-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qae0OJbXHKazHm+q8XkCkEakj57Hka52IX9+n0cFXZvSYF2wcPuQcCEeLkNN9f3g VaXbcKcuNLhGz2CtwxgO8g== 0000950137-99-004135.txt : 19991117 0000950137-99-004135.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950137-99-004135 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASCHE TRANSPORTATION SERVICES INC CENTRAL INDEX KEY: 0000927809 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 363964954 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24576 FILM NUMBER: 99752017 BUSINESS ADDRESS: STREET 1: 10214 N MT VERNON RD CITY: SHANNON STATE: IL ZIP: 61078 BUSINESS PHONE: 8158642421 MAIL ADDRESS: STREET 1: 10214 N MT VERNON ROAD CITY: SHANNON STATE: IL ZIP: 61078 FORMER COMPANY: FORMER CONFORMED NAME: AASCHE TRANSPORTATION SERVICES INC DATE OF NAME CHANGE: 19940802 10-Q 1 FORM 10-Q 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 SEPTEMBER 30, 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 ASCHE TRANSPORTATION SERVICES, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 36-3964954 - ---------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 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 8,623,587 SHARES OF PAR ----------------------- VALUE $.0001 COMMON STOCK - ------------------------- 2 PART I: FINANCIAL INFORMATION Item 1. Financial Statements ASCHE TRANSPORTATION SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
SEPTEMBER 30, 1999 DECEMBER 31, (UNAUDITED) 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 6,967 $ 2,761 Trade receivables, net 20,273 15,947 Prepaid expenses and other current assets 8,390 5,947 ------------ ------------ Total current assets 35,630 24,655 Property and equipment, at cost 62,477 57,053 Less accumulated depreciation and amortization (15,509) (11,650) ------------ ------------ Net property and equipment 46,968 45,403 ------------ ------------ Excess of cost over net assets acquired, net 13,824 14,176 Debt issuance cost, net 426 1,045 Other assets 280 2,999 ------------ ------------ TOTAL ASSETS $ 97,128 $ 88,278 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Cash overdraft $ 2,616 $ 1,657 Accounts payable 4,893 3,756 Accrued liabilities 1,509 3,453 Guaranteed obligation of Employee Stock Ownership Plan 152 155 Line of credit 4,974 - Current maturities of long-term debt with unrelated parties 3,630 4,152 Current maturities of long-term debt with related party - 995 Current maturities of capital lease obligations with unrelated parties 2,017 2,090 Current maturities of capital lease obligations with related parties - 151 Subordinated debt, less unamortized debt discount of $ - and $107 500 11,268 ------------ ------------ Total current liabilities 20,291 27,677 Line of credit 17,424 18,660 Long-term debt with unrelated parties, less current maturities 16,130 16,379 Long-term debt with related party, less current maturities 1,319 761 Capital lease obligations with unrelated parties, less current maturities 4,492 5,797 Deferred revenue 6,384 - Minority interest 1,500 563 Subordinated debt, less unamortized debt discount of $430 - 1,570 Deferred income taxes 1,656 1,656 Accrued warrant accretion 1,500 786 ------------ ------------ Total liabilities 70,696 73,849 Stockholders' equity: Common stock, $.0001 par value, 25,000,000 shares authorized, 8,623,587 and 4,696,130 shares issued and outstanding 1 - Additional paid-in capital 34,066 18,077 Guarantee of Employee Stock Ownership Plan obligation (152) (155) Accumulated deficit (7,483) (3,493) ------------ ------------ Total stockholders' equity 26,432 14,429 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,128 $ 88,278 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 3 ASCHE TRANSPORTATION SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share and share data) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------ 1999 1998 1999 1998 --------- ----------- --------- --------- NET REVENUES $ 40,838 $ 29,462 $ 112,416 $ 80,761 OPERATING EXPENSES Salaries, wages and benefits 15,603 11,453 43,584 30,359 Fuel 5,313 3,425 13,896 9,841 Purchased transportation 8,846 6,295 24,845 16,853 Supplies and maintenance 4,837 2,824 13,080 7,990 Depreciation and amortization 1,764 1,643 4,972 5,152 Taxes and licenses 703 474 1,893 1,272 Insurance 1,333 886 3,610 2,261 Communications and utilities 471 365 1,358 987 Gain on disposition of equipment (250) (409) (332) (457) Other 750 604 2,106 1,183 --------- ----------- --------- --------- Total operating expenses 39,370 27,560 109,012 75,441 --------- ----------- --------- --------- OPERATING INCOME 1,468 1,902 3,404 5,320 OTHER (EXPENSES) INCOME Interest expense (1,248) (1,408) (4,214) (3,633) Warrant accretion expense (191) (214) (714) (572) Debt issuance cost (24) (76) (184) (203) Amortization of debt discount (375) (72) (526) (192) Minority interest expense (817) (17) (937) (46) Investment banking termination fee (1,000) - (1,000) - Prepayment penalty (240) - (240) - Warrant expense (56) - (56) - Other 37 112 369 296 --------- ----------- --------- --------- (LOSS) INCOME BEFORE INCOME TAX BENEFIT (PROVISION), EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (2,446) 227 (4,098) 970 INCOME TAX BENEFIT (PROVISION) 399 (219) 764 (728) --------- ----------- --------- --------- (LOSS) INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (2,047) 8 (3,334) 242 Loss on extinguishment of debt, net of tax benefit of $9 and $151 (150) - (479) - --------- ----------- --------- --------- (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (2,197) 8 (3,813) 242 Cumulative effect of change in accounting for start-up costs, net of tax benefit of $111 - - (177) - --------- ----------- --------- --------- NET (LOSS) INCOME $ (2,197) $ 8 $ (3,990) $ 242 ========= =========== ========= ========= BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE (Loss) income before extraordinary item and cumulative effect of accounting change $ (0.34) $ 0.00 $ (0.62) $ 0.05 Extraordinary item (0.02) - (0.09) - Cumulative effect of accounting change - - (0.04) - --------- ----------- --------- --------- Net (loss) income $ (0.36) $ 0.00 $ (0.75) $ 0.05 ========= =========== ========= ========= Weighted average common shares outstanding 6,032,750 4,626,130 5,353,088 4,580,014 ========= =========== ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 ASCHE TRANSPORTATION SERVICES, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share data) (Unaudited)
