<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
-----------------------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to ______________________
Commission file number 0-25352
-------------------------------------------
Ampace Corporation
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its charter)
Delaware 36-3988574
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
201 Perimeter Park Road, Suite A, Knoxville, TN 37922
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(423) 691-5799
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 No X
------- ---------
State the number of shares outstanding of each of the Issuer's classes
of common equity, as of the last practicable date: 3,062,713 at March 31, 1998
------------------------------
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
See Financial Statements attached hereto
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 should be read in conjunction with the
attached unaudited interim condensed consolidated financial statements and notes
thereto, and with the Company's audited consolidated financial statements and
notes thereto for the calendar year ended December 31, 1997. It also contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors including the timing
of acquisitions, availability of drivers, fuel prices and the addition of new
customers.
RESULTS OF OPERATIONS
Effective with the close of business on December 31, 1997 the Company
merged all of its operating subsidiaries into one legal entity named Ampace
Freightlines, Inc. Additionally, the Company acquired the assets and assumed
certain obligations of Roy Widener Motor Lines, Inc. and Morristown
Transportation Systems, Inc. on January 29, 1998.
COMPARISON OF FIRST QUARTER 1998 TO FIRST QUARTER 1997
The following table sets forth items in the Condensed Consolidated
Statements of Operations as a percentage of operating revenues.
<TABLE>
<CAPTION>
Three Months Ended March 31
Percentage of
Operating Revenue
---------------------------------
1997 1998
---- ----
<S> <C> <C>
Operating revenues 100.0% 100.0%
Operating expenses:
Salaries, wages and employee benefits 40.0 41.8
Purchased transportation 9.0 16.4
Fuel 17.8 12.8
Depreciation and amortization 12.4 9.1
Rent 4.3 7.9
Operating supplies and expenses 8.0 9.3
Insurance and claims 3.8 3.4
Operating taxes and licenses 2.0 2.0
General and administrative expenses (0.8) 4.1
Communications and utilities 1.7 1.6
------- -------
Total operating expenses 98.2 108.4
------- -------
Operating income (loss) 1.8 (8.4)
Interest expense, net 4.6 2.9
------- -------
Loss before income taxes (2.8) (11.3)
Income taxes (1.0) (0.0)
------- -------
Net loss (1.8)% (11.3)%
======= =======
</TABLE>
<PAGE> 3
OPERATING REVENUES
Operating revenues for the first quarter of 1998 increased
approximately $2.6 million or 33% to $10.3 million from $7.7 million in the
first quarter of 1997. The increase in operating revenues was due primarily to
increased revenues associated with the completion of the Company's fourth, fifth
and sixth acquisitions, Bar-J Enterprises which was combined into the existing
Calhoun operation, effective May 5, 1997, Walker Trucking which became the
Columbus operation of Ampace Freightlines, effective June 1, 1997, and Roy
Widener Motor Lines, Inc. and Morristown Transportation System, Inc. (Widener
acquisition) which became the East Tennessee operation of Ampace Freightlines,
effective January 29, 1998, respectively.
The net loss for the quarter ended March 31, 1997 increased from
$138,000 to $1,163,317 for the quarter ended March 31, 1998. This increase was
due primarily to losses generated from the operations of the two most recent
acquisitions, Walker Trucking and Widener acquisition, and a favorable sales tax
refund recognized in the first quarter of 1997. The loss will negatively impact
the Company's ability to become profitable in the second half of 1998. The
Company can give no assurances that profitability will be attained in 1998.
The Company has added two new directors, giving voting control to the
outside directors, and appointed a new chairman. The Board has engaged
independent advisory services to review its cost, information and management
structures. Management has taken immediate steps to reduce discretionary costs
and restructured its operational and support staffs last week. Additionally, the
Company is focused on securing necessary drivers to support existing strong
freight demand while reducing excess trailer related costs. Additionally, the
management is engaged in efforts to attract new strategic customers for which it
can charge higher freight rates for additional value added.
OPERATING EXPENSES
Salaries, wages and benefits as a percentage of revenue increased in
the first quarter of 1998 compared to the same quarter in 1997 as a result of
the Widener acquisition. Purchased transportation increased from 9.0% of revenue
in 1997 to 16.4% for 1998. This increase was the result of the increased usage
of independent contractors. Fuel expense declined from 17.8% during the first
quarter of 1997 to 12.8% in 1998 as a result of lower fuel prices and higher
miles per gallon during 1998 and because a higher percentage of revenue was
handled by independent contractors during 1998.
