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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24576
ASCHE TRANSPORTATION SERVICES, INC.
(formerly known as Aasche Transportation Services, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 36-3964954
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
10214 NORTH MT. VERNON ROAD
SHANNON, ILLINOIS 61078
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (815) 864-2421
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per Share
Warrant to purchase one share of Common Stock, par value $.0001 per Share
(Title of Class)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
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 information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A.
The aggregate market value of voting stock held by non-affiliates of the
registrant based upon the closing sale price of the stock as reported on the
Nasdaq National Market on March 25, 1999, was $15,356,820.
At March 25, 1999, 5,098,930 shares of the registrant's Common Stock were
outstanding.
DOCUMENT INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for the annual meeting of
stockholders, estimated to be held on May 19, 1999, expected to be filed with
the Commission not later than April 16, 1999, is incorporated by reference into
Part III of this Form 10-K/A.
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PART I
ITEM 1. BUSINESS
GENERAL
Asche Transportation Services, Inc. (the "Company," formerly known as
Aasche Transportation Services, Inc.), through its subsidiaries is a diversified
transportation services company. The Company operates primarily in two segments
of the transportation services industry. Asche Transfer, Inc. ("ATI") and AG
Carriers, Inc. ("AG") (collectively, the "Temperature-Controlled Segment") are
truckload operations delivering a variety of foods and other products for many
Fortune 500 companies that require temperature-controlled service and
"just-in-time" delivery. Specialty Transportation Services, Inc. ("STS") (the
"Municipal Solid Waste Segment") is the only national and the largest for-hire
carrier of municipal solid waste and special waste in transfer vehicles in the
United States. STS has long-term contracts ranging from five to twenty years
with municipalities and large national waste service companies, including Waste
Management, Inc., Republic Industries, Inc., Allied Waste Services, Inc. and
Browning-Ferris Industries, Inc.
MEASUREMENT OF SEGMENT PROFIT AND LOSS AND SEGMENT ASSETS
The Company evaluates performance and allocates resources based on net
profit and loss from operations. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. The Municipal Solid Waste Segment financial data includes
parent company subordinated debt of $5,375, less unamortized debt discount of
$537 issued by the parent company and related debt issuance cost of $210, less
accumulated amortization of $74 in connection with the acquisition of the net
assets of the municipal solid waste transport division of Jack Gray Transport,
Inc. (the "Waste Transport Business"). The related interest expense of $611,
amortization of debt issuance costs of $74 and amortization of debt discount of
$264 are also included in the Municipal Solid Waste Segment.
FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS
The Company's reportable segments are business units that offer
different transportation services. The reportable segments are each managed
separately because of the distinct differences in the operations.
YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
TEMPERATURE- MUNICIPAL
CONTROLLED SOLID WASTE TOTALS
---------- ----------- ---------
<S> <C> <C> <C>
Net revenues ...................................... $ 60,762 $ 52,669 $113,431
Depreciation and amortization ..................... 3,972 2,714 6,686
Operating income .................................. 3,871 4,232 8,103
Interest expense .................................. 1,353 3,654 5,007
Income tax provision .............................. 1,157 176 1,333
Segment profit (loss) ............................. 1,740 (877) 863
Other significant noncash items
included in segment profit (loss):
Warrant accretion expense .................... -- 786 786
Amortization of debt issuance costs .......... -- 280 280
Amortization of debt discount ................ -- 264 264
Other ........................................ -- 63 63
Segment assets .................................... 30,890 57,284 88,174
Expenditures for long-lived assets ................ 5,052 1,622 6,674
OPERATING INCOME
Total operating income for reportable segments .... $ 8,103
Parent company operating loss ..................... (1,248)
--------
Total consolidated operating income .......... $ 6,855
========
SEGMENT PROFIT (LOSS)
Total profit for reportable segments .............. $ 863
Parent company loss ............................... (803)
--------
Total consolidated profit .................... $ 60
========
ASSETS
Total assets for reportable segments .............. $ 88,174
Parent company assets ............................. 104
--------
Total consolidated assets .................... $ 88,278
========
</TABLE>
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OTHER SIGNIFICANT ITEMS
<TABLE>
<CAPTION>
PARENT COMPANY
SEGMENT TOTALS ADJUSTMENTS CONSOLIDATED TOTALS
-------------- ----------- -------------------
<S> <C> <C> <C>
Interest expense.................................. $ 5,007 $ 59 $ 5,066
Income tax provision (benefit).................... 1,333 (503) 830
</TABLE>
STRATEGY
Temperature-Controlled Segment
The business strategy of the Temperature-Controlled Segment is to offer
premium-quality services to high-volume selective customers with significant
temperature-controlled transportation and "just-in-time" delivery requirements.
The "just-in-time" concept stresses the importance of precise delivery times and
the need for dependability in order to control inventory levels and limit
handling. The Company believes that these customers provide more predictable
and, in some respects, less price-sensitive business because the Company
believes that service, rather than price, generally is the primary factor that
dictates its customers' choice of carrier.
Municipal Solid Waste Segment
The business strategy of the Municipal Solid Waste Segment is to expand
its municipal solid waste transportation business by continuing to build strong,
long-term relationships with major customers within the municipal solid waste
market. The market has been created during the past ten years as a result of the
outsourcing of transportation services by large waste services companies who
have reduced and eliminated their "non-collection" trucking operations. With
landfill sites being
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located, in some instances, over 100 miles from cites and in larger regional
sites to serve multiple metropolitan centers, the municipal solid waste that is
collected by waste service companies at residential and commercial sites in
collection vehicles is unloaded and compacted in semi-trailers at transfer
stations operated by waste services companies for transport to landfill sites.
Transfer stations are facilities where solid waste is received from collection
vehicles and then transferred to, and in some cases compacted in, large
specially constructed trailers for transportation to disposal or resource
recovery facilities.
STS utilizes specially designed trailers and unloading equipment as
well as experienced personnel to handle the constant flow of municipal solid
waste from transfer stations to landfill sites. Since STS has developed
significant relationships with large national waste services companies, the
Company believes that STS is favorably positioned to capture a substantial share
of the newly outsourced business.
The Company believes that the growth of the Municipal Solid Waste
Segment will occur by:
- Supplementing continued growth with increased marketing efforts
and more aggressive bidding, in particular by pursuing the
opportunities available through the outsourcing of trucking by
the large waste services companies;
- Seeking suitable acquisitions which will allow STS greater access
to new major customers in additional geographic markets,
primarily by acquiring smaller and regional independent
companies;
- Expanding into additional regions by establishing new terminals
in areas of high population to provide a wider network for
developing new business; and
- Leveraging its transportation capabilities to capture outsourcing
opportunities for other types of solid waste and recyclables
including biosolids, sludge, saturated soils, scrap metal, paper,
green waste and compost.
MARKETING
Temperature-Controlled Segment
AG and ATI market high-quality, "just-in-time," temperature-controlled
services in the full-truckload carrier market, primarily to high-volume
customers with predictable movements in traffic lanes served by the
Temperature-Controlled Segment. ATI and AG emphasize their use of
technologically advanced systems and a late-model fleet in attracting large
national shippers of temperature-controlled commodities. The "just-in-time"
concept stresses the importance of precise delivery times and the need for
dependability in order to control inventory levels and limit handling. Full
truckload operations typically involve a single shipment occupying the entire
carrying capacity of a semi-trailer, moving directly from origin to destination.
The full truckload segment generally is less capital intensive, more fragmented
and populated by smaller firms than the less-than-truckload segment.
ATI and AG target the Midwest, Southeast, Northeast and South Central
United States as their principal service areas based upon their success in
developing significant customers in these markets. In
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particular, the Southeast, Northeast and South Central regions have generated
outbound delivery opportunities for the return trip to the Midwest. Management
believes these regions offer significant opportunities to service the needs of
national shippers of temperature-controlled commodities. Because of their
presence in these regions, ATI and AG are becoming increasingly competitive for
return shipments, thereby reducing empty miles, improving productivity and
increasing overall profitability.
Municipal Solid Waste Segment
STS markets primarily to large national waste services companies who
outsource the transportation of the municipal solid waste from transfer stations
to landfill sites. By establishing and performing under contracts with such
waste services companies in key markets in the United States including New York,
Los Angeles, Dallas, Phoenix, Baltimore, St. Louis, Portland, Birmingham and
Nashville, the Company believes that STS has positioned itself to attract
additional business in new and existing markets. STS also markets to cities and
other municipalities who contract directly with trucking companies for waste
hauling transportation services.
CUSTOMERS AND OPERATIONS
Temperature-Controlled Segment
The customers of the Temperature-Controlled Segment consist primarily
of high-volume shippers that have significant temperature-controlled
transportation requirements. Management believes these major customers provide
more predictable and, in some respects, less price-sensitive business. ATI and
AG are currently "core carriers" for Coca-Cola, Hershey, Tropicana Foods,
Americold, S.C. Johnson Wax, Schreiber Foods, Abbott Laboratories, Baxter
International and Kraft Foods. "Core-carrier" relationships involve strategic
alliances between volume shippers and their distribution partners dedicated to
transporting goods.
Generally, ATI and AG determine freight rates through direct
negotiations with their customers, rather than relying upon published tariffs
which maintains flexibility in rapidly responding to the varying service demands
of their customers. ATI and AG have written contracts with substantially all of
their customers. The contracts generally require the customer to use ATI and AG
for a specified minimum number of shipments each year and may be terminated by
either party upon 30 to 60 days' written notice. The loss of any of ATI's and
AG's largest customers could adversely affect the profitability of ATI and AG.
Municipal Solid Waste Segment
As of December 31, 1998, substantially all of STS' revenue was under
long-term contracts, with terms ranging from five to twenty years. STS has
written contracts with Waste Management, Inc., Republic Industries, Inc., Allied
Waste Services, Inc. and Browning-Ferris Industries, Inc. STS also has contracts
with the City of Phoenix and the municipal authority of Portland, Oregon. STS
recently entered into a three-year agreement to transport biosolids, sludge and
saturated soils for a subsidiary of Synagro Technologies, Inc. which has begun
to outsource the transportation of such waste throughout the entire country.
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Long-term municipal waste contracts are bid competitively and are
typically awarded to the low-cost bidder. A contract with a waste services
company may be awarded on a competitive basis or on a negotiated basis.
Historically, in the waste services organizations, decisions have been made at
the regional level so that the regional supervisor has been given the authority
to select an independent carrier. As these companies continue to stress the need
for outsourcing of waste transportation to their landfills, STS believes that it
is well positioned to receive a substantial amount of new business. STS has won
waste transportation contracts primarily by charging competitive prices and by
offering quality service with late-model, specially designed trailers and
unloading equipment, and experienced personnel. Volume increases within these
contracts can occur each year due to the population growth and aggressive sales
by the waste companies.
Under each contract, STS has been granted the exclusive right to
transport all of the solid waste from a designated transfer station to the
landfill site. All of the contracts provide for annual adjustments in the event
of changes in the Consumer Price Index and provide that in the event of a breach
by STS, the agreement may be terminated only after written notice is given to
STS and an opportunity to cure the breach. The contracts do not have a
guaranteed volume or number of loads, although many contracts have minimum size
specifications for loads. STS does not pay any tipping fees at the transfer
stations or at the landfill sites.
REVENUE EQUIPMENT AND COMMUNICATION SYSTEMS
Temperature-Controlled Segment
The Temperature-Controlled Segment purchases or leases high-quality,
late-model tractors and temperature-controlled trailers manufactured to its
specifications. ATI and AG also contract with owner-operators to provide
additional tractors and trailers. The Temperature-Controlled Segment has
established standard specifications for the purchased tractors and trailers to
simplify driver training, control the cost of maintaining a spare parts
inventory, enhance its preventive maintenance program and increase fuel economy.
The tractors are equipped with optimal comfort and safety features, such as
air-conditioning, high-quality interiors, power steering, engine brakes and
sleeper cabs.
As of December 31, 1998, 504 late-model tractors, including 71 tractors
which are owned by owner-operators, and 610 temperature-controlled trailers were
maintained by the Temperature-Controlled Segment.
All of the tractors in the Temperature-Controlled Segment are equipped
with a two-way, satellite-based tracking and communication system manufactured
by Qualcomm(TM), Incorporated. The Company has a fully integrated management
system that utilizes an IBM AS/400 computer with software from Innovative
Computing Corporation. These technological systems allow dispatchers to monitor
the location and delivery schedules of all shipments and equipment, maintain
constant communications with drivers, coordinate routes and maximize utilization
of drivers and equipment.
Municipal Solid Waste Segment
As of December 31, 1998, 346 late model tractors and 782 trailers were
maintained for the transportation of municipal solid waste. The Municipal Solid
Waste Segment also owns and operates 14 "tipper" unloading machines which are
located in various landfills throughout the country. A "tipper"
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unloading machine is used to lift and tilt a trailer to a 70 degree angle to
dump the solid waste out of the trailer. In addition to the Municipal Solid
Waste Segment owned tractors, 169 tractors are supplied by owner-operators which
permits the Municipal Solid Waste Segment to quickly expand its fleet to meet
the needs of the customers.
After a period of initial use (generally 2 to 3 years), substantially
all of the tractors in the Temperature-Controlled Segment are converted and used
by the Municipal Solid Waste Segment for their remaining useful life. During the
conversion process, which takes approximately two weeks, the body frame is
shortened, the sleeper cab is removed, the unit is painted and any other
necessary customization that is required is performed. By keeping the equipment
longer, the Company is able to lower the overall cost of the equipment as well
as provide STS an additional source of equipment during periods of growth.
DRIVERS AND OWNER-OPERATORS
General
All of the Company's drivers must meet specific standards relating
primarily to driving experience, personal evaluation, safety record and all
Department of Transportation ("DOT") driver qualification mandated criteria
including commercial driver's license qualifications, physical examinations,
drug testing and employer verification background checks. The Company attracts
drivers with competitive compensation and benefit packages and with late-model,
comfortable tractors.
Temperature-Controlled Segment
The drivers in the Temperature-Controlled Segment are compensated on
the basis of miles driven and number of stops in transit or deliveries
completed. All such drivers are paid by the mile operated, based upon the number
of years of experience and service. In addition, drivers have the right to earn
bonuses based on safety requirements, annual mileage and years of service with
the Company. All drivers and other employees are eligible to participate in the
Company's 401(k) Plan, which includes an employee stock ownership plan, and
health, vision, life and dental insurance plans.
