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 September 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
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Commission file number: 0-2882
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ESCO TRANSPORTATION CO.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 55-0257510
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(State or other jurisdiction of (I.R.S. Employer Identification no.)
incorporation or organization)
4301 EASTPARK DRIVE
HOUSTON, TEXAS 77028
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(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 No X . Registrant is working
--- ---
diligently to become current in its filings.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No X . Registrant has not had a bankruptcy
---- -----
plan confirmed by a court as of the date of this filing hereof.
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 12,552,997
------------------------------ ----------
(Class) (Outstanding as of September 30, 2000)
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Statements of Income for the Three and Nine Months Ended
September 30, 2000 (Unaudited) and 1999 (Unaudited) 3
Balance Sheets for the Nine Months Ended September 30,
2000 (Unaudited) and for the Year Ended December 31, 1999
(Unaudited) 4
Statements of Cash Flows for the Nine Months Ended
September 30, 2000 (Unaudited) and 1999 (Unaudited) 5
Notes to the Financial Statements (Unaudited) 6-13
Item 2. Management's Discussion & Analysis of Financial Condition and 14-16
Results of Operations
PART II OTHER INFORMATION
Item 1. Recent Developments in Legal Proceedings 17-18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
ESCO TRANSPORTATION CO.
Statements of Income
For the Three and Nine Months Ended
September 30, 2000 and December 31, 1999
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
OPERATING REVENUE:
Freight Revenue $12,304,417 $ 8,778,050 $36,191,464 $24,294,211
Oil and Gas Revenue 2,660 1,022 5,380 3,156
------------ ------------ ------------ ------------
TOTAL OPERATING REVENUE 12,307,077 8,779,072 36,196,844 24,297,367
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of Freight Revenue 9,520,324 6,749,512 28,319,508 18,076,865
General Administrative Expenses 2,769,754 1,692,600 7,469,087 5,084,091
Depreciation and Depletion 103,488 72,325 301,250 192,599
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 12,393,566 8,514,437 36,089,845 23,353,555
------------ ------------ ------------ ------------
OPERATING INCOME (86,489) 264,635 106,999 943,812
------------ ------------
OTHER INCOME (EXPENSE):
Interest Income 10,990 12,477 34,592 25,467
Other Income (17,095) 0 2,015 15,016
Interest Expense (539,788) (371,930) (1,388,601) (1,040,789)
Gain (Loss) on Sale of Assets (236,449) 35,851 (227,221) 80,094
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE): (782,342) (323,602) (1,579,215) (920,212)
------------ ------------ ------------ ------------
INC. (LOSS) BEFORE REORG. ITEMS (868,831) (58,967) (1,472,216) 23,600
REORGANIZATION ITEMS:
Professional Fees 59,707 0 59,707 0
------------ ------------ ------------ ------------
NET INC. (LOSS) BEFORE TAXES (928,538) (58,967) (1,531,923) 23,600
INCOME TAX: 0 0 0 0
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (928,538) $ (58,967) $(1,531,923) $ 23,600
============ ============ ============ ============
Net Income (Loss) Per Share $ (0.072) $ (0.004) $ (0.113) $ 0.002
============ ============ ============ ============
Weighted Average Number of Shares Outstanding 12,932,997 14,179,112 13,613,970 14,179,112
See Notes to Unaudited Condensed Financial Statements
3
ESCO TRANSPORTATION CO.
