<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] 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
AASCHE TRANSPORTATION SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3964954
- -------------------------------- ------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10214 NORTH MOUNT VERNON ROAD
SHANNON, ILLINOIS 61078
(Address of Principal Executive Offices)
815-864-2421
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date 5,098,930 SHARES OF
PAR VALUE $.0001 COMMON STOCK
<PAGE> 2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AASCHE TRANSPORTATION SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 360 $ 2,761
Trade receivables, net 17,153 15,947
Prepaid expenses and other current assets 6,681 5,947
--------- --------
Total current assets 24,194 24,655
Property and equipment, at cost 58,094 57,053
Less accumulated depreciation and amortization (12,595) (11,650)
--------- --------
Net property and equipment 45,499 45,403
--------- --------
Excess of cost over net assets acquired, net 14,002 14,176
Debt issuance cost, net 956 1,045
Other assets 3,167 2,999
--------- --------
TOTAL ASSETS $ 87,818 $ 88,278
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 2,949 $ 1,657
Accounts payable 3,408 3,756
Accrued liabilities 1,423 3,453
Guaranteed obligation of Employee Stock Ownership Plan 155 155
Lines of credit in default 20,312 18,660
Current maturities of long-term debt with unrelated parties
(including $16,071 and $16,714 in default) 17,438 18,294
Current maturities of long-term debt with related party 995 995
Current maturities of capital lease obligations with unrelated parties 2,335 2,090
Current maturities of capital lease obligations with related parties 84 151
Subordinated debt, less unamortized debt discount of $24 and $107
(including $8,984 and $8,973 in default) 10,226 11,768
--------- --------
Total current liabilities 59,325 60,979
Long-term debt with unrelated parties, less current maturities 3,345 2,237
Long-term debt with related party, less current maturities 319 761
Capital lease obligations with unrelated parties, less current maturities 5,180 5,797
Minority interest 581 563
Subordinated debt, less unamortized debt discount of $404 and $430 1,096 1,070
Deferred income taxes 1,656 1,656
Accrued warrant accretion 1,048 786
--------- --------
Total liabilities 72,550 73,849
Stockholders' equity:
Common stock, $.0001 par value, 10,000,000 shares authorized,
5,098,930 and 4,696,130 shares issued and outstanding 1 --
Additional paid-in capital 20,168 18,077
Guarantee of Employee Stock Ownership Plan obligation (155) (155)
Accumulated deficit (4,746) (3,493)
--------- --------
Total stockholders' equity 15,268 14,429
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 87,818 $ 88,278
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 3
AASCHE TRANSPORTATION SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
---------- -----------
<S> <C> <C>
NET REVENUES $ 32,755 $ 22,170
OPERATING EXPENSES:
Salaries, wages and benefits 12,968 8,132
Fuel 3,893 2,900
Purchased transportation 7,749 4,220
Supplies and maintenance 3,739 1,851
Depreciation and amortization 1,496 1,657
Taxes and licenses 579 401
Insurance 1,038 678
Communications and utilities 410 295
Gain on disposition of equipment (42) (25)
Other 582 412
---------- -----------
Total operating expenses 32,412 20,521
---------- -----------
OPERATING INCOME 343 1,649
OTHER (EXPENSES) INCOME:
Interest expense (1,456) (837)
Warrant accretion expense (262) (143)
Debt issuance cost (97) (51)
Amortization of debt discount (98) (48)
Minority interest expense (17) (12)
Other 200 56
---------- -----------
(LOSS) INCOME BEFORE INCOME TAX BENEFIT (PROVISION),
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (1,387) 614
INCOME TAX BENEFIT (PROVISION) 413 (328)
---------- -----------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (974) 286
Loss on extinguishment of debt, with no tax benefit (102) --
---------- -----------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (1,076) 286
Cumulative effect of change in accounting for
start-up costs, net of tax benefit of $111 (177) --
---------- -----------
NET (LOSS) INCOME $ (1,253) $ 286
---------- -----------
BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE:
(Loss) income before extraordinary item and
cumulative effect of accounting change $ (0.20) $ 0.06
Extraordinary item (0.02) --
Cumulative effect of accounting change (0.04) --
---------- -----------
Net (loss) income $ (0.26) $ 0.06
========== ===========
Weighted average common shares outstanding 4,848,641 4,540,291
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