The over-the-road, long-haul, truckload segment of the trucking
industry, of which the Temperature-Controlled Segment is a part, experiences
significant driver turnover. In addition, because of strict regulations, the
trucking industry has a limited pool from which to select qualified drivers. As
a result, the Temperature-Controlled Segment must compete with other
transportation service companies for the currently available drivers. Management
anticipates that the intense competition for qualified drivers in the trucking
industry will continue. In an effort to increase the recruitment of experienced,
qualified drivers and to improve the retention of these drivers, the
Temperature-Controlled Segment has formed a driver retention committee that
meets on a regular basis to address specific recruitment and retention issues.
As a direct result of this process, the Temperature-Controlled Segment has
constructed a driver facility in Shannon, Illinois that includes a diner that
provides meals to drivers, an orientation room, a drivers lounge, sleeping
quarters for drivers, laundry and shower facilities among other benefits.
Although the Company currently has an adequate number of drivers in the
Temperature-Controlled Segment, there can be no assurance that the Company will
not be affected by a shortage of qualified drivers in the future.
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In addition to its employees, the Temperature-Controlled Segment
contracts with a select group of owner-operators who own and operate their own
tractors and in certain instances, their own trailers. The owner-operators are
compensated on the basis of a percentage of the revenue derived from the hauling
of each shipment. The Temperature-Controlled Segment's selection process for
independent owner-operators is substantially the same as the process for
employee drivers. Each owner-operator is required to enter into an
owner-operator lease agreement with the Temperature-Controlled Segment, which is
cancelable by either party upon thirty days' notice. The Temperature-Controlled
Segment believes that owner-operators provide the Temperature-Controlled Segment
with an additional source of drivers, particularly during periods of peak demand
for transportation services.
Municipal Solid Waste Segment
The drivers of the Municipal Solid Waste Segment are generally
compensated on the basis of a percentage of the revenue derived from the hauling
of each load or at a flat rate per load. The drivers and other employees are
eligible to participate substantially in the same benefits that are offered to
drivers and other employees in the Temperature-Controlled Segment. The Company
also utilizes owner-operators in the Municipal Solid Waste Segment who are
compensated on the same basis as employee drivers.
Because all of the municipal solid waste hauling routes can be driven
in one day or less, STS has not experienced a shortage of qualified drivers.
SAFETY AND INSURANCE
The Company's safety department is responsible for training and
supervising personnel to keep safety awareness at its highest level. The Company
has implemented an active safety and loss prevention program at its corporate
headquarters and its regional terminals including establishing a safety
committee to promote safety and heighten awareness throughout the organization.
ATI and AG have received a "satisfactory" safety and fitness rating (the highest
rating) from the DOT. STS has not yet been rated by the DOT.
The emphasis on safety begins in the hiring and orientation process,
where prospective employees are required to provide a current medical examiner's
certificate, complete orientation, safety and proficiency training and submit to
drug testing in accordance with all applicable DOT requirements. The Company's
safety and loss prevention program includes ongoing education, random drug
testing, training and retraining of drivers regarding DOT compliance issues,
safe vehicle operations, company policies and procedures and accident reporting.
The Company is committed to securing appropriate insurance coverage at
cost-effective rates. The primary claims that arise in the trucking industry
consist of cargo loss and damage, personal injury, property damage and workers'
compensation. The Company maintains insurance that it believes is adequate to
cover its liabilities and risks.
FUEL MANAGEMENT
The Temperature-Controlled Segment manages fuel purchases by directing
its drivers to certain truck stops that give discounts in return for volume
purchases on a recurring basis. Through the use of
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computerized monitoring devices imbedded in the engines of its tractors in the
Temperature-Controlled Segment, the Company monitors fuel usage, miles per
gallon and cost per mile. The Municipal Solid Waste Segment has direct purchase
agreements with national fuel suppliers, as well as a cost management program
for any fuel purchased. The Company has not experienced any difficulty in
maintaining fuel supplies sufficient to support its operations. Historically,
the Company has been able to pass on a portion of fuel price increases to its
customers. Nevertheless, shortages of fuel, increases in fuel prices or fuel tax
rates or rationing of petroleum products could have a materially adverse effect
on the operations and profitability of the Company. In the case of the Municipal
Solid Waste Segment, fuel increases are recovered through the Consumer Price
Index rate adjustment provisions in the waste hauling contracts.
COMPETITION
The trucking industry, in general, is highly competitive and
fragmented. The Temperature-Controlled Segment competes primarily with other
long-haul, temperature-controlled truckload carriers, private fleets operated by
existing and potential customers and, to a lesser extent, railroads. The other
trucking companies in the temperature-controlled segment possess substantially
greater financial resources, operate more equipment or carry a larger volume of
freight than the Company. The Temperature-Controlled Segment also competes with
other motor carriers in hiring qualified drivers.
The Municipal Solid Waste Segment competes primarily with smaller
privately owned regional trucking companies and local independent hauling
operations. The Company also competes with rail and barge companies for solid
waste transportation.
REGULATION
The Company's drivers and independent contractors must comply with the
safety and fitness regulations promulgated by the DOT, including those relating
to drug and alcohol testing and hours of service. The Company's operations are
subject to various federal, state and local environmental laws and regulations,
implemented principally by the Environmental Protection Agency and similar state
regulatory agencies, governing the management of hazardous wastes, other
discharge of pollutants into the air and surface and underground waters and the
disposal of certain substances. Management believes that its operations are in
compliance with current laws and regulations.
EMPLOYEES
As of December 31, 1998, the Company employed 1,170 persons, of whom
874 were drivers, 296 were maintenance and support personnel including
management and administration, and the Company contracted with 159
owner-operators. As of December 31, 1998, approximately 150 of the employees in
the Municipal Solid Waste Segment were represented by collective bargaining
units and the Company has never experienced a work stoppage. STS has reached a
collective bargaining agreement with workers in Oregon which expires December
31, 1999. Four terminals in the Municipal Solid Waste Segment are affiliated
with the International Brotherhood of Teamsters. The Company believes that its
relations with its employees are good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
LARRY L. ASCHE, age 47, has served as Chairman and Director of the
Company since July 1994 and as Chief Executive Officer since November 1996. Mr.
Asche also served as Chief Operating Officer from July 1994 to November 1996.
Mr. Asche has served as President and Director of ATI since its incorporation in
February 1983. He also serves as Chairman of the Board of AG and Vice President
and Director of STS. Mr. Asche acquired the business from Clarence Asche, Mr.
Asche's uncle, in 1973 and operated ATI for ten years as a sole proprietorship.
Mr. Asche is the husband of Diane L. Asche.
KEVIN M. CLARK, age 43, has served as President and Director of the
Company since July 1994. Mr. Clark also served as Chief Executive Officer from
July 1994 to November 1996. Since May 1987, Mr. Clark has served as Vice
President of ATI. He also serves as Vice-President of AG and Vice-President of
STS. Prior to joining ATI, Mr. Clark served for over two years as a management
consultant to ATI. From 1982 to 1984, Mr. Clark was Vice President and Director
of Batt Trucking, Inc., Caldwell, Idaho, a refrigerated trucking company. From
1980 to 1984, Mr. Clark was the founder and President of National Traffic
Services Corporation, Boise, Idaho, a management consulting firm providing
regulatory compliance assistance to regional and national transportation
companies. Prior to that time, Mr. Clark served as the Transportation Auditor
and Acting Director of the Idaho Public Utilities Commission, Boise, Idaho and
prior thereto, he was a transportation specialist with Consolidated Freightways,
Boise, Idaho. Mr. Clark has a B.S. degree in business from Ottawa University,
Phoenix, Arizona. Mr. Clark has also received a Transportation Practitioner
Degree from the College of Advanced Traffic, Chicago, Illinois and has been
admitted to practice before the Interstate Commerce Commission and Federal
Maritime Commission. Mr. Clark has served as Chairman of the Advisory Board of
Directors of the University of Georgia Trucking Profitability Strategies
Conference. He is also the author of three books in the transportation and
business fields and has been a frequent speaker for various national
organizations.
LEON M. MONACHOS, age 47, has served as a Director of the Company since
March 1996 and as Chief Financial Officer since May 1996. Since September 1996,
Mr. Monachos has served as Vice-President - Finance of ATI and AG. He also
serves as Vice-President - Finance and Director of STS. From October 1995 to May
1996, Mr. Monachos had been an advisor to the president and founder of a
privately-held transportation services company. From June 1986 to September
1995, he was employed at Ernst & Young LLP, a public accounting firm, most
recently as Senior Manager. Mr. Monachos has a B.S. degree from the University
of Illinois and is a certified public accountant.
GARY I. GOLDBERG, age 55, has served as Vice President of the Company
since February 1998 and a Director since July 1996. Mr. Goldberg is President
and a Director of STS. From 1977 to 1997, Mr. Goldberg served as Executive Vice
President of Jack Gray Transport, Inc. ("JGT"). Prior to joining JGT, he was
employed by Material Service Corporation and Vulcan Materials Company as
controller for eight years. Mr. Goldberg has a B.A. degree in commerce from
DePaul University.
DIANE L. ASCHE, age 45, has served as Vice President, Secretary and
Director of the Company since July 1994. Mrs. Asche has served as Vice
President, Secretary and Director of ATI since its incorporation in February
1983 and in addition, serves as Secretary of AG and STS. Mrs. Asche is the wife
of Larry L. Asche.
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ITEM 2. PROPERTIES
The Company's corporate headquarters and principal terminal are located
on a five-acre tract in Shannon, Illinois which is owned by ATI and consists of
six buildings with 4,400 square feet of office space, 12,000 square feet of
space devoted to equipment maintenance and repair, as well as two acres of
parking space. ATI operates a 15,000 square-foot terminal, warehouse and office
facility in Apopka, Florida for its foliage division which is leased from an
unrelated party under a five-year lease. ATI owns a 70-door, 10,000 square-foot
regional terminal and maintenance facility in Conley, Georgia and leases from an
unrelated party a 13,000 square-foot office facility, approximately 13,000
square-foot shop area and parking area in Tontitown, Arkansas under a ten-year
lease.
AG owns and operates a regional terminal and maintenance facility in
Tavares, Florida consisting of 6,000 square feet of office space and 2.5 acres
of parking. AG rents two additional acres of parking adjacent to the terminal
facility from Richard S. Baugh, a director of the Company, under a five-year
lease.
STS owns or leases 19 terminals in the following cities: Irondale,
Alabama; Chandler, Arizona; Lancaster, California; Moreno Valley, California;
Bradenton, Florida; Granite City, Illinois; Indianapolis, Indiana; Valparaiso,
Indiana; Nicholasville, Kentucky; Baltimore, Maryland; Freeport, New York;
Greensboro, North Carolina; Arlington, Oregon; Portland, Oregon; Bigler,
Pennsylvania; Duncan, South Carolina; Camden, Tennessee; Irving, Texas and
Federal Way, Washington. STS also utilizes the maintenance facility and a
portion of ATI's terminal in Conley, Georgia as an office, as well as leases
office space in Portage, Indiana. All leases are with unrelated parties.
ITEM 3. LEGAL PROCEEDINGS
The Company has been from time to time a party to litigation incidental
to its business, primarily involving claims for personal injury and property
damage incurred in the transportation of freight. The Company has not received
notice of any material pending claims other than those arising from vehicle
accidents and there are no environmental, regulatory, or other governmental
proceedings pending against the Company. The Company maintains insurance that it
believes is adequate to cover its liability risks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the
fourth quarter of fiscal 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the Nasdaq National Market
under the symbol ASHE. The following table shows the quarters' high and low
closing prices as reported by Nasdaq.
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW FISCAL 1997 HIGH LOW
----------- ---- --- ----------- ---- ---
<S> <C> <C> <C> <C> <C>
First Quarter.......................5 1/2 3 5/16 First Quarter................7 1/16 4 3/4
Second Quarter......................8 15/32 4 Second Quarter...............6 1/8 3 7/8
Third Quarter.......................7 1/4 3 9/16 Third Quarter................5 3 13/16
Fourth Quarter......................5 1/2 2 3/4 Fourth Quarter...............4 3/4 2 1/2
</TABLE>
As of March 25, 1998 there were approximately 212 holders of record and
approximately 2,700 beneficial holders of the Company's common stock.
