FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-2882
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ESCO TRANSPORTATION CO.
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(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)
6505 HOMESTEAD
HOUSTON, TEXAS 77028
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 635-1008
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Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $ .001 par value per share
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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 .(1)
--- ---
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 12,477,612
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(Class) (Outstanding as of March 31, 1998)
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on March 31, 1998 was approximately $4,117,612.
(1) Registrant is herewith contemporaneously with this filing now current in all
reports required to be filed.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
------
Balance Sheets for the Three Months Ended March 31,
1998 (unaudited) and for the Year Ended December 31, 1997 (audited) 3
Statements of Income for the Three Months Ended
March 31, 1998 (unaudited) and 1997 (unaudited) 4
Statements of Stockholders' Equity for the Three Months
Ended March 31, 1998 (unaudited)
5
Statements of Cash Flows for the Three Months Ended
March 31, 1998 (unaudited) and 1997 (unaudited) 6
Notes to the Financial Statements (unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1. Recent Developments in Legal Proceedings 13
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports in Form 8-K 14
Signatures 15
ESCO TRANSPORTATION CO.
Balance Sheets
March 31, 1998 December 31, 1997
---------------- -------------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and Cash Equivalents $ 162,955 $ 22,678
Accounts Receivable, Net of Allowance for
Bad Debts of $481,108 in 1997 and
$248,796 in 1998 2,532,396 2,282,893
Truck Maintenance Supplies 15,328 0
Notes Receivable - Stockholders 75,533 20,000
Prepaid Expenses - Current 149,823 36,597
Other Current Assets 23,714 204,460
---------------- -------------------
TOTAL CURRENT ASSETS 2,959,749 2,566,628
---------------- -------------------
PROPERTY AND EQUIPMENT
Property and Equipment 10,636,759 10,611,537
Less Accumulated Depreciation (1,848,958) (1,511,048)
---------------- -------------------
8,787,801 9,100,489
---------------- -------------------
OTHER ASSETS
Prepaid Insurance - Net of Current Portion 91,948 101,097
Other Assets - Non Current 37,463 34,692
---------------- -------------------
129,411 135,789
---------------- -------------------
TOTAL ASSETS $ 11,876,961 $ 11,802,906
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable to Stockholders $ 0 $ 70,319
Accounts Payable - Trade 572,125 375,213
Bank Overdrafts 279,249 280,715
Accrued and Other Liabilities 495,377 422,878
Amounts Due Factor 1,894,722 1,262,094
Current Portion of Long-Term Debt 1,807,738 1,807,738
---------------- -------------------
TOTAL CURRENT LIABILITIES 5,049,211 4,218,957
---------------- -------------------
LONG-TERM DEBT - NET OF CURRENT PORTION 6,194,784 6,645,188
DEFERRED INCOME TAXES 0 0
COMMITMENTS 0 0
STOCKHOLDERS' EQUITY
Common Stock, $.0001 Par Value; 20,000,000
Shares Authorized; 12,176,760 Shares
Issued and Outstanding in 1997 and
12,477,612 in 1998 1,519 1,218
Additional Paid-In Capital 910,956 863,818
Retained Earnings (Deficit) (275,509) 77,725
---------------- -------------------
636,966 942,761
Less Treasury Stock, At Cost (4,000) (4,000)
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TOTAL STOCKHOLDERS' EQUITY 632,966 938,761
---------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,876,961 $ 11,802,906
================ ===================
3
ESCO TRANSPORTATION CO.
Statements of Income
For the Three Months Ended March 31, 1998 and 1997
1998 1997
------------ ------------
(Unaudited) (Unaudited)
REVENUE:
Freight Revenue $ 5,819,735 $ 5,082,331
Oil and Gas Revenue 1,464 2,566
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TOTAL REVENUE 5,821,199 5,084,897
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EXPENSES:
Cost of Freight Revenue 4,265,291 3,427,112
General Administrative Expenses 1,296,091 1,329,602
Depreciation and Depletion 337,909 173,913
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TOTAL EXPENSES 5,899,291 4,930,627
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OPERATING INCOME (78,092) 154,270
OTHER INCOME (EXPENSE)
Interest Income 8 786
Other Income 3,000 0
Interest Expense (278,293) (112,825)
Gain (Loss) on Sale of Assets 150 0
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(275,135) (112,039)
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NET INCOME (LOSS) BEFORE INCOME TAXES (353,227) 42,231
Income Tax 0 (6,334)
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NET INCOME (LOSS) $ (353,227) $ 35,897
============ ============
Net Income (Loss) Per Share $ (.028) $ .003
============ ============
Weighted Average Number of Shares Outstanding 12,477,612 12,176,760
4
ESCO TRANSPORTATION CO.