Common Stock Guarantee of ----------------------- Employee $.0001 Par Value Additional stock Total ----------------------- Paid-In Ownership Accumulated Stockholders' Shares Amount Capital Plan Deficit Equity ----------------------- ------------- ------------ ------------ ------------- Balance at December 31, 1998 4,696,130 $ - $ 18,077 $ (155) $ (3,493) $ 14,429 Issuance of common stock 3,927,457 1 15,989 - - 15,990 Reduction in Guarantee of ESOP obligation - - - 3 - 3 Net loss - - - - (3,990) (3,990) ----------------------- ----------- --------- ----------- ------------ Balance at September 30, 1999 8,623,587 $ 1 $ 34,066 $ (152) $ (7,483) $ 26,432 ======================= =========== ========= =========== ============
The accompanying notes are an integral part of these condensed consolidated f inancial statements. 4 5 ASCHE TRANSPORTATION SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended September 30, ---------------------- 1999 1998 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $(3,990) $ 242 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 4,972 5,152 Gain on disposition of equipment (332) (457) Warrant accretion expense 714 572 Amortization of debt discount 526 192 Amortization of debt issuance costs 619 203 Minority interest 937 46 Changes in other operating items: Trade receivables (4,326) (9,502) Prepaid expenses and other assets 276 (5,647) Accounts payable 1,137 2,099 Accrued liabilities (1,944) 1,664 ------- ------- Net cash used in operating activities (1,411) (5,436) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Property and equipment additions: Revenue equipment (4,388) (3,789) Building, office equipment and other (2,657) (554) Proceeds from the sale of equipment 1,192 9,637 Purchase of Specialty Transportation Services, Inc. - (31,817) ------- ------- Net cash used in investing activities (5,853) (26,523) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings of debt with unrelated parties 2,124 18,090 Proceeds from borrowings of subordinated debt - 13,375 Minority interest - 500 Debt issuance costs - (1,175) Net borrowings on lines of credit 3,738 8,071 Net increase in cash overdraft 959 1,217 Principal payments on subordinated debt (12,864) - Principal payments on long-term debt with unrelated parties (2,895) (3,738) Principal payments on long-term debt with related party (437) (747) Principal payments on capital leases with unrelated parties (1,378) (3,478) Principal payments on capital leases with related parties (151) (548) Deferred revenue 6,384 - Proceeds from exercise of options and warrants 15,990 392 ------- ------- Net cash provided by financing activities 11,470 31,959 ------- ------- INCREASE IN CASH AND CASH EQUIVALENTS 4,206 - CASH AND CASH EQUIVALENTS Beginning of period 2,761 - ------- ------- End of period $ 6,967 $ - ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 4,784 $ 3,677 ======= ======= Income taxes paid $ 51 $ 399 ======= =======
The accompanying notes are an integral part of these consolidated financial s tatements. 5 6 ASCHE TRANSPORTATION SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (in thousands, except per share and share data) (Unaudited) NOTE 1 - NAME CHANGE In May 1999, the Company changed its name from Aasche Transportation Services, Inc. to Asche Transportation Services, Inc. NOTE 2 - 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 Forms 10-K and 10-K/A. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. NOTE 3 - 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 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. Subsequent to December 31, 1998, actions were taken by the Company relating to the $8,000 of subordinated debt with ACS. Refer to Note 10. 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 6 7 Allied Waste Industries. Under the 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. STS is operated 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 statement of operations of the Waste Transport Business for the nine months ended September 30, 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. Net revenues $69,673 Net loss 531 Basic and diluted net loss per share 0.12 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 on net profit and loss from operations. The Municipal Solid Waste Segment financial data includes parent company subordinated debt of $4,766 at September 30, 1998, less unamortized debt discount of $609 at September 30, 1998 issued by the parent company and related debt issuance costs of $210, less accumulated amortization of $210 at September 30, 1999 ($99 at September 30, 1998) in connection with the acquisition of the Waste Transport Business. The related interest expense of $337 for the nine month period ended September 30, 1999 ($444 for the nine month period ended September 30, 1998), amortization of debt issuance costs of $74 for the nine month period ended September 30, 1999 ($99 for the nine month period ended September 30, 1998) and amortization of debt discount of $526 for the nine month period ended September 30, 1999 ($192 for the nine month period ended September 30, 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. 7 8
