FORM 10-Q
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 March 31, 2000
---------------------------
OR
[ ] 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: 0-2882
---------------------------
ESCO TRANSPORTATION CO.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 55-0257510
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification no.)
incorporation or organization)
4301 EAST PARK DRIVE
HOUSTON, TEXAS 77028
-------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 635-1008
--------------
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 13,975,497
------------------------------ ----------
(Class) (Outstanding as of March 31, 2000)
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on May 31, 2000 was approximately $2,795,099.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
------
Balance Sheets for the Three Months Ended March 31,
2000 (unaudited) and for the Year Ended December 31, 1999 3
(audited)
Statements of Income for the Three Months Ended
March 31, 2000 (unaudited) and 1999 (unaudited) 4
Statements of Change in Stockholders' Equity (Deficit) for the Three
Months Ended March 31, 2000 (unaudited)
5
Statements of Cash Flows for the Three Months Ended
March 31, 2000 (unaudited) and 1999 (unaudited) 6
Notes to the Financial Statements (unaudited) 7 - 13
Item 2. Management's Discussion and Analysis 14
PART II OTHER INFORMATION
Item 1. Recent Developments in Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports in Form 8-K 19
Signatures 20
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ESCO TRANSPORTATION CO.
Balance Sheets
March 31,2000 December 31,1999
--------------- ------------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and Cash Equivalents $ 103,510 $ 109,929
Accounts Receivable - Trade, Net of Allowance for
Bad Debts of $395,000 in 2000 and $338,000 in 1999 7,396,771 6,172,164
Truck Maintenance Supplies 147,649 152,557
Employee Advances and Driver Loans 243,598 117,092
Notes Receivable - Employees, Current 132,019 241,830
Notes Receivable - Stockholders 314,927 217,109
Prepaid Expenses 200,318 134,046
Other Current Assets 127,206 26,085
--------------- ------------------
TOTAL CURRENT ASSETS 8,665,998 7,170,812
--------------- ------------------
PROPERTY AND EQUIPMENT
Property and Equipment 12,652,864 12,516,566
Less Accumulated Depreciation (4,381,434) (3,980,000)
--------------- ------------------
8,271,430 8,536,566
--------------- ------------------
OTHER ASSETS
Intangibles, Net of Accumulated Amortization 527,134 82,871
Other Assets - Non Current 21,248 35,392
--------------- ------------------
Total Other Assets 548,382 118,263
--------------- ------------------
TOTAL ASSETS $ 17,485,810 $ 15,825,641
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts Payable - Trade $ 901,548 $ 1,247,094
Bank Overdrafts 812,325 436,838
Accrued and Other Liabilities 1,228,186 980,700
Amounts Due Factor 8,337,559 6,944,085
Current Portion of Long-Term Debt 2,038,470 2,038,470
Current Portion of Obligations under Capital Leases 235,603 235,603
--------------- ------------------
TOTAL CURRENT LIABILITIES 13,553,691 11,882,790
Long-term Debt
Long-Term Debt, Net of Current Portion 2,673,232 3,138,735
Obligations under Capital Leases, Net of Current Portion 824,186 852,633
--------------- ------------------
17,051,109 15,874,158
--------------- ------------------
Stockholders' Equity (Deficit)
Preferred Stock, $.001 Par Value: 15,000,000 Shares Authorized: Non Issued
Common Stock, $.001 Par Value; 20,000,000 Authorized: 14,243,017 and 14,084,017
Issued; 13,975,497 and 13,818,997 Outstanding in 2000 and 1999 1,719 1,560
Additional Paid-In Capital 2,142,098 1,625,765
Retained Earnings (Deficit) (433,875) (396,385)
--------------- ------------------
1,709,942 1,230,940
Less: Notes Receivable from Stockholder (1,186,669) (1,191,635)
Less: Treasury Stock, At Cost (88,572) (87,822)
--------------- ------------------
434,701 (48,517)
--------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 17,485,810 $ 15,825,641
=============== ==================
3
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ESCO TRANSPORTATION CO.
