FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarter ended September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-2882
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ESCO TRANSPORTATION CO.
(Exact name of registrant as specified in its charter)
DELAWARE 55-0257510
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(State or other jurisdiction of (I.R.S. Employer Identification no.)
incorporation or organization)
6505 HOMESTEAD
HOUSTON, TEXAS 77028
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 635-1008
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Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $ .001 par value per share
---------------------------------------
Title of class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Common Stock, $ .001 Par Value 14,179,112
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(Class) (Outstanding as of September 30, 1999)
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on September 30, 1999 was approximately $ 4,111,943.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Balance Sheets for the Nine Months Ended September 30,
1999 (unaudited) and for the Year Ended December 31, 1998 3
(audited)
Statements of Income for the Nine Months Ended
September 30, 1999 (unaudited) and 1998 (unaudited) 4
Statements of Stockholders' Equity for the Nine Months
Ended September 30, 1999 (unaudited) 5
Statements of Cash Flows for the Nine Months Ended
September 30, 1999 (unaudited) and 1998 (unaudited) 6
Notes to the Financial Statements (unaudited) 7 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
Item 1. Recent Developments in Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports in Form 8-K 18
Signatures 19
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
ESCO TRANSPORTATION CO.
BALANCE SHEET
SEPTEMBER 30,1999 DECEMBER 31,1998
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 54,218 $ 25,833
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
BAD DEBTS OF $472,253 IN 1998 AND
$403,228 IN 1999 4,933,788 5,755,857
TRUCK MAINTENANCE SUPPLIES 176,229 106,058
NOTES RECEIVABLE - STOCKHOLDERS 781,026 51,293
PREPAID EXPENSES - CURRENT 217,674 158,337
OTHER CURRENT ASSETS 272,089 128,697
------------------- ------------------
TOTAL CURRENT ASSETS 6,435,024 6,226,075
------------------- ------------------
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT 12,209,511 10,904,274
LESS ACCUMULATED DEPRECIATION (3,660,495) (2,785,694)
------------------- ------------------
8,549,016 8,118,580
------------------- ------------------
OTHER ASSETS
PREPAID INSURANCE - NET OF CURRENT PORTION 0 64,500
OTHER ASSETS - NON CURRENT 167,841 133,090
------------------- ------------------
TOTAL OTHER ASSETS 167,841 197,590
------------------- ------------------
TOTAL ASSETS $ 15,151,881 $ 14,542,245
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE - TRADE $ 776,000 $ 756,895
ACCRUED AND OTHER LIABILITIES 892,844 313,893
AMOUNTS DUE FACTOR 6,034,607 6,434,481
CURRENT PORTION OF LONG-TERM DEBT AND CAPITAL LEASES 1,855,297 1,860,814
------------------- ------------------
TOTAL CURRENT LIABILITIES 9,558,748 9,366,083
LONG-TERM DEBT AND CAPITAL LEASES- NET OF CURRENT 4,887,039 4,978,916
DEFERRED INCOME TAXES 0 0
COMMITMENTS 0 0
------------------- ------------------
TOTAL LIABILITIES 14,445,787 14,344,999
------------------- ------------------
STOCKHOLDERS' EQUITY
COMMON STOCK, $.001 PAR VALUE; 35,000,000
SHARES AUTHORIZED; 14,179,112 AND 12,527,612 SHARES
ISSUED AND OUTSTANDING IN 1999 AND 1998 1,561 1,569
ADDITIONAL PAID-IN CAPITAL 1,592,515 931,906
RETAINED EARNINGS (DEFICIT) (295,244) (318,844)
------------------- ------------------
1,298,832 614,631
LESS NOTE RECEIVABLE FROM SHAREHOLDER (554,731) (413,385)
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744,101 201,246
LESS TREASURY STOCK, AT COST (38,007) (4,000)
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TOTAL STOCKHOLDERS' EQUITY 706,094 197,246
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,151,881 $ 14,542,245
=================== ==================
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Statements of Stockholders' Equity
For the Nine Months Ended September 30, 1999 and 1998
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------- ---------------------- --------------------- ------------ -----------
REVENUE:
FREIGHT REVENUE $ 9,034,105 $ 7,198,575 $24,611,971 $19,749,895
OIL AND GAS REVENUE 1,022 1,260 3,156 3,840
---------------------- --------------------- ------------ ------------