The Company has never paid cash dividends on its common stock and the
Board of Directors intends to continue a policy of retaining any earnings for
use in the Company's operations. The Company does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's loan agreement
contains a prohibition on the payment of any cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The statements of operations data and the balance sheet data are
derived from the audited financial statements and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere. (in thousands, except per share data)
12
<PAGE> 13
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998(4) 1997 1996 1995 1994
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES ......................................... $ 113,431 $ 65,170 $ 77,365 $ 67,748 $ 34,034
OPERATING EXPENSES:
Salaries, wages and benefits .................... 42,065 23,403 27,109 24,352 11,605
Fuel ............................................ 13,581 10,867 13,350 10,532 4,889
Purchased Transportation ........................ 24,180 11,185 10,772 7,148 4,802
Supplies and maintenance ........................ 12,053 6,317 7,032 6,369 3,256
Depreciation and amortization ................... 6,686 5,354 8,547 7,887 3,309
Taxes and licenses .............................. 1,754 1,667 2,073 1,762 792
Insurance ....................................... 3,201 2,079 2,838 2,784 1,266
Communications and utilities .................... 1,448 821 818 809 431
Gain (loss) on disposition of
equipment(1) .................................. (387) (905) (1,165) (323) (74)
Litigation settlement(2) ........................ -- -- 150 -- --
Polar restructuring expense(3) .................. -- -- 490 -- --
Investment write-off ............................ -- -- 100 -- --
Writedown of equipment to net
realizable value(1) ........................... -- -- 1,155 -- --
Severance expense ............................... -- -- 81 -- --
Merger consummation costs(4) .................... -- -- -- 1,269 --
Other ........................................... 1,995 1,545 2,298 1,297 281
----------- ----------- ----------- ----------- ---------
Total operating expenses ........................ 106,576 62,333 77,978 63,886 30,557
----------- ----------- ----------- ----------- ---------
OPERATING INCOME (LOSS) .............................. 6,855 2,837 (613) 3,862 3,477
OTHER (EXPENSES) INCOME:
Interest expense ................................ (5,066) (2,128) (3,464) (4,069) (2,366)
Warrant accretion expense ....................... (786) -- -- -- --
Amortization of debt issuance costs ............. (280) -- -- (447)(4) (1,786)(4)
Amortization of debt discount ................... (264) -- -- -- --
Other ........................................... 494 67 136 127 61
----------- ----------- ----------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAX PROVISION
(BENEFIT) AND MINORITY INTEREST EXPENSE AND
EXTRAORDINARY ITEM ............................... 953 776 (3,941) (527) (614)
INCOME TAX PROVISION (BENEFIT) ....................... 830 506 (1,321) 538 465
----------- ----------- ----------- ----------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST EXPENSE
AND EXTRAORDINARY ITEM .......................... 123 270 (2,620) (1,065) (1,079)
Minority interest expense ....................... (63) -- -- -- --
----------- ----------- ----------- ----------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .............. $ 60 $ 270 $ (2,620) $ (1,065) (1,079)
Loss on extinguishment of debt, net of
income tax benefit of $134 .................... -- -- -- 261 --
----------- ----------- ----------- ----------- ---------
NET INCOME (LOSS) .................................... $ 60 $ 270 $ (2,620) $ (1,326) $ (1,079)
=========== =========== =========== =========== =========
Basic and diluted historical income (loss)
per common share:
Loss before extraordinary item .................. $ (0.28)
Extraordinary item .............................. (0.07)
----------- ----------- ----------- -----------
Net income (loss) ............................... $ 0.01 $ 0.06 $ (0.67) $ (0.35)
=========== =========== =========== ===========
Basic and diluted proforma net loss income per
common share (unaudited): ........................ $ (0.57)
=========
Basic weighted average common shares outstanding:
Historical ...................................... 4,600,926 4,273,842 3,928,596 3,750,914
========== =========== =========== ===========
Proforma ........................................ 1,878,649
==========
</TABLE>
13
<PAGE> 14
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Working capital ................................... $ (3,022) $ (5,326) $(11,601) $(11,729) $ (3,759)
Property and equipment, net ........................ 45,403 19,176 26,552 48,280 32,114
Total assets ....................................... 88,278 35,507 46,304 68,933 43,693
Debt and capital lease obligations (including
current maturities) ............................ 61,978 19,358 30,104 45,868 30,395
Stockholders' equity ............................... 14,429 12,809 10,531 12,905 8,311
</TABLE>
(1) See Note 3 to Audited Consolidated Financial Statements.
(3) See Note 13 to Audited Consolidated Financial Statements.
(4) See Note 14 to Audited Consolidated Financial Statements.
(5) See Note 1 to Audited Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations contain forward-looking statements relating
to future financial results or business expectations. Business plans may change
as circumstances warrant. Actual results may differ materially as a result of
factors over which the Company has no control. Such factors include, but are not
limited to: general economic conditions, availability of drivers, labor costs,
fuel costs, interest rates, competition and governmental regulations. These risk
factors and additional information are included in the Company's reports on file
with the Securities and Exchange Commission.
On January 30, 1998, the Company purchased the net assets of the Waste
Transport Business ("STS Acquisition") for $30,200 in cash. The Waste Transport
Business is operated through STS, a newly formed subsidiary of the Company. The
STS Acquisition was accounted for as a purchase and accordingly, the 1998
consolidated statement of operations includes the results of STS from the date
14
<PAGE> 15
of acquisition. The results of operations discussed below are not necessarily
comparable between periods because the results from operations for the years
ended December 31, 1997 and 1996 do not include STS and the results from
operations for the year ended December 31, 1998 only include STS since the date
of acquisition.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net revenues increased $48.3 million, or 74.1%, to $113.4 million in
1998, from $65.2 million in 1997, largely due to the STS Acquisition. During
1998, the Company increased its revenue producing power units by 520 units.
Without giving effect to the additional net revenues contributed by the STS
Acquisition, the Company's net revenues decreased by $4.4 million, or 6.8%, due
to having less tractors in service in its Temperature-Controlled Segment.
Total miles increased 23.3 million, or 40.2%, to 81.3 million in 1998
from 58.0 million in 1997, largely due to the STS Acquisition. Average miles per
tractor decreased 16.7% to 100,380 miles in 1998 from 120,501 miles in 1997.
Average revenue per tractor increased 3.5% to $140,072 in 1998 from $135,348 in
1997. The decrease in average miles per tractor and the increase in average
revenue per tractor are attributable to the shorter length of haul in the
Municipal Solid Waste Segment. Without giving effect to the STS Acquisition, the
Company's total miles decreased by 9.6 million, or 16.6%, due to having less
tractors in service in its Temperature-Controlled Segment. Competition for
drivers is intense within the trucking industry and the Company occasionally
experiences difficulty attracting and retaining qualified drivers and
owner-operators which results in the temporary idling of revenue equipment.
The Company's operating ratio (operating expenses divided by operating
revenues) decreased 1.6%, to 94.0% in 1998 from 95.6% in 1997. The decrease in
the operating ratio is largely due to a lower operating ratio in the Municipal
Solid Waste Segment. Without giving effect to the STS Acquisition, the Company's
operating ratio increased 0.1%, to 95.7% in 1998 from 95.6% in 1997. Total
operating expenses increased $44.2 million, or 71.0%, to $106.6 million in 1998,
compared to $62.3 million in 1997, largely due to the STS Acquisition. Without
giving effect to the STS Acquisition, the Company's total operating expenses
decreased $4.2 million, or 6.7%, due primarily having less tractors in service
in its Temperature-Controlled Segment and decreased fuel prices.
Salaries, wages and benefits increased $18.7 million, or 79.7%, to
$42.1 million in 1998 compared to $23.4 million in 1997, due to the STS
Acquisition and increases in overall compensation of drivers that were needed to
enhance driver recruitment and retention. Without giving effect to the STS
Acquisition, the Company's salaries, wages and benefits decreased $0.4 million,
or 1.7%, largely due to having less personnel to service the fewer tractors in
its Temperature-Controlled Segment which more than offset increases in overall
compensation of drivers that were needed to enhance driver recruitment and
retention.
Fuel expenses increased $2.7 million, or 25.0% to $13.6 million in 1998
compared to $10.9 million in 1997, largely due to the effect of the STS
Acquisition, which more than offset decreased fuel prices. Without giving effect
to the STS Acquisition, the Company's fuel expense decreased by $2.5
15
<PAGE> 16
million or 22.6%, largely due to the decrease in the number of tractors in its
Temperature-Controlled Segment and decreased fuel prices.
Purchased transportation expense increased $13.0 million, or 116.2% to
$24.2 million in 1998 compared to $11.2 million in 1997, largely due to the
effect of the STS Acquisition. Without giving effect to the STS Acquisition, the
Company's purchased transportation expense increased by $1.0 million or 8.7%,
due to an increase in contractor operated units.
Supplies and maintenance expenses increased $5.7 million, or 90.8% to
$12.1 million in 1998 compared to $6.3 million in 1997, largely due to the
effect of the STS Acquisition. Without giving effect to the STS Acquisition, the
Company's supplies and maintenance expense decreased by $0.8 million or 16.4%,
due to a decrease in company-owned units in service in its
Temperature-Controlled Segment.
Depreciation and amortization expense increased $1.3 million, or 24.9%,
to $6.7 million in 1998 compared to $5.4 million in 1997, largely due to the STS
Acquisition. Without giving effect to the STS Acquisition, the Company's
depreciation and amortization expense decreased by $1.4 million or 25.8%, due to
a decrease in company-owned units in service in its Temperature-Controlled
Segment.
Insurance expense increased $1.1 million, or 54.0%, to $3.2 million in
1998 compared to $2.1 million in 1997, due to the STS Acquisition.
Interest expense increased $2.9 million, or 138.1%, to $5.1 million in
1998 compared to $2.1 million in 1997, due to the STS Acquisition. Without
giving effect to the STS Acquisition, the Company's interest expense decreased
$0.7 million due to lower levels of debt. Outstanding debt and capital lease
obligations aggregated $62.0 million at December 31, 1998 compared to $19.4
million at December 31, 1997.
Warrant accretion expense of $786 in 1998 represents the accretion of
STS warrants in connection with the STS Acquisition.
Amortization of debt issuance costs of $280 in 1998 represents the
amortization of debt issuance costs in connection with the STS Acquisition.
Amortization of debt discount of $264 in 1998 represents the
amortization of debt discount in connection with the STS Acquisition.
Minority interest expense of $63 in 1998 represents the increase in
minority interest in connection with the STS Acquisition.
The effective income tax rates of 93.3% and 65.2% in 1998 and 1997,
respectively, are higher than the federal statutory rate due primarily to the
nondeductibility of certain expenses (i.e., warrant accretion expense,
amortization of debt discount, minority interest and per diem expense
reimbursements paid to drivers).
16
<PAGE> 17
YEARS ENDED DECEMBER 31, 1997, AND 1996
Net revenues decreased $12.2 million, or 15.8%, to $65.2 million in
1997, from $77.4 million in 1996, largely due to having less tractors in
service. During 1997, the Company decreased its tractor fleet by 115 units.
Average revenue per tractor increased 0.8% to $135,348 in 1997 from $134,314 in
1996.
Total miles decreased 12.1 million, or 17.2%, to 58.0 million in 1997
from 70.1 million in 1996, largely due to having less tractors in service.
Average miles per tractor decreased 1.0% to 120,501 miles in 1997 from 121,738
miles in 1996, largely due to having less revenue producing tractors in service
due to a shortage of drivers. Competition for drivers is intense within the
trucking industry and the Company occasionally experiences difficulty attracting
and retaining qualified drivers and owner-operators which results in the
temporary idling of revenue equipment.
The Company's operating ratio (operating expenses divided by operating
revenues) decreased 5.2%, to 95.6% in 1997 from 100.8% in 1996, largely due to
several nonrecurring one-time charges in 1996 (i.e., litigation settlement,
Polar restructuring expense, investment write-off, writedown of equipment to net
realizable value and severance expense) totaling $2.0 million and a loss on
disposition of equipment of $1.2 million in 1996 compared to a gain of $0.9
million in 1997. Total operating expenses decreased $15.6 million, or 20.1%, to
$62.3 million in 1997, compared to $78.0 million in 1996, largely due to having
less tractors in service.
Salaries, wages and benefits decreased $3.7 million, or 13.7%, to $23.4
million in 1997 compared to $27.1 million in 1996, largely due to having less
personnel to service the fewer tractors in service, which more than offset
increases in overall compensation of drivers that were needed to enhance driver
recruitment and retention.
Fuel expenses decreased $2.5 million, or 18.6% to $10.9 million in 1997
compared to $13.4 million in 1996, largely due to the decrease in the number of
tractors in service and decreased fuel prices.
Depreciation and amortization expense decreased $3.2 million, or 37.4%,
to $5.4 million in 1997 compared to $8.5 million in 1996, largely due to having
less tractors in service, in accordance with the Company's strategic plan of
selling 68 Polar tractors.
Insurance expense decreased $0.8 million, or 26.7%, to $2.1 million in
1997 compared to $2.8 million in 1996, largely due to the decrease in the number
of tractors in service.
Gain on disposition of equipment in 1997 was $0.9 million compared to a
loss in 1996 of $1.2 million, largely due to the sale and leaseback of certain
Polar motor carrier equipment that resulted in a loss of $1.0 million in 1996.
Litigation settlement expense in 1996 represents the provision for
final settlement of all outstanding litigation related to Polar's acquisition of
Polar Express, Inc.
Polar restructuring expense in 1996 represents severance payments to
terminated employees of Polar.
17
<PAGE> 18
Writedown of equipment to net realizable value represents the writedown
in 1996 of Polar equipment to more closely approximate the net realizable value
of the related equipment.
Interest expense decreased $1.3 million, or 38.6%, to $2.1 million in
1997 compared to $3.5 million in 1996, due to lower levels of debt and lower
overall interest rates. Outstanding debt and capital lease obligations
aggregated $19.4 million at December 31, 1997 compared to $30.1 million at
December 31, 1996.
The effective income tax rate of 65.2% in 1997 is higher than the
federal statutory rate due primarily to the non-deductibility of per diem
expense reimbursements paid to drivers.
Net income increased $2.9 million to $0.3 million in 1997 compared to a
net loss of $2.6 million in 1996, largely due to several nonrecurring one-time
charges (i.e., litigation settlement, Polar restructuring expense, investment
write-off, writedown of equipment to net realizable value and severance expense)
totaling $1.2 million, net of tax, in 1996 and a loss on disposition of
equipment of $0.7 million, net of tax, in 1996 compared to a gain of $0.6
million, net of tax, in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had a net working capital deficit of
$3.0 million. The Company historically has funded its working capital
requirements through a combination of operating profits, short turnover in trade
receivables, effective cash management practices and borrowings under its
revolving bank lines of credit. The Company has two revolving bank lines of
credit with a total borrowing limit of $24.0 million, consisting of $18.0
million (Municipal Solid Waste Segment) and $6.0 million (Temperature-Controlled
Segment) based on a percentage of eligible trade receivables and certain other
fixed assets, $18.7 million, of which was borrowed against the lines of credit
at December 31, 1998, consisting of $14.1 million (Municipal Solid Waste
Segment) and $4.5 million (Temperature-Controlled Segment) and approximately
$0.8 million, consisting of $0.8 million (Municipal Solid Waste Segment) and
$0.1 million (Temperature-Controlled Segment) was available.
The Company's growth and the significant investment in its modern fleet
of tractors and temperature-controlled trailers have historically been financed
substantially through long-term debt and lease obligations collateralized by the
equipment. The Company's outstanding debt and capital lease obligations,
including current maturities, aggregated $62.0 million and $19.4 million at
December 31, 1998 and 1997, respectively. The debt to equity ratio (calculated
excluding payables and other liabilities) was 4.30:1 at December 31, 1998 and
1.51:1 at December 31, 1997. During 1998, the Company increased its fleet size
by 329 tractors and 808 temperature-controlled trailers, primarily through
operating leases.
In January 1997, the Company borrowed $1 million against the appraised
value of approximately $1.5 million of a terminal and maintenance facility, and
used the proceeds to pay down current liabilities. In February 1997, the Company
entered into a purchase agreement to sell certain Polar Express Corporation
motor carrier equipment for $4.6 million. The transaction was completed in March
1997 and generated $1.4 million in net cash proceeds, and the Company used the
proceeds for general corporate purposes. In July 1997, the Company completed a
private placement offering of restricted common stock that raised net proceeds
to the Company of $1.8 million, and the Company used the proceeds for general
corporate purposes.