TEMPERATURE- MUNICIPAL NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999: CONTROLLED SOLID WASTE TOTALS - ----------------------------------------------------------------------- ------------ ----------- -------- Net revenues $47,221 $65,195 $112,416 Depreciation and amortization 2,270 2,702 4,972 Operating income 2,061 2,559 4,620 Interest expense 1,007 3,163 4,170 Income tax benefit (provision) (510) 789 279 Segment profit (loss) before extraordinary item and cumulative effect of accounting change 816 (3,319) (2,503) Cumulation effect of accounting change - (177) (177) Segment profit (loss) 816 (3,874) (3,058) Significant noncash items included in segment profit (loss): Warrant accretion expense - 714 714 Amortization of debt issuance costs - 184 184 Amortization of debt discount - 526 526 Other - 937 937 Segment assets 41,029 50,976 92,005 Expenditures for long-lived assets 5,642 1,403 7,045 OPERATING INCOME Total operating income for reportable segments $ 4,620 Parent company operating loss (1,216) -------- Total consolidated operating income $ 3,404 ======== SEGMENT LOSS Total loss for reportable segments $ (3,058) Parent company loss (932) -------- Total consolidated loss $ (3,990) ======== ASSETS Total assets for reportable segments $ 92,005 Parent company assets 5,123 -------- Total consolidated assets $ 97,128 ======== OTHER SIGNIFICANT ITEMS PARENT SEGMENT COMPANY CONSOLIDATED TOTALS ADJUSTMENTS TOTAL ------- ----------- ------------ Interest expense $ 4,170 $ 44 $ 4,214 Income tax benefit 279 485 764
8 9
TEMPERATURE- MUNICIPAL NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998: CONTROLLED SOLID WASTE TOTALS - ----------------------------------------------------------------------- ------------ ----------- -------- Net revenues $45,830 $34,931 $80,761 Depreciation and amortization 3,220 1,932 5,152 Operating income 3,301 2,895 6,196 Interest expense 1,043 2,547 3,590 Income tax provision 984 98 1,082 Segment profit (loss) 1,490 (683) 807 Significant noncash items included in segment profit (loss): Warrant accretion expense - 572 572 Amortization of debt issuance costs - 203 203 Amortization of debt discount - 192 192 Other - 46 46 Segment assets 36,066 42,566 78,632 Expenditures for long-lived assets 3,506 837 4,343 OPERATING INCOME Total operating income for reportable segments $ 6,196 Parent company operating loss (876) ------- Total consolidated operating income $ 5,320 ======= SEGMENT PROFIT (LOSS) Total profit for reportable segments $ 807 Parent company loss (565) ------- Total consolidated profit $ 242 ======= ASSETS Total assets for reportable segments $78,632 Parent company assets 107 ------- Total consolidated assets $78,739 ======= OTHER SIGNIFICANT ITEMS PARENT SEGMENT COMPANY CONSOLIDATED TOTALS ADJUSTMENTS TOTAL ------- ----------- ------------ Interest expense $ 3,590 $ 43 $ 3,633 Income tax provision (benefit) 1,082 (354) 728
9 10
TEMPERATURE- MUNICIPAL THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999: CONTROLLED SOLID WASTE TOTALS - ----------------------------------------------------------------------- ------------ ----------- -------- Net revenues $16,002 $24,836 $40,838 Depreciation and amortization 732 1,032 1,764 Operating income 623 1,292 1,915 Interest expense 361 872 1,233 Income tax benefit (provision) (130) 351 221 Segment profit (loss) before extraordinary item and cumulative effect of accounting change 210 (1,917) (1,707) Segment profit (loss) 210 (2,067) (1,857) Significant noncash items included in segment profit (loss): Warrant accretion expense - 191 191 Amortization of debt issuance costs - 24 24 Amortization of debt discount - 375 375 Other - 817 817 Segment assets 41,029 50,976 92,005 Expenditures for long-lived assets 2,991 829 3,820 OPERATING INCOME Total operating income for reportable segments $ 1,915 Parent company operating loss (447) ------- Total consolidated operating income $ 1,468 ======= SEGMENT LOSS Total loss for reportable segments $(1,857) Parent company loss (340) ------- Total consolidated loss $(2,197) ======= ASSETS Total assets for reportable segments $92,005 Parent company assets 5,123 ------- Total consolidated assets $97,128 ======= OTHER SIGNIFICANT ITEMS PARENT SEGMENT COMPANY CONSOLIDATED TOTALS ADJUSTMENTS TOTAL ------- ----------- ------------ Interest expense $ 1,233 $ 15 $ 1,248 Income tax benefit 221 178 399
10 11
TEMPERATURE- MUNICIPAL THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998: CONTROLLED SOLID WASTE TOTALS - ----------------------------------------------------------------------- ------------ ----------- -------- Net revenues $14,522 $14,940 $29,462 Depreciation and amortization 927 716 1,643 Operating income 1,112 1,093 2,205 Interest expense 360 1,032 1,392 Income tax provision (benefit) 332 10 342 Segment profit (loss) 503 (299) 204 Significant noncash items included in segment profit (loss): Warrant accretion expense - 214 214 Amortization of debt issuance costs - 76 76 Amortization of debt discount - 72 72 Other - 17 17 Segment assets 36,066 42,566 78,632 Expenditures for long-lived assets 152 755 907 OPERATING INCOME Total operating income for reportable segments $ 2,205 Parent company operating loss (303) ------- Total consolidated operating income $ 1,902 ======= SEGMENT PROFIT (LOSS) Total profit for reportable segments $ 204 Parent company loss (196) ------- Total consolidated profit $ 8 ======= ASSETS Total assets for reportable segments $78,632 Parent company assets 107 ------- Total consolidated assets $78,739 ======= OTHER SIGNIFICANT ITEMS PARENT SEGMENT COMPANY CONSOLIDATED TOTALS ADJUSTMENTS TOTAL ------- ----------- ------------ Interest expense $ 1,392 $ 16 $ 1,408 Income tax provision (benefit) 342 (123) 219