TOTAL REVENUE 9,035,127 7,199,835 24,615,127 19,753,735
---------------------- --------------------- ------------ ------------
EXPENSES:
COST OF FREIGHT REVENUE 6,694,606 5,102,517 17,470,626 14,225,239
GENERAL ADMINISTRATIVE EXPENSES 1,692,600 1,342,645 5,084,091 3,924,312
DEPRECIATION AND DEPLETION 383,286 388,314 1,116,598 1,065,111
---------------------- --------------------- ------------ ------------
TOTAL EXPENSES 8,770,492 6,833,476 23,671,315 19,214,662
---------------------- --------------------- ------------ ------------
OPERATING INCOME 264,635 366,359 943,812 539,073
OTHER INCOME (EXPENSE)
INTEREST INCOME 12,477 3,038 25,467 4,779
OTHER INCOME 0 0 15,016 11,700
INTEREST EXPENSE (371,930) (347,705) (1,040,789) (970,701)
GAIN (LOSS) ON SALE OF ASSETS 35,851 18,657 80,094 98,932
---------------------- --------------------- ------------ ------------
TOTAL OTHER INCOME (323,602) (326,010) (920,212) (855,290)
---------------------- --------------------- ------------ ------------
NET INC. (LOSS) BEFORE TAXES (58,967) 40,349 23,600 (316,217)
INCOME TAX 0 0 0 0
---------------------- --------------------- ------------ ------------
NET INCOME (LOSS) $ (58,967) $ 40,349 $ 23,600 $ (316,217)
====================== ==================== ============ ============
NET INCOME (LOSS) PER SHARE $ (0.004) $ 0.003 $ 0.002 $ (0.025)
====================== ==================== ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 14,179,112 12,527,612 14,179,112 12,505,817
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
STATEMENTS OF INCOME NOTE
FOR THE THREE AND NINE MONTHS ADDITIONAL RETAINED RECEIVABLE
ENDED SEPTEMBER 30, 1999 PAID-IN EARNINGS TREASURY FROM
(UNAUDITED) COMMON STOCK CAPITAL (DEFICIT) STOCK SHAREHOLDER TOTAL
---------- -------- ----------- ---------- ---------- ------------- ----------
SHARES AMOUNT
---------- --------
BALANCE AT DECEMBER 31, 1998 12,527,612 $ 1,569 $ 931,906 $(318,844) $ (4,000) $ (413,385) $ 197,246
CORRECTION 0 (174) 174 0 0 0 0
ACQUISITION 100,000 10 39,990 0 0 40,000
STOCK ISSUED UNDER MANAGEMENT INCENTIVES 1,425,000 23 89,978 0 0 90,001
ADVANCE TO STOCKHOLDERS - STOCK PURCHASE 0 0 0 0 (141,346) (141,346)
EMPLOYEE STOCK BONUS 126,500 133 530,467 0 0 0 530,600
PURCHASE OF TREASURY STOCK 0 0 0 0 (34,007) (34,007)
NET INCOME (LOSS) 0 0 0 23,600 0 23,600
---------- -------- ----------- ---------- ---------- ------------- ----------
BALANCE AT SEPTEMBER 30, 1999 14,179,112 $ 1,561 $ 1,592,515 $(295,244) $ (38,007) $ (554,731) $ 706,094
========== ======== =========== ========== ========== ============= ==========
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) Unaudited)
Net Cash Provided by Operating Activities $ 1,940,590 $ 2,094,222
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property, Equipment and Capital Leases (2,274,883) (105,938)
Proceeds from Sale of Property and Equipment 867,326 244,470
Purchase Non-Compete Agreement 0 (135,560)
Shareholder Advance (371,249) (324,463)
------------ ------------
Net Cash Used in Investing Activities (1,778,806) (321,491)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Payments on Short-Term Debt 0 (70,319)
Net Payments on Long-Term Debt (2,077,629) (1,512,560)
Proceeds from Capital Leases 686,282 0
Payments on Capital Leases (44,919) 0
Proceeds from Long-Term Debt 1,336,874 0
Purchase of Treasury Stock (34,007) 0
------------ ------------
Net Cash Provided (Used) by Financing Activities (133,399) (1,582,879)
------------ ------------
Net Increase in Cash and Cash Equivalents 28,385 189,852
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 25,833 22,678
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 54,218 $ 212,530
============ ============
Non Cash Transactions:
Stock issued to acquire business $ 40,000 $ 21,000
Stock issued under management incentive agreements 570,001 0
Stock issued to Employees 50,600 47,439
------------ ------------
Total Non-Cash Transactions $ 660,601 $ 68,439
============ ============
Note 1 - Interim Financial Statements
- ------------------------------------------
The accompanying unaudited financial statements of ESCO Transportation Co., (the
"Company") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been condensed
or omitted pursuant to those rules and regulations. However, the Company
believes the disclosures contained herein are adequate to make the information
presented not misleading. The financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position and
results of operations.
