FORM 10-Q/A
AMENDMENT NUMBER 1
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 June 30, 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 12,550,497
------------------------------ ----------
(Class) (Outstanding as of June 30, 2000)
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on August 8, 2000 was approximately $1,380,554.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Balance Sheets for the Six Months Ended June 30,
2000 (unaudited) and for the Year Ended December 31, 1999 3
Statements of Income for the Three and Six Months Ended
June 30, 2000 (unaudited) and 1999 (unaudited) 4
Statements of Change in Stockholders' Equity (Deficit)
for the Six Months Ended June 30, 2000 (unaudited) 5
Statements of Cash Flows for the Six Months Ended
June 30, 2000 (unaudited) and 1999 (unaudited) 6
Notes to the Financial Statements (unaudited) 7 - 18
Item 2. Management's Discussion and Analysis 19
PART II OTHER INFORMATION
Item 1. Recent Developments in Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports in Form 8-K 23
Signatures 24
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ESCO TRANSPORTATION CO.
Balance Sheets
June 30, 2000 December 31, 1999
--------------- -------------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and Cash Equivalents $ 13,128 $ 109,929
Accounts Receivable, Net of Allowance for Bad Debts of
$829,280 in 2000 and $338,000 in 1999 8,873,184 6,172,164
Truck Maintenance Supplies 144,799 152,557
Employee Advances and Driver Loans 269,719 117,092
Notes Receivable - Employees, Current 90,642 241,830
Notes Receivable - Stockholders 383,338 217,109
Prepaid Expenses 197,516 134,046
Other Current Assets 130,425 26,085
--------------- -------------------
TOTAL CURRENT ASSETS 10,102,751 7,170,812
--------------- -------------------
PROPERTY AND EQUIPMENT
Property and Equipment 12,568,094 12,516,566
Less Accumulated Depreciation (4,701,850) (3,980,000)
--------------- -------------------
7,866,244 8,536,566
--------------- -------------------
OTHER ASSETS
Intangibles, Net of Accumulated Amortization 430,123 82,871
Notes Receivable - Employees, Non Current 30,506 0
Other Assets - Non Current 19,755 35,392
--------------- -------------------
480,384 118,263
--------------- -------------------
TOTAL ASSETS $ 18,449,379 $ 15,825,641
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable - Trade $ 1,262,702 $ 1,247,094
Bank Overdrafts 1,111,241 436,838
Accrued and Other Liabilities 1,401,686 980,700
Amounts Due Factor 9,524,542 6,944,085
Current Portion of Long-Term Debt 2,280,161 2,038,470
Current Portion of Obligations under Capital Lease 279,292 235,603
--------------- -------------------
TOTAL CURRENT LIABILITIES 15,859,624 11,882,790
LONG-TERM DEBT
Long-Term Debt, Net of Current Portion 2,097,245 3,138,735
Obligations under Capital Lease, Net of Current Portion 730,663 852,633
--------------- -------------------
18,687,532 15,874,158
--------------- -------------------
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 Par Value; 15,000,000 Shares Authorized;
None Issued Common Stock, $.001 Par Value;
20,000,000 Authorized; 12,818,017 and 14,084,017 Issued; 1,576 1,560
12,550,497 and 13,818,997 Outstanding in 2000 and 1999
Additional Paid-In Capital 1,550,041 1,625,765
Retained Earnings (Deficit) (999,771) (396,385)
--------------- -------------------
551,846 1,230,940
Less Note Receivable from Stockholders (701,427) (1,191,635)
Less Treasury Stock, At Cost (88,572) (87,822)
--------------- -------------------
TOTAL STOCKHOLDERS' EQUITY (238,153) (48,517)
--------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,449,379 $ 15,825,641
=============== ===================
See Notes to Unaudited Condensed Financial Statements.