18
<PAGE> 19
In March 1998, ATI entered into various agreements for the sale and
leaseback of certain motor carrier equipment which reduced operating expenses
and increased cash flows $0.4 million. The leases are classified as capital
leases in accordance with SFAS No. 13, Accounting for Leases. The transactions
generated no cash proceeds. During 1998, ATI entered into various agreements for
the sale of certain motor carrier equipment with an immediate leaseback of the
same motor carrier equipment by STS. The motor carrier equipment sold by ATI was
originally financed with debt, capital leases and operating leases. The net book
value of the debt financed equipment and the capital lease financed equipment
was $4.9 million. The leases entered into by STS are classified as operating
leases in accordance with SFAS No. 13, Accounting for Leases. The transactions
generated $1.9 million in net cash proceeds to the Company.
The Company believes that available cash, cash flow from future
operations, and borrowings available under its lines of credit will be
sufficient to meet its current working capital needs and short-term commitments.
The Company's long-term commitments consist of long-term debt and lease
obligations. The Company believes that available cash, cash flow from
operations, equity that the Company has in its equipment upon sale, and
borrowings available under its lines of credit will be sufficient to meet its
long-term commitments.
As of December 31, 1998, the Company has $3.8 million in subordinated
debt due in July and August of 1999. On January 29, 1999, certain related
parties, substantially all of whom are officers and directors of the Company,
exchanged $0.7 million of the subordinated debt for 135,000 shares of the
Company's common stock. On March 12, 1999, an unrelated individual exchanged
$1.2 million of the subordinated debt for 230,000 shares of the Company's common
stock. Additionally, $0.2 million of accrued interest owed to this individual
was exchanged for an additional 37,800 shares of the Company's common stock. The
Company anticipates satisfying the remaining obligations through a refinancing
of the debt or an equity infusion.
Management plans to actively seek refinancing of the $8.0 million
subordinated debt with ACS which may be in the form of equity securities or in
other certain subordinated debt securities.
The Company anticipates its future growth in the Municipal Solid Waste
Segment to be more prominent than the Temperature-Controlled Segment. Certain
growth in the Municipal Solid Waste Segment is anticipated to come from new
contract opportunities at existing terminal facilities, also requiring the
purchase of additional motor carrier and other equipment. These equipment
purchases are anticipated to be financed primarily through long-term debt and
lease obligations collateralized by the equipment. Certain growth in the
Municipal Solid Waste Segment is anticipated to come from new contract
opportunities at new locations requiring a significantly greater investment by
the Company. The Company anticipates financing start-up costs for the new
terminal facilities primarily through lease obligations.
As the Company continues to facilitate its planned future growth, the
Company's capital needs may require additional borrowings or an equity infusion.
19
<PAGE> 20
RECENT ACCOUNTING STANDARDS
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires the costs of start-up activities, including
organization costs, to be expensed as incurred. The SOP broadly defines start-up
activities as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business with a new class of
customer or beneficiary, initiating a new process in an existing facility, or
commencing some new operation. The SOP is effective for the Company for fiscal
years beginning after December 15, 1998, and will require the Company upon
adoption to write off any previously capitalized start-up or organization costs
as a cumulative effect of a change in accounting principle. Thus, effective
January 1, 1999, the Company will write off all organization and start-up costs
under the SOP as a cumulative effect of a change in accounting principle in the
amount of approximately $0.5 million, which primarily relates to the STS costs
incurred in 1998 to open new terminals or expand existing facilities.
CHANGE IN ESTIMATED SALVAGE VALUES
In July 1998, the Company adjusted the estimated salvage values related
to certain motor carrier equipment of AG Carriers from 20% to 49% of the
original purchase price. The change better aligns the allocation of equipment
cost with its expected use. This change reduced operating expenses approximately
$0.2 million, $0.1 million after-tax ($0.03 basic and diluted net income per
common share) in 1998.
In December 1996, the Company adjusted the estimated salvage values
related to certain motor carrier equipment of Polar Express Corporation from 44%
to 35% of the original purchase price. The change better aligns the allocation
of equipment cost with its expected use. This resulted in a writedown of
equipment in the amount of $1.2 million, $0.7 million after-tax ($0.18 basic and
diluted net loss per common share) in 1996.
In December 1996, the Company entered into various agreements for the
sale and leaseback of certain Polar Express Corporation motor carrier equipment
reduced expenses $0.6 million and increased net income $0.4 million during the
year ended December 31, 1997 ($0.09 basic and diluted net income per common
share). The leases are classified as operating leases in accordance with SFAS
No. 13, Accounting for Leases. The book values of the equipment totaling $6.3
million were removed from the balance sheet with the resulting loss of $1.0
million, $0.6 million after-tax ($0.16 basic and diluted net loss per common
share) recorded in 1996.
RESTRUCTURING
Due primarily to losses incurred at Asche Transfer, Inc.'s Southwest
Division, formerly Polar Express Corporation ("Polar"), the Company determined
that a restructuring was necessary to reduce the overhead of that operation. In
June 1996, the Company consolidated certain functions, primarily management,
accounting and information systems and terminated approximately 30 employees of
Polar. The Company recorded a non-recurring, one-time restructuring charge of
$0.49 million, or $0.08 net loss per common share. The Company anticipated and
realized cost savings that approximated $1.0 million annually.
20
<PAGE> 21
In conjunction with the restructuring, the Company determined that
losses realized at Polar were also related to unprofitable transportation
services performed by Polar. The Company decided to no longer haul for certain
customers in certain lanes and to dispose of excess motor carrier equipment. In
February 1997, the Company entered into an agreement to sell 68 Polar tractors
and 141 Polar trailers for approximately $4.6 million. The termination generated
approximately $1.4 million in net cash proceeds to the Company with no
significant earnings effect in 1997. The transaction was completed in March 1997
and no current plans exist to replace this equipment.
SALE LEASEBACKS
In March 1998, ATI entered into various agreements for the sale and
leaseback of certain motor carrier equipment which reduced operating expenses
$0.4 million, $0.3 million after-tax ($0.05 basic and diluted net income per
common share) in 1998. The leases are classified as capital leases in accordance
with SFAS No. 13, Accounting for Leases.
During 1998, ATI entered into various agreements for the sale of
certain motor carrier equipment with an immediate leaseback of the same motor
carrier equipment by STS. The motor carrier equipment sold by ATI was originally
financed with debt, capital leases and operating leases. The net book value of
the debt financed equipment and the capital lease financed equipment was $4.9
million. The leases entered into by STS are classified as operating leases in
accordance with SFAS No. 13, Accounting for Leases. The transactions generated
$1.9 million in net cash proceeds to the Company and resulted in a gain of $0.5
million, of which $0.1 million was recognized in 1998 with the remainder of $0.4
million amortized over the remaining lives of the related leases.
RELATED PARTY LEASES
The Company currently leases certain of its revenue equipment from
related parties. These leases are accounted for as capital leases. Payments to
related parties on capital lease obligations in 1998, 1997 and 1996 were $0.6
million, $0.8 million and $0.8 million, respectively.
SEASONALITY
The Company's Temperature-Controlled Segment results of operations show
a seasonal pattern because certain of the frozen food companies serviced by the
Company generally reduce shipments during the summer season. During the winter
months, the Company has at times experienced delays in meeting its pick-up and
delivery schedules as a result of severe weather conditions. In addition, the
Company's operating expenses have historically been higher in the winter months
due to decreased fuel efficiency and increased maintenance costs in colder
weather. Accordingly, such factors cause fluctuations in results of operations.
The foliage business of ATI experiences seasonal fluctuations in volume during
certain periods of the year. The Company's Municipal Solid Waste Segment does
not experience significant seasonal fluctuations.
YEAR 2000
Computer programs have historically been written to abbreviate dates by
using two digits instead of four digits to identify a particular year. The
so-called "year 2000 problem" or "millennium bug" is the inability of computer
software or hardware to recognize or properly process dates ending in "00" and
21
<PAGE> 22
dates after the year 2000. Significant attention is being focused as the year
2000 approaches on updating or replacing such software and hardware in order to
avoid system failures, miscalculations or business interruptions that might
otherwise result. The Company is taking the steps we believe are necessary to
insure that this potential problem does not adversely affect our operating
results in the future. We are continuing our as-yet incomplete assessment of the
impact of the year 2000 problem.
The Company has reviewed its internal information systems and believes
that the costs and efforts to address the year 2000 problem will not be material
to our business, financial condition or results of operations, and may be
resolved through replacements and upgrades to our software or hardware. The year
2000 problem may, however, adversely impact the Company by affecting the
business and operations of parties with which we transact business, although we
are unable to precisely determine the likelihood or potential impact of any such
event. There can be no assurance that the Company will be able to effectively
address year 2000 issues in a cost-efficient manner and without interruption to
our business, or that year 2000 problems encountered by our suppliers, customers
or other parties will not have a material impact on our business, financial
condition and results of operations.
The Company's state of readiness for the year 2000, our estimated costs
associated with year 2000 issues, the risks we face associated with year 2000
issues and our year 2000 contingency plans are summarized below.
STATE OF READINESS
Internally, we have implemented a three-phase process to assess year
2000 compliance of our systems and remediate any material non-compliance. The
phases are (1) to identify and test our material computer software and hardware
in order to determine whether they are year 2000 compliant; (2) to correct or
replace those software or hardware systems in which we determine there is a
material problem with year 2000 compliance; and (3) to internally test the
corrected or upgraded systems in order to determine whether they are year 2000
compliant. We have completed all three phases with respect to most of our
purchased information technology ("IT") systems and non-IT systems and believe
the systems are year 2000 compliant. We anticipate completing all three phases
with respect to the remainder of the purchased IT and non-IT systems by the end
of the second quarter in 1999.
Externally, we have implemented a three-phase process to assess year
2000 compliance of the systems of our vendors, customers and third-party
servicers, and remediate any material non-compliance. The phases are (1) to
identify the vendors, customers and other third parties with whom we transact
business and determine whether they are significant to our business ("core"
parties); (2) to contact the vendors, customers and other third parties with
whom we do business by, among other methods, sending them letters and
questionnaires designed to solicit information relating to the year 2000
problem; and (3) to evaluate the responses received from the vendors, customers
and other third parties. The questionnaire we are using asks vendors, customers
and other third parties such questions as (i) whether they have a documented
year 2000 compliance plan, (ii) whether they are aware of any year 2000
readiness issues that could affect the Company, (iii) whether, if such an issue
exists, they have plans in place to ensure compliance, (iv) what their target
date is for year 2000 compliance and (v) whether they have any contingency
plans. We have substantially completed all three phases with respect to core
parties. We plan to follow up during 1999 with our core vendors, core customers
and third parties with whom we do business, and update our information regarding
the year 2000 problem.
22
<PAGE> 23
We are in the first and second phases with respect to non-core parties, and
anticipate completing all phases with respect to non-core parties before the end
of the third quarter of 1999.
COSTS ASSOCIATED WITH YEAR 2000 ISSUES
We estimate that the costs associated with implementing all phases of
our year 2000 assessment and resolving any year 2000 problems will be less than
$100. This estimate includes expenditures for both repairs and upgrades. We
believe that these costs, assuming this estimate is accurate, would not have a
material effect on our business, financial condition and results of operations.
We anticipate that cash flow from operations will be used to pay the costs
associated with our year 2000 problem. All year 2000 costs are expensed as
incurred.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
We are unaware of any material risk to the Company associated with year
2000 issues at the present time. We believe that the reasonably likely worst
case year 2000 scenario is a decrease in the efficiency with which we procure
and deliver loads, and a decrease in the efficiency with which we receive
payment for services rendered. A decrease in efficiency, however, would not
necessarily result in a decrease in business. We expect that load procurement,
load delivery and billing all could be achieved through alternative methods
within a relatively short period of time. Any disruption, however, could result
in some lost revenue.
We face the additional risk of experiencing an increase in claims and
litigation relating to the year 2000 problem because, among other reasons, there
is no uniform definition of year 2000 "compliance" and because all vendor,
customer and third party situations cannot be anticipated, particularly those
involving third party products. Such claims, if successful, could have a
material adverse effect on future results. Moreover, the costs of defending the
Company against such claims, even if ultimately resolved in our favor, could
have a material adverse effect on future results.
CONTINGENCY PLANS
We have not yet developed specific contingency plans for the millennium
bug because our assessment of year 2000 issues is incomplete. We generally
expect that our contingency plans will be to identify and have available to us
alternate vendors and service providers to decrease the impact on the Company if
one or more of the core parties with whom we do business suffers a significant
year 2000 problem. We expect to have the Company's contingency plans complete
before the end of the third quarter of 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
Interest Rate Sensitivity. The Company's earnings are affected by
changes in short-term interest rates as a result of its notes payable under
their revolving lines of credit. If market interest rates for such borrowings
average 1% more during 1999 than they did during 1998, the Company's interest
expense would increase, the income before income taxes would decrease by
approximately $0.1 million. This
23
<PAGE> 24
analysis does not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management could take actions to further mitigate its
exposure to the change. However, due to the uncertainty of the specific actions
that would be taken and their possible effects, the sensitivity analysis assumes
no changes in the Company's financial structure.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are annexed to this Report as
pages F-2 through F-27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of
the Company is incorporated by reference from the Company's definitive proxy
statement, expected to be filed with the Commission on or before April 16, 1999.
Information regarding executive officers is set forth in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the Company's definitive proxy statement, expected to be filed with the
Commission on or before April 16, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the Company's definitive proxy statement, expected to be filed with the
Commission on or before April 16, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the Company's definitive proxy statement, expected to be filed with the
Commission on or before April 16, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements filed as part of this report are listed in the
accompanying Index to Financial Statements. The exhibits filed as part of this
report are listed in the accompanying Index to Exhibits. The Company will
furnish a copy of any exhibit listed to requesting stockholders upon payment of
the Company's reasonable expenses in furnishing those materials. No reports on
Form 8-K were filed by the Company during the fourth quarter of 1998.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ASCHE TRANSPORTATION SERVICES, INC.