Note 2 - Organization
- ------------------------
The Company was incorporated under the name of Power Oil Company in 1916 in West
Virginia. In 1992, the Company was reincorporated as a Delaware corporation.
The Company changed its name from "Power Oil Company to "ESCO Transportation
Co." in 1994.
ESCO Transportation maintains two divisions with distinct transportation
services offered by each. The Company's Intermodal division primarily hauls
container and piggyback shipments between shipping locations and railroads or
ports. This division operates out of facilities in Houston, Texas; Ontario,
California; Memphis, Tennessee; and Dallas, Texas. The Company also maintains
an Over-The-Road division that performs long haul services for numerous
customers within the United States. The main office for this division is
located in Springdale, Arkansas. The Company's corporate office is located in
Houston, Texas.
Note 3 - Summary of Significant Accounting Policies
- ----------------------------------------------------------
A. Basis of Accounting
Income and expenses are recorded on the accrual method of accounting for
financial and federal income tax reporting purposes.
B. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts and related disclosures. Actual results could differ
from these estimates. Management believes that the estimates are reasonable.
C. Revenue Recognition
Revenue and direct costs are recognized when the shipment is completed.
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
September 30, 1999 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
D. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash on
hand, cash in bank (demand deposits), savings accounts, cash held in brokerage
accounts and highly liquid debt instruments purchased with a maturity of three
months or less to be cash and cash equivalents.
E. Property and Equipment
Property and equipment are carried at cost. Depreciation for financial
reporting purposes has been computed on the straight-line method over the
estimated useful lives of the assets which range from three to twenty years.
Accelerated methods of depreciation are used for computation of depreciation
expense for income tax reporting purposes.
F. Oil and Gas Properties
The Company accounts for its oil and gas exploration and development activities
using the successful efforts method. Under this method of accounting,
exploratory drilling costs which result in the discovery of proved reserves are
capitalized. All other exploratory costs, including geological and geophysical
costs, are expensed when incurred. Development costs, including development of
dry holes, are capitalized when incurred. The Company incurred no exploration
and development costs during the nine months ended September 30, 1999.
Depletion of capitalized costs on producing properties is computed on a
property-by-property basis utilizing the unit-of-production method. Depletion
expense was $4,488 for 1999 and $4,482 for 1998.
Lease acquisition costs are capitalized when incurred. Leasehold improvements
are recognized through a charge to operations if the lease expires or management
decides to abandon the Company's interest.
When assets are retired, abandoned or otherwise disposed of, the related costs
and accumulated depreciation are removed from the accounts, and gain or loss is
included in income.
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
September 30, 1999 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
G. Income Taxes
The Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for deductible temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax basis. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. For the nine months ended September 30, 1999, net operating
loss benefits were offset by a valuation allowance.
H. Net Income Per Share
Net income per common share is based on the weighted average number of shares
outstanding during the year. The Company declared a one-for-four reverse stock
split in 1994. The Company declared a one-for-ten forward stock split in 1996.
All share and per share amounts have been adjusted to reflect the stock splits.
I. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. In the normal
course of business the Company grants credit without collateral to customers.
Consequently, the Company's ability to collect the amounts due from customers is
affected by economic conditions.
J. Fair Value of Financial Instruments
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at September 30, 1999 does not differ materially from the aggregate
carrying values of its financial instruments recorded in the accompanying
balance sheet. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgement is necessarily required in interpreting
market data to develop the estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in the current market exchange.