3
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Statements of Income
For the Three and Six Months Ended
June 30, 2000 and 1999
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
2000 1999 2000 1999
---------------------- -------------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE:
Freight Revenue $ 12,710,765 $ 8,455,025 $24,510,075 $15,577,866
Oil and Gas Revenue 1,388 963 2,720 2,134
---------------------- -------------------- ------------ ------------
TOTAL REVENUE 12,712,153 8,455,988 24,512,795 15,580,000
---------------------- -------------------- ------------ ------------
EXPENSES:
Cost of Freight Revenue 9,524,948 5,914,582 17,949,266 10,776,020
General Administrative Expenses 2,894,034 1,678,890 5,463,629 3,391,490
Depreciation and Depletion 434,020 368,400 895,985 733,313
---------------------- -------------------- ------------ ------------
TOTAL EXPENSES 12,853,002 7,961,872 24,308,880 14,900,823
---------------------- -------------------- ------------ ------------
OPERATING INCOME (140,849) 494,116 203,915 679,177
OTHER INCOME (EXPENSE)
Interest Income 0 9,837 23,602 12,990
Other Income 5,597 6,289 19,109 15,016
Interest Expense (463,977) (339,163) (859,240) (668,858)
Gain (Loss) on Sale of Assets 11,844 51,237 9,228 44,244
---------------------- -------------------- ------------ ------------
(446,536) (271,800) (807,301) (596,608)
---------------------- -------------------- ------------ ------------
NET INC. (LOSS) BEFORE TAXES (587,385) 222,316 (603,386) 82,569
Income Tax 0 0 0 0
---------------------- -------------------- ------------ ------------
NET INCOME (LOSS) $ (587,385) $ 222,316 $ (603,386) $ 82,569
====================== ==================== ============ ============
Net Income (Loss) Per Share $ (0.047) $ 0.016 $ (0.046) $ 0.006
====================== ==================== ============ ============
Weighted Average Number of Shares Outstanding 12,550,497 14,179,112 13,247,456 13,682,013
See Notes to Unaudited Condensed Financial Statements.
4
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Statement of Stockholders' Equity
For the Six Months Ended June 30, 2000 (Unaudited)
Note
Retained Receivable
Additional Earnings From
Common Stock Paid-In Capital (Deficit) Treasury Stock Shareholder Total
----------------------- ----------- ---------- -------------------- ------------ ----------
Shares Amount Shares Amount
----------- ---------- --------- ---------
Balance at December 31, 1999 14,084,017 $ 1,560 $1,625,765 $(396,385) (265,020) $(87,822) $(1,191,635) $ (48,517)
Shares issued in
Quantum Acquisition 159,000 159 476,841 0 0 0 0 477,000
Management Incentive
Shares Returned (1,425,000) (143) (569,857) 0 0 0 570,000 0
Shareholder Notes
Receivable Interest 0 0 17,292 0 0 0 (17,292) 0
Advances to Stockholder -
Stock Purchase 0 0 0 0 0 0 (62,500) (62,500)
Purchase of Treasury Stock 0 0 0 0 (2,500) (750) 0 (750)
Net Income (Loss) 0 0 0 (603,386) 0 0 0 (603,386)
----------- ---------- ----------- ---------- --------- --------- ------------ ----------
Balance at June 30, 2000 12,818,017 $ 1,576 $1,550,041 $(999,771) (267,520) $(88,572) $ (701,427) $(238,153)
=========== ========== =========== ========== ========= ========= ============ ==========
See Notes to Unaudited Condensed Financial Statements.
5
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
2000 1999
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $ 1,184,088 $ 1,093,232
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (136,298) (136,194)
Purchase of Quantum Transportation (67,874) 0
Proceeds from Sale of Property and Equipment 0 270,547
------------ ------------
Net Cash Used in Investing Activities (204,172) (85,659)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Payments on Long-Term Debt (969,317) (1,093,650)
Proceeds from Capital Leases 0 53,934
Payments on Capital Leases (92,630) (12,711)
Stockholder Advance (113,042) (220,012)
Purchase Treasury Stock (750) (18,004)
------------ ------------
Net Cash Provided (Used) by Financing Activities (1,175,739) (1,070,431)
------------ ------------
Net Increase in Cash and Cash Equivalents (195,823) (62,858)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 109,929 25,833
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ (85,894) $ (37,025)
============ ============
Non Cash Transactions:
Stock issued to acquire business 0 40,000
Stock issued to acquire Quantum Transportation 477,000 0
Stock issued under management incentive agreements (570,001) 570,001
Stock issued to Employees 0 50,600
See Notes to Unaudited Condensed Financial Statements.
