<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 September 30, 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 registrant 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 October 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.
The condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has suffered
recurring losses from operations, has a deficit working capital of $8.3 million
and a stockholders' deficit of $1.4 million at September 30, 1998, and is in
violation of financial covenants under its line of credit agreement that expires
on January 1, 1999 for which no commitments exist to refinance, all of which
raise substantial doubt about the Company's ability to continue as a going
concern. See Notes 2 and 5 of the Notes to Condensed Consolidated Financial
Statements and the discussion included herein for further information on these
matters and management's plans. The condensed consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
The following table sets forth items in the Condensed Consolidated
Statements of Operations as a percentage of operating revenues for the three
months ended September 30:
<TABLE>
<CAPTION>
Percentage of
Operating Revenue
-----------------------------
1997 1998
------ ------
<S> <C> <C>
Operating revenues 100.0% 100.0%
------ ------
Operating expenses:
Salaries, wages and employee benefits 36.8 42.1
Purchased transportation 10.7 14.3
Fuel 14.3 11.9
Depreciation and amortization 9.1 10.8
Rent 8.5 7.7
Operating supplies and expenses 7.5 12.6
Insurance and claims 2.5 4.5
Operating taxes and licenses 1.6 2.3
General and administrative expenses 4.0 5.9
Communications and utilities 2.0 2.0
Restructuring charge -- 0.3
------ ------
Total operating expenses 97.0 114.4
------ ------
Operating income (loss) 3.0 (14.4)
Interest expense, net 3.2 3.8
------ ------
Loss before income taxes (0.2) (18.2)
Income taxes (0.1) 0.0
------ ------
Net loss (0.1)% (18.2)%
====== ======
</TABLE>
<PAGE> 3
The Company continued to incur losses during the quarter ended
September 30, 1998 with such losses amounting to approximately $1.6 million.
Although the Company adopted a restructuring plan at the end of the second
calendar quarter in 1998 to curtail these losses, the Company was unable to
reduce its costs as quickly as anticipated. Operations were further negatively
impacted by driver shortages in East Tennessee which adversely affected its
revenues for the third quarter, causing certain fixed costs such as office
wages, depreciation, insurance and operating taxes to increase as a percentage
of revenues. The increase in purchased transportation as a percentage of
revenues was due to having to use more independent contractors than in the
previous year to haul customers' freight. The increase in total expenditures
compared to the previous year was due primarily to an acquisition made in early
1998. The Company expects to continue to incur losses through the remainder of
1998.
During June 1998, the Company adopted a restructuring plan with the
purpose of downsizing the current fleet and taking the Company forward through
the last six months of 1998. The Company abandoned its previous strategy of
acquiring companies to maintain growth and achieve critical mass. The Company
instead focused on profit improvement and cash flow management. Under the
restructuring plan, the Company intended to reduce its current number of
tractors and trailers in operation by approximately 75 and 570 units,
respectively. In addition to the reduction of the fleet size, the Company
planned to sell the Columbus, Ohio and Orlando, Florida operating locations, and
to close the Asheboro, North Carolina facility and combine its Morristown and
Knoxville, Tennessee office locations. In connection with the restructuring plan
implemented by the Company during June of 1998, the Company recorded a charge
for restructuring costs in the amount of $1,995,250 which consists of the
following items: approximately $582,000 due to the impairment of goodwill
associated with certain facilities; approximately $581,000 due to the impairment
of a noncompete covenant associated with one of the facilities; approximately
$567,000 for estimated losses to be incurred as a result of fleet downsizing and
the disposal of certain terminals; approximately $180,000 for severance pay; and
approximately $85,000 for other costs to be incurred as a result of the
restructuring of the Company.
Subsequent to the third quarter, management has determined that the
restructuring plan, as originally designed, will not result in sufficient
operational improvements and cost reductions as anticipated. Accordingly,
management has determined that additional measures are necessary to continue to
operate the Company which include scaling back certain locations, making
additional employee headcount reductions, and actively seeking a buyer for parts
or all of the remainder of the Company. Management has not determined what the
impact of the additional restructuring decisions will have on its financial
position, results of operations or liquidity. At September 30, 1998 management
estimates that approximately $353,000 of costs remain to fully implement the
originally designed restructuring plan as indicated below, all of which are
expected to be incurred during the fourth quarter. Management will continue to
implement the restructuring plan and focus on hiring and retaining drivers in
addition to seeking a potential buyer for parts or all of the Company.