Statements of Stockholders' Equity
For the Three Months Ended March 31, 1998 (Unaudited)
Additional Retained
Paid-In Earnings Treasury
Common Stock Capital (Deficit) Stock Total
--------------------------- ---------- ---------- ---------- --------
Shares Amount
------------ -------------
Balance at December 31, 1997 12,176,760 $ 1,218 $ 863,818 $ 77,725 $(4,000) $ 938,761
Correction 174,352 174 (174) 0 0 0
Employee Stock Bonus 126,500 127 47,312 0 0 47,439
Net (Loss) 0 0 0 (353,234) 0 (353,234)
------------ ------------- ---------- ---------- -------- ----------
Balance at March 31, 1998 12,477,612 $ 1,519 $ 910,956 $(275,509) $(4,000) $ 632,966
============ ============= ========== ========== ======== ==========
5
ESCO TRANSPORTATION CO.
Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997
1998 1997
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $ 725,705 $ (148,303)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (25,222) (1,119,939)
Other (1,093) (81)
------------ ------------
Net Cash Used in Investing Activities (26,315) (1,120,020)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Payments on Short-Term Debt (64,709) 8,254
Net Payments on Long-Term Debt (494,404) 801,802
Sale of Stock 0 500,000
------------ ------------
Net Cash Provided (Used) by Financing (559,113) 1,310,056
Activities ------------ ------------
Net Increase in Cash and Cash Equivalents 140,277 41,733
CASH AND CASH EQUIVALENTS, AT BEGINNING OF 22,678 20,450
YEAR ------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 162,955 $ 62,183
============ ============
6
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 1998 (Unaudited)
Note 1 - Interim Financial Statements
- ------------------------------------------
The accompanying unaudited financial statements of ESCO Transportation Co., (the
"Company") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been condensed
or omitted pursuant to those rules and regulations. However, the Company
believes the disclosures contained herein are adequate to make the information
presented not misleading. The financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position and
results of operations.
Note 2 - Organization
- ------------------------
The Company was incorporated under the name of Power Oil Company in 1916 in West
Virginia. In 1992, the Company was reincorporated as a Delaware corporation.
The Company changed its name from "Power Oil Company to "ESCO Transportation
Co." in 1994.
ESCO Transportation maintains two divisions with distinct transportation
services offered by each. The Company's Intermodal division primarily hauls
container and piggyback shipments between shipping locations and railroads or
ports. This division operates out of facilities in Houston, Texas; Ontario,
California; Memphis, Tennessee; and Dallas, Texas. The Company also maintains
an Over-The-Road division that performs long haul services for numerous
customers within the United States. The main office for this division is
located in Springdale, Arkansas. The Company's corporate office is located in
Houston, Texas.
Note 3 - Summary of Significant Accounting Policies
- ----------------------------------------------------------
A. Basis of Accounting
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Income and expenses are recorded on the accrual method of accounting for
financial and federal income tax reporting purposes.
B. Use of Estimates
------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from these estimates. Management believes that the
estimates are reasonable.
C. Revenue Recognition
--------------------
Revenue and direct costs are recognized when the shipment is completed.
7
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 1998 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
D. Cash and Cash Equivalents
----------------------------
For purposes of the statements of cash flows, the Company considers all
cash on hand, cash in bank (demand deposits), savings accounts, cash held
in brokerage accounts and highly liquid debt instruments purchased with a
maturity of three months or less to be cash and cash equivalents.
E. Property and Equipment
------------------------
Property and equipment are carried at cost. Depreciation for financial
reporting purposes has been computed on the straight-line method over the
estimated useful lives of the assets which range from three to twenty
years.
Accelerated methods of depreciation are used for computation of
depreciation expense for income tax reporting purposes.
F. Oil and Gas Properties
-------------------------
The Company accounts for its oil and gas exploration and development
activities using the successful efforts method. Under this method of
accounting, exploratory drilling costs which result in the discovery of
proved reserves are capitalized. All other exploratory costs, including
geological and geophysical costs, are expensed when incurred. Development
costs, including development of dry holes, are capitalized when incurred.