Statements of Income
For the Three Months Ended March 31, 2000 and 1999
2000 1999
------------ ------------
(Unaudited) (Unaudited)
REVENUE:
Freight Revenue $11,799,310 $ 7,122,841
Oil and Gas Revenue 1,332 1,171
------------ ------------
11,800,642 7,124,012
------------ ------------
EXPENSES:
Cost of Freight Revenue 8,424,318 4,861,439
Operating and Administrative Expenses 2,616,310 1,712,600
Depreciation and Depletion 436,739 364,913
------------ ------------
11,477,367 6,938,952
------------ ------------
OPERATING INCOME 323,275 185,060
OTHER INCOME (EXPENSE)
Interest Income 27,708 3,153
Other Income 9,406 8,729
Interest Expense (395,263) (329,695)
Gain (Loss) on Sale of Assets (2,616) (6,994)
------------ ------------
Total Other Income (360,765) (324,807)
------------ ------------
NET INCOME (LOSS) BEFORE TAXES (37,490) (139,747)
Provision for Federal Income Tax 0 0
------------ ------------
NET INCOME (LOSS) $ (37,490) $ (139,747)
============ ============
Net Income (Loss) Per Share- Basic and Fully Diluted $ (0.003) $ (0.011)
============ ============
------------ ------------
Weighted Average Number of Shares Outstanding 13,944,415 13,179,391
============ ============
4
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ESCO TRANSPORTATION CO.
Statement of Changes in Stockholders' Equity (Deficit)
For the Three Months Ended March 31, 2000
Common Stock Retained Treasury Stock
------------------------- Additional Earnings ------------------
Shares Amount Paid-In Capital (Deficit) Shares
------------ ----------- ---------------- ---------------- ------------------
Balance - December 31,1999 14,084,017 $ 1,560 $ 1,625,765 $ (396,385) (265,020)
Shares issued in Quantum Acquisition 159,000 159 476,841 0 0
Advances to Stockholders - Stock Purchase 0 0 0 0 0
Interest on Stockholder notes for Stock 0 0 39,492 0 0
Reductions in Shareholder Notes Receivable 0 0 0 0 0
Purchase Treasury Stock 0 0 0 0 (2,500)
Net Income (Loss) 0 0 0 (37,490) 0
------------ ----------- ---------------- ---------------- ------------------
Balance - December 31, 1999 14,243,017 $ 1,719 $ 2,142,098 $ (433,875) $ (267,520)
============ =========== ================ ================ ==================
--------- Notes Receivable
Amount from Stockholders Total
--------- ------------------- ---------
Balance - December 31,1999 $(87,822) $ (1,191,635) $(48,517)
Shares issued in Quantum Acquisition 0 0 477,000
Advances to Stockholders - Stock Purchase 0 (31,250) (31,250)
Interest on Stockholder notes for Stock 0 (10,577) 28,915
Reductions in Shareholder Notes Receivable 0 46,773 46,773
Purchase Treasury Stock (750) 0 (750)
Net Income (Loss) 0 0 (37,490)
--------- ------------------- ---------
Balance - December 31, 1999 $(88,572) $ (1,186,689) $434,681
========= =================== =========
5
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ESCO TRANSPORTATION CO.
Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
2000 1999
------------ -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $ 785,501 $ 644,711
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (136,295) 0
Purchase of Quantum Transportation (67,874) 0
Proceeds from Sale of Property and Equipment 0 43,542
Stockholder Advances (93,050) (102,981)
------------ ----------
Net Cash Provided (Used) in Investing Activities (297,219) (59,439)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Long-Term Debt (493,951) (503,145)
Purchase of Treasury Stock (750) (18,004)
------------ ----------
Net Cash Provided (Used) in Financing Activities (494,701) (521,149)
------------ ----------
Net Increase (Decrease) in Cash and Cash Equivalents (6,419) 64,123
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 109,929 25,833
------------ ----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 103,510 $ 89,956
============ ==========
Non - Cash Transactions:
Stock Issued to Acquire Quantum Transportation $ 477,000 $ 0
Stock Issued to Acquire Business 0 40,000
Stock Issued Under Management Incentive Agreement 0 570,001
Stock Issued to Employees 0 50,600
------------ ----------
Total Non-Cash Transactions $ 477,000 $ 660,601
============ ==========
6
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 2000 (Unaudited)
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, railroads, and
ports plus it operates a container yard in Memphis, Tennessee. This division
operates out of facilities in Houston, Texas; Ontario, California; Memphis,
Tennessee; Dallas, Texas; Minneapolis, Minnesota; and Stockton, California. 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 and has an expansion office in
Selma, Alabama which opened in May 2000. 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.
7
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 2000 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
C. Revenue Recognition
Revenue and direct costs are recognized when the shipment is completed.
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 three
months ended March 31, 2000.
Depletion of capitalized costs on producing properties is computed on a
property-by-property basis utilizing the unit-of-production method.
Depletion expense was $1,496 and $1,494 for the three months ended March
31, 2000 and 1999 respectively. The Company's total capitalized costs as of
March 31, 2000 and 1999 were $21,248 and $27,224 respectively.