As part of its restructuring plan, the Company sold its Columbus, Ohio
and Orlando, Florida operating locations on September 1, 1998. Net proceeds for
the sale of these two locations was approximately $375,000 and resulted in a
gain of approximately $95,000. Such gain has been credited to depreciation and
amortization expense during the third quarter.
Of the original $180,000 amount of severance pay recorded as part of
the restructuring charge, approximately $140,000 pertained to six months of
severance pay for two executives who resigned in June 1998. Since these two
executives as well as a third executive had employment contracts which required
certain payments in the event of change of control of the Company, the Company
determined during September 1998 to buy out the employment contracts of these
three executives in order to facilitate the sale of the Company should a
potential buyer for the Company be found. Accordingly, the Company entered into
agreements with each of these three individuals which effectively canceled such
previous employment agreements as well as the previous severance agreements for
the two executives who have resigned. Collectively, the agreements require the
Company to pay these three individuals $445,000, of which $255,000 has been paid
as of September 30, 1998. As a result of these agreements, the Company recorded
additional restructuring charges of approximately $350,000 during the quarter
ended September 30, 1998. The Company has incurred
<PAGE> 4
less costs than originally anticipated in connection with the facility closing
and downsizing of its fleet and, accordingly, has adjusted its estimated
restructuring costs during the quarter ended September 30, 1998. The following
summarizes the approximate changes in the restructuring reserve from June 30,
1998 to September 30, 1998:
<TABLE>
<CAPTION>
Fleet and
facility Severance Other
downsizing pay costs Total
--------- ------- ------ --------
<S> <C> <C> <C> <C>
Balance at June 30 $ 567,000 180,000 85,000 832,000
Change in estimate (311,000) 350,000 (9,000) 30,000
Costs paid (108,000) (340,000) (61,000) (509,000)
--------- -------- ------- --------
Balance at September 30 $ 148,000 190,000 15,000 353,000
========= ======== ======= ========
</TABLE>
For the quarter ended September 30, 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 September 30, 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 September 30, 1998.
There exists a reasonable possibility that additional impairments of
long-lived assets, including intangible assets and goodwill, may be necessary in
the near term. If such impairment provisions or other exit costs are required in
the near term, it is reasonably possible that such charges will have a material
adverse effect on the Company's financial condition, results of operations and
liquidity.
Although management has undertaken restructuring efforts described
above, there can be no assurance that the Company will be able to effectively
implement the restructuring plan as described above. Should the Company be
unable to effectively implement the restructuring plan, management may have to
make further restructuring decisions which could include filing for relief under
Federal bankruptcy laws.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
The following table sets forth items in the Condensed Consolidated
Statements of Operations as a percentage of operating revenues for the nine
months ended September 30:
<TABLE>
<CAPTION>
Percentage of
Operating Revenue
-----------------------------
1997 1998
------ ------
<S> <C> <C>
Operating revenues 100.0% 100.0%
------ ------
Operating expenses:
Salaries, wages and employee benefits 40.4 41.2
Purchased transportation 3.2 15.6
Fuel 18.0 12.3
Depreciation and amortization 13.3 11.0
Rent 7.1 7.6
Operating supplies and expenses 8.7 10.8
Insurance and claims 3.8 3.5
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
Operating taxes and licenses 1.6 1.9
General and administrative expenses 2.8 5.2
Communications and utilities 1.3 2.0
Restructuring charge -- 6.7
------ ------
Total operating expenses 100.2 117.8
------ ------
Operating loss (0.2) (17.8)
Interest expense, net 3.0 3.4
------ ------
Loss before income taxes (3.2) (21.2)
Income taxes (1.2) --
------ ------
Net loss (1.5)% (21.2)%
====== ======
</TABLE>
OPERATING REVENUES
Operating revenues for the first nine months of 1998 increased
approximately $7.8 million or 34% to $30.3 million from $22.6 million in the
first nine months 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 Systems, Inc. ("Widener
acquisition") which became the East Tennessee operation of the Company effective
January 29, 1998, respectively.
The net loss for the nine months ended September 30, 1997 increased
from $0.45 million to approximately $6.4 million for the nine months ended
September 30, 1998. This increase was due primarily to losses generated from the
operations of the two most recent acquisitions, Walker Trucking and Widener
acquisition, the recognition of an approximate $2.0 million restructuring
charge, and the inability to hire and retain drivers in the East Tennessee
operation. The Company expects to continue to incur losses through the remainder
of 1998.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1998
increased approximately $13.1 million or 58% to $35.7 million as of September
30, 1998 from $22.6 million in the first nine months of 1997. The increase in
total expenses was due primarily to the increased expenses associated with the
completion of the acquisitions referred to above, increased overhead costs to
support an expanding level of business earlier in 1998 and a restructuring
charge of $2.0 million during 1998. In addition, a favorable sales tax refund
was recognized by the Company in the first quarter of 1997.