AASCHE TRANSPORTATION SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
GUARANTEE
COMMON STOCK OF EMPLOYEE
--------------------- STOCK
$.0001 PAR VALUE ADDITIONAL OWNERSHIP TOTAL
--------------------- PAID-IN PLAN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT CAPITAL OBLIGATION DEFICIT EQUITY
---------- -------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 4,696,130 $ -- $ 18,077 $ (155) $ (3,493) $ 14,429
Issuance of common stock 402,800 1 2,091 -- -- 2,092
Net loss -- -- -- -- (1,253) (1,253)
---------- ------ -------- ------- -------- ---------
Balance at March 31, 1999 5,098,930 $ 1 $ 20,168 $ (155) $ (4,746) $ 15,268
========== ====== ======== ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
AASCHE TRANSPORTATION SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) Income $(1,253) $ 286
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 1,496 1,657
Gain on disposition of equipment (42) (25)
Warrant accretion expense 262 143
Amortization of debt discount 98 48
Amortization of debt issuance costs 97 51
Minority interest 17 12
Other -- (51)
Changes in other operating items:
Trade receivables (1,206) (6,657)
Prepaid expenses and other assets (909) (2,012)
Accounts payable (348) 1,429
Accrued liabilities (1,552) 836
------- --------
Net cash used in operating activities (3,340) (4,283)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Revenue equipment (2,458) (3,001)
Building, office equipment and other (551) (87)
Proceeds from the sale of equipment 1,633 5,823
Purchase of Specialty Transportation Services, Inc. -- (31,275)
------- --------
Net cash used in investing activities (1,376) (28,540)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of debt with unrelated parties 1,374 18,000
Proceeds from borrowings of subordinated debt -- 13,375
Minority interest -- 500
Debt issuance costs -- (1,175)
Net borrowings on lines of credit 1,652 6,481
Net increase (decrease) in cash overdraft 1,292 (312)
Principal payments on long-term debt with unrelated parties (1,564) (2,892)
Principal payments on long-term debt with related party -- (249)
Principal payments on capital leases with unrelated parties (372) (561)
Principal payments on capital leases with related parties (67) (139)
Proceeds from exercise of options and warrants -- 165
------- --------
Net cash provided by financing activities 2,315 33,193
------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: (2,401) 370
CASH AND CASH EQUIVALENTS:
Beginning of period 2,761 --
------- --------
End of period $ 360 $ 370
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,900 $ 807
======= ========
Income taxes paid $ 15 $ 210
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
AASCHE TRANSPORTATION SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(in thousands, except per share and share data)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although management believes these disclosures are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments necessary for fair presentation for the periods
presented have been reflected and are of a normal recurring nature. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto for the three years
ended December 31, 1998, 1997, and 1996, as filed with the Securities and
Exchange Commission as part of the Company's Annual Report on Form 10-K. Results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the year.
NOTE 2 - ACQUISITION OF THE MUNICIPAL SOLID WASTE HAULING 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 American Capital
Strategies, Ltd. ("ACS") and $500 from the sale of a 10% common stock 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 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.
STS transports municipal solid and special waste under contracts ranging from
five to twenty years with municipalities and large national waste services
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.
6
<PAGE> 7
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 as 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 operations.
The following unaudited pro forma statement of operations data is based on
certain amounts derived from the unaudited statements of operations of the Waste
Transport Business for the three months ended March 31, 1998, and assumes that
the acquisition of the net assets of the Waste Transport Business occurred on
January 1, 1998. The pro forma data is not necessarily indicative of the results
of operations, which would have occurred had the acquisition taken place on
January 1, 1998, or of future results of the consolidated operations of STS and
the Company.
