| 2009       |       | 2,458,926                         |       | 2,590,294 |   | 5,049,220 |   |
| 2010       |       | 2,127,904                         |       | 1,807,118 |   | 3,935,022 |   |
| Thereafter |       | 12,321,586                        |       | 1,971,905 |   | 14,293,491 |   |
|       |       | $                                 | 27,056,088 |   | $ | 18,833,360 |   | $ | 45,889,448 |   |

 

Total rental charges amounted to $8,337,968 and$10,214,299 for the years ended June 30, 2004 and 2005, respectively.

 

**Litigation**

 

The Company is a defendant with respect to variousclaims involving accidents and other issues arising in the normal conduct ofits business. Management and counsel believe the ultimate resolution of thesematters will not have a material impact on the financial position or results ofoperations of AETC. There are various claims, which are insured under anautomobile insurance policy issued by

 

F-20

----

 

Reliance NationalIndemnity Company (“Reliance”) for the period February 28, 1997 through December 31,1998. Reliance is insolvent and as such the New York Public Motor VehicleLiability Fund is required to provide coverage in lieu of Reliance. In May 2002,the New York State Insurance Department Liquidation Bureau notified the Companythat this fund is financially strained and will be unable to provide defense orindemnification for claims, which arose during the Reliance policy period. TheCompany has commenced an action against the Superintendent of Insurance of NewYork to compel him to provide coverage, however, any related claims will be settledunder the liabilities subject to compromise as a result of the reorganization.

 

**Environmental**

 

 The Company is aware that certain properties andfacilities it owns or operates may be subject to environmental remediation inthe future due to the potential impact of asbestos contaminating material andoffsite issues such as leaking underground storage tanks or previous or currentindustrial operations. In addition, the Company has recently received noticesof violations and potential violations related to certain environmentalmatters. The Company hired an environmental consultant, who completed Phase IEnvironmental Site Assessments on approximately seven of the Company’sproperties. Based upon the reports of the environmental consultant, the Companybelieves that any penalty or remediation cost would not be material. Inaddition, the Company has recently settled two environmental claims forimmaterial amounts. As a result, management and counsel do not believe that thepenalties, if any, will be material.

 

**Outstanding Letters of Credit**

 

Letters of credit totaling approximately $18,844,000and $15,344,000 related to the collateralization of self insurance deductiblesand worker’s compensation insurance and automobile liability insurance lossfunds, were outstanding as of June 30, 2004 and 2005, respectively.

 

**Performance Security**

 

AETC’s transportation contracts generally provide forperformance security in one or more of the following forms: performance bonds,letters of credit or cash retainages. At June 30, 2005, AETC secured theperformance of its DOE contracts through the use of cash retainages of 5% ofamounts due to AETC.

 

In most instances, AETC has opted to satisfy itssecurity performance requirements by posting performance bonds. At June 30,2004 and 2005 AETC has provided performance bonds aggregating approximately$44.0 million and $53.1million respectively.

 

**Employment Agreements**

 

At June 30, 2005, AETC has employment agreementswith certain executives which require payments of $1,177,000, $1,203,000 and$1,083,000 in fiscal year 2006, 2007, and 2008 respectively.

 

Under an employment agreement dated November 25,2003 with an executive, that executive receives a cash exit bonus, upon achange in control, equal to the fair market value, as of the date of suchchange in control, of 1.5% of all issued and outstanding Company common sharesimmediately following the effective date of the reorganization. The exit bonusis also due and payable on a reduced basis, as defined, in the event theexecutive leaves the Company. In the event a change in control has not occurredprior to December 31, 2010 the exit bonus is payable January 1, 2011.The amount of this exit bonus accrued as of June 30, 2005, isapproximately $81,600.

 

The same executive was eligible to receive aperformance bonus of $250,000, subject to increases based on certainprofitability levels to a maximum of $500,000, for 2006, since the Companysigned a contract with the DOE for school bus service beginning July 1,2005. On September 23, 2005 the Company paid out $250,000 of this bonus.