6
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 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. In January 2000, the Company incorporated ESCO Acquisition Corp.
to facilitate in the acquisition of newly acquired corporations. In January of
2000, ESCO acquired Quantum Transportation Company through ESCO Acquisition
Corp. and immediately subsequent to acquisition, has transferred all assets and
liabilities of Quantum to ESCO Transportation Company. Accordingly, the
accompanying financial statements include the activity of Quantum Transportation
subsequent to the date of acquisition.
ESCO Transportation maintains two divisions representing three business segments
with distinct transportation services offered by each. The Company's Intermodal
division primarily hauls container and piggyback shipments between shipping
locations, railroads, and ports (the intermodal segment) plus it operates a
container yard in Memphis, Tennessee (the storage segment). This division
operates out of facilities in Houston, Texas; Ontario, California; Memphis,
Tennessee; Dallas, Texas; Minneapolis, Minnesota; Fort Smith, Arkansas; and
Stockton, California. The Company also maintains an Over-The-Road division (OTR
segment) that performs long haul services for numerous customers within the
United States. The main office for this division is located in Springdale,
Arkansas with expansion offices in Selma, Alabama which opened in May 2000, and
Gulfport, Mississippi. 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.
7
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
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.
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.
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.
8
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
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 six
months ended June 30, 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 $2,988 and $2,992 for the six months ended June 30,
2000 and 1999 respectively. The Company's total capitalized costs as of
June 30, 2000 and 1999 were $19,754 and $28,717 respectively.
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 six months
ended June 30, 2000, net operating loss benefits were offset by a valuation
allowance. The valuation allowance did not change materially from the
balance at December 31, 1999.
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.
9
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
H. Net Income Per Share (Continued)
------------------------------------
The Company acquired Quantum Transportation in January 2000 as disclosed in
Note 12. The purchase price includes the options for the seller to receive
additional shares of stock with an expiration of six years from the
acquisition date if the shares of stock do not reach a benchmark price of
$3.00 per share. If these shares were converted as of June 30, 2000, an
additional 2,822,250 shares would be issued under this agreement. The
dilution effect on earnings per share for the additional shares issued is
not disclosed in the accompanying financial statements because they would
be anti-dilutive if reported.
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 June 30, 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.
At June 30, 2000, the Company had $1,084,765 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.
10
- ------
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 4 - Property and Equipment
- ------------------------------------
Property and equipment consists of the following:
Description 6/30/00 12/31/99
- ---------------------------------- ------------ ------------
Land $ 175,975 $ 175,975
Buildings and Improvements 13,554 13,554
Office Equipment 675,075 571,061
Communications Equipment 223,216 183,584
Furniture and Fixtures 46,216 32,699
Leasehold Improvements 38,853 0
Trucks, Tractors, and Trailers 9,683,594 9,827,467
Property Held Under Capital Leases 1,512,716 1,476,881
Yard Equipment 200,085 235,345
------------ ------------
12,568,094 12,516,566
Less Accumulated Depreciation (4,701,850) (3,980,000)
------------ ------------
$ 7,866,244 $ 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 June 30, 2000 and December 31,
1999.
June 30, 2000 December 31, 1999
=============== ===================
Notes payable to various banks and finance companies; $ 4,377,406 $ 5,177,205
payable in monthly installments totaling $202,141
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; 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 (2,280,161) (2,038,470)
--------------- -------------------
Long Term Debt, Net of Current $ 2,097,245 $ 3,138,735
=============== ===================
11
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 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.
6/30/00 12/31/99
---------- ----------
Transportation Equipment/Trailers $1,383,532 $1,347,697
Communications Equipment 75,250 75,250
Office Equipment 53,934 53,934
---------- ----------
$1,512,716 $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. The monthly
installments on these capital leases total $27,925 per month including principal
and interest.
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.