<TABLE>
<S> <C>
Net revenues $25,604
Net income 284
Basic and diluted net income per share 0.06
</TABLE>
NOTE 3 - GOING CONCERN AND MANAGEMENT'S PLANS
The Company has not complied with certain loan covenants during the year ended
December 31, 1998 and the three month period ended March 31, 1999, and also is
not likely to be able to comply with certain covenants during the remainder of
1999, under loan agreements with: (1) ACS (10% stockholder and $8,000
subordinated lender to STS), (2) one of STS's senior bank lenders ($15,429
outstanding line of credit and $16,071 note payable at March 31, 1999), (3) the
Company's senior bank lender ($4,883 outstanding line of credit at March 31,
1999), and (4) an unsecured subordinated lender holding a 14.00% note payable in
the amount of $984 at March 31, 1999 (net of unamortized debt discount of $16)
and due July 1, 1999. The violations primarily relate to financial covenants
including: total leverage ratio; minimum tangible net worth amount; fixed charge
coverage ratio; interest coverage ratio; minimum annual net income; and the
maximum amount for leases and capital expenditures. As of May 14, 1999, the
Company has not been successful in obtaining the necessary waivers and
amendments from the respective lenders in order for the debt not to be
considered in default at March 31, 1999. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans include actively seeking refinancing of the $8,000
subordinated debt with ACS, which may be in the form of equity securities or in
other certain subordinated debt securities. Upon the refinancing of the $8,000
subordinated debt, management believes it will be successful in obtaining the
necessary waivers and amendments with its other lenders in order for the debt
not to be considered in default at and for the year ended December 31, 1998 and
the three month period ended March 31, 1999 and to enable the Company to comply
with its loan covenants, if amended, during the remainder of 1999.
Under the provisions of a subordination and intercreditor agreement between STS,
STS's senior bank lenders and ACS, ACS is prohibited from taking any legal
action against STS until an event of default under the loan agreement with ACS
occurs and continues uncured and unwaived for six months after notice of such
event of default is provided to the senior bank lenders by ACS. As of May 14,
1999, no written notification from ACS regarding an event of default has been
received by the senior bank lenders. Upon written notice of an event of default,
interest can accrue at the default rate (17.50% on the $5,500 senior
subordinated note and 20.00% on the $2,500 junior subordinated note) until such
default is waived or cured. A prepayment premium can also be assessed under the
provisions of the loan agreement as a result of the default, not to exceed $240.
Under the provisions of the loan agreement with STS's senior bank lender, upon
written notice of an event of default, the bank can automatically cease to make
any new loans. Upon written notice, the bank can also declare all principal and
interest amounts outstanding as immediately due and payable. In addition, upon
written notice of an event of
7
<PAGE> 8
default, interest can accrue at its current rate plus 2.00%, compounded daily.
As of May 14, 1999, no written notification from STS's senior bank lender
regarding an event of default has been received.
Under the provisions of the loan agreement with the Company's senior bank
lender, upon written notice by the bank of an event of default, the bank can
declare all principal and interest amounts outstanding as immediately due and
payable. In addition, upon written notice of an event of default, interest can
accrue at the prime rate plus 3.00% per annum. As of May 14, 1999, no written
notification from the Company's senior bank lender regarding an event of default
has been received.
Under the provisions of the loan agreement with the unsecured subordinated
lender holding a 14.00% note payable in the amount of $984 at March 31, 1999
(net of unamortized debt discount of $16) and due July 1, 1999, the holder of
the note, by written notice, can declare all principal and interest amounts
outstanding as immediately due and payable. In addition, upon notification of
the occurrence of an event of default, interest can accrue at a rate of 18.00%
per annum. As of May 14, 1999, no written notification from the unsecured
subordinated lender has been received.
As a result of the violations of certain financial covenants related to the
8.81% note payable to a bank and the 12.50% and 15.00% subordinated notes
payable to ACS which have not been waived or cured, the long-term portion of the
originally scheduled maturities totaling $21,499 are classified as current
obligations in the accompanying balance sheet at March 31, 1999. In addition, as
a result of the violations of certain financial covenants related to the
revolving lines of credit which have not been waived or cured, the outstanding
borrowings of $20,312 are classified as a current obligation in the accompanying
balance sheet at March 31, 1999. The 14.00% unsecured subordinated notes payable
in the amount of $984 at March 31, 1999 (net of unamortized debt discount of
$16) is already classified as current as it is due July 1, 1999.
NOTE 4 - 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 Municipal Solid Waste Segment financial data
includes parent company subordinated debt of $3,750 at March 31, 1999 ($5,375 at
March 31, 1998), less unamortized debt discount of $428 at March 31, 1999 ($753
at March 31, 1998) issued by the parent company and related debt issuance costs
of $210, less accumulated amortization of $193 at March 31, 1999 ($136 at March
31, 1998) in connection with the acquisition of the Waste Transport Business.