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
September 30, 1999 (Unaudited)
Note 4 - Property and Equipment
- ------------------------------------
Property and equipment consists of the following:
Description
Balance at Balance at
- ---------------------------------- 9/30/99 12/31/98
Land $ 167,519 $ 706,370
Buildings and Improvements 13,554 13,554
Office Equipment 375,439 300,007
Communications Equipment 167,834 356,869
Furniture and Fixtures 32,699 30,133
Trucks, Tractors, and Trailers 9,833,516 9,099,802
Equipment Held Under Capital Lease 1,401,631 0
Yard Equipment 217,319 397,539
-------------------- ---------------------
12,209,511 10,904,274
Less Accumulated Depreciation (3,660,495) (2,785,694)
-------------------- ---------------------
$ 8,549,016 $ 8,118,580
==================== =====================
Note 5 - Long-Term Debt and Financing Arrangements
- ---------------------------------------------------------
Pursuant to a factoring agreement, the Company factors all of its accounts
receivable. The Company repurchases all factored accounts receivable over
ninety days old and the factor withholds a reserve of 10% of the uncollected and
unrepurchased accounts. The factor has a security interest in accounts
receivable purchased and the Company's obligation to the factor is guaranteed by
the majority shareholder who is also an officer and another office of the
Company.
Due primarily to the repurchase feature of the factoring agreement, the Company
accounts for the factored accounts receivable as a secured borrowing rather than
a sale. Many receivables are not collected within ninety days and have to be
repurchased by the Company. As of September 30, 1999, the total amount due to
the factor is $6,034,607.
The following schedule summarizes the Company's long-term debt and capital
leases.
Balance at 9/30/99
Description
- ---------------------------------------- -------------------
Stockholder Notes Payable $ 0
Notes Payable and Capital Leases Payable 6,742,336
-------------------
$ 6,742,336
-------------------
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
September 30, 1999 (Unaudited)
Note 6 - Segment Information
- --------------------------------
The following represents the 1999 segment information by each of the Company's
segments or groups of services.
THE FOLLOWING REPRESENTS THE 1999 SEGMENT INFORMATION BY EACH OF THE COMPANY'S SEGMENTS OR GROUPS
OF SERVICES.
NINE NINE
QUARTER QUARTER MONTHS MONTHS
ENDED ENDED ENDED ENDED
9/30/99 9/30/98 9/30/99 9/30/98
-------------- -------------- ---------------- ----------------
REVENUE FROM EXTERNAL CUSTOMERS
INTERMODAL: $ 5,521,743 $ 4,265,759 $ 15,038,967 $ 10,966,497
OVER THE ROAD 3,513,384 2,934,076 9,576,160 8,787,238
-------------- -------------- ---------------- ----------------
COMBINED REVENUE $ 9,035,127 $ 7,199,835 $ 24,615,127 $ 19,753,735
============== ============== =============== ===============
NINE NINE
QUARTER QUARTER MONTHS MONTHS
ENDED ENDED ENDED ENDED
9/30/99 9/30/98 9/30/99 9/30/98
-------------- -------------- ---------------- ----------------
NET INCOME:
INTERMODAL $ 334,053 $ 209,244 $ 448,412 $ (349,358)
OVER THE ROAD (275,086) (168,895) (424,812) 33,141
-------------- -------------- ---------------- ----------------
COMBINED NET INCOME $ 58,967 $ 40,349 $ 23,600 $ (316,217)
============= ============== =============== ==================
9/30/99 9/30/98
---------------- ----------------
TOTAL NET LONG LIVED ASSETS:
INTERMODAL $ 715,282 NOT
OVER THE ROAD 7,833,734 AVAILABLE
----------------
COMBINED NET ASSETS $ 8,549,016
===============
The information for segmented long lived assets is not available for 1998.
Differences in the Basis of Segmentation
- ---------------------------------------------
During the quarter ended September 30, 1999, the Company began segregating its
operations between the intermodal and the over the road divisions. For the
annual report ended December 31, 1998, the Company did not segregate its
operations in this manner and reported only one segment.
For the period ended September 30, 1999, all of the Company's operations are
conducted within the United States.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
OVERVIEW
- --------
The Company's operations for the third quarter resulted a net operating loss of
($58,967) and a year-to-date profit of $23,600. ESCO's new management team has
continued to address issues which were identified in the second quarter of this
year and have completed the following tasks during or near the end of the third
quarter:
a. The Company completed its initial due diligence of Panther Lines, Inc.
and Value Distribution for the proposed acquisition discussed in the second
quarter. From the due diligence, the Company determined the acquisition was not
a good fit for the current operations of ESCO and rescinded its letter of intent
in October 1999. The Company continues to evaluate other potential acquisition
candidates as part of its long-term consolidation plan.