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:
12
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 8 - Segment Information (Continued)
- ---------------------------------------------
Three Months Ended June 30, 2000
--------------------------------------------------
Depreciation
Cost of and Interest
Sales Sales Amortization Expense
----------- ----------- ----------- -----------
Intermodal $ 7,718,032 $5,836,944 $ 95,679 $ 330,299
Over-the-Road 4,591,993 3,688,004 342,784 133,678
Storage 400,740 0 13,557 0
Other 1,388 0 0 0
----------- ----------- ----------- -----------
$12,712,153 $9,524,948 $ 434,020 $ 463,977
=========== =========== =========== ===========
Three Months
Ended June 30,
2000
----------------
Earnings (Loss)
----------------
Intermodal $ (573,527)
Over-the-Road (278,679)
Storage 263,433
Other 1,388
----------------
$ (587,385)
================
Six Months Ended June 30, 2000
--------------------------------------------------------
Depreciation
Cost of And Interest
Sales Sales Amortization Expense
-------------- ----------- ------------- ------------
Intermodal $ 15,471,224 $11,531,099 $ 157,588 $ (580,536)
Over-the-Road 8,271,751 6,418,167 698,223 (278,704)
Storage 767,100 0 40,174 0
Other 2,720 0 0 0
-------------- ----------- ------------- ------------
$ 24,512,795 $17,949,266 $ 895,985 $ (859,240)
============== =========== ============= ============
Six Months Ended June 30, 2000
--------------------------------------------------------
Additions to
Earnings Long-Term Long-Lived
(Loss) Assets Assets Total Assets
-------------- ----------- ------------- ------------
Intermodal $ (536,687) $ 1,178,154 $ 85,625 $ 8,306,185
Over-the-Road (538,827) 6,530,128 50,673 9,135,232
Storage 469,408 157,962 0 1,007,962
Other 2,720 0 0 0
-------------- ----------- ------------- ------------
$ (603,386) $ 7,866,244 $ 136,298 $18,449,379
============== =========== ============= ============
13
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 8 - Segment Information (Continued)
- ---------------------------------------------
Three Months Ended June 30, 1999
--------------------------------------------------
Depreciation
Cost of And Interest
Sales Sales Amortization Expense
------------- ---------- ------------- --------
Intermodal $ 4,990,782 $3,797,990 $ 53,246 $184,729
Over-the-Road 3,332,055 2,116,592 308,872 154,434
Storage 132,188 0 6,282 0
Other 963 0 0 0
------------- ---------- ------------- --------
$ 8,455,988 $5,914,582 $ 368,400 $339,663
============= ========== ============= ========
Three Months
Ended June 30,
1999
================
Earnings (Loss)
----------------
Intermodal $ 198,099
Over-the-Road (5,737)
Storage 28,991
Other 963
----------------
$ 222,316
================
Six Months Ended June 30, 1999
---------------------------------------------------
Depreciation
Cost of And Interest
Sales Sales Amortization Expense
------------- ----------- ------------- --------
$ 9,252,201 $ 6,892,897 $ 103,025 $360,607
Intermodal
Over-the-Road 6,063,047 3,883,123 617,724 308,251
Storage 262,618 0 12,564 0
Other 2,134 0 0 0
------------- ----------- ------------- --------
$ 15,580,000 $10,776,020 $ 733,313 $668,858
============= =========== ============= ========
Six Months Ended June 30, 1999
------------------------------------------------------
Additions to
Earnings Long-Term Long-Lived
(Loss) Assets Assets Total Assets
-------------- ---------- ----------- -------------
Intermodal $ 173,936 $ 827,615 $ 0 $ 4,669,221
Over-the-Road (149,725) 6,320,867 0 8,068,034
Storage 56,224 225,819 0 756,249
Other 2,134 0 0 0
-------------- ---------- ----------- -------------
$ 82,569 $7,374,302 $ 0 $ 13,493,505
============== ========== =========== =============
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 June 30, 2000, all of the Company's operations are
conducted within the United States.
14
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 9 - Going Concern
- --------------------------
The financial statements have been prepared assuming that ESCO Transportation
Co. will continue as a going concern. The Company incurred net losses in 1999
and 1998, had a working capital deficit of approximately $4.7 million and had a
deficit in stockholders' equity at December 31, 1999. On April 20, 2000,
Compass Bank acknowledged that the Company was in default on its factoring
agreement. Compass Bank agreed to forbear this default subject to the
conditions described in Note P to the December 31, 1999 financial statements.
There is no certainty that the Company will be able to meet these conditions.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties. (Also see Note 13.)
Management has implemented plans to address the following issues over the
upcoming year. Management is addressing its historical losses with the
preparation and implementation of a revised operational plan and budget which
includes profitability for each division during 2000 and a reduction of the
Company's over-the-road fleet. The plan includes the continued implementation
of budgetary controls and cost control measures in all areas of operation.