The related interest expense of $147 for the three month period ended March 31,
1999 ($167 for the three month period ended March 31, 1998), amortization of
debt issuance costs of $57 for the three month period ended March 31, 1999 ($37
for the three month period ended March 31, 1998) and amortization of debt
discount of $98 for the three month period ended March 31, 1999 ($48 for the
three month period ended March 31, 1998) 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.
8
<PAGE> 9
<TABLE>
<CAPTION>
TEMPERATURE- MUNICIPAL
THREE MONTH PERIOD ENDED MARCH 31,1999: CONTROLLED SOLID WASTE TOTALS
- ------------------------------------------------------------ ---------- ----------- --------
<S> <C> <C> <C>
Net revenues $ 14,546 $ 18,209 $ 32,755
Depreciation and amortization 767 729 1,496
Operating income 377 297 674
Interest expense 305 1,136 1,441
Income tax benefit (provision) (68) 348 280
Segment profit (loss) before extraordinary item and
cumulative effect of accounting change 108 (870) (762)
Cumulation effect of accounting change -- (177) (177)
Segment profit (loss) 108 (1,047) (939)
Significant noncash items included in segment profit (loss):
Warrant accretion expense -- 262 262
Amortization of debt issuance costs -- 97 97
Amortization of debt discount -- 98 98
Other -- 17 17
Segment assets 35,276 52,024 87,300
Expenditures for long-lived assets 1,992 1,017 3,009
OPERATING INCOME
Total operating income for reportable segments $ 674
Parent company operating loss (331)
--------
Total consolidated operating income $ 343
========
SEGMENT LOSS
Total loss for reportable segments $ (939)
Parent company loss (314)
--------
Total consolidated loss $ (1,253)
========
ASSETS
Total assets for reportable segments $ 87,300
Parent company assets 518
--------
Total consolidated assets $ 87,818
========
</TABLE>
OTHER SIGNIFICANT ITEMS
<TABLE>
<CAPTION>
PARENT
SEGMENT COMPANY CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
------- ----------- ------------
<S> <C> <C> <C>
Interest expense $1,441 $ 15 1,456
Income tax benefit 280 133 413
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
TEMPERATURE- MUNICIPAL
THREE MONTH PERIOD ENDED MARCH 31, 1998: CONTROLLED SOLID WASTE TOTALS
- ------------------------------------------------------------ ---------- ----------- --------
<S> <C> <C> <C>
Net revenues $ 15,302 $ 6,868 $ 22,170
Depreciation and amortization 1,163 494 1,657
Operating income 989 910 1,899
Interest expense 295 530 825
Income tax provision 299 130 429
Segment profit (loss) 450 (3) 447
Significant noncash items included in segment profit (loss):
Warrant accretion expense -- 143 143
Amortization of debt issuance costs -- 51 51
Amortization of debt discount -- 48 48
Other -- 12 12
Segment assets 37,799 39,802 77,601
Expenditures for long-lived assets 3,088 -- 3,088
OPERATING INCOME
Total operating income for reportable segments $ 1,899
Parent company operating loss (250)
--------
Total consolidated operating income $ 1,649
========
SEGMENT PROFIT (LOSS)
Total profit for reportable segments $ 447
Parent company loss (161)
--------
Total consolidated profit $ 286
========
ASSETS
Total assets for reportable segments $ 77,601
Parent company assets 311
--------
Total consolidated assets $ 77,912
========
</TABLE>
OTHER SIGNIFICANT ITEMS
<TABLE>
<CAPTION>
PARENT
SEGMENT COMPANY CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
------ ----------- ------
<S> <C> <C> <C>
Interest expense $ 825 $ 12 $837
Income tax provision (benefit) 429 (101) 328
</TABLE>
10
<PAGE> 11
NOTE 5 - DEBT TO EQUITY EXCHANGES
On January 29, 1999, certain related parties, substantially all of who 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 recorded a non-recurring, non-cash, one-time
extraordinary loss of $102 in the first quarter of 1999.
NOTE 6 - 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 the three months ended March 31, 1998 in
connection with options and warrants amount to 249,754 shares.
NOTE 7 - 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 requires 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 wrote off all organization and start-up costs under the SOP
as a cumulative effect of a change in accounting principle in the amount of
$177, net of tax benefit of $111, which primarily relates to the STS costs
incurred in 1998 to open new terminals or expand existing facilities.