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.
8
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 2000 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
F. Oil and Gas Properties (Continued)
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.
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 three
months ended March 31, 2000, 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 March 31, 2000 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.
9
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 2000 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
J. Fair Value of Financial Instruments (Continued)
----------------------------------------------------
At March 31, 2000, the Company had $1,501,595 in notes receivable from
stockholders. Management believes the fair value of the notes receivable
from the stockholders is less than its carrying value; however, the fair
value is not estimable.
Note 4 - Property and Equipment
- ------------------------------------
Property and equipment consists of the following:
Description 3/31/00 12/31/99
- ---------------------------------- ------------ ------------
Land $ 175,975 $ 175,975
Buildings and Improvements 13,554 13,554
Office Equipment 632,703 571,061
Communications Equipment 186,195 183,584
Furniture and Fixtures 46,216 32,699
Leasehold Improvements 44,690 0
Trucks, Tractors, and Trailers 9,841,305 9,827,467
Property Held Under Capital Leases 1,476,881 1,476,881
Yard Equipment 235,345 235,345
------------ ------------
12,652,864 12,516,566
Less Accumulated Depreciation (4,381,434) (3,980,000)
------------ ------------
$ 8,271,430 $ 8,536,566
============ ============
Note 5 - Long-Term Debt and Loans
- ---------------------------------------
The Company has loans from various banks and finance companies for the purchase
of transportation equipment including trucks and trailers, communication
equipment, leasehold improvements, and portable buildings. The Company's
long-term debt was issued to purchase property and equipment. The following is
a summary of the loan balances outstanding at March 31, 2000 and December 31,
1999.
March 31, 2000 December 31, 1999
---------------- -------------------
Notes payable to various banks and finance companies; payable in $ 4,711,702 $ 5,177,205
monthly installments totaling $202,312 including principal and
interest; bearing interest at rates ranging from 9.5% to 11.5%; secured
by transportation equipment purchased in conjunction with the
financing; guaranteed by a major stockholder. The notes mature at
varying dates from 2001 through 2004 and also a mortgage note
payable to a partnership; bearing interest at 8%; payable in monthly
installments of $1,722 including principal and interest; secured by
real estate; guaranteed by a major stockholder. The note matures in
2002.
---------------- -------------------
Less: Current Maturities (2,038,470) (2,038,470)
---------------- -------------------
Long Term Debt, Net of Current $ 2,673,232 $ 3,138,735
================ ===================
10
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 2000 (Unaudited)
Note 6 - Obligations Under Capital Leases
- -----------------------------------------------
The Company is lessee of trailers and communication equipment which are held
under capital leases expiring in various years. The assets and liabilities
under capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. Assets are amortized (or
depreciated) over the longer of the lease terms or their estimated productive
lives. Amortization (or depreciation) of assets under capital leases is
included in depreciation expense for 2000 and 1999. Following is a summary of
property held under capital leases.
3/31/00 12/31/99
------------ -------------
Transportation Equipment/Trailers $ 1,347,697 $ 1,347,697
Communications Equipment 75,250 75,250
Office Equipment 53,934 53,934
------------ -------------
$ 1,476,881 $ 1,476,881
============ =============
Interest rates on capitalized leases vary from 8.7% to 12.2% and are imputed
based upon the lower of the Company's incremental borrowing rate at the
inception of the lease or the lessor's implicit rate of return.
Note 7 - Amounts Due to Factor
- ------------------------------------
Pursuant to a factoring agreement, the Company factors all of its accounts
receivable under an agreement with Compass Bank doing business as Commercial
Billing Service. Interest is paid on the total outstanding balance at a rate of
12.5% per annum.
As of April 20, 2000, the Company renegotiated its agreement with the factoring
company (see Note P in the year-end audited financial statements for a
description of the revised agreement with the factoring company.) The revised
agreement is also accounted for as a secured borrowing rather than a sale of
receivables.