 

An executive of the Company has entered into anagreement with the major shareholder of AETG whereby that executive willreceive a bonus that will be paid by that shareholder based upon the value thatshareholder receives as a result of the sale of the Company.

 

**17.****                               RetirementPlans**

 

AETC sponsors a tax qualified 401(k) plan wherebyeligible employees can invest up to 15% of base earnings subject to a specifiedmaximum among several investment alternatives. An employer matchingcontribution up to a maximum of 2.5% of the employee’s compensation is alsoinvested. AETC’s contributions were approximately $387,000 and $362,000 for theyears ended June 30, 2004 and 2005, respectively.

 

F-21

----

 

AETC has a qualified Profit Sharing Plan for eligibleemployees (primarily drivers, mechanics and escorts not covered by uniondeferred compensation plans). AETC’s contributions are based upon hours worked.Participants are not allowed to make deferred contributions. AETC’scontributions were approximately $68,000 and $79,000 for the years ended June 30,2004 and 2005, respectively.

 

The Company contributed to the pension plans ofvarious unions covering drivers, mechanics and other workers as part of relatedunion agreements. Such contributions amounted $5,840,000 and $6,162,000 for theyears ended June 30, 2004 and 2005, respectively.

 

**18.****                               MajorCustomer and Concentration of Credit Risk**

 

For the years ended June 30, 2004 and 2005, revenuesderived from the DOE were the following:

 
| ** **                                 | ** ** | **Year Ended June 30,** | ** **  |
|--------------------------------------------|------------|------------------------------|-------------|
| ** **                                 | ** ** | **2005**                     | ** **  | **2004** | ** ** |
| Total revenues from  continuing operations |       | $                            | 363,675,565 |   | $ | 363,520,687 |   |
| DOE revenues—$                        |       | $                            | 160,830,952 |   | $ | 155,217,213 |   |
| DOE revenues—%                        |       | 44.22                        | %           | 42.70 | % |

 

As of June 30, 2004 and 2005, AETC had accountsreceivable including retainage from the DOE of $20,509,191 and $15,102,816,respectively.

 

At June 30, 2004 and 2005, substantially all cashand cash equivalents were on deposit with one major financial institution. Depositsheld with banks may exceed the amounts of insurance provided on such deposits.

 

Approximately three quarters of the Company’semployees are subject to twenty-nine collective bargaining agreements thateither will expire over the next three to four years, or in the case of fiveagreements, have already expired.

 

**19.****                               SubsequentEvents**

 

On July 6,2005, 201 West Sotello Realty Inc., a subsidiary of the Company, completed thesale and leaseback of its owned real property located in Los Angeles, California. The sale and lease back was pursuant to the Agreement and Escrow Instructionsfor Purchase of Real Estate (the “Agreement and Escrow Instructions”) with S.R.Partners (the “Buyer”).  Pursuant to the Agreement and EscrowInstructions, 201 West Sotello Realty Inc. sold to the Buyer its owned realproperty located in Los Angeles, California for a gross purchase price of$5,000,000.  In connection with the sale of the property, Atlantic Expressof L.A. Inc., a subsidiary of the Company, agreed to leaseback the premisesfrom the Buyer for a term of approximately ten years.  The triple netlease calls for a monthly payments of $39,583 with annual increments of2.5%.  Atlantic Express of L.A. Inc. will be responsible for all realproperty taxes and certain insurance costs under the lease.  The Company expects a gain on thistransaction of $737,268 and will be amortized over the leaseback period on astraight-line basis.

 

On August 3, 2005, the Company announced itsoffer to exchange up to (i) $105.0 million in aggregate principal amountof its 12% Series B Senior Secured Notes due 2008, which have beenregistered under the Securities Act of 1933, as amended, for its outstandingunregistered 12% Series A Senior Secured Notes due 2008 and (ii) $10.0million in aggregate principal amount of its Series B Senior SecuredFloating Rate Notes due 2008, which have been registered under the SecuritiesAct of 1933, as amended, for its outstanding unregistered Series A SeniorSecured Floating Rate Notes due 2008. On August 31, 2005, Atlantic ExpressTransportation Corp. announced the successful completion of this exchangeoffer.