Balance Sheets
For the Nine and Twelve Months Ended
September 30, 2000 and December 31, 1999
September 30, 2000 December 31, 1999
-------------------- -------------------
ASSETS (Unaudited) (Unaudited)
- ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 49,857 $ 109,929
Accounts Receivable, Net of Allowance for Bad Debts of
$781,087 in 2000 and $403,228 in 1999 7,444,590 6,172,164
Truck Maintenance Supplies 126,275 152,557
Employee Advances and Driver Loans 218,365 117,092
Notes Receivable - Employees, Current 96,363 241,830
Notes Receivable - Stockholders 396,593 217,109
Prepaid Expenses 377,712 134,046
Other Current Assets 152,102 26,085
-------------------- -------------------
TOTAL CURRENT ASSETS 8,861,857 7,170,812
-------------------- -------------------
PROPERTY AND EQUIPMENT:
Property and Equipment 11,369,217 12,516,566
Less Accumulated Depreciation (4,478,724) (3,980,000)
-------------------- -------------------
NET PROPERTY AND EQUIPMENT: 6,890,493 8,536,566
-------------------- -------------------
OTHER ASSETS:
Intangibles, Net of Accumulated Amortization 353,110 82,871
Notes Receivable - Employees, Non Current 10,804 0
Other Assets - Non Current 18,261 35,392
-------------------- -------------------
TOTAL OTHER ASSETS: 382,175 118,263
-------------------- -------------------
TOTAL ASSETS $ 16,134,525 $ 15,825,641
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable - Trade $ 2,290,949 $ 1,247,094
Bank Overdrafts 640,775 436,838
Accrued and Other Liabilities 1,461,463 980,700
Amounts Due Factor 8,551,843 6,944,085
Current Portion of Long-Term Debt 2,070,288 2,038,470
Current Portion of Obligations under Capital Lease 271,492 235,603
-------------------- -------------------
TOTAL CURRENT LIABILITIES 15,286,810 11,882,790
LONG-TERM DEBT:
Long-Term Debt, Net of Current Portion 1,352,774 3,138,735
Obligations under Capital Lease, Net of Current Portion 661,630 852,633
-------------------- -------------------
TOTAL LONG-TERM DEBT 2,014,404 3,991,368
LIABILITIES SUBJECT TO COMPROMISE: 0 0
-------------------- -------------------
TOTAL LIABILITIES 17,301,214 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; 12,820,517 and
14,084,017 Issued; 12,552,997 and 13,818,997 Outstanding in 2000 and 1999 1,577 1,560
Additional Paid-In Capital 1,562,316 1,625,765
Retained Earnings (Deficit) (1,928,308) (396,385)
-------------------- -------------------
(364,415) 1,230,940
Less Note Receivable from Stockholders (713,702) (1,191,635)
Less Treasury Stock, At Cost (88,572) (87,822)
-------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY (1,166,689) (48,517)
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,134,525 $ 15,825,641
==================== ===================
See Notes to Unaudited Condensed Financial Statements
4
ESCO TRANSPORTATION CO.
Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
2000 1999
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $ 56,344 $ 1,940,590
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (204,796) (2,274,883)
Purchase of Selma Receivables (15,629) 0
Purchase of Quantum Intangibles (67,874) 0
Shareholder Advance (203,687) (371,249)
Payments Received on Notes Receivable 45,578 0
Payments Received from Shareholders 3,900 0
Proceeds from Sale of Property and Equipment 454,006 867,326
------------ ------------
Net Cash Provided (Used) in Investing Activities 11,498 (1,778,806)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Payments on Long-Term Debt (1,789,268) (2,077,629)
Proceeds from Capital Leases 0 686,282
Payments on Capital Leases (184,715) (44,919)
Proceeds from Long-Term Debt 1,846,819 1,336,874
Purchase Treasury Stock (750) (34,007)
------------ ------------
Net Cash Provided (Used) by Financing Activities (127,914) (133,399)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (60,072) 28,385
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 109,929 25,833
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 49,857 $ 54,218
============ ============
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
------------ ------------
Total Non-Cash Transactions $ (93,001) $ 660,601
============ ============
See Notes to Unaudited Condensed Financial Statements
5
Item 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
September 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 - Chapter 11 Bankruptcy Filing
- -------------------------------------------
The Company had a going concern footnote to its financial statements as of
December 31, 1999. The Company had incurred net losses in 1999 and 1998 and had
a working capital deficit of $4.7 million and a deficit in the stockholders'
equity at December 31, 1999. This deficit position continued throughout the
first three quarters of 2000. Additionally, on April 20, 2000, Compass Bank
acknowledged that the Company was in default on its factoring agreement, but
subsequently agreed that the Company would have an extended deadline of
September 1, 2000 to comply with the terms set forth in this agreement.