Purchased transportation expense increased and fuel expense decreased
as a percentage of revenues during 1998 due to the increased use of independent
contractors used by the Company during 1998. Due to the low equipment
utilization resulting from the inadequate number of drivers, certain fixed costs
as a percentage of revenues have increased from the prior year, particularly
office wages, insurance, operating supplies and general and administrative
expenses. Depreciation and amortization as a percent of revenues has decreased
in 1998 from the same period in 1997 due to gains on the sale of equipment.
The Company adopted a restructuring plan during June 1998. See
discussion of the restructuring plan under the Comparison of the Three Months
Ended September 30, 1998 to the Three Months Ended September 30, 1997 and in
Notes 2 and 5 to the Notes to the Condensed Consolidated Financial Statements.
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
<PAGE> 6
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 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 at
March 31, 1998, (ii) a minimum net worth of $4.6 million at September 30, 1998,
(iii) a debt-to-equity ratio not to exceed 4:1 at September 30, 1998, and (iv)
maintenance of a $600,000 excess borrowing base at September 30, 1998. In
addition to the above mentioned loan covenant changes, the interest rate on the
line of credit was increased to 1% over the bank's Prime Rate on June 30, 1998
and to 2% over the bank's prime Rate on July 31, 1998. As of September 30, 1998,
the Company was in violation of 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 September 30, 1998. The Company has had discussions with
its revolving credit lender who has indicated its intent that it will most
likely discontinue its relationship with the Company upon maturity of the
current lending arrangement. The Company has no commitment for financing to
replace the facility on January 1, 1999.
As of September 30, 1998, approximately 92% of the trade payables were
past due, and, of the amount past due, approximately 38% were greater than 60
days past due. The Company has been using the extensions of vendor payables to
create short-term cash flow. The Company's efforts to maximize the short term
cash flow of the Company has not seriously jeopardized relationships with trade
vendors and has allowed the Company to continue to make payroll. The Company
will continue to extend its vendors for the remainder of the year. However,
there can be no assurance that the Company's trade vendors will allow such
extensions to continue.
Current liabilities at December 31, 1997 and September 30, 1998 include
the guaranteed residuals of maturing capitalized leases, while the corresponding
asset values are shown as property and equipment, a long-term asset. The amount
of guaranteed residuals is approximately $2.7 million at September 30, 1998.
Under the restructuring plan discussed above, the Company intended to
reduce its current number of tractors and trailers in operation by approximately
75 and 570 units, respectively. This reduction of revenue equipment was to be
accomplished though cancellation of existing operating leases, turning in
revenue equipment for which the related obligations were expiring and selling
equipment, the proceeds of which were to be used to pay off the related
equipment obligations. In addition to these fleet reductions, management also
reached agreement with many of its revenue equipment vendors/creditors for
restructuring debt terms which include payment deferrals, refinancing of the
related obligations over extended periods and other modifications. The Company
has been successful in restructuring the majority of the debt on the revenue
equipment. The restructuring allowed the Company to pay on extended credit
terms, extend the maturity date of the debt or sell the equipment with any
deficiency to be repaid over time. See Note 2 of the Notes to Condensed
Consolidated Financial Statements.
The Company has taken steps for implementing operational improvements
outlined in the restructuring plan, but the difficulty in retaining drivers has
caused a further deterioration of the Company's operating results and has
mitigated the efforts of the restructuring plan. Management will continue to
implement the restructuring plan and focus on hiring and retaining drivers as
well as seeking potential buyers for all or part of the Company.
Although management has undertaken restructuring efforts, there can be
no assurance that the Company will be able to effectively implement the
restructuring plan as described above. Should the Company be unable to
effectively implement the restructuring plan, management may have to make
further downsizing and restructuring decisions which could include filing for
relief under Federal bankruptcy laws.
YEAR 2000 COMPLIANCE
The Company began assessing its information technology systems to
determine if such systems were Year 2000 compliant in 1997 and has determined
that such systems are not compliant. To become compliant, management has
determined that it must purchase new software for all of its
<PAGE> 7
financial information reporting as well as for its freight dispatching purposes.
The Company believes that various vendors can provide the Company with such
software programs which are Year 2000 compliant. Although the Company has not
determined which such software programs are best suited for its needs, and
accordingly does not know what the cost of such programs will be, management
believes that the cost of such programs including installation will be less than
$100,000 assuming that outside resources are not necessary to implement the
conversion to the new systems.