11 12 NOTE 5 - DEBT TO EQUITY EXCHANGES In January 1999, certain related parties, substantially all of whom are officers and directors of the Company, exchanged $675 of subordinated debt bearing 14% interest for 135,000 shares of the Company's common stock. In March 1999, an individual who is an affiliate of the Company 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. 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. In July 1999, certain unrelated individuals exchanged $400 of subordinated debt bearing 14% interest for 88,894 shares of the Company's common stock. Additionally, $86 of accrued interest owed to these individuals was exchanged for an additional 19,096 shares of the Company's common stock. NOTE 6 - MODIFICATION OF LONG-TERM CONTRACT AND PREPAYMENT OF SUBORDINATED DEBT In June 1999, STS modified a long-term contract with the Metropolitan Service District of Portland ("Metro"). Under the terms of the modification, STS agreed to give Metro a rate reduction of one dollar per ton to transport municipal solid waste. In exchange of the rate reduction, Metro agreed to prepay $6,592 of monthly fixed payments provided for in the original contract. In addition, Metro agreed to return $2,500 of cash to STS that was held by Metro to secure STS's performance under their contract. STS hauls approximately 650 tons of municipal solid waste per year under this contract. In June 1999, STS prepaid $7,500 of subordinated debt with ACS. In conjunction with the prepayment, STS and ACS entered into an agreement, whereby STS agreed to a floor on ACS's common stock investment in STS of an internal rate of return of 24% to ACS in exchange for STS's right to call ACS's common stock investment in STS after the final payment of the remaining $500 of subordinated debt with ACS. NOTE 7 - ISSUANCES OF COMMON STOCK In July 1999, the Company issued 750,000 shares of the Company's common stock in a private sale to an individual investor who is an affiliate of the Company for $3,000. In September 1999, the Company issued 2,666,667 shares of the Company's common stock in a private sale to Churchill Environmental & Industrial Equity Partners, L.P ("Churchill") for $12,000, $10,621 net of offering expenses. A portion of the proceeds were used to pay-off subordinated debt of $1,950 and pay-down the lines of credit by $4,156. Under the agreement with Churchill, if the highest average closing price on the NASDAQ of the Company's common stock for any ten consecutive trading days during the period from September 1, 2000 to November 1, 2000 (the "Adjustment Price") is less than $6.50, the Company is required to issue to Churchill a number of additional shares, if any, equal to the quotient of (x) (1) $6.50 multiplied by 2,666,667; minus (2) the greater of the Adjustment Price or $3.00 per share multiplied by 2,666,667, divided by (y) the greater of the Adjustment Price or $3.00 per share. NOTE 8 - 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 September 30, 1998 in connection with options and warrants amounted to 559,075. Diluted weighted-average shares outstanding for the nine months ended September 30, 1998 in connection with options and warrants amounted to 568,638 shares. 12 13 NOTE 9 - 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 related to the STS costs incurred in 1998 to open new terminals or expand existing facilities. NOTE 10 - SUBSEQUENT EVENTS In October 1999, the Company paid $4,515 to ACS to pay-off all remaining subordinated debt held by ACS ($500), to call all warrants in STS held by ACS, to purchase the 10% common stock in STS held by ACS and to terminate an investment banking agreement between STS and ACS. In conjunction with these transactions and the subordinated debt of $1,950 paid-off in September 1999 (see Note 7), the Company incurred a one-time, non-recurring charge of $1,780, net of income tax benefit of $995. 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 newly formed subsidiary of the Company. The STS acquisition was accounted for as a purchase and accordingly, the 1998 consolidated statement of operations includes the results of STS from the date it was acquired. The results of operations discussed below are not necessarily comparable between periods because the results from operations for the nine months ended September 30, 1999 include STS and the results from operations for the nine months ended September 30, 1998 only includes STS since the date it was acquired. RESULTS OF OPERATIONS COMPARISON OF THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 WITH THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998. Net revenues increased $31.7 million, or 39.2 %, to $112.4 million in 1999, from $80.8 million in 1998, largely due to the STS Acquisition. During the first nine months of 1999, the Company increased its revenue producing power units by 235 units. Without giving effect to the additional net revenues contributed by the STS Acquisition, the Company's net revenues increased by $1.4 million, or 3.0%. Net revenues on a pro forma basis (assuming the STS Acquisition had occurred on January 1, 1998) increased $28.2 million, or 33.5% to $112.4 million for 1999 due to increased volume from existing customers and the addition of new customers in 1999. Total miles increased 19.6 million, or 31.5 %, to 81.8 million in 1999 from 62.2 million in 1998, largely due to the STS Acquisition. Average miles per tractor decreased 10.9% to 73,335 miles in 1999 from 82,332 miles in 1998. Average revenue per tractor decreased 5.6% to $100,822 in 1999 from $106,827 in 1998. The decreases in average miles per 13 14 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 increased by 0.9 million, or 3.3%. Competition for drivers is intense within the trucking industry and the Company occasionally experiences difficulty attracting and retaining