Although the Company attempted to alleviate the conditions set forth in its
agreement with Compass Bank and although the Company's revenue has continued to
grow at a significant rate, a concurrent increase in interest and other expenses
(discussed at greater length in Management's Discussion, Analysis, and Plan of
Operation) promulgated the Company to file a voluntary petition on September 25,
2000 (the "Date of the Petition") under Chapter 11 of the Federal Bankruptcy
Code, the Southern District of Texas in re: 00-38785-H5-11; ESCO Transportation
Company. From and since the Date of Petition, the Company has maintained
possession of its property, and has continued to remain in control of its
ongoing business affairs as a Debtor-in-Possession pursuant to the provisions of
11 U.S.C. Sec.Sec. 1107 and 1108.
Note 3 - Summary of Significant Accounting Policies
- ----------------------------------------------------------
A. Correction in recording Drivers' Reimbursements
---------------------------------------------------
Drivers' reimbursements for such items as insurance, radios, pagers,
uniforms, and license fees had been booked in the past as Revenue. A
correction was made to book these items in Cost of Sales to offset the
associated expenses for all of 2000. The financial information for three
and nine months for 2000 and 1999 reflects this correction. For the three
months ended September 30, 2000 and 1999, revenue and cost of sales
decreased by $332,670 and $256,055 respectively. For the nine months ended
September 30, 2000 and 1999, revenue and cost of sales decreased by
$955,698 and $317,760 respectively. Item 1. Financial Statements
(Continued)
6
Item 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
September 30, 2000 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
B. Correction in recording Depreciation for Trucks and Trailers
-------------------------------------------------------------------
Depreciation for trucks and trailers had been booked in the past as an
operating expense under the title Depreciation and Depletion. A correction
was made to book depreciation on trucks and trailers in Cost of Sales. The
financial information for three and nine months for 2000 and 1999 reflects
this correction. For the three months ended September 30, 2000 and 1999,
cost of sales increased by $336,084 and $310,961 respectively. For the nine
months ended September 30, 2000 and 1999, costs of sales increased by
$1,067,931 and $923,999 respectively.
C. 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.
D. Revenue Recognition
--------------------
Revenue and direct costs are recognized when the shipment is completed.
E. 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 will be adjusted for the effects
of changes in tax laws and rates on the date of enactment. For the nine
months ended September 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.
7
Item 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
September 30, 2000 (Unaudited)
F. Net Income Per Share
-----------------------
Net income per common share is based on the weighted average number of
shares outstanding during the year.
The Company acquired Quantum Transportation in January, 2000 as disclosed
in Note P - Subsequent Events of the Company's December 31, 1999 Form
10KSB. 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 September 30, 2000,
an additional 3,816,000 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 since the Company is currently operating at a
loss.
8
Item 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
September 30, 2000 (Unaudited)
Note 4 - Amounts Due to Compass Bank
- -------------------------------------------
Pursuant to the Bankruptcy agreement, as of September 30, 2000, the Company owed
Compass Bank $8,551,843, which is secured by accounts receivable and all other
assets and as of the date of this filing the balance is approximately $8.2
million.
Note 5 - Cash and Cash Equivalents
- ----------------------------------------
Included in the totals for Cash and Cash Equivalents for September 30, 2000, is
a certificate of deposit in the amount of $11,326, which is pledged as a
security deposit with a vendor. This certificate of deposit was acquired in the
purchase of Quantum Transportation, Inc. on January 19, 2000.
Note 6 - 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 are 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 tables present 2000 and 1999
segment information:
9
Item 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
September 30, 2000 (Unaudited)
Note 6 - Segment Information (Continued)
- ---------------------------------------------
Three Months Ended September 30, 2000
----------------------------------------------------------
Earnings
Sales (Loss)
----------- ----------
Intermodal $ 8,211,199 $(139,590)
Over-the-Road 3,640,893 (545,629)
Storage 452,325 281,377
Other 2,660 (524,696)
----------- ----------
$12,307,077 $(928,538)
=========== ==========
Nine Months Ended September 30, 2000
----------------------------------------------------------
Earnings
Sales (Loss)
----------- ------------
Intermodal $22,805,357 $ (649,081)
Over-the-Road 12,166,682 (1,108,664)
Storage 1,219,425 750,785
Other 5,380 (524,963)
----------- ------------
$36,196,844 $(1,531,923)
=========== ============
Nine Months Ended September 30, 2000
----------------------------------------------------------
Additions to
Long-Term Long-Lived
Assets Assets Total Assets
---------- ------------- -------------
Intermodal $1,167,053 $ 75,747 $ 10,392,823
Over-the-Road 5,580,204 86,933 5,580,204
Storage 143,236 143,236
Other 18,262
---------- ------------- -------------
$6,890,493 $ 162,680 $ 16,134,525
========== ============= =============
10
Item 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
September 30, 2000 (Unaudited)
Note 6 - Segment Information (Continued)
- ---------------------------------------------
Three Months Ended September 30, 1999
----------------------------------------------------------
Earnings
Sales (Loss)
---------- ----------
Intermodal $5,165,810 $ 571,395
Over-the-Road 3,509,835 (741,945)
Storage 102,405 115,048
Other 1,022 (3,465)
---------- ----------
$8,779,072 $ (58,967)
========== ==========
Nine Months Ended September 30, 1999
----------------------------------------------------------
Earnings
Sales (Loss)
----------- ----------
Intermodal $14,356,306 $ 745,331
Over-the-Road 9,572,882 (891,670)
Storage 365,023 171,272
Other 3,156 (1,333)
----------- ----------
$24,297,367 $ 23,600
=========== ==========
Nine Months Ended September 30, 1999
----------------------------------------------------------
Total Net Additions to
Long-Term Long-Lived
Assets Assets Total Assets
----------- ------------- -------------
Intermodal $ 544,141 $ 258,184 $ 8,599,293
Over-the-Road 7,833,734 1,957,625 6,381,447
Storage 152,880 152,880
Other 18,261 18,261
----------- ------------- -------------
$ 8,549,016 $ 2,215,809 $ 15,151,881
=========== ============= =============
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 September 30, 2000, all of the Company's operations are
conducted within the United States.