The Company has not adopted a formal plan to contact its vendors and
customers to determine whether their systems are Year 2000 compliant. Daily
business transactions include electronic data interchange of information (EDI)
with customers as well as the use of electronic fuel cards for over the road
fuel purchases and repair expenses. Year 2000 compliance failures in these areas
could negatively impact the Company's ability to operate the freight equipment
or bill and collect revenues.
The ability of the Company to become Year 2000 compliant will be
influenced in part by the success of their other restructuring efforts and to
obtain adequate financing. The Company has not adopted a contingency plan for
addressing Year 2000 issues.
FORWARD LOOKING STATEMENTS
This report contains statements that may be considered as
forward-looking or predictions concerning future operations. Such statements are
based on management's belief or interpretation of information currently
available. These statements and assumptions involve certain risks and
uncertainties and management can give no assurance that such expectations will
be realized. Among all the factors and events that are not within the Company's
control and could have a material impact on future operating results are general
economic conditions, cost and availability of diesel fuel, adverse weather
conditions, availability of drivers, the ability to obtain adequate financing
and the ability to achieve profitable operations. In addition, the Year 2000
issue is extremely complex and compliance failures on the part of customers
and/or vendors that are outside the control of the Company could have a material
negative impact on future operating results.
<PAGE> 8
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 15, 1998, the Company and one of its former officers,
along with a securities firm and two of its officers, were named in a lawsuit
filed by a Company shareholder in the state circuit court of Cook County,
Chicago, Illinois. The lawsuit alleges that the defendants made false and
misleading statements and failed to disclose material facts which induced the
plaintiff to invest in the Company. The complaint also alleges that the Company
did not provide certain information to Plaintiff that he was entitled to review.
Plaintiff seeks restitution for the amount paid for the Company's shares of
common stock, plus interest and attorneys fees. Plaintiff seeks additional
monetary damages for the alleged failure of the Company to disclose its records.
The Company believes that it has several defenses to this lawsuit. The Company
will assert these defenses primarily through the filing of dispositive motions.
The Company believes that this lawsuit is without merit and will defend against
it vigorously.
During October 1998, the former owners of Roy Widener Motor Lines, Inc.
("Widener") filed a lawsuit against the Company for nonpayment of the
noncompetition agreement liability entered into by Widener and the Company in
connection with the Company's purchase of Widener. The suit provides for the
Company to provide a summary of and submit payment to Widener for noncompetition
amounts owed by the Company. Prior to the filing of this lawsuit by Widener, the
Company filed a lawsuit against the former owners of Widener alleging malicious
conduct detrimental to the Company. Currently, both of the lawsuits are pending
in the Knox County, Tennessee Chancery Court. At September 30, 1998, the Company
has a liability of approximately $390,000 recorded for its remaining obligation
under the noncompete agreement.
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: (i) a
minimum tangible net worth of $1.0 million at 3/31/98, (ii) a minimum net worth
of $4.6 million at 9/30/98, (iii) a debt-to-equity ratio not to exceed 4:1 at
9/30/98, and (iv) maintenance of a $600,000 excess borrowing base at 9/30/98. As
of September 30, 1998, the Company was in violation of certain of these
financial covenants with respect to its line of credit. The revolving credit
lender has indicated its intent that it will most likely discontinue its
relationship with the Company upon the maturity of the current lending
arrangement.