qualified drivers and owner-operators in its Temperature-Controlled Segment, which results in the temporary idling of revenue equipment. The Company's operating ratio (operating expenses divided by operating revenues) increased 3.6%, to 97.0% in 1999 from 93.4% in 1998. The increase in the operating ratio is largely due to the STS Acquisition and a shortage of drivers at the Temperature-Controlled Segment, which resulted in poor operating results in January 1999. Without giving effect to the STS Acquisition, the Company's operating ratio increased 3.5%, to 98.2% in 1999 from 94.7% in 1998. Total operating expenses increased $33.6 million, or 44.5%, to $109.0 million in 1999, compared to $75.4 million in 1998, largely due to the STS Acquisition. Without giving effect to the STS Acquisition, the Company's total operating expenses increased by $3.0 million, or 6.8%. Operating expenses on a pro forma basis increased $30.6 million, or 39.0% to $109.0 million for 1999. Salaries, wages and benefits increased $13.2 million, or 43.6%, to $43.6 million in 1999 compared to $30.4 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 $1.3 million, or 7.1%, largely due to increases in overall compensation of drivers that were needed to enhance driver recruitment and retention. Salaries, wages and benefits on a pro forma basis increased $12.0 million, or 38.0% to $43.6 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 $4.1 million, or 41.2%, to $13.9 million in 1999 compared to $9.8 million in 1998, 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 $0.2 million or 2.6%, largely due to decreased fuel prices. Fuel expense on a pro forma basis increased $3.7 million, or 36.4% to $13.9 million for 1999, due to having more tractors in service which more than offset decreased fuel prices. Purchased transportation expense increased $8.0 million, or 47.4%, to $24.8 million in 1999 compared to $16.9 million in 1998, largely due to the STS Acquisition. Without giving effect to the STS Acquisition, the Company's purchased transportation expense increased by $1.6 million, or 17.9%, due to an increase in contractor operated units. Purchased transportation expense on a pro forma basis increased $7.3 million, or 41.9% to $24.8 million for 1999, due to an increase in contractor-operated units. Supplies and maintenance expenses increased $5.1 million, or 63.7%, to $13.1 million in 1999 compared to $8.0 million in 1998, largely due to the STS Acquisition. Without giving effect to the STS Acquisition, the Company's supplies and maintenance expense increased by $0.02 million, or 0.6%. Supplies and maintenance expense on a pro forma basis increased $4.8 million, or 57.6% to $13.1 million for 1999, due to having more tractors in service. Insurance expense increased $1.3 million, or 59.7%, to $3.6 million in 1999 compared to $2.3 million in 1998, largely due to the STS Acquisition. Interest expense increased $0.6 million, or 16.0%, to $4.2 million in 1999 compared to $3.6 million in 1998, due to the STS Acquisition. Outstanding debt and capital lease obligations aggregated $50.6 million at September 30, 1999 compared with $62.0 million at December 31, 1998. Warrant accretion expense of $714 and $572 in 1999 and 1998, respectively, represents the accretion of STS warrants in connection with the STS Acquisition. Debt issuance cost of $184 and $203 in 1999 and 1998, respectively, represents the amortization of debt issuance costs in connection with the STS Acquisition. 14 15 Amortization of debt discount of $526 and $192 in 1999 and 1998, respectively, represents the amortization of debt discount in connection with the STS Acquisition. Minority interest expense of $937 and $46 in 1999 and 1998, respectively, represents the increase in minority interest in connection with the STS Acquisition. The investment banking termination fee of $1,000 in 1999 represents the termination of an investment banking agreement between STS and ACS. The effective income tax rates of 18.6% (benefit) and 75.1% (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 $479, net of tax benefit of $151, 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 and the write-off of debt issuance costs due to the prepayment of subordinated debt. The cumulative effect of change in accounting relates to the write-off of organization 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 $4.2 million to $4.0 million in 1999 compared to net income of $0.2 million in 1998, largely due to non-recurring one-time charges (i.e., loss on extinguishment of debt, cumulative effect of a change in accounting, warrant accretion expense, debt issuance cost, amortization of debt discount, minority interest expense, investment banking termination fee, prepayment penalty and warrant expense) totaling $4.6 million, $2.9 million net of tax, as well as, start-up operations of six new terminals in 1999 and a shortage of drivers at the Temperature-Controlled Segment which resulted in poor operating results in January 1999. COMPARISON OF THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 WITH THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998. Net revenues increased $11.4 million, or 38.6%, to $40.8 million in 1999, from $29.5 million in 1998, largely due to having more tractors in service. During the third quarter of 1999, the Company increased its revenue producing power units by 96 units. Without giving effect to the additional net revenues contributed by the STS Acquisition, the Company's net revenues increased by $1.5 million, or 10.2%, due to having more tractors in service. Total miles increased 6.8 million, or 30.0%, to 29.5 million in 1999 from 22.7 million in 1998, largely due to having more tractors in service. Average miles per tractor decreased 14.3% to 23,541 miles in 1999 