Management has begun to update its accounting and dispatch system to a new
platform which should further reduce billing errors, increase cost control in
the over-the-road division, and provide better profitability in the intermodal
division. Management is also pursuing outside capital sources to provide
additional working capital for the Company. Management is working with Compass
Bank to ensure they continue to provide needed working capital for Company
operations through December 31, 2000. Continued funding is subject to the
conditions explained in Note P to the December 31, 1999 financial statements.
Note 10 - Recent Pronouncements
- -----------------------------------
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulleting No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. In June 2000,
the SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), Amendment: Revenue
Recognition in Financial Statements. SAB 101B delays the implementation date of
SAB 101 for registrants with fiscal years that begin between December 16, 1999
and March 15, 2000. The Company will adopt SAB 101 as required in the fourth
quarter of 2000 and is evaluating the effect that such adoption may have on its
consolidated results of operations and financial position.
Note 11 - Related Party Transactions
- -----------------------------------------
During the quarter ended June 30, 2000, the Company paid $31,208 to a former
spouse of the Chief Executive Officer and majority stockholder of the Company in
conjunction with a stock purchase agreement between the former spouse and the
majority stockholder of the Company.
15
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 11 - Related Party Transactions (Continued)
- ------------------------------------------------------
During the quarter ended June 30, 2000, the shares previously issued under a
management incentive agreement for the former president and chief financial
officer were returned to the Company and canceled. The accompanying financial
statements reflect the reduction of the notes receivable and reduction of the
additional paid-in capital and common stock resulting from this transaction.
At June 30, 2000, the Company had pledged $100,000 of cash accounts as security
for a personal note payable to a majority stockholder. Subsequent to June 30,
2000, the cash security was offset against a personal loan of the stockholder
and is reported as a cash advance in the accompanying financial statements.
Note 12 - Acquisitions
- -------------------------
QUANTUM
On January 19, 2000, the Company acquired 100% of the outstanding stock of
Quantum Transportation, Inc., a Minnesota corporation, in a purchase transaction
valued at $530,000. The acquisition was completed through a combination of
159,000 shares of stock at a $3.00 per share benchmark price and $53,000 in cash
in a merger transaction. This merger was completed through a newly formed,
wholly owned subsidiary named ESCO Acquisition Corp. The accompanying financial
statements include the results of operations of Quantum Transportation from
January 19, 2000, the date of acquisition. The merger agreement provides for
the issuance of additional cash or Company stock if the market price of ESCO
stock does not reach the $3.00 benchmark price during a three-year period from
the date of acquisition. If the stock were to be converted as of June 30, 2000,
the additional shares of stock to be issued total 2,822,250 shares. The
purchase transaction resulted in the recording of goodwill totaling $368,659
which is amortized over a sixty month period and a covenant not to compete
valued at $53,000 which is amortized over the life of the non-compete period,
which is thirty-six (36) months.
The following represents 1999 proforma information for the three month period
ended June 30, 1999 as if the Quantum transaction had occurred at that date.
Income before Net Income
Revenue extraordinary items (Loss) Net Earnings per share
- ---------- -------------------- ------------------ -----------------------
9,278,427 $ 251,619 $ 251,619 $ .017
16
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 12 - Acquisitions (Continued)
- --------------------------------------
FISHER TRUCKING
During the quarter ended June 30, 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. Effective May 1, 2000, management has entered into an
informal agreement with Fisher to acquire its operations. The agreement
provides for ESCO to lease equipment from Fisher through the term of the
outstanding debt held by Fisher against the equipment. Upon the completion of
the lease, the equipment will transfer to ESCO. ESCO assumed all operations of
Fisher from May 1, 2000 forward. All assets and liabilities of Fisher prior to
May 1, 2000 remain with Fisher Trucking, Inc.
A major stockholder of ESCO has also agreed to contribute 100,000 shares of
personal ESCO stock as additional compensation to consummate this transaction.
As of June 30, 2000, these shares have not been transferred to Fisher. ESCO has
paid no cash to Fisher as part of the purchase price for this transaction.
KISER, INC.
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.