ITEM 5. OTHER INFORMATION
Effective October 1998, the Company's common stock is no longer listed
and traded on NASDAQ National Stock Market. The Company's stock is now listed on
the Over-the-Counter Bulletin Board Service.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit No. Description
27 Financial Data Schedule
<PAGE> 9
AMPACE CORPORATION & SUBSIDIARY
Condensed Consolidated Balance Sheets
December 31, 1997 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 539,165 155,111
Accounts Receivable, net 4,084,210 3,849,432
Other current assets 1,066,138 503,615
------------ -----------
Total current assets 5,689,513 4,508,158
Property and equipment, net 10,146,259 12,830,403
Other assets 2,295,674 1,444,270
------------ -----------
$ 18,131,446 18,782,831
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt and
capital lease obligations 4,233,820 7,462,645
Other current liabilities 2,558,626 5,302,493
------------ -----------
Total current liabilities 6,792,446 12,765,138
Long-term debt and capital lease obligations
excluding current installments 6,277,118 7,374,422
------------ -----------
Total liabilities 13,069,564 20,139,560
------------ -----------
Stockholders' equity (deficit):
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) (8,789,758)
Treasury stock, 37,287 shares at cost (43,153) (43,153)
------------ -----------
Total stockholders' equity (deficit) 5,061,882 (1,356,729)
Commitments and contingencies $ 18,131,446 18,782,831
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 10
AMPACE CORPORATION & SUBSIDIARY
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C>
Operating Revenues $ 9,564,810 9,043,030
------------ -----------
Operating expenses:
Salaries, wages and employee benefits 3,516,813 3,809,202
Purchased transportation 1,022,075 1,289,166
Fuel 1,374,792 1,075,613
Depreciation & amortization 872,335 978,532
Rent 810,509 696,722
Operating supplies & expenses 716,828 1,139,519
Insurance & claims 236,991 402,109
Operating taxes & licenses 152,846 212,245
General & administrative expenses 381,697 528,955
Communication & utilities 191,597 178,183
Restructuring charge -- 30,000
------------ -----------
Total Operating Expenses 9,276,483 10,340,246
------------ -----------
Operating loss 288,327 (1,297,216)
------------ -----------
Interest expense, net 304,691 345,508
------------ -----------
Loss before taxes (16,364) (1,642,724)
Income taxes (9,237) 3,720
------------ -----------
Net loss $ (7,127) (1,646,444)
============ ===========
Weighted average common shares-basic and diluted 3,089,304 3,062,713
============ ===========
Loss per share - basic and diluted $ 0.00 (0.54)
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 11
AMPACE CORPORATION & SUBSIDIARY
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C>
Operating revenues $ 22,551,000 30,304,678
------------ -----------
Operating expenses:
Salaries, wages and employee benefits 9,109,000 12,451,161
Purchased transportation 723,000 4,730,584
Fuel 4,057,000 3,737,796
Depreciation & amortization 3,004,000 3,346,425
Rent 1,602,000 2,314,921
Operating supplies & expenses 1,952,000 3,274,068
Insurance & claims 854,000 1,072,759
Operating taxes & licenses 368,000 584,032
General & administrative expenses 637,000 1,578,224
Communication & utilities 289,000 587,798
Restructuring charge -- 2,025,250
------------ -----------
Total operating expenses 22,595,000 35,703,018
------------ -----------
Operating loss (44,000) (5,398,340)
Interest expense, net 669,000 1,016,551
------------ -----------
Loss before taxes (713,000) (6,414,891)
Income taxes (263,000) 3,720
------------ -----------
Net loss $ (450,000) (6,418,611)
============ -----------
Weighted average common shares-basic and diluted 3,096,084 3,062,713
============ ===========
Loss per share - basic and diluted $ (0.15) (2.10)
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 12
AMPACE CORPORATION & SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C>
Operating activities:
Net loss (450,000) (6,418,611)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,004,000 3,346,425
Restructuring charges -- 1,163,250
Changes in operating assets and liabilities:
Accounts receivable, net (1,813,537) 774,570
Other current assets (763,300) 837,860
Other current liabilities 1,483,414 1,905,087
------------ -----------
Net cash provided by operating activities 1,460,577 1,608,581
------------ -----------
Investing activities:
Proceeds from disposals of property and equipment 721,227 1,403,804
Acquisitions (485,045) (226,529)
Purchases of property and equipment (754,534) (3,509,538)
------------ -----------
Net cash used by investing activities (518,352) (2,332,263)
------------ -----------
Financing activities:
Proceeds from long-term debt 1,826,444 3,253,359
Purchase of treasury stock (27,681) --
Payment of non-compete obligation (77,000) (77,000)
Principal payments on long-term debt and capital leases (2,537,022) (2,836,731)
------------ -----------
Net cash provided (used) by financing activities (815,259) 339,628
------------ -----------
Net decrease in cash and cash equivalents 126,966 (384,054)
Cash and cash equivalents at beginning of period 534,629 539,165
------------ -----------
Cash and cash equivalents at end of period $ 661,595 155,111
============ ===========
Supplementary disclosure of cash flow information:
Interest paid $ 623,096 711,533
Income taxes refunded -- (332,361)
Accrued interest expense capitalized into debt -- 178,385
Equipment acquired under capital lease 427,500 --
Satisfaction of capital lease and debt through
return of equipment 67,339 1,291,561
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 13
AMPACE CORPORATION & SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
The interim consolidated condensed financial statements contained herein
reflect all adjustments which, in the opinion of management, are
necessary for a fair statement of financial condition, results of
operations and cash flows for the periods presented. They have been
prepared in accordance with Rule 10-01 of Regulation S-X and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. Operating
results for the three months and for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected
for the entire year ending December 31, 1998. 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.