The Company incurred no exploration and development costs during the three
months ended March 31, 1998.
Depletion of capitalized costs on producing properties is computed on a
property-by-property basis utilizing the unit-of-production method.
Depletion expense was $1,496 for 1997 and $1,494 for 1998.
Lease acquisition costs are capitalized when incurred. Leasehold
improvements are recognized through a charge to operations if the lease
expires or management decides to abandon the Company's interest.
When assets are retired, abandoned or otherwise disposed of, the related
costs and accumulated depreciation are removed from the accounts, and gain
or loss is included in income.
8
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 1998 (Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
- -----------------------------------------------------------------------
G. Income Taxes
-------------
The Company uses the liability method of accounting for income taxes under
which deferred tax assets and liabilities are recognized for deductible
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. For the three
months ended March 31, 1998, net operating loss benefits were offset by a
valuation allowance.
H. Net Income Per Share
-----------------------
Net income per common share is based on the weighted average number of
shares outstanding during the year. The Company declared a one-for-four
reverse stock split in 1994. The Company declared a one-for-ten forward
stock split in 1996. All share and per share amounts have been adjusted to
reflect the stock splits.
I. Concentration of Credit Risk
-------------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. In the normal course of business the Company grants credit
without collateral to customers. Consequently, the Company's ability to
collect the amounts due from customers is affected by economic conditions.
J. Fair Value of Financial Instruments
---------------------------------------
The Company has a number of financial instruments, none of which are held
for trading purposes. The Company estimates that the fair value of all
financial instruments at March 31, 1998 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgement is necessarily
required in interpreting market data to develop the estimates of fair
value, and, accordingly, the estimates are not necessarily indicative of
the amounts that the Company could realize in the current market exchange.
9
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
March 31, 1998 (Unaudited)
Note 4 - Property and Equipment
- ------------------------------------
Property and equipment consists of the following:
Balance at Balance at
Description 3/31/98 12/31/97
- ------------------------------ ------------ ------------
Land $ 385,019 $ 385,019
Buildings and Improvements 336,782 323,228
Office Equipment 221,356 210,338
Communications Equipment 353,281 353,281
Furniture and Fixtures 30,133 29,483
Trucks, Tractors, and Trailers 9,145,654 9,145,654
Yard Equipment 164,534 164,534
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10,636,759 10,611,537
Less Accumulated Depreciation (1,848,958) (1,511,048)
------------ ------------
$ 8,787,801 $ 9,100,489
============ ============
Note 5 - Long-Term Debt and Financing Arrangements
- ---------------------------------------------------------
Pursuant to a factoring agreement, the Company factors all of its accounts
receivable. The Company purchases all factored accounts receivable over ninety
days old and the factor withholds are reserved of 10% of the uncollected and
unrepurchased accounts. The factor has a security interest in accounts
receivable purchased and the Company's obligation to the factor is guaranteed by
the majority shareholder who is also an officer and another office of the
Company.
Due primarily to the repurchase feature of the factoring agreement, the Company
accounts for the factored accounts receivable as a secured borrowing rather than
a sale. Many receivables are not collected within ninety days and have to be
repurchased by the Company. As of March 31, 1998, the total amount due to the
factor is $1,894,722.
The following schedule summarizes the Company's long-term debt and capital
leases.
Balance at
Description 3/31/98
- ---------------------------------------- -----------
Stockholder Notes Payable $ 0
Notes Payable and Capital Leases Payable 8,002,522
-----------
$ 8,002,522
===========
10
ITEM 2. Management's Discussion and Analysis or Plan of Operation
OVERVIEW
- --------
During the first quarter of 1998, ESCO Transportation began to implement changes
in the Company's administrative processes in an effort to improve profitability.
Most of these changes were completed by the end of the quarter; however,
management believes the impact of these changes will not be reflected in the
Company's financial statements until the later quarters of 1998.
Some of the more significant changes were as follows:
The Company completed a factoring agreement with Commercial Billing Services
Inc. of Decatur, Alabama, an affiliate of Compass Bank. Under this arrangement,
the effective rate for the cost of funds will be reduced and management
anticipates substantial savings. This agreement also automates the information
transfer process that should reduce administrative costs.