b. Internal financial reporting procedures continue to improve and
management has used improved financial information to analyze operations by
division and design procedures for improvement. Management also began the
initial stages of its five-year growth plan in conjunction with analysis of
profitability by division.
c. The Company implemented a management change in its Memphis division to
provide better oversight of the day-to-day operations in the intermodal
division. In addition, the new management offers better lines of authority for
the container yard operation and improved direct reporting to the corporate
office.
d. The Company completed a review of its employee benefit package and
revised its health insurance and 401(K) plan in efforts to increase employee
retention. The Company also bid and reviewed its cargo and liability insurance
packages during the third quarter and selected a new agency, Adams Insurance
Agency, as the Company's primary insurance broker.
e. The Company completed the financing of fifteen new Peterbilt trucks which
were added to the Springdale over-the-road operation. These are initially
additions to the over-the-road fleet and are necessary to accommodate new
business. These will later be used to phase out older equipment as part of our
overall maintenance and operating control procedures.
f. The Company completed the financing of thirty-two (32) new trailers to
add to the fleet in our Springdale over-the-road division. These trailers are
also necessary to assist in handling new specialized business and new traffic
lanes in this division.
g. The Company began the implementation of its networking plan discussed in
our MD&A in the second quarter. The installation began in late September 1999
with anticipated date for complete installation on or before December 1999.
Management has revised its initial estimates for a complete conversion of the
system from January 1, 2000 to April 1, 2000.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
(Continued)
OVERVIEW (CONTINUED)
h. The management team continues to look for new opportunities to expand the
Company operations in different parts of the country. During this quarter, the
Company began negotiations with the Union Pacific Railroad to operate a ramp
facility in Fort Smith, Arkansas. Subsequent to the quarter, a contract was
signed and operations were scheduled to begin in November 1999. Operations were
actually commenced on December 1, 1999.
The Company fell below its budget projections during the third quarter and does
not anticipate meeting its internal budget during the fourth quarter. However,
management still anticipates substantial improvements in net income and overall
operations from 1998 results, and sees an excellent opportunity for future
growth of the Company to generate substantial profits. During 1999, the Company
has substantially increased its corporate overhead with the addition of the new
management team and consultants to assist in evaluating Company operations.
This restructure and rebuilding has resulted in additional costs in this first
year which management expects to reap the benefits from in the year 2000 as well
as subsequent years.
RESULTS OF OPERATIONS
- -----------------------
The third quarter operations resulted in a net operating loss before taxes of
($58,967). Operating revenue for the third quarter was $9,035,127 versus
$7,199,835 for the same period of 1998 or a twenty-five percent (25%) increase.
The increase primarily results from additional revenue generated in the Dallas
and Ontario facilities and is primarily related to the intermodal operations.
We saw increases in revenue of approximately $500,000 in the over-the-road
division in Arkansas. Management believes its sales efforts and its presence in
key markets has attributed to its overall growth, and sees substantial potential
in the upcoming months for additional growth in these and additional
geographical areas.
The Company operated at a twenty-two percent (22%) gross profit margin for the
quarter and general administrative expenses were nineteen percent (19%) which is
consistent with 1998 averages. The management team has enjoyed better financial
information during the third quarter and has been using this information to
continue to evaluate methods to control costs in all areas. All divisions of
the Company were profitable for the third quarter with the exception of the
Memphis operation, including intermodal and the container yard, and the
Springdale over-the-road operation. Memphis reported a net operating loss of
($69,092) and Springdale reported a net operating loss of ($275,086), both of
which were after corporate allocations. Each operation did, however, contribute
to corporate but not amounts sufficient to generate a surplus. The loss in
Memphis is attributed to lost business resulting from the management change and
reduced business that occurred from management problems in quarters prior to
this change. The administrative cost levels have been high in the Memphis
location at its present income level; however, Company plans are to see growth
in the Memphis area in the fourth quarter and into 2000, which we anticipate
bringing the overall operating expenses within line of other Company divisions.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
(Continued)
RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------
The Springdale operation continues to show growth in revenue. The Springdale
over-the-road operation has been averaging between $1.13 and $1.15 in revenue
per mile. During this quarter and in subsequent months, management has
evaluated its business and is taking steps to restructure its shipping lanes
which should allow for increased profitability through increased revenues per
mile.
Interest expense decreased from 4.8% to 4.1% in 1998, but continues to be a
substantial operating cost for the Company.