By: /s/ Larry L. Asche
---------------------------------------
Larry L. Asche, Chief Executive Officer
August 10, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Larry L. Asche Chief Executive Officer and August 10, 1999
- --------------------------- Chairman of the Board of
Larry L. Asche Directors (Principal Executive
Officer)
/s/ Leon M. Monachos
- ---------------------------
Leon M. Monachos Chief Financial Officer (Principal August 10, 1999
Financial and Accountiing Officer)
/s/ Kevin M. Clark President, Director August 10, 1999
- ---------------------------
Kevin M. Clark
/s/ Gary I. Goldberg
- --------------------------- Vice President, Director August 10, 1999
Gary I. Goldberg
/s/ Diane L. Asche Vice President, Secretary, Director August 10, 1999
- ---------------------------
Diane L. Asche
/s/ Richard S. Baugh Director August 10, 1999
- ---------------------------
Richard S. Baugh
/s/ Dennis D. Wilson
- --------------------------- Director August 10, 1999
Dennis D. Wilson
/s/ Michael Todd Recob
- --------------------------- Director August 10, 1999
Michael Todd Recob
/s/ Karl R. Sattler
- --------------------------- Director August 10, 1999
Karl R Sattler
</TABLE>
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
<S> <C>
2.1 Agreement and Plan of Merger among Registrant, Asche Newco, Inc. and
Polar Express Corporation, dated July 12, 1995(1)
2.2 Amendment No. 1 to Agreement and Plan of Merger among Registrant, Asche
Newco, Inc. and Polar Express Corporation, dated November 10, 1995(1)
3.1 Certificate of Incorporation of Registrant(2)
3.1(a) Amendment to Certificate of Incorporation of Registrant(2)
3.2 By-laws of Registrant(2)
4.1 Specimen Common Stock Certificate(2)
10.1 Employment and Stock Option Agreement between Registrant and Kevin M.
Clark dated September 23, 1994(2)
10.2 Employment and Stock Option Agreement between Registrant and Larry L.
Asche dated September 23, 1994(2)
10.3 Employment and Stock Option Agreement between Registrant and Diane L.
Asche dated September 23, 1994(2)
10.4 Asche Transfer, Inc. Retirement and Savings Plan(2)
10.5 Restated Asche Transportation Services, Inc. Employees' Stock Ownership
Trust as adopted on September 22, 1994(3)
10.6 Amended and Restated Asche Transportation Services, Inc. Employees'
Stock Ownership Plan as adopted on September 22, 1994(3)
10.7 First Amendment to the Amended and Restated Asche Transportation
Services, Inc. Employees' Stock Ownership Plan as adopted on October
24, 1994(3)
10.8 Second Amendment to the Amended and Restated Asche Transportation
Services, Inc. Employees' Stock Ownership Plan as adopted on November
15, 1994(3)
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
<S> <C>
10.9 Third Amendment to the Amended and Restated Asche Transportation
Services, Inc. Employees' Stock Ownership Plan as restated effective as
of September 22, 1994, dated as of August 10, 1995(8)
10.10 Lease Agreement between Asche Transfer, Inc. and K&D Leasing dated
December 14, 1992(2)
10.11 Lease Agreement between Asche Transfer, Inc. and Daniel Asche dated
December 14, 1992(2)
10.12 Lease Agreement between Asche Transfer, Inc. and Michele Asche dated
December 14, 1992(2)
10.13 Lease Agreement between Asche Transfer, Inc. and Angela Asche dated
December 14, 1992(2)
10.14 Lease Agreement between Asche Transfer, Inc. and L&D Leasing dated
December 14, 1992(2)
10.15 Lease Agreement between Asche Transfer, Inc. and Asche-Nielsen dated
December 14, 1992(2)
10.16 Insurance Policy with Golden Rule Insurance Company covering the lives
of Kevin M. Clark, and Larry L. Asche and (6)
10.17 Amendment No. 1 dated as of January 1, 1995 to Lease Agreements dated
December 14, 1992 between Asche Transfer, Inc. and K&D Leasing, L&D
Leasing, Asche-Nielsen, Daniel Asche, Michele Asche and Angela Asche,
respectively(6)
10.18 Amendment No. 2 dated as of July 1, 1995 to Lease Agreements dated
December 14, 1992 between Asche Transfer, Inc. and K&D Leasing, L&D
Leasing, Asche-Nielsen, Daniel Asche, Michele Asche and Angela Asche,
respectively(4)
10.19 Agreement for Purchase and Sale of Assets among Registrant, AG.
Carriers and Richard S. Baugh dated April 20, 1995(7)
10.20 Amendment No. 1 to Agreement for Purchase and Sale of Assets among
Registrant, AG. Carriers and Richard S. Baugh dated May 16, 1995(7)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
<S> <C>
10.21 Employment and Stock Option Agreement between Registrant and Leon M.
Monachos dated May 15, 1996(11)
10.22 Asche Transportation Services, Inc. Stock Option Plan dated June 1,
1996(9)
10.23 First Amendment dated May 13, 1998 to the Stock Option Plan (12)
10.24 Asset Purchase Agreement dated September 24, 1997 between Gary I.
Goldberg and Jack Gray Transport, Inc.(10)
10.25 Assignment of Asset Purchase Agreement dated September 29, 1997 between
Gary I. Goldberg and Registrant(10)
10.26 Credit Agreement dated as of January 30, 1998, by and among Specialty
Transportation Services, Inc., the Lenders parties thereto from time to
time, and Mellon Bank, N.A.(11)
10.27 Subordinated Note and Equity Purchase Agreement, dated January 30,
1998, between Specialty Transportation Services, Inc. and American
Capital Strategies, Ltd.(11)
10.28 Term Loan Agreement dated January 30, 1998 between Registrant and Aim
Financial Corporation(11)
10.29 Promissory Note dated as of January 16, 1998 by Registrant payable to
Larry L. Asche in the amount of $500,000(11)
10.30 Promissory Note dated as of January 16, 1998 by Registrant payable to
Diane L. Asche in the amount of $500,000(11)
10.31 Promissory Note dated as of January 26, 1998 by Registrant payable to
Diane L. Asche in the amount of $25,000(11)
10.32 Promissory Note dated as of January 20, 1998 by Registrant payable to
Kevin M. Clark in the amount of $500,000(11)
10.33 Promissory Note dated as of January 26, 1998 by Registrant payable to
Richard S. Baugh in the amount of $250,000(11)
10.34 Promissory Note dated as of January 26, 1998 by Registrant payable to
Gary I. Goldberg in the amount of $250,000(11)
10.35 Warrant dated as of January 16, 1998, from Registrant to Larry L.
Asche(11)
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
<S> <C>
10.36 Warrant dated as of January 16, 1998, from Registrant to Diane L.
Asche(11)
10.37 Warrant dated as of January 26, 1998, from Registrant to Diane L.
Asche(11)
10.38 Warrant dated as of January 20, 1998, from Registrant to Kevin M.
Clark(11)
10.39 Warrant dated as of January 26, 1998, from Registrant to Richard S.
Baugh(11)
10.40 Warrant dated as of January 26, 1998, from Registrant to Gary I.
Goldberg(11)
10.41 Employment Agreement dated as of January 2, 1998 between Specialty
Transportation Services, Inc. and Gary I. Goldberg(11)
10.42 Loan and Security Agreement between Asche Transfer, Inc., AG Carriers,
Inc. and American National Bank and Trust Company of Chicago dated June
23, 1998 (12)
10.43 Secured Guaranty by Asche Transportation Services, Inc. in favor of
American National Bank and Trust Company of Chicago dated June 23, 1998
(12)
10.44 ESOP Loan and Security Agreement between Asche Transportation Services,
Inc. Employees' Stock Ownership Trust and American National Bank and
Trust Company of Chicago dated June 23, 1998 (12)
10.45 Continuing Unconditional Guaranty by Asche Transportation Services,
Inc. in favor of American National Bank and Trust Company of Chicago
dated June 23, 1998 (12)
10.46 Continuing Unconditional Guaranty by Asche Transfer, Inc. in favor of
American National Bank and Trust Company of Chicago dated June 23, 1998
(12)
10.47 Continuing Unconditional Guaranty by AG Carriers, Inc. in favor of
American National Bank and Trust Company of Chicago dated June 23, 1998
(12)
10.48 Stock Purchase Agreement dated as of July 23, 1998 among Specialty
Transportation Services, Inc., Michael Sizemore and Gary I. Goldberg
(13)
21.1 List of the Subsidiaries of Registrant(1)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
(1) Incorporated by reference from Registrant's Registration Statement on
Form S-4 effective November 28, 1995 (File No. 33-99264).
</TABLE>
30
<PAGE> 31
(2) Incorporated by reference from Registrant's Registration Statement on
Form SB-2 effective September 23, 1995 (File No. 33-81942c).
(3) Incorporated by reference from Registrant's Registration Statement on
Form S-8 filed on December 21, 1994 (File No. 33-87826).
(4) Incorporated by reference from Registrant's Report on Form 10-QSB for
the quarter ended March 30, 1995 (File No. 0-24576).
(5) Incorporated by reference from Registrant's Report on Form 10-QSB for
the quarter ended September 30, 1995 (File No. 0-24576).
(6) Incorporated by reference from Registrant's Report on Form 10-QSB for
the quarter ended December 31, 1994 (File No. 0-24576).
(7) Incorporated by reference from Registrant's Current Report on Form 8-K
dated May 16, 1995, filed May 31, 1995 (File No. 0-24576).
(8) Incorporated by reference from Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1995 (File No. 0-24576).
(9) Incorporated by reference from Registrant's Registration Statement on
Form S-8 filed on June 21, 1996 (File No. 333-06569).
(10) Incorporated by reference from Registrant's Report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 0-24576).
(11) Incorporated by reference from Registrant's Report on Form 8-K filed on
March 30, 1998 (File No. 0-24576).
(12) Incorporated by reference from Registrant's Report on Form 10-Q for the
Quarter ended June 30, 1998 (File No. 0-24576).
(13) Incorporated by reference from Registrant's Report on Form 10-Q for the
Quarter ended September 30, 1998 (File No. 0-24576).
31
<PAGE> 32
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997...............................F-4
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996......................................................................F-6
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996.........................................................F-7
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996......................................................................F-8
Notes to Consolidated Financial Statements.................................................F-9
</TABLE>
F-1
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Asche Transportation Services, Inc.