ITEM 2. 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 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 it was acquired. The
results of operations discussed below are not necessarily comparable between
periods because the results from operations for the three months ended March 31,
1999 include STS and the results from operations for the three months ended
March 31, 1998 only includes STS since the date it was acquired.
11
<PAGE> 12
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIOD ENDED MARCH 31, 1999 WITH THE THREE MONTH
PERIOD ENDED MARCH 31, 1998.
Net revenues increased $10.6 million, or 47.7%, to $32.8 million in 1999, from
$22.2 million in 1998, largely due to the STS Acquisition. During the first
quarter of 1999, the Company increased its revenue producing power units by 9
units. Without giving effect to the additional net revenues contributed by the
STS Acquisition, the Company's net revenues decreased by $0.8 million, or 4.9%,
due to having less tractors in service.
Net revenues on a pro forma basis (assuming the STS Acquisition had occurred on
January 1, 1998) increased $7.2 million, or 27.9% to $32.8 million for 1999 due
to increased volume from existing customers and the addition of new customers in
1999.
Total miles increased 6.4 million, or 36.6%, to 23.9 million in 1999 from 17.5
million in 1998, largely due to the STS Acquisition. Average miles per tractor
decreased 10.6% to 23,818 miles in 1999 from 26,644 miles in 1998. Average
revenue per tractor decreased 5.2% to $32,003 in 1999 from $33,760 in 1998. The
decreases in average miles per tractor and average revenue per tractor are
primarily attributable to the effects of the STS Acquisition. Without giving
effect to the STS Acquisition, the Company's total miles decreased by 0.4
million, or 3.1%, due to having less tractors in service. 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)
increased 6.4%, to 99.0% in 1999 from 92.6% in 1998. The increase in the
operating ratio is largely due to the STS Acquisition and a shortage of drivers
at Asche Transfer, Inc., which resulted in poor operating results in January
1999. Without giving effect to the STS Acquisition, the Company's operating
ratio increased 4.5%, to 99.7% in 1999 from 95.2% in 1998. Total operating
expenses increased $11.9 million, or 57.9%, to $32.4 million in 1999, compared
to $20.5 million in 1998, largely due to the STS Acquisition. Without giving
effect to the STS Acquisition, the Company's total operating expenses decreased
by $0.1 million, or 0.4%.
Operating expenses on a pro forma basis increased $8.9 million, or 37.9% to
$32.4 million for 1999.
Salaries, wages and benefits increased $4.8 million, or 59.5%, to $13.0 million
in 1999 compared to $8.1 million in 1998, due to the STS Acquisition and
increases in overall compensation of drivers that were needed to enhance
recruitment and retention. Without giving effect to the STS Acquisition, the
Company's salaries, wages and benefits increased by $0.1 million, or 2.5%,
largely due to increases in overall compensation of drivers that were needed to
enhance driver recruitment and retention which more than offset having less
personnel to service the fewer tractors in service.
Salaries, wages and benefits on a pro forma basis increased $3.6 million, or
38.6% to 13.0 million for 1999, largely due to increases in overall compensation
of drivers that were needed to enhance driver recruitment and retention, as well
as, having more tractors in service.
Fuel expenses increased $1.0 million, or 34.2%, to $3.9 million in 1999 compared
to $2.9 million in 1999, 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 $0.3 million or 12.9%,
largely due to the decrease in the number of tractors in service and decreased
fuel prices.
Fuel expense on a pro forma basis increased $0.6 million, or 19.8% to $3.9
million for 1999, due to having more tractors in service which more than offset
decreased fuel prices.
12
<PAGE> 13
Purchased transportation expense increased $3.5 million, or 83.6%, to $7.7
million in 1999 compared to $4.2 million in 1998, largely due to the STS
Acquisition. Without giving effect to the STS Acquisition, the Company's
purchased transportation expense increased by $0.6 million, or 20.6%, due to an
increase in contractor operated units.
Purchased transportation expense on a pro forma basis increased $2.9 million, or
58.9% to $7.7 million for 1999, due to an increase in contractor-operated units.
Supplies and maintenance expenses increased $1.9 million, or 102.0%, to $3.7
million in 1999 compared to $1.9 million in 1998, largely due to the STS
Acquisition. Without giving effect to the STS Acquisition, the Company's
supplies and maintenance expense decreased by $0.2 million, or 17.7%, due to a
decrease in company-owned units in service.