Depreciation and amortization as a percentage of revenue declined
from 12.4% during the first quarter of 1997 to 9.1% for the same period in 1998
as a result of the recognition of equipment gains, better equipment utilization
and the additional freight handled by independent contractors in 1998. Rent
increased during 1998 to 7.9% from 4.3% in 1997 as a result of financing some of
the 1997 and 1998 acquisition and expansion equipment with operating leases.
Operating supplies and expenses increased as a percentage of revenue in the
first quarter of 1998 to 9.3% from 8.0% for the same period in 1997 primarily as
a result of the Widener acquisition and the integration charges associated with
it.
The decline in insurance and claims from 3.8% of revenue for the
quarter ending March 31, 1997 to 3.4% for the same quarter during 1998 resulted
primarily from more favorable insurance rates during 1998. Operating taxes and
licenses remained constant in spite of the increased usage of owner operators
because of the increased miles driven by Company drivers.
General and administrative expenses increased from (0.8)% of revenue
during the first quarter of 1997 to 4.1% during 1998. This increase was created
by a one time sales tax refund recognized in the first quarter of 1997 and
additional expenses as compared to revenue associated with the Widener
acquisition. Communication expense decreased from 1.7% of revenue in the first
quarter of 1997 to 1.6% of revenue in 1998. This decrease results from savings
realized in the standardization of the Company's communication platform.
<PAGE> 4
For the quarter ended March 31, 1998, the Company did not recognize any deferred
income tax benefit from the operating losses generated. The ultimate realization
of the operating loss carryforwards generated during the quarter ended March 31,
1998 and those generated in previous years is dependent upon the generation of
future taxable income. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon levels of historical taxable losses and
uncertainty regarding the generation of taxable income in future years,
management has established a valuation allowance equal to net deferred tax
assets at March 31, 1998, pursuant to the requirements of Statement of Financial
Accounting Standards No. 109. If Management had recorded its customary deferred
tax benefit at 38% of the net loss, the benefit would have been approximately
$435,000.
The Company assesses the impairment of long-lived assets, including identifiable
intangibles and goodwill, whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. At March 31, 1998,
the Company has made such assessment and concluded that an impairment provision
was not required. However, if operating losses continue for the near term, it is
possible that impairment provisions may be necessary in this near term
timeframe, and such impairment provisions may be material to the Company's
consolidated results of operations and financial position.
LIQUIDITY AND CAPITAL RESOURCES
Since its public stock offering in February 1995, the Company has used
the proceeds from the offering to fund acquisitions and support business
development activities. Working capital requirements have been funded with cash
generated from operations and a line of credit secured by the Company's trade
receivables. Equipment purchases have principally been financed by manufacturers
or by asset-based lenders.
During the first three months of 1998, the Company borrowed $754,500
from its line of credit to support working capital needs.
The working capital at December 31, 1997 and March 31, 1998 reflect as
a current liability the guaranteed residuals of maturing capitalized leases,
while the corresponding asset values are shown as Property and Equipment, a
long-term asset. This amount is approximately $1.8 million.
During February 1998 the loan covenants on the Company's line of credit
were modified to require (i) a minimum tangible net worth of $1.0 million, (ii)
a minimum net worth of $4.6 million, (iii) a debt-to-equity ratio not to exceed
4:1, and (iv) maintenance of a $600,000 excess borrowing base. In addition to
the above mentioned loan covenant changes, the interest rate on the line of
credit will increase to 1% over the bank's Prime Rate at June 30, 1998 and to 2%
over the bank's Prime Rate at July 31, 1998. As of March 31, 1998, the Company
was in violation to certain of the financial covenants under the Company's line
of credit. The agreement expires on January 1, 1999, and has been classified as
a current liability at March 31, 1998.
YEAR 2000 COMPLIANCE
In 1997, the Company assessed its computer systems and began
converting such systems to be Year 2000 compliant. This conversion is expected
to be completed by the end of 1998. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Management does not anticipate the costs of becoming Year 2000
compliant will have a material impact on the Company's financial position,
results of operations or liquidity. The Company does not currently have any
information concerning the Year 2000 compliance status of its suppliers and
customers.