As part of the original management agreement with Kiser, ESCO agreed to finance
$457,256 of Kiser net trade accounts receivable which were transferred to ESCO.
The cash collected for a portion of these receivables was not forwarded to ESCO
as agreed and during the quarter ended June 30, 2000, Kiser filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. The Company is attempting to
collect the amounts due from Kiser. During the quarter ended June 30, 2000,
ESCO provided an allowance of $354,627 for possible losses related to this
transaction.
17
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
June 30, 2000 (Unaudited)
Note 13 - Subsequent Events
- -------------------------------
As described in Note P in the December 31, 1999 financial statements, the
Company was to have signed confidentiality agreements with at least five serious
or potential investors or signed a letter of intent to propose investment of an
additional $5,000,000 in equity or subordinated debt by July 1, 2000, and and
other conditions imposed by Compass Bank pursuant to the terms of the April 20,
2000 Agreement. A number of these terms have not been met by the Company and
the Company is presently working with Compass Bank to resolve any outstanding
issues to its satisfaction. Compass has extended the deadline referred to in
the agreement until September 1, 2000.
18
ITEM 2. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION
OVERVIEW
- --------
The quarter ended June 30, 2000 was a period of repositioning for ESCO and
management of the Company. During this period, ESCO's president, Robert J.
Weaver, and its Chief Financial Officer, Robert F. Darilek, resigned to pursue
other interests. In addition, a board member Bernard Vlahakis also resigned
effective July 6, 2000. ESCO's management has used these resignations as an
opportunity to revise its operating plan for the second half of the 2000 fiscal
year. The revised plan includes additional reductions of top management staff
which equates to a total cost savings of approximately $600,000 on an annualized
basis. Management has also taken steps during the second quarter and the months
of July and August to revise its 2000 budget and implement changes which are
needed in the over-the-road division to make it a profitable operation. ESCO
has historically operated profitably in the intermodal division before one-time
adjustments but it has also shown losses historically in the over-the-road
division. Management's short-term plan is to reduce the over-the-road fleet,
replace outdated and deteriorating equipment and redirect its over-the-road
division into traffic lanes which only produce revenues per mile which can
generate profitable operations in this division. Management has continued to
evaluate and improve its intermodal operations and its storage and container
yard operations. These divisions continued to show strong profits before
one-time adjustments and are expected to continue with profitability through the
end of 2000.
The Company finished the second quarter with a loss of $(587,385) or 4.7 cents
per share and a year-to-date loss of $(603,386). The profitable operations
before one-time adjustments of the Company's intermodal division (which combines
the intermodal and storage segments) were offset by losses of the Springdale
division as detailed in the segment reporting in our quarterly financial
statements. In this quarter, management has also elected to record substantial
one-time accounts receivable write-offs in the intermodal division related to
potentially uncollectable receivables which were outstanding at June 30, 2000.
The most significant portion of this write-off relates to the Kiser, Inc.
adjustment as discussed in Note 12 to the financial statements. In addition,
the Company has provided for potential write-offs in the intermodal division for
advances made to former employees or existing employees which may be deemed
uncollectable and has accrued for the assessment of prior-year payroll taxes
assessed against the Company during the three-month period ended June 30, 2000,
but relates to prior years.
In addition, in the second quarter of 2000, management has continued to work
with Compass Bank in its agreement to provide working capital for ESCO on an
ongoing basis. Both ESCO and Compass are generating a team effort to provide
short-term capital to ESCO during this period of repositioning.
During the second quarter of 2000, management continues to actively pursue
potential investors to re-capitalize the Company. Management continues to seek
additional equity and/or subordinated debt to help improve the working capital
ratio and debt-to-equity ratio.
19
ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued)
OPERATIONS
- ----------
As stated above, the Company operated at a loss of $(587,385) for the second
quarter which is substantially below budget but is an improvement over the 1999
operations when the one-time adjustments are removed. Freight revenue has
exceeded budget by approximately $1,103,000 or 4.7% of budget and reflects a 67%
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 June
30, 2000. In addition, revenues for the quarter were increased resulting from
the Selma, Alabama operation. The Company's intermodal operations also
experienced strong internal growth through increased business in all regions and
divisions of the Company.