Supplies and maintenance expense on a pro forma basis increased $1.6 million, or
72.9% to $3.7 million for 1999, due to having more tractors in service.
Insurance expense increased $0.4 million, or 53.1%, to $1.0 million in 1999
compared to $0.7 million in 1998, largely due to the STS Acquisition.
Insurance expense on a pro forma basis increased $0.3 million, or 37.0% to $1.0
million for 1999, due to having more tractors in service.
Interest expense increased $0.6 million, or 74.0%, to $1.5 million in 1999
compared to $0.8 million in 1998, due to the STS Acquisition. Outstanding debt
and capital lease obligations aggregated $61.5 million at March 31, 1999
compared with $62.0 million at December 31, 1998.
Warrant accretion expense of $262 and $143 in 1999 and 1998, respectively,
represents the accretion of STS warrants in connection with the STS Acquisition.
Debt issuance cost of $97 and $51 in 1999 and 1998, respectively, represents the
amortization of debt issuance costs in connection with the STS Acquisition.
Amortization of debt discount of $98 and $48 in 1999 and 1998, respectively,
represents the amortization of debt discount in connection with the STS
Acquisition.
Minority interest expense of $17 and $12 in 1999 and 1998, respectively,
represents the increase in minority interest in connection with the STS
Acquisition.
The effective income tax rates of 29.8% (benefit) and 53.4% (provision) in 1999
and 1998, respectively, are higher than the federal statutory rate due primarily
to the non-deductibility of certain expenses (i.e. warrant accretion expense,
amortization of debt discount, minority interest and per diem expense
reimbursement paid to drivers.)
The loss on extinguishment of debt of $102 relates to the issuance of warrants
to purchase the Company's common stock issued in connection with an exchange of
subordinated debt for common stock in March 1999.
The cumulative effect of change in accounting relates to the write off of
start-up costs of $177, net of tax benefit of $111, in accordance with SOP 98-5
"Reporting on the Costs of Start-up Activities".
Net loss increased $1.6 million to $1.3 million in 1999 compared to net income
of $0.3 million in 1998, largely due to non-recurring one-time charges (i.e.,
loss on extinguishment of debt and cumulative effect of a change in accounting)
totaling $0.4 million, $0.3 million net of tax, as well as, a loss before
cumulative effect of accounting change of $0.9 million at STS, largely due to
the start-up operations of five new terminals in 1999 and a shortage of drivers
at Asche Transfer, Inc. which resulted in poor operating results in January
1999.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had net working capital deficit of $35.1 million.
Excluding the long-term debt in default which has been reclassified to current
as a result of covenant violations, the Company had net working capital of $6.7
million at March 31, 1999. 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, $20.3 million of which was borrowed against the lines of credit at
March 31, 1999, consisting of $15.4 million (Municipal Solid Waste Segment) and
$4.9 million (Temperature-Controlled Segment) and approximately $0.1 was
available, consisting of $0.1 million (Municipal Solid Waste Segment).
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 $61.5 million and $62.0 million at
March 31, 1999 and December 31, 1998, respectively. The debt to equity ratio
(calculated excluding payables and other liabilities) was 4.03:1 at March 31,
1999 and 4.30:1 at December 31, 1998.
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 (excluding the
potential effects of long-term debt in default which has been reclassified to
current as a result of covenant violations). 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 under its lines of credit will be sufficient
to meet its long-term commitments.
As of March 31, 1999, 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 the refinancing
of the debt or an equity infusion.
Management's plans include actively seeking refinancing of the $8.0 million
subordinated debt with ACS which may be in the form of equity securities or in
other subordinated debt securities. Upon the refinancing of the $8.0 million
subordinated debt, management believes it will be successful in obtaining the
necessary waivers and amendments with its other lenders in order for the debt
not to be considered in default at and for the year ended December 31, 1998 and
at and for the three month period ended March 31, 1999 and to enable the Company
to comply with its loan covenants, if amended, during the remainder of 1999.
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.
14
<PAGE> 15
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 wrote off all organization and start-up costs under
the SOP as a cumulative effect of a change in accounting principle in the amount
of $0.2 million, net of tax benefit of $0.1 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 $0.05
million, $0.03 million after-tax ($0.01 basic and diluted net income per common
share) in the three month period ended March 31, 1999.