We have audited the accompanying consolidated balance sheets of Asche
Transportation Services, Inc. (formerly known as Aasche Transportation Services,
Inc.) as of December 31, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis of our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated March 12, 1999,
which report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern, the Company, as discussed in Note 16, has
obtained the necessary waivers and amendments from its lenders in order for its
debts to no longer be in default at and for the year ended December 31, 1998.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Asche
Transportation Services, Inc. at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Chicago, Illinois
March 12, 1999
except for Notes 4, 5, and 16
as to which the date is August 10, 1999
F-2
<PAGE> 34
ASCHE TRANSPORTATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 2,761 $ --
Trade receivables, less allowance for doubtful accounts of $71 ............. 15,947 5,449
Prepaid expenses and other current assets .................................. 3,983 1,631
Inventory supplies ......................................................... 1,964 575
Prepaid acquisition costs .................................................. -- 485
-------- --------
Total current assets ..................................................... 24,655 8,140
Property and equipment, at cost ................................................ 57,053 32,931
Less accumulated depreciation and amortization ............................. (11,650) (13,755)
-------- --------
Net property and equipment ............................................... 45,403 19,176
-------- --------
Excess of cost over net assets acquired, less accumulated amortization of
$1,177 and $730 ............................................................ 14,176 7,340
Debt issuance cost, less accumulated amortization of $280 ...................... 1,045 --
Other assets ................................................................... 2,999 851
-------- --------
TOTAL ASSETS ............................................................. $ 88,278 $ 35,507
======== ========
</TABLE>
F-3
<PAGE> 35
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Cash overdraft ............................................................. $ 1,657 $ 312
Accounts payable ........................................................... 3,756 788
Accrued liabilities ........................................................ 3,453 1,234
Guaranteed obligation of Employee Stock Ownership Plan ..................... 155 203
Lines of credit ............................................................ -- 3,817
Current maturities of long-term debt with unrelated parties ................ 4,152 2,752
Current maturities of long-term debt with related party .................... 995 995
Current maturities of capital lease obligations with unrelated parties ..... 2,090 2,696
Current maturities of capital lease obligations with related parties ....... 151 669
Subordinated debt, less unamortized debt discount of $107 .................. 11,268 --
-------- --------
Total current liabilities ................................................ 27,677 13,466
Lines of credit ............................................................ 18,660 --
Long-term debt with unrelated parties, less current maturities ............. 16,379 3,745
Long-term debt with related parties, less current maturities ............... 761 1,550
Capital lease obligations with unrelated parties, less current maturities .. 5,797 2,787
Capital lease obligations with related parties, less current maturities .... -- 144
Minority interest .......................................................... 563 --
Subordinated debt, less unamortized debt discount of $430 .................. 1,570 --
Deferred income taxes ...................................................... 1,656 1,006
Accrued warrant accretion .................................................. 786 --
-------- --------
Total liabilities ........................................................ 73,849 22,698
Stockholders' equity
Common stock, $.0001 par value, 10,000,000 shares authorized,
4,696,130 and 4,539,735 shares issued and outstanding .................... -- --
Additional paid-in capital ................................................. 18,077 16,565
Guarantee of Employee Stock Ownership Plan obligation ...................... (155) (203)
Accumulated deficit ........................................................ (3,493) (3,553)
-------- --------
Total stockholders' equity ............................................... 14,429 12,809
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 88,278 $ 35,507
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 36
ASCHE TRANSPORTATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- ---------- ----------
<S> <C> <C> <C>
NET REVENUES ............................................. $ 113,431 $ 65,170 $ 77,365
OPERATING EXPENSES:
Salaries, wages and benefits ......................... 42,065 23,403 27,109
Fuel ................................................. 13,581 10,867 13,350
Purchased transportation ............................. 24,180 11,185 10,772
Supplies and maintenance ............................. 12,053 6,317 7,032
Depreciation and amortization ........................ 6,686 5,354 8,547
Taxes and licenses ................................... 1,754 1,667 2,073
Insurance ............................................ 3,201 2,079 2,838
Communications and utilities ......................... 1,448 821 818
(Gain) loss on disposition of equipment .............. (387) (905) 1,165
Litigation settlement ................................ -- -- 150
Polar restructuring expense .......................... -- -- 490
Investment write-off ................................. -- -- 100
Writedown of equipment to net realizable value ....... -- -- 1,155
Severance expense .................................... -- -- 81
Other ................................................ 1,995 1,545 2,298
----------- ----------- -----------
Total operating expenses ........................... 106,576 62,333 77,978
----------- ----------- -----------
OPERATING INCOME (LOSS) .................................. 6,855 2,837 (613)
OTHER (EXPENSES) INCOME:
Interest expense ..................................... (5,066) (2,128) (3,464)
Warrant accretion expense ............................ (786) -- --
Amortization of debt issuance cost ................... (280) -- --
Amortization of debt discount ........................ (264) -- --
Other ................................................ 494 67 136
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) AND MINORITY INTEREST EXPENSE .... 953 776 (3,941)
INCOME TAX PROVISION (BENEFIT) ........................... 830 506 (1,321)
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST EXPENSE ........... 123 270 (2,620)
Minority interest expense ............................ (63) -- --
----------- ----------- -----------
NET INCOME (LOSS) ........................................ $ 60 $ 270 $ (2,620)
=========== =========== ===========
Net income (loss) per common share:
Basic ................................................ $ 0.01 $ 0.06 $ (0.67)
=========== =========== ===========
Diluted .............................................. $ 0.01 $ 0.06 $ (0.67)
=========== =========== ===========
Basic weighted average common shares outstanding ......... 4,600,926 4,273,842 3,928,596
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 37
ASCHE TRANSPORTATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
GUARANTEE
OF EMPLOYEE
STOCK
COMMON STOCK OWNERSHIP
$.0001 PAR VALUE ADDITIONAL PLAN TOTAL
------------------- PAID-IN ("ESOP") ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL OBLIGATION DEFICIT EQUITY
--------- ------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ................. 3,947,107 $-- $ 14,442 $ (334) $(1,203) $12,905
Escrow shares retired in connection with
litigation settlement ..................... (34,030) -- -- -- -- --
Exercise of stock options .................... 40,000 -- 156 -- -- 156
Reduction in Guarantee of ESOP obligation .... -- -- -- 90 -- 90
Net loss ..................................... -- -- -- -- (2,620) (2,620)
--------- --- -------- ------- ------- -------
Balance at December 31, 1996 ................. 3,953,077 -- 14,598 (244) (3,823) 10,531
Exercise of Series A warrants ................ 41,100 -- 100 -- -- 100
Exercise of stock options .................... 5,000 -- 18 -- -- 18
Common stock issued in private placement ..... 540,558 -- 1,849 -- -- 1,849
Reduction in Guarantee of ESOP obligation .... -- -- -- 41 -- 41
Net income ................................... -- -- -- -- 270 270
--------- --- -------- ------- ------- -------
Balance at December 31, 1997 ................. 4,539,735 -- 16,565 (203) (3,553) 12,809
Exercise of stock options and warrants ....... 106,395 -- 461 -- -- 461
Asche warrants granted in connection with
STS acquisition ........................... -- -- 801 -- -- 801
Issuance of common stock ..................... 50,000 -- 250 -- -- 250
Reduction in Guarantee of ESOP obligation .... -- -- -- 48 -- 48
Net income ................................... -- -- -- -- 60 60
--------- --- -------- ------- ------- -------
Balance at December 31, 1998 ................. 4,696,130 $-- $ 18,077 $ (155) $(3,493) $14,429
========= === ======== ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 38
ASCHE TRANSPORTATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 60 $ 270 $ (2,620)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation ..................................................... 6,288 5,072 8,277
Amortization ..................................................... 398 282 270
Warrant accretion expense ........................................ 786 -- --
Amortization of debt discount .................................... 264 -- --
Amortization of debt issuance costs .............................. 218 -- --
Minority interest ................................................ 63 -- --
Writedown of equipment to net realizable value ................... -- -- 1,155
(Gain)loss on disposition of equipment ........................... (387) (905) 1,165
Deferred income taxes ............................................ 466 351 (1,321)
Changes in other operating items:
Trade receivables .............................................. (10,498) 1,233 (228)
Prepaid expenses, inventory and other assets ................... (2,355) (1,094) (179)
Accounts payable ............................................... 2,968 (1,511) (675)
Accrued liabilities ............................................ 2,219 (1,132) 691
------- -------- --------
Net cash provided by operating activities .................... 490 2,566 6,535
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Revenue equipment ................................................ (6,667) (2,273) (102)
Building, office equipment and other ............................. (1,669) (324) (382)
Proceeds from the sale of equipment ................................ 6,663 8,806 8,615
Purchase of Specialty Transportation Services, Inc. and
Dump Truck Services, Inc. .......................................... (33,975) -- --
------- -------- --------
Net cash (used in) provided by investing activities .......... (35,648) 6,209 8,131
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of debt with unrelated parties ............ 19,385 -- 800
Proceeds from borrowings of subordinated debt ...................... 13,375 -- --
Minority interest .................................................. 500 -- --
Debt issuance cost ................................................. (1,263) -- --
Net borrowings (repayments) on line of credit ...................... 14,843 (1,425) 2,383
Net increase (decrease) in cash overdraft .......................... 1,345 (37) 349
Principal payments on long-term debt with unrelated parties ........ (5,144) (4,192) (12,689)
Principal payments on long-term debt with related party ............ (996) (995) (938)
Principal payments on capital leases with unrelated parties ........ (4,193) (3,276) (4,356)
Principal payments on capital leases with related parties .......... (644) (817) (874)
Proceeds from exercise of stock options and warrants ............... 461 118 156
Proceeds from issuance of common stock ............................. 250 1,849 --
------- -------- --------
Net cash provided by (used in) financing activities .......... 37,919 (8,775) (15,169)
------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... 2,761 -- (503)
CASH AND CASH EQUIVALENTS:
Beginning of year .................................................. -- -- 503
------- -------- --------
End of year ........................................................ $ 2,761 $ -- $ --
------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ...................................................... $ 4,373 $ 2,068 $ 3,424
======== ======== ========
Income taxes paid .................................................. $ 489 $ 55 $ --
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 39
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
1. DESCRIPTION OF THE BUSINESS
Asche Transportation Services, Inc. (the "Company," formerly known as
Aasche Transportation Services, Inc.), through its wholly-owned operating
subsidiaries, Asche Transfer, Inc. ("ATI") and AG Carriers, Inc. (collectively,
"Temperature-Controlled Segment") is a provider of temperature-controlled,
time-sensitive transportation of perishable consumer products, and through its
90% owned operating subsidiary, Specialty Transportation Services, Inc.
("Municipal Solid Waste Segment"), is a provider of municipal solid waste and
bulk industrial transport services, throughout the continental United States.
The remaining 10% ownership interest is held by American Capital Strategies,
Ltd. ("ACS"), a publicly traded investment company.
ACQUISITION OF THE MUNICIPAL SOLID WASTE TRANSPORT DIVISION OF JACK GRAY
TRANSPORT, INC.
On January 30, 1998, the Company purchased the net assets of the
municipal solid waste transport division of Jack Gray Transport, Inc. (the
"Waste Transport Business") for $30,200 in cash. The Waste Transport Business is
operated through Specialty Transportation Services, Inc. ("STS"), a newly formed
subsidiary of the Company, headquartered in Portage, Indiana. In conjunction
with the acquisition, the Company recorded $5,200 in cost in excess of net
assets acquired. The acquisition was accounted for as a purchase and
accordingly, the 1998 consolidated statement of operations includes the results
of operations of STS from the date it was acquired.
The acquisition by STS was financed with an $18,000 senior bank credit
facility, $13,375 of subordinated debt, $2,125 of which was issued to related
parties (primarily directors), $8,000 of which was issued to ACS and $500 of
common stock in exchange for a 10% ownership interest in STS to ACS. In
connection with the issuance of the subordinated debt, 947,500 warrants to
acquire the Company's common stock at prices ranging from $3.49 to $4.63 per
share were issued to various investors, including related parties (primarily
directors), and warrants to acquire an additional 10% of STS common stock were
issued to ACS.
In addition, if the internal rate of return ("IRR") of the $8,000
subordinated debt investment with ACS is less than 24%, STS is required to issue
warrants to ACS to purchase up to an additional 30% of STS common stock for a
nominal cost. The Company has the right to call all, but not less than all, of
these warrants or the underlying common stock, if previously converted, upon 30
days notice after all, but not less than all, of the $8,000 of subordinated debt
issued has been paid in full by the Company for the greater of fair market value
or a 24% IRR. The Company has the right to call the warrants, or underlying
common stock, if previously converted, any time up to 5 years from the date of
the acquisition. Commencing February 1, 2003, the warrants or underlying common
stock, if previously converted, can be put to STS for cash, an increase in the
subordinated debt, or shares in the Company's common stock at the
F-8
<PAGE> 40
greater of fair market value or a 24% IRR on its investment. ACS's $500 common
stock investment in STS can be put to STS after February 1, 2003 for the fair
market value of the common stock. Upon certain events, both the subordinated
debt warrants and the common stock in STS can be put to STS for cash, an
increase in the subordinated debt, or shares in the Company's common stock at an
earlier date. Subsequent to December 31, 1998, various actions were taken by the
Company relating to the $8,000 subordinated debt with ACS. Refer to Note 16.
STS transports municipal solid and special waste under contracts
ranging from five to twenty years with municipalities and large national waste
service companies, including Waste Management, Browning-Ferris, Republic
Industries and Allied Waste Industries. Under exclusive waste transfer
contracts, STS transports solid and special waste from transfer stations to
landfill sites owned by either the municipality or a waste services company.
Subsequent to the acquisition, STS has expanded its operations to include the
transportation of bulk commodities for the scrap recycling, environmental,
construction and manufacturing industries.
The former executive vice president of Jack Gray Transport, Inc. who
organized the waste transport division of Jack Gray Transport, Inc. in 1983 and
ran its operations until the date of acquisition, has entered into a five year
employment agreement to serve as the President of STS. This former executive
vice-president has served as a member of the Company's Board of Directors since
July 1996 and a vice president of the Company since January 1998.
STS operates as a stand-alone business unit separate from the Company's
existing Temperature-Controlled Segment.
The following unaudited pro forma data is based on certain amounts
derived from the audited consolidated statement of operations for the year ended
December 31, 1998 and the unaudited statement of operations of the Waste
Transport Business for the one month ended January 30, 1998 and the audited
statement of operations of the Waste Transport Business for the nine months
ended September 30, 1997, the unaudited statement of operations of the Waste
Transport Business for the three months ended December 31, 1997 and the audited
consolidated statement of operations of the Company for the year ended December
31, 1997, and assumes in each case, that the acquisition of the net assets of
the Waste Transport Business occurred on January 1, 1997. The pro forma
statements are not necessarily indicative of the results of operations which
would have occurred had the acquisition taken place on January 1, 1997 or of
future results of the consolidated operations of STS and the Company.
PRO FORMA STATEMENTS OF OPERATIONS DATA (UNAUDITED):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
----------------- -----------------
DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
Net revenues .......................................... $ 116,865 $ 100,445
Operating income ...................................... 7,310 6,736
Income (loss) before income tax provision (benefit) ... 954 (208)
Net income (loss) ..................................... 58 (315)
Basic and diluted net income (loss) per share ......... 0.01 (0.08)
</TABLE>
F-9
<PAGE> 41
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all accounts of the
Company and its operating subsidiaries, ATI, AG Carriers, Inc. and STS. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
The Temperature-Controlled Segment recognizes revenue when the freight
leaves the terminal. Cost and related expenses are recorded when the related
revenue is recognized. Management has concluded that the difference between the
Temperature-Controlled Segment's method of recognizing revenue and a prescribed
method does not result in a material difference in reported quarterly or annual
net income and related per share amounts. The Municipal Solid Waste Segment
recognizes revenue when the freight is delivered. Cost and related expenses are
recorded when the related revenue is recognized.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment, including capitalized leases, are stated at
cost, less accumulated depreciation and amortization and are being depreciated
and amortized using both straight-line and accelerated methods over the
estimated useful lives of the assets which range from two to thirty years. Motor
carrier equipment, consisting of tractors and trailers, are depreciated using
the straight-line method over the estimated useful lives of the assets which
range from three to ten years. The carrying amounts of motor carrier equipment
are reflected at net realizable value, as determined based on the estimated
salvage values at the end of the estimated useful life of the related motor
carrier equipment.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
the liability method, deferred taxes are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.
F-10
<PAGE> 42
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
DEBT ISSUANCE COST
Fees associated with the issuance of debt are amortized using the
straight-line method over the life of the related debt.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired is amortized on a
straight-line basis over 30 years with the exception of the September 1994
acquisition of Polar Express, Inc. ("PEI"). The excess of cost over net assets
acquired resulting from the September 1994 acquisition of PEI is amortized on a
straight line basis over 25 years. The Company assesses long-lived assets for
impairment under FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. In accordance
with this Statement, the excess of cost over net assets acquired associated with
assets acquired in a purchase business combination is included in impairment
evaluations when events or circumstances exist that indicate the carrying amount
of those assets may not be recoverable. If this review indicates that the
carrying amount will not be recoverable, as determined based on the estimated
undiscounted cash flows over the remaining amortization period, the carrying
amount of the excess of cost over net assets acquired will be reduced by the
estimated shortfall of cash flows.
WARRANT ACCRETION
STS warrants are valued at the greater of fair market value or an
amount that gives rise to an internal rate of return of 24% to the holder of an
$8,000 subordinated debt investment.
DEBT DISCOUNT
Discounts associated with the issuance of $5,375 of subordinated debt
are amortized using the interest method over the life of the related debt.
MINORITY INTEREST
Minority interest associated with a $500 common stock investment in STS
is valued at the fair market value of the related common stock.
STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), was issued which, if
elected, would require companies to use a new fair value method of accounting
for stock-based compensation plans. The Company has elected to continue
following present accounting rules under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") which uses an
intrinsic value method and often results in no compensation expense. Under APB
25, because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
F-11
<PAGE> 43
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
COMMON SHARE DATA
Basic income per share is computed using the weighted average number of
shares outstanding. On a diluted basis, the weighted average number of shares
outstanding is adjusted for the incremental shares attributed to outstanding
options and warrants, when the effect of such items are dilutive. Diluted
weighted average shares outstanding for 1998 and 1997 in connection with options
and warrants amount to 479,539 shares and 61,585 shares, respectively. In 1996
the weighted average shares outstanding related to options and warrants are
antidilutive and, accordingly, are not included in the per share calculations.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," which changes the way public
companies report information about operating segments. The Company adopted SFAS
No. 131 as of December 31, 1998. This statement, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the major countries in which
the Company holds assets and reports revenues.