The Company's cash flow during the second quarter continued to be limited and
100% of the Company's receivables were factored through Commercial Billing
Services and Compass Bank. During the second quarter of 2000, the Company
continued to operate under its renegotiated factoring agreement with the bank as
referred to in our annual audited financial statement. Subsequent to June 30,
2000, management and the bank have agreed to reduce the cap on the line to $9.5
million 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 decreased from $494,116 in 1999 to $(140,849) in
2000 before interest expense. Interest expense increased by approximately 37%
over the same period in 1999 primarily due to the increase in the factoring
line, reduction of long-term debt at lower interest rates, and the cost of bank
fees associated with the Company's forbearance agreement. Operating and
administrative expenses increased by 72% from 1999 primarily attributable to the
new locations in Minneapolis, Minnesota; Ripon, California; and Fort Smith,
Arkansas and Selma, Alabama added during the first and second quarters. As a
percentage of revenue, operating and administrative costs increased from 20% in
1999 to 23% in 2000.
During the quarter, collections improved substantially as management began
operating under its revised collection procedures which included decentralizing
collection efforts from the corporate office to individual terminal offices.
This change has facilitated the Company's collections process and has improve
the processing of paperwork and the support needed by the customers prior to
payment. These collection efforts are part of the steps which have attributed
to the Company's ability to operate under its reduced credit line at Compass
Bank.
YEAR 2000 ISSUE
- -----------------
During the quarter ended June 30, 2000, the Company continued to implement its
Year 2000 plan which addresses the issues associated with Year 2000 processing
problems and the Company's computer programs. The progress made was in
accordance with the plan, including progress on implementation of a new system
which has gone online for one division in June 2000 and is expected to go online
in all other divisions on or before December 2000. There is 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.
20
ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued)
YEAR 2000 ISSUE (CONTINUED)
- ------------------------------
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.
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.
21
ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued)
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.
SIGNIFICANT EVENTS
- -------------------
As stated in the overview, during the quarter ended June 30, 2000, the Company's
President/Chief Operating Officer and Chief Financial Officer resigned to pursue
other interests. This significant management change has been accepted by the
remaining management of ESCO as a substantial opportunity to improve on the
changes that have been made during the past year and a half and use those
efforts as a means of turning ESCO's operations into profitable operations. The
substantial changes in administrative costs will allow ESCO additional
flexibility to go forward with its remaining management team. The
responsibilities of the President and Chief Executive Officer were resumed by
Edwis Selph, Sr. and he continues to work with prior management to ensure a
smooth transition and improved operations for the company as a whole.
Management sees this significant change as a positive step towards improved
Company operations.
In addition, the Executive Vice President and Corporate Secretary also resigned
in June, 2000.
RELATED PARTY TRANSACTIONS
- ----------------------------
During the quarter ended June 30, 2000, the Company paid $31,208 to a former
spouse of the Chief Executive Officer and majority stockholder of the Company in
conjunction with a stock purchase agreement between the family member and the
majority stockholder of the Company.
During the quarter ended June 30, 2000, the shares previously issued under a
management incentive agreement for the President/Chief Operating Office and
Chief Financial Officer were returned to the Company and canceled. The
accompanying financial statements reflect the reduction of the notes receivable
and reduction of the additional paid-in capital and common stock resulting from
this transaction.
Subsequent to the quarter ended June 30, 2000, the Company offset cash which had
been pledged as security for a personal note payable to a bank by a majority
stockholder. The transaction was reported as a cash advance in the
accompanying financial statements.
22
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.
Case No. USDC LR-C-99-807; Jackie Brown, individually and as administrator of
the estate of Katrina Brown, deceased, and as husband of Nancy K. Brown,
individually, and Chris Brown, individually versus ESCO Transportation Co. and
Joe W. Jones.
This case results from a motor vehicle accident which occurred in 1999. The
case resulted in injuries and a fatality. Management is consulting with
counsel but is of the opinion that it can be concluded satisfactorily. The
incident falls within the insurance coverage maintained by the Company.
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 - Filed July 6, 2000 regarding the
resignation of Robert J. Weaver, President and Chief Operating
Officer; Robert F. Darilek, Chief Financial Officer; and Bernard
Vlahakis, Board Member.
23
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
______________________________ _____________________________
Becky Clamp, CPA Date
Controller
24