from 27,483 miles in 1998. Average revenue per tractor decreased 8.6% to $32,566 in 1999 from $35,638 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 increased by 1.1 million, or 9.8%, due to having more 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 in its Temperature-Controlled Segment, which results in the temporary idling of revenue equipment. The Company's operating ratio (operating expenses divided by operating revenues) increased 2.9%, to 96.4% in 1999 from 93.5% in 1998. The increase in the operating ratio is largely due to increases in fuel, maintenance and insurance expenses. Without giving effect to the STS Acquisition, the Company's operating ratio increased 4.5%, to 98.9% in 1999 from 94.4% in 1998. Total operating expenses increased $11.8 million, or 42.9%, to $39.4 million in 1999, compared to $27.6 million in 1998, largely due to increases in fuel, maintenance and insurance expenses. Without giving effect to the STS Acquisition, the Company's total operating expenses increased by $2.1 million, or 15.4%. Salaries, wages and benefits increased $4.2 million, or 36.2%, to $15.6 million in 1999 compared to $11.5 million in 1998, due to having more tractors in service 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 $0.6 million, or 10.5%, largely due to increases in overall compensation of drivers that were needed to enhance driver recruitment and retention. 15 16 Fuel expenses increased $1.9 million, or 55.1%, to $5.3 million in 1999 compared to $3.4 million in 1998, largely due to having more tractors in service and increased fuel prices. Without giving effect to the STS Acquisition, the Company's fuel expense increased by $0.3 million or 16.7%, largely due to increased fuel prices. Purchased transportation expense increased $2.6 million, or 40.5%, to $8.8 million in 1999 compared to $6.3 million in 1998, largely due to an increase in contractor-operated units. Without giving effect to the STS Acquisition, the Company's purchased transportation expense increased by $0.6 million, or 20.7%, due to an increase in contractor operated units. Supplies and maintenance expenses increased $2.0 million, or 71.3%, to $4.8 million in 1999 compared to $2.8 million in 1998, largely due to an increase in company-owned units in service. Without giving effect to the STS Acquisition, the Company's supplies and maintenance expense increased by $0.3 million, or 34.0%. Insurance expense increased $0.4 million, or 50.5%, to $1.3 million in 1999 compared to $0.9 million in 1998, largely due to increased insurance claims and an increase in tractors in service. Interest expense decreased $0.2 million, or 11.4%, to $1.2 million in 1999 compared to $1.4 million in 1998. Outstanding debt and capital lease obligations aggregated $50.6 million at September 30, 1999 compared with $62.0 million at December 31, 1998. Warrant accretion expense of $191 and $214 in 1999 and 1998, respectively, represents the accretion of STS warrants in connection with the STS Acquisition. Debt issuance cost of $24 and $76 in 1999 and 1998, respectively, represents the amortization of debt issuance costs in connection with the STS Acquisition. Amortization of debt discount of $375 and $72 in 1999 and 1998, respectively, represents the amortization of debt discount in connection with the STS Acquisition. Minority interest expense of $817 and $17 in 1999 and 1998, respectively, represents the increase in minority interest in connection with the STS Acquisition. The investment banking termination fee of $1,000 in 1999 represents the termination of an investment banking agreement between STS and ACS. The effective income tax rates 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 $150, net of tax benefit of $9, relates to the write-off of debt issuance costs due to the prepayment of subordinated debt. Net loss increased $2.2 million to $2.2 million in 1999, largely due to a non-recurring one-time charge (i.e., loss on extinguishment of debt, warrant accretion expense, debt issuance cost, amortization of debt discount, minority interest expense, investment banking termination fee, prepayment penalty and warrant expense) totaling $2.9 million, as well as, increases in fuel, maintenance and insurance expenses. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had net working capital of $15.3 million. The Company historically has funded its working capital requirements through a combination of operating profits, short turnover in trade receivables, effective cash management practices and borrowing 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, $22.4 million was borrowed against the lines of credit at September 30, 1999, consisting of $17.4 million (Municipal Solid Waste Segment) and $5.0 million (Temperature-Controlled Segment). The Company had $2.3 million available at September 30, 1999. 16 17 The Company's growth and the significant investment in its modern fleet of tractors and 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 $50.6 million and $62.0 million at September 30, 1999 and December 31, 1998, respectively. The debt to equity ratio (calculated excluding payables and other liabilities) was 1.92:1 at September 30, 1999 and 4.30:1 at December 31, 1998. The Company believes that available cash, cash flow from future operations, and borrowings under its lines of credit will be sufficient to meet its current working capital needs and short-term commitments. The Company's long-term commitments consist of long-term debt and lease obligations. The Company believes that available cash, cash flow from operations, equity that the Company has in its equipment upon sale, and borrowings under its lines of credit will be sufficient to meet its long-term commitments. In January 1999, certain related parties, substantially all