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 the three month periods ended March 31,
1999 and 1998 were $0.2 million.
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 dates after
the year 2000. Significant attention is 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 it believes are necessary to insure that this
potential problem does not adversely affect its operating results in the future.
The Company is continuing its 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 its
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 it transacts business, although the Company
15
<PAGE> 16
is 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 its business, financial
condition and results of operations.
The Company's state of readiness for the year 2000, its estimated costs
associated with year 2000 issues, the risks it faces associated with year 2000
issues and its year 2000 contingency plans are summarized below.
STATE OF READINESS
Internally, the Company has implemented a three-phase process to assess year
2000 compliance of its systems and remediate any material non-compliance. The
phases are (1) to identify and test its 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 it determines 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. The Company completed all three phases with respect to most of its
purchased information technology ("IT") systems and non-IT systems and believes
the systems are year 2000 compliant. The Company anticipates completing all
three phases with respect to the remainder of the purchased IT and non-IT
systems by the end of the second quarter of 1999.
Externally, the Company implemented a three-phase process to assess year 2000
compliance of the systems of its 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 the Company transacts
business and determine whether they are significant to its business ("core"
parties); (2) to contact the vendors, customers and other third parties with
whom the Company does 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 the Company is 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 to ensure compliance, (iv) what their target date
is for year 2000 compliance, and (v) whether they have any contingency plans.
The Company has substantially completed all three phases with respect to core
parties. The Company plans to follow-up during 1999 with its core vendors, core
customers and third parties with whom the Company does business, and update its
information regarding the year 2000 problem. The Company is in the first and
second phases with respect to non-core parties, and anticipates completing all
phases with respect to non-core parties before the end of the third quarter of
1999.
COSTS ASSOCIATED WITH YEAR 2000 ISSUES
The Company estimates that the costs associated with implementing all phases of
its year 2000 assessment and resolving any year 2000 problems will be less than
$100. This estimate includes expenditures for both repairs and upgrades. The
Company believes that these costs, assuming this estimate is accurate, would not
have a material effect on its business, financial condition and results of
operations. The Company anticipates that cash flow from operations will be used
to pay the costs associated with its year 2000 problem. All year 2000 costs are
expensed as incurred.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
The Company is unaware of any material risk to the Company associated with year
2000 issues at the present time. The Company believes that the reasonably likely
worst case year 2000 scenario is a decrease in the efficiency with which it
procures and delivers loads, and a decrease in the efficiency with which it
receives payment for services rendered. A decrease in efficiency, however, would
not necessarily result in a decrease in business. The Company expects 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.
16
<PAGE> 17
The Company faces 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,
customers 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 its favor, could
have a material adverse effect on future results.
CONTINGENCY PLANS
The Company has not yet developed specific contingency plans for the millennium
bug because its assessment of year 2000 issues is incomplete. The Company
generally expects that its contingency plans will be to identify and have
available to the Company alternate vendors and service providers to decrease the
impact on the Company if one or more of the core parties with whom it does
business suffers a significant year 2000 problem. The Company expects to have
the Company's contingency plans complete before the end of the third quarter of
1999.
ITEM 3. 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 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.
17
<PAGE> 18
PART II: OTHER INFORMATION
AASCHE TRANSPORTATION SERVICES, INC.
(A DELAWARE CORPORATION)
Item 1. LEGAL PROCEEDINGS.
Not applicable.
Item 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
The Company has not complied with certain loan covenants during the
year ended December 31, 1998 and the three month period ended March 31,
1999 under loan agreements with: (1) American Capital Strategies, Ltd.,
(2) one of Specialty Transportation Services, Inc.'s senior bank
lenders, (3) the Company's senior bank lender, and (4) an unsecured
subordinated lender. As of May 14, 1999, the Company has not been
successful in obtaining the necessary waivers and amendments from the
respective lenders in order for the debt not to be considered in
default at March 31, 1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
Item 5. OTHER INFORMATION.
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the calendar year quarter
ended March 31, 1999.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
Aasche Transportation Services, Inc.
Date: May 14, 1999 BY: s/Leon M. Monachos
-----------------------------------------------
Leon M. Monachos, Chief Financial Officer
Date: May 14, 1999 BY: s/Larry L. Asche
-----------------------------------------------
Larry L. Asche, Chairman and
Chief Executive Officer
19
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