The condensed consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has suffered
recurring losses from operations, has a deficit in working capital of
approximately $8.3 million and a stockholders' deficit of approximately
$1.4 million at September 30, 1998, and is in violation of certain of
the financial covenants under its line of credit agreement that expires
on January 1, 1999 for which no commitments exist to refinance, all of
which raise substantial doubt about the Company's ability to continue as
a going concern. See Notes 2 and 5 for further information on these
matters and management's plans. The condensed consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
(2) DEBT AND LIQUIDITY
Long-term debt and capital leases consist of:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
----------- -----------
<S> <C> <C>
Revolving credit agreement $ 2,106,656 $ 2,575,000
Various equipment notes payable in
monthly installments of $68,976 at
8.05% to 8.52%, due through
February 2002 2,622,630 2,402,589
Note payable in monthly installments of
$75,931 at 9.44%, due May 2002 -- 2,818,252
Note payable in monthly installments of
$21,086 at 9.75% due September 2001 -- 640,097
Note payable in monthly installments of
$26,060 at 9.36% due May 2001 -- 730,901
Note payable in monthly installments of
$43,228 at 8.83%, due October 1999 875,071 --
Note payable in monthly installments of
$22,250 at 9.42%, due June 1999 304,497 183,142
</TABLE>
<PAGE> 14
AMPACE CORPORATION & SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
<S> <C> <C>
Various equipment notes payable in
monthly installments of $5,249 at
7.98% to 8.70%, due December 2002 256,863 --
Non-compete payable in annual installments
of $77,400, interest imputed at 8.25%,
due March 2000 172,989 108,747
Note payable in monthly installments of
$2,340 at 1% over prime, due September 1999 152,303 136,725
Note payable in monthly installments
of $2,601 at 9.50%, due
September 2003 -- 122,255
Equipment note payable in monthly
installments of $8,328 at 10.00%,
due August 2000 224,598 166,762
Acquisition note payable, interest due
quarterly at 8.00%, due March 2000 100,000 100,000
Various equipment leases payable in monthly
installment of $5,140 to $57,331 at 14.06%,
due August 2000 2,519,831 2,623,293
Various equipment leases payable in monthly
installments of $5,777 to $22,539 at 10.00%,
due through June 2000 -- 1,517,644
Various equipment leases payable in monthly
installments of $2,529 to $7,935 at 9.64%
to 10.32%, due through June 1999 817,319 270,279
Capital lease obligations payable in monthly
installments of $11,427 at 11.45%, due
October 2000 -- 270,448
Equipment leases payable in monthly install-
ments of $2,703 to $4,055 at 6.60%, due
August 1998 138,617 108,364
Various other debt and capital leases 219,564 62,569
----------- -----------
10,510,938 14,837,067
Less current maturities 4,233,820 7,462,645
----------- -----------
$ 6,277,118 7,374,422
=========== =========
</TABLE>
(Continued)
<PAGE> 15
AMPACE CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Effective December 31, 1995, the Company entered into a revolving credit
agreement with a bank which expires January 1, 1999. The agreement
establishes a borrowing base of up to $3,000,000 and bears interest,
payable monthly, at either the prime rate or the London Interbank
Offered Rate plus 200 or 225 basis points depending on certain financial
ratios of the Company.
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 at
3/31/98 (2) a minimum net worth of $4,600,000 at 9/30/98, (3) a maximum
debt to shareholder equity of 4.00:1.00 at 9/30/98, and (4) maintenance
of a $600,000 excess borrowing base at 9/30/98. In addition to the above
mentioned loan covenant changes, the interest rate on the line of credit
increased as of July 31, 1998. As of September 30, 1998, the Company was
in violation of the financial covenants under the Company's line of
credit, and the Company is not in compliance with the borrowing formula
as of September 30, 1998. Subsequent to September 30, 1998, a $200,000
payment was made to pay down the line of credit. In total, the Company
has repaid $500,000 of principal on the line of credit since the second
quarter of 1998. The Company has also had discussions with its revolving
credit lender who has indicated its intent that it will most likely
discontinue its relationship with the Company upon maturity of the
current lending arrangement. The Company has no commitment for financing
to replace the facility on January 1, 1999.
Management has also discussed with each of its revenue equipment
vendors/creditors, for restructuring debt terms which include payment
deferrals and/or refinancing of the related obligations over extended
periods and other modifications. The Company has been successful in
restructuring the majority of the debt on the revenue equipment,
allowing the Company to pay on extended credit terms, extend the
maturity date of the debt or sell the equipment with any deficiency to
be repaid over time. The restructuring generally resulted in higher
interest rates, extended payment terms and/or reduced monthly payments.