11
Item 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
September 30, 2000 (Unaudited)
Note 7 - Going Concern
- --------------------------
The financial statements have been prepared assuming that ESCO Transportation
Co. will continue as a going concern. The Company incurred net losses for the
quarter and year-to-date ended at September 30, 2000 of $928,538 and $1,531,923
respectively. In 1999 and 1998, the Company had a working capital deficit of
approximately $4.7 million and had a deficit in stockholders' equity at December
31, 1999. On September 25, 2000 the Company filed for Chapter 11 Bankruptcy.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
The Company intends to file an Exit Plan with the Bankruptcy Court within 200
days from September 25th, 2000. The Company is currently operating under a Cash
Collateral Agreement agreed to by creditors and approved by the Court. (See
Note 10 - Subsequent Events)
Note 8 - 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.
12
Item 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Unaudited Condensed Financial Statements
September 30, 2000 (Unaudited)
Note 9 - Acquisitions
- ------------------------
None
Note 10 - Subsequent Events
- -------------------------------
The Gulfport, Selma, Ripon, and Savanna terminals were closed in January,
February, February, and March of 2001 respectively. A new intermodal terminal
was opened in Charlotte, North Carolina on February 14, 2001. The number of
trucks and trailers at the Springdale terminal has been reduced to decrease
operating costs and bring the over-the-road segment toward being profitable.
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred a net
loss of $1,531,923 for the nine months ended September 30, 2000, and has not yet
filed the bankruptcy plan. These factors, among others, raise substantial doubt
as to the Company's ability to continue as a going concern.
The Company's management intends to raise additional operating funds through
equity and/or debt offerings. However, there can be no assurance that
management will be successful in this endeavor.
13
Item 2. Management's Discussion & Analysis of Financial Condition and Results
of Operations
OVERVIEW
- --------
During the second and third quarters of 2000, the Company decided to streamline
its management configuration. During the second quarter the Company accepted the
resignations of its president, chief financial officer, secretary/treasurer and
a long time Board member in addition to other staff reductions. The Company has
used these resignations as an opportunity to revise officer positions and
realign and combine tasks and functions. This revised plan allows a cost
savings to the Company of over $500,000 on an annualized basis. After
considering its alternatives and reviewing the financial position with its CFO
and other advisors, the Board of Directors made the further determination that
the Company needed to work down its debt position and reorganize for its return
to profitability. The Company sought protection under Chapter 11 of the
Bankruptcy Code on September 25, 2000 due to its inability to make payments on
debt service for some of its equipment. The Company is currently selling and
offering for sale, certain non-essential equipment, specifically older model
trucks and trailers. The Company's sale of equipment has resulted in a
significant reduction in debt service and increased cash flow.
Streamlined management and restructured over-the-road operations during the
third quarter as well as in October and November of 2000 reduced operating
costs. Management's short-term plan is to reduce the over-the-road fleet,
replace outdated and deteriorating equipment with owner-operator managed
equipment, and redirect its over-the-road division into traffic lanes, which
increase average revenues per mile, and can generate profitable operations.