<PAGE> 5
PART II
OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company's line of credit contains certain loan covenants, including
the following financial covenants in which the Company must maintain: (1) a
minimum tangible net worth of $1.0 million, (ii) a minimum net worth of $4.6
million, (iii) a debt-to-equity ratio not to exceed 4:1, and (iv) maintenance of
a $600,000 excess borrowing base. As of March 31, 1998, the Company was in
violation of certain of these financial covenants with respect to its line of
credit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Exhibit No. Description
<S> <C>
27 Financial Data Schedule
</TABLE>
<PAGE> 6
Attachment-Item 1. Financial Statements
AMPACE CORPORATION & SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1997 and March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
---- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 539,165 $ --
Accounts Receivable, net 4,084,210 5,580,180
Other current assets 1,066,138 1,327,937
------------ ------------
Total current assets 5,689,513 6,908,117
------------ ------------
Property and equipment, net 10,146,259 15,261,390
Other assets 2,295,674 2,975,834
------------ ------------
$ 18,131,446 $ 25,145,341
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of long-term debt and
capital lease obligations 4,233,820 8,553,100
Other current liabilities 2,558,626 4,876,439
------------ ------------
Total current liabilities 6,792,446 13,429,539
Long-term debt and capital lease obligations
excluding current installments 6,277,118 7,817,236
------------ ------------
Total liabilities 13,069,564 21,246,775
------------ ------------
Stockholders' equity:
Common stock, $.0001 par value. Authorized
10,000,000 and issued 3,075,000 shares in 1997
and 3,100,000 shares in 1998 308 310
Additional paid in capital 7,475,874 7,475,872
Accumulated deficit (2,371,147) (3,534,463)
Treasury stock, 37,287 shares at cost (43,153) (43,153)
------------ ------------
Total stockholders' equity 5,061,882 3,898,566
Commitments and contingencies
------------ ------------
$ 18,131,446 $ 25,145,341
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 7
AMPACE CORPORATION & SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Operating Revenues $ 7,686,090 $ 10,256,005
Salaries, wages and employee benefits 3,077,049 4,284,117
Purchased transportation 695,358 1,681,581
Fuel 1,367,146 1,311,807
Depreciation & amortization 954,523 930,545
Rent 330,474 811,482
Operating supplies & expenses 611,175 953,761
Insurance & claims 292,124 345,590
Operating taxes & licenses 150,345 203,579
General & administrative expenses (59,343) 426,680
Communication & utilities 126,947 168,282
------------ ------------
Total Operating Expenses 7,545,798 11,117,424
------------ ------------
Operating Income (loss) 140,292 (861,419)
Interest expense, net 356,120 301,898
------------ ------------
Loss before taxes (215,828) (1,163,317)
Income taxes (78,261) --
------------ ------------
Net loss $ (137,567) $ (1,163,317)
============ ============
Weighted average common shares 3,100,000 3,062,713
============ ============
Loss per share - basic and diluted $ (.04) $ (.38)
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 8
AMPACE CORPORATION & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Operating Activities:
Net loss $(137,567) (1,163,317)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 849,000 930,545
Changes in operating assets and liabilities:
Accounts receivable, net (646,000) (1,495,970)
Other current asset 444,000 (107,572)
Other liabilities 87,567 1,606,433
--------- -----------
Net cash provided (used) by operating activities 597,000 (229,881)
--------- -----------
Investing activities:
Proceeds from disposals of equipment -- 438,000
Acquisitions -- (203,140)
Purchases of property, equipment and intangible assets (443,000) (1,387,765)
--------- -----------
Net cash used by investing activities (443,000) (1,152,905)
--------- -----------
Financing activities:
Proceeds from long-term debt -- 2,302,912
Principal payments on long-term debt and capital leases (689,000) (1,459,291)
--------- -----------
Net cash provided (used) by financing activities (689,000) 843,621
--------- -----------
Net decrease in cash and cash equivalents (535,000) (539,165)
Cash and cash equivalents at beginning of period 535,000 539,165
--------- -----------
Cash and cash equivalents at end of period $ -- $ --
========= ===========
Supplementary disclosure of cash flow information:
Interest paid $ 215,000 $ 263,271
========= ===========
Income taxes refunded $ -- $ (336,081)
========= ===========
Liabilities assumed and debt issued in connection
with acquisitions $ -- $ 5,727,159
========= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 9
AMPACE CORPORATION & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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. In the
opinion of management, all adjustments necessary for fair presentation
of 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 audited financial statements and
the notes, as filed with the Securities and Exchange Commission as part
of the Company's 1997 Form 10-KSB. Results of operations for the interim
periods are not necessarily indicative of the results to be expected for
the year.
(2) DEBT AND LIQUIDITY
In February 1998 the loan covenants under the Company's line of credit were
modified to include (1) a minimum tangible net worth of $1,000,000, (2)
a minimum net worth of $4,600,000, (3) a maximum debt to shareholder
equity of 4.00:1.00, and (4) maintenance of a $600,000 excess borrowing
base. In addition to the above mentioned loan covenant changes, the
interest rate on the line of credit will increase to 1% over the bank's
Prime Rate at June 30, 1998 and to 2% over the bank's Prime Rate at July
31, 1998. As of March 31, 1998, the Company was in violation to certain
of the financial covenants under the Company's line of credit. The
agreement expires on January 1, 1999, and has been classified as a
current liability at March 31, 1998.