Five long-term debt and capital leases listed above were refinanced and
decreased the Company's monthly installments by approximately $31,500,
three of the above notes increased their average annual interest rate by
342 basis points, and six of the above notes extended their due dates by
an average of 8 months.
Management of the Company continues to work with its creditors as part of
its existing restructuring efforts. Additionally, management is actively
seeking a buyer for all of part of the Company's operations. If
management is unable to implement its restructuring plan, the Company
may seek relief under Federal bankruptcy laws.
(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 September 30, 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
870,250 and 530,250, respectively.
<PAGE> 16
AMPACE CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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 September 30, 1998 related to this claim,
as in the opinion of management, such contingency is neither probable
nor reasonably estimable.
During October 1998, the former owners of Roy Widener Motor Lines, Inc.
("Widener") filed a lawsuit against the Company for nonpayment of the
noncompetition agreement liability entered into by Widener and the
Company in connection with the Company's purchase of Widener. The suit
provides for the Company to provide a summary of and submit payment to
Widener for noncompetition amounts owed by the Company. Prior to the
filing of this lawsuit by Widener, the Company filed a lawsuit against
the former owners of Widener alleging malicious conduct detrimental to
the Company. Currently, both of the lawsuits are pending in the Knox
County, Tennessee Chancery Court. Management is unable to estimate the
ultimate outcome of this litigation. At September 30, 1998, the Company
has a liability of approximately $390,000 recorded for its remaining
obligation under the noncompete agreement. During the second quarter of
1998 the Company recorded an impairment loss in the amount of
approximately $581,000 for the carrying value of this intangible asset.
This impairment loss was included in the restructuring charge during the
second quarter.
On September 15, 1998, the Company and one of its former officers, along
with a securities firm and two of its officers, were named in a lawsuit
filed by a Company shareholder in the state circuit court of Cook
County, Chicago, Illinois. The lawsuit alleges that the defendants made
false and misleading statements and failed to disclose material facts
which induced the plaintiff to invest in the Company. The complaint also
alleges that the Company did not provide certain information to
plaintiff that he was entitled to review. Plaintiff seeks restitution
for the amount paid for the Company's shares of common stock, plus
interest and attorneys fees. Plaintiff seeks additional monetary damages
for the alleged failure of the Company to disclose its records. The
Company believes that it has several defenses to this lawsuit. The
Company will assert these defenses primarily through the filing of
dispositive motions. The Company believes that this lawsuit is without
merit and will defend against it vigorously.
The Company is also involved in certain other claims and pending litigation
arising as a result of the liquidity problems of the Company as well as
from the normal conduct of business. As a result of the liquidity and
cash flow problems of the Company, additional claims and litigation
could arise against the Company. Such additional claims could involve
amounts material to the Company and could adversely impact the financial
position, results of operations and liquidity of the Company, including
both the voluntary or involuntary petition for bankruptcy under the
Federal bankruptcy laws.
Management is unable to estimate the ultimate outcome or effect, if any, on
its financial position, results of operations or liquidity related to
the contingencies described or referred to herein.
<PAGE> 17
AMPACE CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(5) RESTRUCTURING
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 June 30, 1998, the Company made such an assessment and
concluded that an impairment provision was required. Accordingly, during
June, the Company began to implement a plan to restructure its
management and facilities.
During June 1998, the Company adopted a restructuring plan with the purpose
of downsizing the current fleet and taking the Company forward through
the last six months of 1998. In connection therewith, the Company
abandoned its previous strategy of acquiring companies to maintain
growth and achieve critical mass. The Company instead focused on profit
improvement and cash flow management. Under the restructuring plan, the
Company intended to reduce its current number of tractors and trailers
in operation by approximately 75 and 570 units, respectively. In
addition to the reduction of the fleet size, the Company planned to sell
the Columbus, Ohio and Orlando, Florida operating locations, and to
close the Asheboro, North Carolina facility and combine its Morristown
and Knoxville Tennessee office locations. In connection with the
restructuring plan implemented by the Company during June of 1998, the
Company recorded a charge for restructuring costs in the amount of
$1,414,000 which consists of the following items: approximately $582,000
due to the impairment of goodwill associated with certain facilities;
approximately $581,000 due to the impairment of a noncompete covenant
associated with one of these facilities; approximately $567,000 for
estimated losses to be incurred as a result of fleet downsizing and the
disposal of certain terminals; approximately $180,000 for severance pay;
and approximately $85,000 for other costs to be incurred as a result of
the restructuring of the Company.