RECENT ACCOUNTING STANDARDS
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires the costs of start-up activities, including
organization costs, to be expensed as incurred. The SOP broadly defines start-up
activities as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business with a new class of
customer or beneficiary, initiating a new process in an existing facility, or
commencing some new operation. The SOP is effective for the Company for fiscal
years beginning after December 15, 1998, and will require the Company upon
adoption to write off any previously capitalized start-up or organization costs
as a cumulative effect of a change in accounting principle. Thus, effective
January 1, 1999, the Company will write off all organization and start-up costs
under the SOP as a cumulative effect of a change in accounting principle in the
amount of approximately $500, which primarily relates to the STS costs incurred
in 1998 to open new terminals or expand existing facilities.
OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents and
trade receivables. The Company places its cash and cash equivalents with high
credit quality financial institutions and instruments.
Concentrations of credit risk with respect to trade receivables is
limited to the large number of customers comprising the Company's customer base
and their dispersion across many different geographic locations.
F-12
<PAGE> 44
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
For all periods presented, the Company had no significant
concentrations of credit risk or financial instruments with off-balance sheet
risk.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land...................................................................... $ 1,329 $ 595
Buildings and improvements................................................ 3,130 2,032
Motor carrier equipment................................................... 29,178 15,495
Motor carrier equipment under capital leases:
Unrelated parties.................................................... 11,134 10,520
Related parties...................................................... 2,832 2,758
Other equipment, furniture, and fixtures.................................. 9,450 1,531
-------- --------
57,053 32,931
Less: Accumulated depreciation and amortization........................... (11,650) (13,755)
-------- --------
$ 45,403 $ 19,176
======== ========
</TABLE>
In March 1998, ATI entered into various agreements for the sale and
leaseback of certain motor carrier equipment which reduced operating expenses
$411 and increased net income $253, or $0.06 and $0.05 basic and diluted net
income per common share, respectively, in 1998. The leases are classified as
capital leases in accordance with SFAS No. 13, Accounting for Leases.
During 1998, ATI entered into various agreements for the sale of
certain motor carrier equipment with an immediate leaseback of the same motor
carrier equipment by STS. The motor carrier equipment sold by ATI was originally
financed with debt, capital leases and operating leases. The net book value of
the debt and capital lease financed equipment was $4,884. The leases entered
into by STS are classified as operating leases in accordance with SFAS No. 13,
Accounting for Leases. The transactions generated $1,867 in net cash proceeds to
the Company and resulted in a gain of $453, of which $76 was recognized in 1998
with the remainder of $377 amortized over the remaining lives of the related
leases.
In July 1998, the Company adjusted the estimated salvage values related
to certain motor carrier equipment of AG Carriers, Inc. from 20% to 49% of the
original purchase price. The change better aligns the allocation of equipment
cost with its expected use. This change reduced operating expenses approximately
$235 and increased net income approximately $143, or $0.03 basic and diluted net
income per common share in 1998.
F-13
<PAGE> 45
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
In December 1996, the Company adjusted the estimated salvage values
related to certain motor carrier equipment of Polar from 44% to 35% of the
original purchase price. The change better aligns the allocation of equipment
cost with its expected use. This resulted in a writedown of equipment in the
amount of $1,155, $716 after-tax ($0.18 net loss per common share) in 1996.
In December 1996, the Company entered into various agreements for the
sale and leaseback of certain Polar motor carrier equipment which reduced
expenses $618 and increased net income $383 during the year ended December 31,
1997 ($0.09 net income per common share). The leases are classified as operating
leases in accordance with SFAS No. 13, Accounting for Leases. The resulting loss
of $1,043, $647 after-tax ($0.16 net loss per common share) was recorded in
1996.
In February 1997, the Company entered into an agreement to sell 68
Polar tractors and 141 Polar trailers for $4,592. The transaction generated
$1,373 in net cash proceeds to the Company with no significant earnings effect
in 1997.
4. LINES OF CREDIT
The Company maintains two revolving lines of credit with financial
institutions which provide for a maximum funding of $24,000, consisting of
$18,000 (Municipal Solid Waste Segment) and $6,000 (Temperature-Controlled
Segment) based on a percentage of eligible trade receivables for the
Temperature-Controlled Segment and eligible trade receivables and property and
equipment not used to collateralize the 8.81% note payable to unrelated parties
of $16,714 (refer to Note 5) for the Municipal Solid Waste Segment. At December
31, 1998, the Company had borrowings of $18,660, consisting of $14,113
(Municipal Solid Waste Segment) and $4,547 (Temperature-Controlled Segment)
outstanding, with a maximum remaining availability of $804, consisting of $796
(Municipal Solid Waste Segment) and $8 (Temperature-Controlled Segment). The
lines bear interest at the prime rate (7.75% at December 31, 1998) on $15,660
and LIBOR (5.28% at December 31, 1998) plus 2.5% on the remaining $3,000. At the
time the Company draws against the line of credit, the Company has the option of
borrowing at the prime rate, or alternatively LIBOR plus 2.5% for the
Temperature-Controlled Segment or LIBOR plus 2.75% for the Municipal Solid Waste
Segment. The lines of $18,000 (Municipal Solid Waste Segment) and $6,000
(Temperature-Controlled Segment) are renewable by the Company on December 31,
2000 and April 30, 2000, respectively. It is the Company's intent to maintain
these outstanding lines of credit for more than a year. The lines of credit are
collateralized by trade receivables for the Temperature-Controlled Segment and
eligible trade receivables and property and equipment not used to collateralize
the 8.81% note payable to unrelated parties of $16,714 for the Municipal Solid
Waste Segment.
The Company is subject to certain restrictive covenants related to the
line of credit, which include maintaining a specified debt service coverage
ratio, debt to equity ratio, a specified tangible net worth and a restriction on
the payment of dividends and stock redemptions.
F-14
<PAGE> 46
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
5. OTHER LONG-TERM DEBT
Other Long-term debt at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
8.81% note payable to a bank due in quarterly installments of $643 with $6,426
due on December 31, 2002-secured........................................................... $16,714 $ --
12.50% subordinated notes payable to ACS, due in monthly installments of $153
commencing March 1, 2003 through February 1, 2006-secured.................................. 5,500 --
15.00% junior subordinated notes payable to ACS, due in monthly installments of $69
commencing March 1, 2003 through February 1, 2006-secured.................................. 2,500 --
14.00% unsecured subordinated notes payable to unrelated parties due July 1, 1999,
net of unamortized debt discount of $58.................................................... 2,042 --
14.00% unsecured subordinated note payable to unrelated party due July 1, 1999,
net of unamortized debt discount of $27.................................................... 973
8.25% unsecured subordinated notes payable to related parties due February 1, 2003, net of
unamortized debt discount of $430.......................................................... 1,070 --
14.00% unsecured subordinated notes payable to related parties due August 1, 1999, net
of unamortized debt discount of $21........................................................ 753 --
6.40% to 9.25% notes payable to unrelated parties, due in various monthly
installments through the year 2003-secured................................................. 2,779 5,512
8.00% unsecured note payable to a related party, due in quarterly installments of
$249 through May 16, 2000.................................................................. 1,556 2,545
14.00% unsecured subordinated note payable to related party due February 1, 2006............. 200 --
Other........................................................................................ 1,038 985
-------- -------
Total long-term debt......................................................................... 35,125 9,042
Less: current maturities..................................................................... (16,415) (3,747)
-------- -------
Long-term debt, less current maturities...................................................... $ 18,710 $ 5,295
======== =======
</TABLE>
The 8.81% note payable, the 12.50% senior subordinated note payable and
the 15.00% junior subordinated note payable are collateralized by eligible trade
receivables and certain fixed assets of STS. The 6.40% to 9.25% secured notes
payable are collateralized by the related motor carrier equipment.
F-15
<PAGE> 47
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The principal maturities of other long-term debt reflecting 1999
prepayments referred to in Note 16 as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999................................................. $ 16,415
2000................................................. 3,532
2001................................................. 2,815
2002................................................. 9,244
2003................................................. 1,944
Thereafter........................................... 1,175
-------
$35,125
=======
</TABLE>
6. COMMITMENTS
At December 31, 1998 the Company was obligated for future rentals under
capital and operating leases, as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES CAPITAL LEASES
WITH UNRELATED WITH RELATED OPERATING
PARTIES PARTIES LEASES
-------------- ------------ ---------
<S> <C> <C> <C>
1999.................................................................... $2,211 $162 $10,598
2000.................................................................... 1,862 -- 12,081
2001.................................................................... 1,192 -- 11,457
2002.................................................................... 1,172 -- 5,457
2003.................................................................... 1,984 -- 4,913
Thereafter.............................................................. 233 -- 5,673
------ ---- -------
8,654 162 $50,179
Amounts representing interest........................................... (767) (11) =======
------ ----
Present value of minimum lease payments, including current
portion of $2,090 and $151 respectively............................... $7,887 $151
====== ====
</TABLE>
The Company financed motor carrier equipment purchases through capital
lease obligations with unrelated parties of $6,579 for the year ended December
31, 1998.
Rent expense under operating leases amounted to $6,686, $3,748 and
$1,687 for the years ended December 31, 1998, 1997 and 1996, respectively.
The capital leases with unrelated parties contain purchase options
under which the Company is required to purchase the equipment for a defined
residual amount, ranging from 15% to 40%, at the end of the lease term.
F-16
<PAGE> 48
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value. The carrying amounts of cash and cash equivalents, trade
receivables, prepaid expenses and other current assets, accounts payable, and
accrued liabilities approximate fair value because of the short maturity of
those instruments. The fair value of the Company's outstanding debt and capital
leases is estimated based on similar issues or on the current rates offered to
the Company for debt and capital leases of the same remaining maturities and the
carrying value is a reasonable estimate of its fair market value.
8. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT OFFERING
In July 1997, the Company completed a private placement offering of
540,558 shares of common stock at a price of $3.70 per share. The offering was
made solely to accredited investors. The net proceeds of approximately $1,849,
including issuance costs of $51, was used to reduce outstanding indebtedness and
for general corporate purposes.
STOCK OPTIONS
In June 1996, the Company merged all of its stock option plans, with
the exception of the two plans in accordance with the separation agreements
described below, into one all inclusive plan, the Asche Transportation Services,
Inc. Stock Option Plan. All matters relating to eligibility for options and the
number of options to which such individuals may be entitled based upon events
occurring prior to the adoption of this plan will be determined in accordance
with the applicable provisions of the prior plans.
The following table summarizes the activities under the Company's Stock
Option Plan and options granted in accordance with employment and stock option
agreements for the three years ended December 31, 1998:
F-17
<PAGE> 49
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS -------------------------------
AVAILABLE FOR WEIGHTED-AVERAGE
GRANT SHARES EXERCISE PRICE
------------- ---------- ----------------
<S> <C> <C> <C>
Balance December 31, 1995............................. 109,918 423,582 $6.97
Increase in shares reserved...................... 200,000 --
Options granted.................................. (260,000) 260,000 $3.85
Options canceled................................. 245,797 (245,797) $6.56
Options exercised................................ -- (40,000) $3.89
--------- ---------
Balance December 31, 1996............................. 295,715 397,785 $5.33
Options granted.................................. (35,000) 35,000 $4.64
Options canceled................................. 25,585 (25,585) $7.37
Options exercised................................ -- (5,000) $3.75
--------- ---------
Balance December 31, 1997............................. 286,300 402,200 $5.37
Increase in shares reserved...................... 1,085,000 --
Options granted.................................. (1,178,000) 1,178,000 $4.19
Options canceled................................. 1,200 (1,200) $7.00
Options exercised................................ -- (5,000) $5.75
--------- ---------
Balance December 31, 1998............................. 194,500 1,574,000 $4.46
========= =========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------- --------------------------------
WEIGHTED-AVERAGE
REMAINING CONTRACT WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICE RANGE SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- -------------------- --------- ------------------ ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$3.66 - $5.19 1,428,000 8.89 $4.09 797,000 $4.03
$5.75 - $8.38 38,000 7.29 $7.44 38,000 $7.44
$8.75 - $10.94 108,000 5.93 $9.52 108,000 $9.52
--------- -------
1,574,000 943,000
========= =======
</TABLE>
The above table includes 714,000 outstanding options with 194,500
options available for grant issued out of the Company's Stock Option Plan and
860,000 outstanding options issued in accordance with employment and stock
option agreements. The Company had 943,000, 267,000 and 176,300 options
exercisable as of December 31, 1998, 1997 and 1996, respectively.
The exercise price of each option must be at least equal to the fair
market value of the common stock on the date the stock option is granted. The
maximum term of options granted under the Stock Option Plan generally is ten
years. The weighted-average fair value of options granted during 1998, 1997 and
1996 was $2.20, $1.47 and $2.01, respectively.
In accordance with a separation agreement between an employee and the
Company in 1996, options to purchase 60,000 shares of the Company's common stock
at an exercise price per share of $3.31 were granted. In May 1998, all 60,000
options were exercised.
In accordance with a separation agreement entered into between a former
consultant of the Company and the Company in July 1996, options to purchase
50,000 shares of the Company's common
F-18
<PAGE> 50
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
stock at an exercise price per share of $3.31 were granted In March 1998, all
50,000 options were exercised.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 4.77%, 5.90% and 6.26%;
volatility factors of the expected market price of the Company's common stock of
56.6%, 46.9% and 55.1%; and a weighted-average expected life of the option of
4.7 years, 2.0 years and 4.7 years, respectively; and no dividend yield.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ---------
<S> <C> <C> <C>
Net income (loss).................................................... $ (779) $ 143 $(3,010)
Basic net income (loss) per common share............................. (0.17) 0.04 (0.77)
Diluted net income (loss) per common share........................... (0.15) 0.04 (0.77)
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
In October 1994, the Company amended and restated the 401(k) Plan to
include as a part of the 401(k) Plan an Employee Stock Ownership Plan (ESOP) for
the benefit of all eligible employees of the Company. Company matching
contributions and any dividends received may be used by the ESOP to purchase
common stock for the account of the participants. The Company may also make
discretionary contributions to the ESOP for the purchase of common stock. In
December 1994, the ESOP borrowed $621 from a bank to purchase 75,000 shares of
common stock from the stockholders. These shares are held in escrow and are
released by the tender to participants' accounts in the ESOP as the loan is
repaid. The loan obligation of the ESOP, which bears interest at prime, is
guaranteed by the Company and is considered unearned employee benefit expense.