 

On October 17, 2005, the Company sold 293,663shares of its Common Stock, $.01 par value per share, to AETG for an aggregatepurchase price of $4.9 million.  TheCompany is a wholly owned subsidiary of AETG. AETG obtained $3.7 million of the proceeds of the $4.9 millioninvestment from GSC and $1.2 million from the holder of the additionalindebtedness (Note 10).

 

**20.****                               SegmentInformation**

 

The operating segments reported below are segments ofthe company for which separate financial information is available and for whichoperating results as measured by income from operations are evaluated regularlyby executive management in deciding how to allocate resources and in assessingperformance. The accounting policies of the business segments are the same asthose described in the Summary of Significant Accounting Policies(Note 1).

 

The Company operates in two reportable segments:School Bus Operations and Paratransit and Transit Operations, both of which areconducted throughout the U.S.

 

F-22

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School Bus Operations provide services for thetransportation of open enrollment students through the use of standard schoolbuses, and the transportation of physically or mentally challenged studentsthrough the use of an assortment of vehicles, including standard school buses,passenger vans and lift-gate vehicles, which are capable of accommodatingwheelchair-bound students.

 

Paratransit and Transit Operations provide paratransitservice in New York and Arizona for physically and mentally challenged personswho are unable to use standard public transportation. The Company also reservedand scheduled passenger service requests under our contract in Arizona. Theremainder of our paratransit and transit operations revenue comes from fixedroute transit, express commuter line and charter and tour bus services. Ourcontract in Arizona, which generated approximately 11.7% and 5.7% of therevenues for our paratransit and transit operations in fiscal 2004 and 2005,respectively, expired in December 2004 and was not renewed.

 

The summarized segment information (excludingdiscontinued operations), as of and for the years ended June 30, 2004 and2005 are as follows:

 
| ** **                     | ** ** | **Year Ended June 30, 2004** | ** **  |
|--------------------------------|------------|-----------------------------------|-------------|
| ** **                     | ** ** | **School Bus  Operations**        | ** **  | **Paratransit  and Transit  Operations** | ** ** | **Total** | ** ** |
| Revenues                       |       | $                                 | 321,465,664 |   | $ | 42,055,023 |   | $ | 363,520,687 |   |
| Cost of operations             |       | 285,644,957                       |        | 35,033,632 |   | 320,678,589 |   |
| Income (loss) from  operations |       | (8,300,217                        | )           | 1,697,596 |   | (6,602,621 | ) |
| Total assets                   |       | 233,320,706                       |        | 21,459,733 |   | 254,780,439 |   |
| Capital expenditures           |       | 18,566,304                        |        | 668,872 |   | 19,235,176 |   |
| Depreciation and  amortization |       | 23,549,097                        |        | 2,737,828 |   | 26,286,925 |   |
|                                |            |                                   |             |  |  |  |  |  |  |  |

 
| ** **                     | ** ** | **Year Ended June 30, 2005** | ** **  |
|--------------------------------|------------|-----------------------------------|-------------|
| ** **                     | ** ** | **School Bus  Operations**        | ** **  | **Paratransit  and Transit  Operations** | ** ** | **Total** | ** ** |
| Revenues                       |       | $                                 | 319,604,294 |   | $ | 44,071,271 |   | $ | 363,675,565 |   |
| Cost of operations             |       | 298,907,448                       |        | 38,490,635 |   | 337,398,083 |   |
| Income (loss) from  operations |       | (18,240,314                       | )           | 1,072,197 |   | (17,168,117 | ) |
| Total assets                   |       | 229,149,965                       |        | 17,885,499 |   | 247,005,464 |   |
| Capital expenditures           |       | 5,994,616                         |        | 2,196,812 |   | 8,191,428 |   |
| Depreciation and  amortization |       | 22,944,663                        |        | 2,084,100 |   | 25,028,763 |   |
|                                |            |                                   |             |  |  |  |  |  |  |  |