Although management has not obtained any commitments to refinance its
revolving credit agreement, the Company believes that it will be able to
obtain such refinancing through other potential lenders. However, there
can be no assurance that the Company will be able to obtain such
financing, or if available, will be available at terms acceptable to the
Company. Also, management believes that equity in revenue equipment will
allow the Company to satisfy a significant portion of its capital lease
obligations that are coming due within the next 12 - 18 months.
(3) EARNINGS PER SHARE
Basic and diluted loss per share is calculated using the net loss of the
Company as the numerator and the weighted-average shares outstanding as
the denominator. There is no difference between basic and diluted loss
per share since the assumed exercise of common stock options and
warrants would be anti-dilutive. At March 31, 1998 and 1997, the number
of shares under options and warrants that were outstanding but were not
included in the computation of diluted loss per share were 850,250 and
490,250, respectively.
(Continued)
<PAGE> 10
AMPACE CORPORATION & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(4) CONTINGENCIES
The Company is the defendant in a claim filed with the United States Equal
Employment Opportunity Commission ("EEOC") by a former employee of the
Company alleging race and disability discrimination. Although no formal
judgment has been made, the EEOC has recommended an award against the
Company in the amount of $133,000, including both compensatory and
punitive damages. The Company denies that it has discriminated against
the former employee and intends to vigorously defend this claim in an
administrative hearing with the EEOC. Accordingly, no accrual has been
established by the Company at March 31, 1998 related to this claim, as
in the opinion of management, such contingency is neither probably nor
reasonably estimable.
The Company is also involved in certain other claims and pending litigation
arising from the normal conduct of business. Based on the present
knowledge of the facts and, in certain cases, opinions of outside
counsel, management believes the resolution of these claims and pending
litigation will not have a material adverse effect on the financial
condition, results of operations or liquidity of the Company.
(5) ACQUISITION
On January 29, 1998, the Company acquired certain revenue and service
equipment and various other assets, licenses and permits from Roy
Widener Motor Lines, Inc. and Morristown Transportation System, Inc.
(collectively, "the Sellers") for $5,199,307, consisting of cash of
$147,148, assumption of capital leases and other obligations of
$4,890,159 and issuance of a note payable of $162,000 to a third party
creditor. Additionally, concurrent with this acquisition, the Company
entered into certain noncompetition agreements with the Sellers for a
period of three years subsequent to the date of acquisition whereby the
Company paid $200,000 at closing to the Sellers consisting of a note
payable to a third party creditor. The Company is also liable for an
additional $475,000 during the term of the noncompetition agreements
based upon gross receipts from previous customers of the Sellers. The
purchase price was allocated to the assets acquired as follows:
<TABLE>
<S> <C>
Revenue and service equipment $ 4,992,443
Permits, licenses and other assets 145,338
Noncompete agreements 675,000
Goodwill 61,526
-----------
$ 5,874,307
===========
</TABLE>
This acquisition has been accounted for as a purchase with the operating
results included in the consolidated statement of operations from the
date of acquisition.
(Continued)
<PAGE> 11
AMPACE CORPORATION & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(6) IMPAIRMENT
The Company assesses the impairment of long-lived assets, including
identifiable intangibles and goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. At March 31, 1998, the Company has made such assessment and
concluded that an impairment provision was not required. However, if
operating losses continue for the near term, it is possible that
impairment provisions may be necessary in this near term timeframe, and
such impairment provisions may be material to the Company's consolidated
results of operations and financial position.
<PAGE> 12
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Ampace Corporation
Date May 19, 1998 BY: /s/ Jay N. Taylor
------------ ----------------------------------------
Jay N. Taylor, Chief Executive Officer
Date May 19, 1998 BY: /s/ Bruce W. Jones
------------ ---------------------------------------
Bruce W. Jones, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMPACE CORPORATION FOR THE THREE MONTHS ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,734,456
<ALLOWANCES> 154,276
<INVENTORY> 0
<CURRENT-ASSETS> 6,908,117
<PP&E> 23,951,864
<DEPRECIATION> 8,690,474
<TOTAL-ASSETS> 25,145,341
<CURRENT-LIABILITIES> 4,876,439
<BONDS> 16,370,336
0
0
<COMMON> 310
<OTHER-SE> 3,898,256
<TOTAL-LIABILITY-AND-EQUITY> 25,145,341
<SALES> 10,256,005
<TOTAL-REVENUES> 10,256,005
<CGS> 11,117,424
<TOTAL-COSTS> 11,117,424
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301,898
<INCOME-PRETAX> (1,163,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,163,317)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