The Company has not provided for a federal income tax provision during this
quarter because management anticipates the utilization of net operating loss
carried forward to offset any tax liability for 1999.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company's primary source of liquidity has been cash flow generated from
operations and borrowing under a factoring arrangement with Commercial Billing
Service. Commercial Billing Service is a subsidiary of Compass Bank.
The Company continues to extend credit to its customers and has seen improvement
in its average aged receivable since the addition of the collections manager in
the second quarter. Accounts receivable collections are primarily centralized
with specific collection efforts directed by each individual dispatch office.
The Company has not been experiencing significant uncollectable receivables but
continues to experience adjustments from improper billing and improper
notifications of assessorials. During the second quarter, procedures were
implemented to control these adjustments and we have continued to see a decline
from 1998. Management continues to monitor this weekly and monthly with the
dispatchers and terminal managers. Implementation of the new dispatch and
accounting system is expected to alleviate a substantial part of adjustments in
the future.
The Company is pursuing additional capital resources to improve the working
capital position of the Company. The Company has completed its five-year
business plan and is using this plan to facilitate its marketing efforts to add
additional capital to the Company.
The Company continues to operate with deficit working capital ratios although
these ratios have improved slightly since December 1998 from a -1.50:1 to
- -1.48:1. The working capital pressures of the Company have historically, and
continue to be, created by marginal or break-even operations which, before
depreciation, are not sufficient to provide cash flow from operations equal to
the long-term debt obligations of the Company. As a result, ESCO has continued
to increase its short-term working capital line to maintain current payment
status of its long-term debt obligations.
During this quarter the Company sold land it was holding for the construction of
a new facility in Houston. The land which was originally purchased for $550,000
and has been sold for $625,000 before selling expenses resulting in a net gain
reflected on these quarterly financial statements.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
(Continued)
YEAR 2000 ISSUE
- -----------------
The Year 2000 issue is the result of date coding within computer programs that
were written using just two digits rather than four digits to define the
applicable year. If not corrected, these date codes could cause computers to
fail to calculate dates beyond 1999 and as a result, computer applications could
fail or create erroneous results by or at the Year 2000.
The Company, together with outside vendors engaged by the Company, have made
assessments of the Company's potential Year 2000 exposure related to its
computerized information systems. Because of the nature of the Company's
operations, many of its computerized information systems will be required to
process information which includes post-year 2000 date coding well in advance of
January 1, 2000. The Company has substantially completed its overall assessment
of Year 2000 issues associated with its current systems and is currently engaged
in efforts to remediate potential year 2000 exposure with respect to those
systems, including the identification, selection, and implementation of a major
new Year 2000 compliant software system. Management believes that the Company's
compliance plan is progressing such that Year 2000 exposures will be mitigated
prior to any critical dates. To date, no material information technology
projects of the Company have been delayed as a result of the Company's Year 2000
compliance efforts.
The Company has also made assessments of the potential Year 2000 exposure
associated with its embedded technology systems, such as telephone systems,
freight hauling tracking systems, and accounting and payment systems. Based on
such assessments, the Company does not believe that it has significant Year 2000
exposure with respect to such embedded technology systems.
The Company is currently involved in discussion with important suppliers,
business partners, customers, and other third parties to determine the extend to
which the Company may be vulnerable to the failure of these parties to identify
and correct their own Year 2000 issues. In the ongoing acquisition of software
and hardware installations, the Company generally requests that its vendors
certify the Year 2000 compliance of acquired products. The Company believes
that its own software vendors are Year 2000 compliant.
The Company is utilizing and will continue to utilize both internal and external
resources to reprogram or replace its computer systems such that the systems can
be expected to be Year 2000 compliant in advance of respective critical dates.
During the nine months ended September 30, 1999, the Company expensed $17,920
with respect to Year 2000 compliance and capitalized $67,044 with respect to new
software purchases and installations which are Year 2000 compliant. The total
estimated remaining cost of modification of existing software and new Year 2000
compliant systems is $300,000 which includes costs attributable to the planned
purchase and implementation of a new accounting and dispatch system. The cost
of this new software is being capitalized. The level of expense anticipated in
connection with Year 2000 issues is not expected to have a material effect on
the Company's result of operations. The costs of the Company's Year 2000
compliance efforts are expected to be funded out of both operating cash flow and
outside financing.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
(Continued)
YEAR 2000 ISSUE (CONTINUED)
- ------------------------------
During the quarter ended September 30, 1999, the Company continued to implement
its Year 2000 plan. The progress made was in accordance with the plan,
including progress on the new system which is expected to go online on or before
December 1999. There was no new information which came to management's
attention that would indicate that the plan should be altered significantly or
that the plan would not be successful in the time frame prescribed by the plan.