This reduction of capital equipment will lower debt service. Management has
continued to evaluate and improve its intermodal operations and its container
storage yard operations. 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. The Company finished the third
quarter of 2000 with a net loss of ($928,538) and a year-to-date net loss of
($1,531,923).
In the third quarter of 2000, management continued to work with Compass Bank on
its agreement to provide working capital for ESCO on an ongoing basis until
September 25, 2000 at which time the Company filed for Chapter 11 Bankruptcy.
The Company is currently operating as a Debtor-in-Possession. The Company is
presently operating under a Cash Collateral Agreement by and between the Company
and Compass Bank (hereinafter referred to as the "Agreement"). Pursuant to the
terms of the Agreement, Compass Bank continues to permit the Company the use of
pre-petition accounts receivable collections. Compass Bank is the Company's
largest creditor with an outstanding claim in the amount of approximately $8.2
million.
14
Item 2. Management's Discussion & Analysis of Financial Condition and Results
of Operations (Continued)
OVERVIEW (Continued)
- --------
The Company anticipates filing a plan of reorganization within 30 days from the
date of the filing of this 10-Q. As part of its plan, the Company intends to
continue to liquidate non-essential equipment and to continue to increase sales
through its intermodal division. The plan anticipates replacement financing of
the present Compass Bank indebtedness. A plan of reorganization is anticipated
to be filed in this matter in which the Company will propose a workout of its
present position and a return to profitability. Management believes that the
plan of reorganization should be confirmed by June of 2001.
OPERATIONS
- ----------
As stated above, the Company operated at a net loss of ($928,538) for the third
quarter of 2000. This amount includes a one-time loss of ($236,449) due to the
sale of under-utilized equipment. A comparison of three-month and nine month
figures for 2000 over 1999 reveals the following increases:
-------------------------------- -------------------- ------------------
Three Month Change Nine Month Change
-------------------------------- -------------------- ------------------
Revenue 40.2% 49.0%
-------------------------------- -------------------- ------------------
Cost of Freight Revenue 41.1% 56.7%
-------------------------------- -------------------- ------------------
General Administrative Expenses 63.6% 46.9%
-------------------------------- -------------------- ------------------
The Company's operating profits for nine months decreased from $943,812 in 1999
to $106,999 in 2000 before interest expense. Interest expense increased by
approximately 33.4% over the same period in 1999 primarily due to the increase
in the factoring line and reduction of long-term debt at lower interest rates.
SAFE HARBOR
- ------------
This report on Form 10-Q (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
15
Item 2. Management's Discussion & Analysis of Financial Condition and Results
of Operations (Continued)
SAFE HARBOR (Continued)
- ------------
as other statements, which include 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
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The Company filed an amendment to its Articles of Incorporation in January 2000
to clarify the authorized capital stock in the Articles to be 20,000,000 shares
of common and 15,000,000 of preferred.
SIGNIFICANT EVENTS
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As stated earlier, the Company filed for Chapter 11 Bankruptcy on September 25,
2000.
RELATED PARTY TRANSACTIONS
- ----------------------------
None
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PART II. OTHER INFORMATION
Item 1. Recent Developments in Legal Proceedings
As of the date of filing hereof, April 17, 2001, the Company is involved in the
following litigation:
Case No. EDCV 98-220 RT (VAPx); INTERCARGO INSURANCE CO. V. BURLINGTON NORTHERN
SANTA FE RAILROAD, ET AL.; In the U.S. District Court, Central District of
California.
Intercargo Insurance Company is suing multiple defendants because a load it
insured was misdelivered at the railyard to persons who stole the merchandise.
Defendant Burlington Northern & Santa Fe Railway has cross-claimed against
multiple other defendants, including the Company, for indemnity. The Company
never had custody or control of the stolen merchandise. The Company has
answered both Intercargo's claim and Burlington's cross-claim. The case is in
the discovery phase, after which the Company, seeking dismissal of the claims
against it, will likely file a motion for summary judgment. The Company seeks
its reasonable and necessary defense costs by asserting that the actions were
not brought with reasonable cause and in the good faith belief that there is a
justifiable controversy under the facts and law. The Company's management does
not believe that this litigation will have any material impact on the Company's
business. The Company had a formal motion cut off date of November 27, 2000, a
pre-trial conference set for December 11, 2000 and a trial date of January 16,
2001. However, these dates are on hold since the case has been stayed pending
resolution of the Company's Debtor-in-Possession bankruptcy filing.