 
| ** **                                                                                  | ** ** | **Years Ended June 30** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Reconciliation  to net income (loss)**                                                    | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands)**           | ** ** |
| Income (loss) from  operations                                                              |       | $                            | (17,168    | ) | $ | (6,603 | ) |
| Forgiveness of indebtedness income                                                          |       | —                       |       | 101,493 |   |
| Interest expense                                                                            |       | (23,514                      | )          | (25,196 | ) |
| Reorganization costs                                                                        |       | (566                         | )          | (11,177 | ) |
| Other income (loss)                                                                         |       | (1,096                       | )          | (142 | ) |
| Income (loss) before benefit from (provision for)  income taxes and discontinued operations |       | $                            | (42,344    | ) | $ | 58,375 |   |

 

**21.****                               ValuationAllowances**

 
| ** **                                  | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions-  Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|--------------------------------|------------|
| Year Ended  June 30, 2004              |       |                                 |       |                                            |       |           |       |                           |       |
| Allowance for doubtful  accounts (1)        |       | 883,000                              |       | 241,000                                         |       | (211,000       | )          | 1,335,000                      |       |
| Valuation allowance for  deferred taxes (2) |       | $                                    | 29,483,000 |                                            | $          | —         |       | $                              | 24,268,000 |   | $ | 5,215,000 |   |
| Year Ended June 30,  2005:             |       |                                 |       |                                            |       |           |       |                           |       |
| Allowance for doubtful  accounts (1)        |       | 1,335,029                            |       | 733,311                                         |       | 363,490        |       | 1,704,850                      |       |
| Valuation allowance for  deferred taxes (2) |       | 5,215,000                            |       | 27,502,000                                      |       | —         |       | 32,717,000                     |       |
|                                             |            |                                      |            |                                                 |            |                |            |                                |            |  |  |  |  |

 

F-23

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(1)                                  Deductionsfrom provisions represent losses or expenses for which the respectiveprovisions were created. In the case of the provision for doubtful accounts,such deductions are reduced by recoveries of amounts previously written off.

 

(2)                                  Adjustmentsassociated with the Company’s assessment of the deferred tax assets. For theyear ended June 30, 2004 the valuation allowance was reduced byapproximately $20.5 million due to primarily the pre-tax income effect ofthe forgiveness of indebtedness income impacting the related federal and statenet operating loss carry forwards.

 

F-24

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on November 16, 2005.

 
|   | Atlantic Express Transportation Corp. |
|--------|---------------------------------------|
|   |                                  |
|   |                                  |
|   | By:                                   |  /s/ Neil J. Abitabilo |   |
|   |                                  |  Neil J. Abitabilo |
|   |                                  |  Chief Financial Officer |
|   |                                  |  (Principal Financial and Accounting Officer) |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed by each of the following persons onbehalf of the Registrant and in the capacities indicated on  November 16, 2005.

 

 
| **SIGNATURE** | ** **            | **TITLE**  |
|---------------|-----------------------|------------|
| ** **    | ** **            | ** ** |
|          | /s/ Peter Frank       |       |   | Chairman of the Board of Directors |
|          | Peter Frank           |       |   |   |
|          |                  |       |   |   |
|          | /s/ Domenic Gatto     |       |   | Director, Chief Executive Officer and President |
|          | Domenic Gatto         |       |   | (Principal Executive Officer) |
|          |                  |       |   |   |
|          | /s/ Matthew Kaufman   |       |   | Director |
|          | Matthew Kaufman       |       |   |   |
|          |                  |       |   |   |
|          | /s/ Adam Draizin      |       |   | Director |
|          | Adam Draizin          |       |   |   |
|          |                  |       |   |   |
|          | /s/ Neil J. Abitabilo |       |   | Chief Financial Officer |
|          | Neil J. Abitabilo     |       |   | (Principal Financial and Accounting Officer) |

 

F-25

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