11
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 2000 (Unaudited)
Note 8 - Segment Information
- --------------------------------
The Company's operations are divided into three segments by type of operations
which are intermodal operations, over-the-road operations, and storage
operations. Intermodal operations consist of short-haul, drayage shipments
primarily from railroad ramps to customer docks and is operated out of various
company locations. Over-the-road operations represent long haul, door-to-door
deliveries for customers. Storage operations represent the Company's container
yard operated in Memphis, Tennessee. The following table presents 2000 segment
information:
Three Months Ended March 31, 2000
-------------------------------------------------
Depreciation
Cost of and Interest
Sales Sales Amortization Expense
----------- ---------- ------------- ---------
Intermodal $ 7,753,192 $5,694,155 $ 36,683 $ 250,236
Over-the-Road 3,679,758 2,730,163 373,439 145,027
Storage 366,360 0 26,617 0
Other 1,337 0 0 0
----------- ---------- ------------- ---------
$11,800,647 $8,424,318 $ 436,739 $ 395,263
=========== ========== ============= =========
Three Months Ended March 31, 2000
----------------------------------------------------
Additions to
Earnings Long-Term Long-Lived
(Loss) Assets Assets Total Assets
---------- ---------- ------------- -------------
Intermodal $ 15,351 $ 792,360 $ 85,625 $ 7,470,273
Over-the-Road (260,145) 7,321,108 50,073 9,482,575
Storage 205,972 157,962 0 532,962
Other 1,332 0 0 0
---------- ---------- ------------- -------------
$ (37,490) $8,271,430 $ 135,698 $ 17,485,810
========== ========== ============= =============
Three Months Ended March 31, 1999
-----------------------------------------------
Depreciation
Cost of and Interest
Sales Sales Amortization Expense
---------- ---------- ------------- ---------
Intermodal $4,261,419 $3,094,907 $ 49,779 $ 175,878
Over-the-Road 2,730,992 1,766,532 308,852 153,817
Storage 130,430 0 6,282 0
Other 1,171 0 0 0
---------- ---------- ------------- ---------
$7,124,012 $4,861,439 $ 364,913 $ 329,695
========== ========== ============= =========
12
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 2000 (Unaudited)
Note 8 - Segment Information (Continued)
- ---------------------------------------------
Three Months Ended March 31, 1999
---------------------------------------------------
Additions to
Earnings Long-Term Long-Lived
(Loss) Assets Assets Total Assets
---------- --------- ------------- -------------
Intermodal $ (24,163) 952,348 $ 107,111 $ 4,865,555
Over-the-Road (143,988) 6,537,671 11,886 7,980,771
Storage 27,233 272,684 0 403,113
Other 1,171 0 0 0
---------- --------- ------------- -------------
$(139,747) 7,762,703 $ 118,997 $ 13,249,439
========== ========= ============= =============
The segmented information is prepared under generally accepted accounting
principles. The amounts also incorporate the allocation of overhead costs based
on the number of loads on the various segments operated within the Company.
For the period ended March 31, 2000, all of the Company's operations are
conducted within the United States.
13
ITEM 2. Management's Discussion, Analysis, and Plan of Operation
OVERVIEW
- --------
The quarter ended March 31, 2000 was a progressive quarter for the Company. The
Company accomplished several milestones that management had been executing for
several months. In this quarter, management closed on the transaction to
acquire Quantum Transportation Company which expanded its operations to
Minneapolis, Minnesota and Ripon, California. During this quarter, management
also completed its 2000 five-year business plan and began implementing this plan
through the execution of its Year 2000 budget. As in the past, the budget for
2000 has been based upon individual terminal responsibility and each terminal
manager is in charge of their cost center with incentives for accomplishing the
goals for the year.
The Company finished the first quarter with a loss of $(37,490). This loss was
attributed to operations in the Company's over-the-road Springdale division and
management is further evaluating how to isolate and correct the issues
attributed to the loss. Management is evaluating the cost benefit of separating
this division into a separate subsidiary and poising it for sale or
restructuring. The other divisions and/or segments of the Company were
profitable or operated within budget constraints and management anticipates a
profitable operation during 2000 in accordance with its budgeted plan.
In addition to the first quarter of 2000, management for ESCO entered into a
management agreement with Kiser, Inc. (Kiser), a Mississippi corporation located
in Gulf Port, Mississippi and several related entities to manage Kiser and its
related companies for a limited period of time, the sole purpose of which is to
evaluate the feasibility of acquiring and completing an agreement and plan of
merger between Kiser and ESCO. Under this agreement, the Company assumed
responsibilities of various day to day operations but assumed no
responsibilities for liability of other obligations of Kiser and the related
companies. (Also see comments regarding this contract in "Subsequent Events.")
During the first quarter of 2000, management is also actively pursuing potential
investors to re-capitalize the Company. Management is seeking $5,000,000 in
additional equity and/or subordinated debt to help improve the working capital
ratio and debt-to-equity ratio.