The dates of expected completion and the costs of the Company's Year 2000
remediation efforts are based on management's estimates, which are derived
utilizing assumptions of future events, including the availability of certain
resources, third party remediation plans, and other factors. There can be no
guarantee that these estimates will be achieved, and if the actual timing and
costs for the Company's Year 2000 remediation program differ materially from
those anticipated, the Company's financial results and financial condition could
be significantly affected. Additionally, despite testing by the Company, the
Company's systems may contain undetected errors or defects associated with Year
2000 issues for remediation or to complete its Year 2000 remediation and testing
efforts prior to respective critical dates, as well as the failure of third
parties with whom the Company has an important relationship to identify,
remediate, and test their own Year 2000 issues and the resulting disruption
which could occur in the Company's systems and could have material adverse
effects on the Company's business, results of operations, cash flow, and
financial condition.
STOCKHOLDER ADVANCES
- ---------------------
As noted in Note M to the financial statements in the December 31, 1998 10-KSB,
the Company has and continues to advance funds to a major stockholder for the
purchase of Company shares owned by the stockholder. As also noted in the
December 31, 1998 10-KSB MD&A discussion, the Company had signed a letter of
intent to acquire Panther Lines, Inc and Value Distribution, Inc. in Los Angeles
and Stockton, California. As reported in the second quarter MD&A, the
stockholder had agreed to contribute 1,000,000 shares of common stock to
facilitate the transaction and reduce or eliminate the receivable due from this
stockholder. As noted in the MD&A discussion above, the letter of intent with
Panther Lines, Inc. and Value Distribution was rescinded in October, 1999.
Consequently the shares to be contributed to reduce this receivable did not
occur during this quarter. The stockholder has agreed to continue to make the
shares available to assist in a future acquisitions of the Company, as
appropriate, and assist the Company in obtaining additional working capital as
necessary.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
(Continued)
SAFE HARBOR
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This report on Form 10-Q or 10-QSB (the Report) contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward-looking statements necessarily involve risks and
uncertainty, including, without limitation, the risk of a significant natural
disaster, the expansion or contraction in its various lines of business, the
impact of inflation, the impact of Year 2000 issues, the ability of the Company
to meet its debt obligation, changing licensing requirements and regulations in
the United States pertinent to its business, the ability of the Company to
expand its businesses, the effect of pending or future acquisitions as well as
acquisitions which have recently been consummated, general market conditions,
competition, licensing and pricing. All statements, other than statements of
historical facts, included or incorporated by reference in the Report that
address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including, without limitation, such
things as future capital expenditures (including the amount and nature thereof),
business strategy and measures to implement such strategy, competitive
strengths, goals, expansion, and growth of the Company's businesses and
operations, plans, references to future success, as well as other statements
which includes words such as "anticipate," "believe," "plan," "estimate,"
"expect," and "intend" and other similar expressions, constitute forward-looking
statements. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could over time prove to be inaccurate and, therefore, there can be
no assurance that the forward-looking statements included in this Report will
themselves prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
SUBSEQUENT EVENTS
- ------------------
On January 19, 2000, the Company acquired 100% of the outstanding stock of
Quantum Transportation Company in a purchase transaction valued at $530,000.
The acquisition was completed through a combination of stock and cash.
PART II. OTHER INFORMATION
ITEM 1. Recent Developments in Legal Proceedings
The Company's two litigation matters were previously referenced in the Form
10-QSB dated March 31, 1998 and its statements are incorporated herein by
reference.
ITEM 2. Changes in Securities - NONE
ITEM 3. Defaults Upon Senior Securities - NONE
ITEM 4. Submission of Matters to a Vote of Security Holders - NONE
ITEM 5. Other Information - NONE
ITEM 6. Exhibits and Reports of Form 8-K - NONE
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
_____________________________ _____________________________
Edwis L. Selph, Sr. Date
Chairman of the Board
_____________________________ _____________________________
Robert Weaver Date
President
______________________________ _____________________________
Robert F. Darilek, CPA Date
Chief Financial Officer