The Company also discontinued discounting invoices for two of the Company's
larger customers which should result in net savings to the Company.
Also during the first quarter of 1998, the Company began aggressively collecting
delinquent receivables. While most of these collected funds will not become
available until the second quarter of 1998, all indications are that the Company
can expect improved cashflow as a result of these collections.
By the end of the first quarter, the Company had already experienced an
improvement in its cash and payable positions relative to the previous quarter.
The Company fully intends to continue its strategy of cost reduction as well as
revenue enhancement to further improve the Company's overall financial position.
The Company's Board of Directors has decided during this first quarter of 1998
to acquire the operations of a Tennessee corporation, Intermodal Logistics
Company, Inc. (ILC), which should facilitate its expanding market in the
mid-Southern states. ILC was acquired for a total purchase price of $337,900 in
April 1998 with a combination of cash, debt assumption, and stock. The
acquisition was accounted for as a purchase.
The Board of Directors has directed the Company's management to additionally
review various alternate bids for insurance companies to control rising costs of
insurance. The containment of insurance costs will directly results in net
savings to the Company.
11
ITEM 2. Management's Discussion and Analysis or Plan of Operation
(Continued)
SAFE HARBOR
- ------------
This report on Form 10-Q or 10-QSB (the Report) contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward-looking statements necessarily involve risks and
uncertainty, including, without limitation, the risk of a significant natural
disaster, the expansion or contraction in its various lines of business, the
impact of inflation, the impact of Year 2000 issues, the ability of the Company
to meet its debt obligation, changing licensing requirements and regulations in
the United States pertinent to its business, the ability of the Company to
expand its businesses, the effect of pending or future acquisitions as well as
acquisitions which have recently been consummated, general market conditions,
competition, licensing and pricing. All statements, other than statements of
historical facts, included or incorporated by reference in the Report that
address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including, without limitation, such
things as future capital expenditures (including the amount and nature thereof),
business strategy and measures to implement such strategy, competitive
strengths, goals, expansion, and growth of the Company's businesses and
operations, plans, references to future success, as well as other statements
which includes words such as "anticipate," "believe," "plan," "estimate,"
"expect," and "intend" and other similar expressions, constitute forward-looking
statements. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could over time prove to be inaccurate and, therefore, there can be
no assurance that the forward-looking statements included in this Report will
themselves prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
12
PART II. OTHER INFORMATION
ITEM 1. Recent Developments in Legal Proceedings
As of the date of filing hereof, October 18, 1999, ESCO Transportation is
involved in the following litigation:
Case No. EDVC 98-22ORT (VAPx); Intercargo Insurance Co. v. Burlington Northern
Santa Fe Railroad, it 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 ESCO
Transportation, for indemnity. ESCO Transportation never had custody or
control of the stolen merchandise. ESCO Transportation has answered both
Intercargo's claim and Burlington's cross-claim. ESCO Transportation 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. ESCO
Transportation is seeking a dismissal of the claims against it. There is
currently a mandatory settlement conference scheduled for October 18, 1999
at which Company management will be present.
The Company's management does not believe that this litigation will have
any material impact on the Company's business.
Case No. 98-0840-1; Pacific Business Capital Corp v. ESCO Transportation Co.
and Michael Till, Individually; in the Chancery Court of Shelby, Tennessee.
Pacific Business sued ESCO Transportation and Mike Till in an attempt to
enforce a security interest it holds in some property of Intermodal
Logistics Co. ESCO Transportation 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 ESCO Transportation 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 ESCO Transportation's
and Mike Till's position that they have not violated any security interest
Pacific Business may have; ESCO Transportation and Mike Till seek dismissal
as expeditiously as possible.
The Company's management does not believe that this litigation will have
any material impact on the Company's business.
13
PART II. OTHER INFORMATION (CONTINUED)
ITEM 2. Changes in Securities - NONE
ITEM 3. Defaults Upon Senior Securities - NONE
ITEM 4. Submission of Matters to a Vote of Security Holders - NONE
ITEM 5. Other Information - NONE
ITEM 6. Exhibits and Reports of Form 8-K - NONE
14
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:
ESCO Transportation Co.
________________________________ ______________________________
Edwis L. Selph, Sr. Date
President/Chief Executive Officer
________________________________ ______________________________
Edwis L. Selph, Jr. Date
Secretary/Treasurer
15