OPERATIONS
- ----------
As stated above, the Company operated at a loss of $(37,490) for the first
quarter which, although is below budget, is a substantial improvement over the
1999 operations. Freight revenue exceeded budget by $927,000 or 8% and reflects
a 66% increase over the 1999 revenue. A substantial part of the increase
relates to revenues generated from the new Minneapolis, Minnesota and Ripon,
California offices acquired through Quantum plus the operation of the Company's
Fort Smith location which operated for a full quarter during the three months
ended March 31, 2000. Throughout the Company's operation, revenue has shown
strong growth through increased business in all regions.
14
ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued)
OPERATIONS (CONTINUED)
- -----------------------
The Company's cash flow during the first quarter continued to be limited and
100% of the Company's receivables were factored through Commercial Billing
Services and Compass Bank. During the first quarter of 2000, the Company
renegotiated its factoring agreement with the bank as stated in our annual audit
report. Subsequent to issuance of the report, management and the bank have
agreed to cap the line to $9,800,000 and the Company has been able to operate
within the limits of the line of credit provided by the bank.
The Company's operating profits increased from $185,000 in 1999 to $323,000 in
2000 for a 75% increase in profits before interest expense. Interest expense
increased by approximately 20% over the same period in 1999 primarily due to
increase in the factoring line and the reduction of long-term debt at lower
interest rates. Operating and administrative expenses increased by 53% from
1999 primarily attributable to the new location added during the first quarter.
However, as a percentage of revenue, operating and administrative costs
decreased from 24% to 22% for the same period in 1999.
During the first quarter, collections have continued to be a high priority and
management has implemented revised collection procedures to decentralize
collections from the corporate office to individual terminal offices.
Management anticipates this will facilitate collections and location of
paperwork and support needed by customers and expects this to improve
collections and reduce the total outstanding balance due to the factoring
company which will help reduce interest costs.
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 2000 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. Following the remediation phase, the
Company engages in testing of the applicable systems in order to verify Year
2000 compliance. The Company utilizes a variety of remediation and testing
methods in connection with its Year 2000 compliance efforts. 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.
15
ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued)
YEAR 2000 ISSUE (CONTINUED)
- ------------------------------
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 requires 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 three months ended March 31, 2000, the Company capitalized $29,310
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.
During the quarter ended March 31, 2000, 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
2000. 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.
16
ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued)
SAFE HARBOR
- ------------
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.
CORPORATE FILINGS
- ------------------
The Company filed an amendment to its Articles of Incorporation in January 2000
to clarify the authorized capital stock in the Articles; 20,000,000 shares of
common and 15,000,000 of preferred.
SUBSEQUENT EVENTS
- ------------------
Subsequent to March 31, 2000, the Company entered into an informal management
agreement with Fisher Trucking (Fisher) in Selma, Alabama, for the Company to
assist Fisher in managing its operations with the intent of acquisition during
2000. Management anticipates signing a letter of intent during the second
quarter if the due diligence is positive and will proceed to complete the
transaction.
As stated in the overview, the Company entered into a management agreement with
Kiser, Inc. and related entities for the purpose of managing Kiser with the
intent of evaluating the feasibility of acquiring Kiser in an agreement and plan
of merger transaction. Management determined the acquisition was not practical
for the Company at this time and, on May 23, 2000, terminated the Kiser
management agreement.
17
ITEM 2. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION (CONTINUED)
RELATED PARTY TRANSACTIONS
- ----------------------------
During the first quarter of 2000, key management personnel completed the terms
of their employment and/or management contracts providing for the vesting of
interest in certain ESCO shares previously issued to the personnel in accordance
with the employment agreements or contracts. This transaction was recorded as a
reduction in the notes receivable from these shareholders totaling $46,774.
18
PART II. OTHER INFORMATION
ITEM 1. Recent Developments in Legal Proceedings
The Company's three litigation matters were previously referenced in the Form
10-KSB dated December 31, 1999 and its statements are incorporated herein by
reference.
Subsequent to the issuance of the 10-KSB, ESCO Transportation and ESCO
Acquisition Corporation were involved in the following litigation:
Case No. A2401-200185; First Continental Leasing, a Division of BancorpSouth vs.
Kiser, Inc., ESCO Transportation Co. and ESCO Transportation Acquisition Corp.;
In the Circuit Court of Harrison County, Mississippi, First Judicial District.
First Continental Leasing is suing Kiser, Inc., ESCO Transportation Co.,
and ESCO Acquisition Corporation as a result of the management agreement
signed in March 2000. Management does not anticipate any liability related
to this litigation and expects a summary disposition on this case.
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
19
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
- -------------------------------- ----------------------------
Becky Clamp, CPA Date
Controller
20