of whom are officers and directors of the Company, exchanged $0.7 million of subordinated debt for 135,000 shares of the Company's common stock. In March 1999, an individual who is an affiliate of the Company 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 37,800 additional shares of the Company's common stock. In June 1999, STS modified a long-term contract with Metro. Under the terms of the modification, STS agreed to give Metro a rate reduction of one dollar per ton to transport municipal solid waste. In exchange of the rate reduction, Metro agreed to prepay $6.6 million of monthly fixed payments provided for in the original contract. In addition, Metro agreed to return $2.5 million of cash to STS that was held by Metro to secure STS's performance under their contract. The proceeds were used to prepay $7.5 million of subordinated debt with ACS. In July 1999, the Company issued 750,000 shares of the Company's common stock in a private sale to an individual investor who is an affiliate of the Company for $3,000. In July 1999, the Company paid off $1.1 million of subordinated debt bearing 14% interest. In July 1999, certain unrelated individuals exchanged $0.4 million of subordinated debt bearing 14% interest for 88,894 shares of the Company's common stock. Additionally, $0.1 million of accrued interest owed to these individuals was exchanged for 19,096 additional shares of the Company's common stock. In August 1999, the Company paid off $0.4 million of subordinated debt bearing 14% interest. In September 1999, the Company issued 2,666,667 shares of the Company's common stock in a private sale to Churchill for $12 million, $10.6 million net of offering expenses. The proceeds were used to pay-off subordinated debt of $ 2.0 million and pay-down the lines of credit by $4.2 million. 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 also 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 also 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. 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 $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. 17 18 CHANGE IN ESTIMATED SALVAGE VALUES In July 1998, the Company adjusted the estimated salvage values related to certain motor carrier equipment of AG Carriers, Inc. from 20% to 49% of the original purchase price. The change better aligns the allocation of equipment cost with its expected use. This change reduced operating expenses approximately $0.15 million, $0.09 million after-tax in the nine month period ended September 30, 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 nine month periods ended September 30, 1999 and 1998 were $0.2 million and $0.6 million, respectively. SEASONALITY The Company's Temperature-Controlled Segment results of operations show a seasonal pattern because certain of the frozen food companies serviced by the Company generally reduce shipments during the summer season. During the winter months, the Company has at times experienced delays in meeting its pick-up and delivery schedules as a result of severe weather conditions. In addition, the Company's operating expenses have historically been higher in the winter months due to decreased fuel efficiency and increased maintenance costs in colder weather. Accordingly, such factors cause fluctuations in results of operations. The foliage business of Asche Transfer, Inc. 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 we believe are necessary to insure that this potential problem does not adversely affect our operating results in the future. We have completed our assessment of the impact of the year 2000 problem. The Company has reviewed its internal information systems and believes that the costs and efforts to address the year 2000 problem will not be material to our business, financial condition or results of operations, and may be resolved through replacements and upgrades to our software or hardware. The year 2000 problem may, however, adversely impact the Company by affecting the business and operations of parties with which we transact business, although we are unable to precisely determine the likelihood or potential impact of any such event. There can be no assurance that the Company will be able to effectively address year 2000 issues in a cost-efficient manner and without interruption to our business, or that year 2000 problems encountered by our suppliers, customers or other parties will not have a material impact on our business, financial condition and results of operations. The Company's state of readiness for the year 2000, our estimated costs associated with year 2000 issues, the risks we face associated with year 2000 issues and our year 2000 contingency plans are summarized below. STATE OF READINESS Internally, we have implemented a three-phase process to assess year 2000 compliance of our systems and remediate any material non-compliance. The phases are (1) to identify and test our material computer software and hardware in order to determine whether they are year 2000 compliant; (2) to correct or replace those software or hardware systems in which we determine there is a material problem with year 2000 compliance; and (3) to internally test the corrected or upgraded systems in order to determine whether they are year 2000 compliant. We have completed all three phases 18 19 with respect to our purchased information technology ("IT") systems and non-IT systems and believe the systems are year 2000 compliant. We have completed all three phases with respect to the remainder of the purchased IT and non-IT systems and believe the systems are year 2000 compliant. Externally, we have implemented a three-phase process to assess year 2000 compliance of the systems of our vendors, customers and third-party servicers, and remediate any material non-compliance. The