The Company's guarantee of the ESOP loan has been recorded as a reduction of
stockholders' equity in the accompanying balance sheet at December 31, 1998 and
1997. The Company made no contributions to the ESOP in 1998, 1997 or 1996.
F-19
<PAGE> 51
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
In December 1994, the Company implemented an Employee Stock Purchase
Plan (ESPP) for the benefit of all eligible employees of the Company.
Participants of the ESSP may contribute "after-tax" compensation through payroll
deductions. The Company was required to provide a 25% matching contribution. In
April 1996, the plan was amended to eliminate the Company matching contribution.
WARRANTS
On September 23, 1994, the Company issued to the underwriter of the
initial public offering, for nominal consideration, warrants to purchase up to
53,125 shares of common stock of the Company. All such warrants will be
exercisable during the four-year period commencing on September 23, 1995 at an
exercise price of 125% of the initial public offering price. At December 31,
1998, all warrants remained outstanding.
On December 22, 1995, pursuant to the Polar merger agreement, the
Company issued 41,100 Series A warrants to purchase the Company's common stock,
in exchange for all outstanding Series A warrants of Polar. The warrants were
exercisable at $2.43 per share through February 8, 2000. In January 1997, all
41,100 Series A Warrants were exercised.
On December 22, 1995, pursuant to the Polar merger agreement, the
Company issued 965,805 Series B warrants to purchase the Company's common stock,
in exchange for all outstanding Series B warrants of Polar. In May 1998, 100
Series B warrants were exercised. At December 31, 1998, 965,705 warrants remain
outstanding. The warrants are exercisable at $7.91 per share through February 8,
2000, and are redeemable by the Company for approximately $.02 if the closing
price of the Company's common stock exceeds $11.86 for any 20 consecutive
trading days commencing February 9, 1996.
In connection with the private placement offering in July 1997, the
Company issued warrants to purchase 54,070 shares of common stock at an exercise
price of $4.625 per share to accredited investors and warrants to purchase
54,056 shares of common stock at an exercise price of $5.55 per share to the
underwriters of the offering.
In connection with the acquisition of the Waste Transport Business,
947,500 warrants to acquire the Company's common stock at prices ranging from
$3.49 to $4.63 per share were issued to various investors, including related
parties (primarily directors). In October 1998, 20,000 warrants were exercised
at $3.49 per share.
CONTINGENT ISSUANCE OF COMMON SHARES
In accordance with the original purchase agreement of AG Carriers,
Inc., as amended, the Company guaranteed the total value of the Company's common
stock issued in the purchase. Under the terms of the agreement, as amended, if
during the period from May 16, 1999 through September 12, 1999, the closing
price per share of the Company's common stock has not reached at least $10.90
per share, then on the 30th day following September 12, 1999, the Company shall
issue sufficient additional shares of the
F-20
<PAGE> 52
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
Company's common stock such that all of the shares issued have a total value of
$1,254. In the event the additional shares are required to be issued, management
believes this will not have a material adverse impact on the financial position
or operations of the Company.
F-21
<PAGE> 53
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
9. INCOME TAXES
Details of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---------- -------- ----------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 321 $ 1,883 $ --
State....................................................... 43 251 --
Utilization of carryforwards................................ -- (1,979) --
---------- -------- -------
Total current.................................................... 364 155 --
Deferred:
Federal..................................................... 412 310 (1,156)
State....................................................... 54 41 (165)
---------- -------- -------
Total deferred................................................... 466 351 (1,321)
---------- -------- -------
$ 830 $ 506 $(1,321)
========== ======== =======
</TABLE>
The provision (benefit) for income taxes differs from the amounts
computed by applying the statutory federal income tax rates to income before
income taxes due primarily to:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---------- -------- ----------
<S> <C> <C> <C>
Income tax at statutory federal rate............................... $ 324 $ 263 $(1,340)
Effect of:
Warrant accretion expense..................................... 303 -- --
Amortization of debt discount................................. 102 -- --
State income taxes, net of federal benefit.................... 26 37 (192)
Other, net.................................................... 75 206 211
------- -------- -------
$ 830 $ 506 $(1,321)
======= ======== =======
</TABLE>
At December 31, 1998, the Company has approximately $423 of alternative
minimum tax credits available that can be carried forward indefinitely to offset
future income taxes. The Company also has unused net operating loss
carryforwards of approximately $4,300 which expire between 2004 and 2013. As a
result of the Polar merger, utilization of certain net operating loss
carryforwards are subject to annual limitations.
F-22
<PAGE> 54
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
Temporary differences which result in deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts and driver advances .... $ 27 $ 27
Accrued expenses ....................................... 182 8
Net operating loss carryforwards ....................... 1,672 687
Alternative minimum tax credits ........................ 423 423
Other .................................................. 151 --
------- -------
2,455 1,145
Deferred tax liabilities:
Basis of intangible assets ............................. (439) (227)
Basis of revenue equipment ............................. (2,238) (1,411)
Basis of capitalized leases ............................ (1,225) (390)
Revenue taxed on in transit shipments .................. -- (15)
Other .................................................. -- (83)
------- -------
(3,902) (2,126)
------- -------
Net deferred tax liability ............................... $(1,447) $ (981)
======= =======
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company currently leases certain of its revenue equipment from
related parties. Payments to related parties on capital lease obligations in
1998, 1997 and 1996 were $644, $817 and $874, respectively.
11. EMPLOYEE BENEFIT PLANS
Each of the Company's subsidiaries and divisions had its own
profit-sharing and 401(k) plans covering substantially all full-time employees.
In January 1999, all subsidiary and division plans were merged into one Company
plan. Company contributions to the plan were $347, $104 and $97 for the years
ended 1998, 1997 and 1996, respectively.
STS participates in several multi-employer, union-sponsored health and
welfare and defined contribution pension plans. Contributions to such plans
amounted to $601 in 1998.
F-23
<PAGE> 55
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
12. LITIGATION SETTLEMENT
In May 1996, the Company settled all outstanding litigation related to
Polar's acquisition of PEI for $150, or $0.02 net loss per common share. This
amount does not include the Company's legal costs incurred related to its
defense of this matter, which had been expensed as incurred and had not been
included in the settlement amount.
In conjunction with the Polar merger, 5% of the Company's common stock
issued in the merger (69,941 shares) were held in an escrow account pending
final determination of the litigation. Upon reaching a final settlement, 34,030
of the common shares held in the escrow account were retired by the Company.
13. RESTRUCTURING
The Company recorded a non-recurring one-time restructuring charge of
$490, or $0.08 net loss per common share, in June 1996 related to severance
payments to approximately 30 terminated employees of Polar.
14. SEGMENT INFORMATION
DESCRIPTION OF THE TYPES OF SERVICES FROM WHICH EACH REPORTABLE SEGMENT DERIVES
ITS REVENUES
The Company has two reportable segments, the Temperature-Controlled
Segment and the Municipal Solid Waste Segment (acquired January 30, 1998). The
Temperature-Controlled Segment consists of two operating companies, Asche
Transfer, Inc. and AG Carriers, Inc., that provide temperature-controlled,
time-sensitive transportation of perishable consumer products. The Municipal
Solid Waste Segment consists of one operating company, Specialty Transportation
Services, Inc., that provides municipal solid waste and bulk industrial
transport services.
MEASUREMENT OF SEGMENT PROFIT AND LOSS AND SEGMENT ASSETS
The Company evaluates performance and allocates resources based on net
profit and loss from operations. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. The Municipal Solid Waste Segment financial data includes
Company subordinated debt of $5,375, less unamortized debt discount of $537
issued by the Company and related debt issuance cost of $210, less accumulated
amortization of $74 in connection with the acquisition of the Waste Transport
Business. The related interest expense of $611, amortization of debt issuance
cost of $74 and amortization of debt discount of $264 are also included in the
Municipal Solid Waste Segment.
F-24
<PAGE> 56
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS
The Company's reportable segments are business units that offer
different transportation services. The reportable segments are each managed
separately because of the distinct differences in the operations.
YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
MUNICIPAL
TEMPERATURE- SOLID
CONTROLLED WASTE TOTALS
------------ --------- ---------
<S> <C> <C> <C>
Net revenues ............................... $ 60,762 $ 52,669 $113,431
Depreciation and amortization .............. 3,972 2,714 6,686
Operating income ........................... 3,871 4,232 8,103
Interest expense ........................... 1,353 3,654 5,007
Income tax provision ....................... 1,157 176 1,333
Segment profit (loss) ...................... 1,740 (877) 863
Other significant noncash items:
Warrant accretion expense ............. -- 786 786
Amortization of debt issuance cost .... -- 280 280
Amortization of debt discount ......... -- 264 264
Minority interest expense ............. -- 63 63
Segment assets ............................. 30,890 57,284 88,174
Expenditures for long-lived assets ......... 5,052 1,622 6,674
</TABLE>
OPERATING INCOME
<TABLE>
<S> <C>
Total operating income for reportable segments .... $ 8,103
Parent company operating loss ..................... (1,248)
--------
Total consolidated operating income .......... $ 6,855
========
SEGMENT PROFIT (LOSS)
Total profit for reportable segments .............. $ 863
Parent company loss ............................... (803)
--------
The consolidated profit ...................... $ 60
========
ASSETS
Total assets for reportable segments .............. $ 88,174
Parent company assets ............................. 104
--------
Total consolidated assets .................... $ 88,278
========
</TABLE>
F-25
<PAGE> 57
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
OTHER SIGNIFICANT ITEMS
<TABLE>
<CAPTION>
SEGMENT TOTALS ADJUSTMENTS CONSOLIDATED TOTALS
-------------- ----------- -------------------
<S> <C> <C> <C>
Interest expense........................... $ 5,007 $ 59 $ 5,066
Income tax provision (benefit)............. 1,333 (503) 830
</TABLE>
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Net revenues................................................ $22,170 $29,129 $29,462 $32,670
Operating income............................................ 1,649 1,768 1,902 1,536
Net income (loss)........................................... 286 (52) 8 (182)
Net income (loss) per common share.......................... $ 0.06 $ (0.01) $ 0.00 $ (0.04)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997(1)
Net revenues................................................ $17,313 $16,799 $15,658 $15,400
Operating income............................................ 686 1,034 541 576
Net income.................................................. 36 161 3 70
Net income per common share................................. $ 0.01 $ 0.04 $ 0.00 $ 0.02
</TABLE>
(1) Net income for the three months ended March 31, 1997, June 30, 1997 and
September 30, 1997 have been restated from the amounts that were
originally reported of $64, $285 and $5, respectively, due to a
restatement of the income tax provision for the respective periods
resulting in restated net income per common share from amounts
previously reported of $0.02 and $0.07 for the three months ended March
31, 1997 and June 30, 1997, respectively.
16. SUBSEQUENT EVENTS
The Company was not in compliance with certain loan covenants during
the year ended December 31, 1998 and as of April 15, 1999 had not obtained
necessary waivers and amendments from its lenders.
The Company's management has actively pursued various financing and
equity related transactions subsequent to the filing of its Form 10-K on April
15, 1999. As a result of various actions taken by the Company, the Company has
been successful in obtaining all the necessary waivers and amendments by August
10, 1999 from its lenders in order for the debt to no longer be considered in
default at and for the year ended December 31, 1998. Additionally, management
believes that the Company's financial performance for 1999 and planned
activities, will enable the Company to comply with its amended loan covenant
requirements during 1999.
F-26
<PAGE> 58
ASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
On January 29, 1999, certain related parties, substantially all of whom
are officers and directors of the Company, exchanged $675 of subordinated debt
bearing 14% interest for 135,000 shares of the Company's common stock.
On March 12, 1999, an unrelated individual exchanged $1,150 of
subordinated debt bearing 14% interest for 230,000 shares of the Company's
common stock. In addition, $189 of accrued interest owed to this individual was
exchanged for an additional 37,800 shares of the Company's common stock and
75,000 warrants to purchase the Company's common stock at $5 per share were also
issued to this individual. In connection with the issuance of the warrants to
purchase the Company's common stock, the Company will record a non-recurring,
non-cash, one-time extraordinary loss of $101 in the first quarter of 1999.
In June 1999, STS modified a long-term contract with the Metropolitan
Service District of Portland ("Metro"). Under the terms of the modification, STS
will give Metro a rate reduction of one dollar per ton to transport municipal
solid waste. In exchange of the rate reduction, Metro agreed to prepay $6,592 of
monthly fixed payments provided for in the original contract. In addition, Metro
agreed to return $2,500 of cash to STS that was held by Metro to secure STS's
performance under their contract. STS hauls approximately 650 tons of municipal
solid waste per year under this contract.
In June 1999, STS prepaid $7,500 of subordinated debt with ACS. In
conjunction with the prepayment, STS and ACS entered into an agreement, whereby
STS agreed to a floor on ACS's common stock investment in STS of an internal
rate of return of 24% to ACS in exchange for STS's right to call ACS's common
stock investment in STS after the final payment of the remaining $500 of
subordinated debt with ACS.
In July 1999, the Company completed a private placement of the
Company's common stock to an individual investor. The Company raised $3,000 in
exchange for 750,000 shares of the Company's common stock.
In July 1999, the Company paid off $1,050 of subordinated debt bearing
14% interest.
In July 1999, certain unrelated individuals exchanged $400 of
subordinated debt bearing 14% interest for 88,894 shares of the Company's common
stock. Additionally, $86 of accrued interest owed to these individuals was
exchanged for an additional 19,096 shares of the Company's common stock.
In August 1999, the Company paid off $350 of subordinated debt bearing
14% interest.
F-27
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Forms S-8 (Nos. 333-19475, 333-06569, and 33-87826) and on Form S-3 (Nos.
333-77741 and 333-37529) of Asche Transportation Services, Inc. (formerly known
as Aasche Transportation Services, Inc. ) and in the related Prospectus of our
report dated April 15, 1999, except for Notes 4, 5 and 16, as to which the date
is August 10, 1999, with respect to the consolidated financial statements of
Asche Transportation Services, Inc., included in the Annual Report to
Shareholders (Form 10-K/A) for the year ended December 31, 1998.
Chicago, Illinois
August 10, 1999