Subsequent to the third quarter, management has determined that the
restructuring plan, as originally designed, will not result in
sufficient operational improvements and cost reductions as anticipated.
Accordingly, subsequent to September 30, 1998, management has determined
that additional measures are necessary to continue to operate the
Company which include scaling back certain locations, making additional
employee headcount reductions, and actively seeking a buyer for all or
parts of the remainder of the Company. Management has not determined
what the impact of the additional restructuring decisions will have on
its financial position, results of operations or liquidity. At September
30, 1998 management estimates that approximately $353,000 of costs
remain to fully implement the originally designed restructuring plan as
indicated below, which should be completed during the fourth quarter.
Management will continue to implement the restructuring plan and focus
on hiring and retaining drivers as well as seeking potential buyers for
all or parts of the Company.
As part of its restructuring plan, the Company sold its Columbus, Ohio and
Orlando, Florida operating locations on September 1, 1998. Net proceeds
for the sale of these two locations was approximately $375,000 and
resulted in a gain of approximately $95,000. Such gain has been recorded
a reduction of depreciation expense during the third quarter.
(Continued)
<PAGE> 18
AMPACE CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Of the original $180,000 amount of severance pay recorded as part of the
restructuring charge, approximately $140,000 pertained to six months of
severance pay for two executives who were terminated in June 1998. Since
these two executives as well as a third executive had employment
contracts which required certain payments in the event of change of
control of the Company, the Company determined during September 1998 to
buy out the employment contracts of these three executives in order to
facilitate the sale of the Company should a potential buyer for the
Company be found. Accordingly, the Company entered into agreements with
each of these three individuals which effectively canceled such previous
employment agreements as well as the previous severance agreements for
the two executives who were terminated by the board of directors.
Collectively, the agreements require the Company to pay these three
individuals $445,000, of which $255,000 has been paid as of September
30, 1998. As a result of these agreements, the Company recorded
approximately an additional $350,000 as restructuring charges during the
quarter ended September 30, 1998. The Company has incurred less costs
than originally anticipated in connection with the facility closings and
downsizing of its fleet and, accordingly, has adjusted its estimated
restructuring costs during the quarter ended September 30, 1998. The
following summarizes the approximate changes in the restructuring
reserve from June 30, 1998 to September 30, 1998:
<TABLE>
<CAPTION>
Fleet and
facility Severance Other
downsizing pay costs Total
--------- ------- ------ --------
<S> <C> <C> <C> <C>
Balance at June 30 $ 567,000 180,000 85,000 832,000
Change in estimate (311,000) 350,000 (9,000) 30,000
Costs paid (108,000) (340,000) (61,000) (509,000)
--------- -------- ------- --------
Balance at September 30 $ 148,000 190,000 15,000 353,000
========= ======== ======= ========
</TABLE>
There exists a reasonable possibility that additional impairments of
long-lived assets, including intangible assets and goodwill, may be
necessary in the near term. If such impairment provisions or other exit
costs are required in the near term, it is reasonably possible that such
charges will have a material adverse effect on the Company's financial
condition, results of operations and liquidity.
Although management has undertaken restructuring efforts described above,
there can be no assurance that the Company will be able to effectively
implement the restructuring plan as described above. Should the Company
be unable to effectively implement the restructuring plan, management
may have to make further restructuring decisions which could include
filing for relief under Federal bankruptcy laws.
<PAGE> 19
(1) 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 November 16, 1998 BY: \s\ David C. Freeman
----------------- -----------------------------------------
David C. Freeman, Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 154,579
<SECURITIES> 0
<RECEIVABLES> 4,087,059
<ALLOWANCES> 237,627
<INVENTORY> 0
<CURRENT-ASSETS> 4,508,158
<PP&E> 20,331,646
<DEPRECIATION> 7,501,243
<TOTAL-ASSETS> 18,782,831
<CURRENT-LIABILITIES> 12,765,138
<BONDS> 14,837,067
0
0
<COMMON> 310
<OTHER-SE> (1,353,039)
<TOTAL-LIABILITY-AND-EQUITY> 18,782,831
<SALES> 30,294,678
<TOTAL-REVENUES> 30,304,678
<CGS> 35,703,018
<TOTAL-COSTS> 35,703,018
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,016,551
<INCOME-PRETAX> (6,414,891)
<INCOME-TAX> 3,720
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,418,611)
<EPS-PRIMARY> (2.10)
<EPS-DILUTED> (2.10)
</TABLE>