phases are (1) to identify the vendors, customers and other third parties with whom we transact business and determine whether they are significant to our business ("core parties"); (2) to contact the vendors, customers and other third parties with whom we do business by, among other methods, sending them letters and questionnaires designed to solicit information relating to the year 2000 problem; and (3) to evaluate the responses received from the vendors, customers and other third parties. The questionnaire we are using asks vendors, customers and other third parties such questions as (i) whether they have a documented year 2000 compliance plan, (ii) whether they are aware of any year 2000 readiness issues that could affect the Company, (iii) whether, if such an issue exists, they have plans to ensure compliance, (iv) what their target date is for year 2000 compliance and (v) whether they have any contingency plans. We have completed all three phases with respect to core parties and non-core parties. COSTS ASSOCIATED WITH YEAR 2000 ISSUES We estimate that the costs associated with implementing all phases of our year 2000 assessment and resolving any year 2000 problems will be less than $100. This estimate includes expenditures for both repairs and upgrades. We believe that these costs, assuming this estimate is accurate, would not have a material effect on our business, financial condition and results of operations. We anticipate that cash flow from operations will be used to pay the costs associated with our year 2000 problem. All year 2000 costs are expensed as incurred. RISKS ASSOCIATED WITH YEAR 2000 ISSUES We are unaware of any material risk to the Company associated with year 2000 issues at the present time. We believe that the reasonably likely worst-case year 2000 scenario is a decrease in the efficiency with which we procure and deliver loads, and a decrease in the efficiency with which we receive payment for services rendered. A decrease in efficiency, however, would not necessarily result in a decrease in business. We expect that load procurement, load delivery and billing all could be achieved through alternative methods within a relatively short period of time. Any disruption, however, could result in some lost revenue. We face the additional risk of experiencing an increase in claims and litigation relating to the year 2000 problem because, among other reasons, there is no uniform definition of year 2000 "compliance" and because all vendor, 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 our favor, could have a material adverse effect on future results. CONTINGENCY PLANS We have not yet developed specific contingency plans for the millennium bug. We have identified alternate vendors and service providers to decrease the impact on the Company if one or more of the core parties with whom we do business suffers a significant year 2000 problem. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 its revolving lines of credit. If the market interest rates for such borrowings average 1% more during 1999 than they did during 1998, the Company's interest expense would increase and the income before income taxes would decrease by approximately $0.1 million. This analysis does not consider the effects of the reduced level of 19 20 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. 20 21 PART II ASCHE TRANSPORTATION SERVICES, INC. (A DELAWARE CORPORATION) Item 1. LEGAL PROCEEDINGS. Not applicable. Item 2. CHANGES IN SECURITIES. (a) Not applicable. (b) Not applicable. (c) 1. On July 7, 1999, the Company sold 750,000 shares of its Common Stock to an accredited investor for $3,000,000 in reliance on Rule 506 of Regulation D. 2. On August 4, 1999, the Company issued 107,990 shares of its Common Stock to several accredited investors in exchange for $485,917 of subordinated indebtedness of the Company in reliance on Rule 506 of Regulation D. 3. On September 24, 1999 the Company sold 2,666,667 shares of its Common Stock to an accredited investor for $12,000,000 in reliance on Rule 506 of Regulation D. Item 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a)(i) Date of Meeting On September 17, 1999 the Company held a Special Meeting of the Stockholders. (b)(i) Description of each matter voted on and number of votes cast. The following actions were taken at the Special Meeting: 1. To approve the investment proposal with Churchill Environmental & Industrial Equity Partners, L.P.: For: 3,561,500; Against: 54,325; Abstain: 37,086; Not Voted: 1,880,826 2. To adopt an amendment to the Certificate of Incorporation to increase the number of authorized shares of Common Stock from 10,000,000 to 25,000,000: For: 5,141,037; Against: 355,364; Abstain: 37,436 3. To adopt an amendment to the Certificate of Incorporation and the By-Laws to increase the maximum number of directors from not greater than nine to not greater than fifteen: For: 3,402,935; Against: 204,643; Abstain: 45,333; Not Voted: 1,880,826 21 22 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 Form 8-K filed on July 22, 1999 Form 8-K filed on August 11, 1999 22 23 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. Asche Transportation Services, Inc. Date November 12 , 1999 BY: /s/Leon M. Monachos -------------------- ----------------------------------------- Leon M. Monachos, Chief Financial Officer Date November 12 , 1999 BY: /s/Larry L. Asche -------------------- ----------------------------------------- Larry L. Asche, Chairman and Chief Executive Officer 23 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 6,967 0 20,273 0 0 35,630 62,477 15,509 97,128 20,291 0 0 0 1 26,431 97,128 0 112,416 0 109,012 3,288 0 4,214 (4,098) 764 (3,334) 0 (479) (177) (3,990) (0.75) (0.75)
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