No. 98-0840-1; PACIFIC BUSINESS CAPITAL CORP. V. ESCO TRANSPORTATION CO. AND
MICHAEL TILL, INDIVIDUALLY; In the Chancery Court of Shelby County, Tennessee
Pacific Business sued the Company and Mike Till in an attempt to enforce a
security interest it holds in some property of Intermodal Logistics Co. The
Company took over the operations of Intermodal, which is more fully described in
the 1997 10K previously filed with the SEC. The security interest granted
Pacific Business by Intermodal concerns chattel paper, mainly receivables and
right to receivables. The agreement between the Company and Intermodal
specifically excludes receivables due and owing prior to the date of the
agreement, and Intermodal retained all rights to those funds. It is the
Company's position and Mike Till's position that they have not violated any
security interest Pacific Business may have; the Company and Mike Till will seek
dismissal as expeditiously as possible. Discovery has been served on the
plaintiff in this matter and receipt of the responses is pending because of the
stay that will be in place pending resolution of the Company's
Debtor-in-Possession bankruptcy filing.
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 V. ESCO TRANSPORTATION CO. AND JOE
W. JONES
This case was pending against the Company as a result of a motor vehicle
accident, which occurred in 1999. The case resulted in injuries and a fatality.
This incident was settled by mediation on March 30, 2001. It fell within the
insurance coverage limits maintained by the Company.
17
Item 1. Recent Developments in Legal Proceedings (continued)
Case No. A2401-200185; FIRST CONTINENTAL LEASING, A DIVISION OF BANCORP
SOUTH 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., the Company and ESCO
Acquisition Corporation as a result of the management agreement executed in
March, 2000. The Company's management does not anticipate any liability related
to this litigation and expects a summary disposition in this matter after the
bankruptcy court agrees to the retention of counsel that the Company has
retained in this matter. This case will be stayed pending resolution of the
Company's Debtor-in-Possession bankruptcy filing.
Case No. RCV 27092; SEPULVEDA V. ESCO, ET AL., In the Superior Court of the
State of California for the County of San Bernardino.
Regina Sepulveda is a former cleaning person for the Company's leased premises
in California; she was allegedly injured when she was leaving the property when
a gate fell on her as she was closing the gate. Sepulveda has brought premises
liability claims against the Company, the owner of the property, and the
manufacturer/repairer of the gate in question. The Company has requested that
its insurance carrier manage the case and take over the defense of same. The
Company's management does not believe that this litigation will have any
material impact on the Company's business. The case has lagged in development
primarily because plaintiff's counsel has not prosecuted the case vigorously and
there is not a great deal of activity pending. Texas counsel will consult with
local counsel to determine whether a motion to dismiss the case for failure to
prosecute is in order. Additionally, this case will be stayed pending
resolution of the Company's Debtor-in-Possession bankruptcy filing.
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
The Registrant reports under this item information, not
previously reported in a report on Form 8-KA, that effective May
15, 2000, Edwis Selph, Jr. officially resigned as the
Registrant's Vice President, Secretary/Treasurer and as a Member
of the Board of Directors. On July 15, 2000 the Board of
Directors elected Edwis Selph, Sr. as President, Chief Executive
Officer and Secretary. On March 14, 2001, the Board of Directors
elected Ken Gregg, CPA to be the Registrant's Chief Financial
Officer and Vice President, Finance.
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Item 6. Exhibits and Reports of Form 8-K.
(a) Notification of Late Filing filed with the Securities and
Exchange Commission on November 15, 2000.
(b) Reports on Form 8-K. Notice of resignation of officers and
directors filed on July 6, 2000. Effective June 30, 2000, Robert
F. Darilek officially resigned as the Registrant's Chief
Financial Officer and Member of the Board of Directors of ESCO
Transportation Co. Effective June 23, 2000, Robert J. Weaver
officially resigned as President/COO and Member of the Board of
Directors of ESCO Transportation Co. Effective July 6, 2000,
Bernard Vlahakis officially resigned as a Member of the Board of
Directors of ESCO Transportation Co.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCO Transportation Co.
/s/ Edwis L. Selph, Sr. April 17, 2001
- ----------------------------------- ----------------------------
Edwis L. Selph, Sr. Date
President and Chairman of the Board
/s/ Ken Gregg April 17, 2001
- ----------------------------------- ----------------------------
Ken Gregg, CPA Date
CFO, VP of Finance
20