FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarter ended September 30, 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
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(State or other jurisdiction of (I.R.S. Employer Identification no.)
incorporation or organization)
6505 HOMESTEAD
HOUSTON, TEXAS 77028
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 635-1008
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Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $ .001 par value per share
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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 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 12,505,817
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(Class) (Outstanding as of September 30, 1998)
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on September 30, 1998 was approximately $5,877,734.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
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Balance Sheets for the Three Months Ended September 30,
1998 (unaudited) and for the Year Ended December 31, 1997 (audited) 3
Statements of Income for the Three Months Ended
September 30, 1998 (unaudited) and 1997 (unaudited) 4
Statements of Stockholders' Equity for the Three Months
Ended September 30, 1998 (unaudited)
5
Statements of Cash Flows for the Three Months Ended
September 30, 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 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports in Form 8-K 12
Signatures 13
ESCO TRANSPORTATION CO.
Balance Sheet
September 30,1998 December 31,1997
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ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and Cash Equivalents $ 212,530 $ 22,678
Accounts Receivable, Net of Allowance for
Bad Debts of $481,108 in 1997 and
$540,740 in 1998 3,570,824 2,282,893
Truck Maintenance Supplies 79,556 0
Notes Receivable - Stockholders 109,722 20,000
Prepaid Expenses - Current 119,942 36,597
Other Current Assets 39,172 204,460
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TOTAL CURRENT ASSETS 4,131,746 2,566,628
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PROPERTY AND EQUIPMENT
Property and Equipment 10,539,312 10,611,537
Less Accumulated Depreciation (2,492,675) (1,511,048)
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8,046,637 9,100,489
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OTHER ASSETS
Prepaid Insurance - Net of Current Portion 73,649 101,097
Other Assets - Non Current 217,253 34,692
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Total Other Assets 290,902 135,789
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TOTAL ASSETS $ 12,469,285 $ 11,802,906
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable to Stockholders $ 0 $ 70,319
Accounts Payable - Trade 496,996 375,213
Bank Overdrafts 10,167 280,715
Accrued and Other Liabilities 412,512 422,878
Amounts Due Factor 4,153,002 1,262,094
Current Portion of Long-Term Debt 1,665,466 1,807,738
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TOTAL CURRENT LIABILITIES 6,738,143 4,218,957
LONG-TERM DEBT - NET OF CURRENT PORTION 5,274,900 6,645,188
DEFERRED INCOME TAXES 0 0
COMMITMENTS 0 0
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TOTAL LIABILITIES 12,013,043 10,864,145
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STOCKHOLDERS' EQUITY
Common Stock, $.0001 Par Value; 20,000,000
Shares Authorized; 12,527,612 Shares
Issued and Outstanding in 1997 and
12,505,817 in 1998 1,569 1,218
Additional Paid-In Capital 931,906 863,818
Retained Earnings (Deficit) (238,492) 77,725
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694,983 942,761
Less Note Receivable from Shareholder (234,741) 0
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460,242 942,761
Less Treasury Stock, At Cost (4,000) (4,000)
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TOTAL STOCKHOLDERS' EQUITY 456,242 938,761
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,469,285 $ 11,802,906
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3
ESCO TRANSPORTATION CO.
Statements of Income
For the Three and Nine Months Ended September 30, 1998 and 1997
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE:
Freight Revenue $ 7,198,575 $ 5,726,651 $19,749,895 $16,795,544
Oil and Gas Revenue 1,260 1,718 3,840 6,102
------------ ------------ ------------ ------------
TOTAL REVENUE 7,199,835 5,728,369 19,753,735 16,801,646
------------ ------------ ------------ ------------
EXPENSES:
Cost of Freight Revenue 5,102,517 3,771,010 14,225,239 11,223,595
General Administrative Expenses 1,342,645 1,604,581 3,924,312 4,376,003
Depreciation and Depletion 388,314 315,913 1,065,111 731,619
------------ ------------ ------------ ------------
TOTAL EXPENSES 6,833,476 5,691,504 19,214,662 16,331,217
------------ ------------ ------------ ------------
OPERATING INCOME 366,359 36,865 539,073 470,429
OTHER INCOME (EXPENSE)
Interest Income 3,038 293 4,779 1,440
Other Income 0 0 11,700 0
Interest Expense (347,705) (192,169) (970,701) (440,430)
Gain (Loss) on Sale of Assets 18,657 0 98,932 0
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Total Other Income (326,010) (191,876) (855,290) (438,990)
------------ ------------ ------------ ------------
NET INC. (LOSS) BEFORE TAXES 40,349 (155,011) (316,217) 31,439
Income Tax 0 0 0 0
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NET INCOME (LOSS) $ 40,349 $ (155,011) $ (316,217) $ 31,439
============ ============ ============ ============
Net Income (Loss) Per Share $ 0.003 $ (0.013) $ (0.025) $ 0.003
============ ============ ============ ============
Weighted Average Number of Shares Outstanding 12,527,612 12,176,760 12,505,817 12,176,760
4
ESCO TRANSPORTATION CO.
Statements of Stockholders' Equity
For the Nine Months Ended September 30, 1998 (Unaudited)
Note
Additional Retained Receivable
Paid-In Earnings Treasury From
Common Stock Capital (Deficit) Stock Shareholder Total
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Shares Amount
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Balance at December 31, 1997 12,176,760 $1,218 $863,818 $ 77,725 $ (4,000) $ 0 $938,761
Correction 174,352 174 (174) 0 0 0 0
Memphis Acquisition 50,000 50 20,950 0 21,000
Note Receivable from Shareholder 0 0 0 (234,741) (234,741)
Employee Stock Bonus 126,500 127 47,312 0 0 47,439
Net (Loss) 0 0 0 (316,217) 0 (316,217)
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Balance at March 31, 1998 12,527,612 $1,569 $931,906 $(238,492) $ (4,000) $(234,741) $456,242
========== ====== ========= ========== ========== ========== ========
5
ESCO TRANSPORTATION CO.
Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
1998 1997
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(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $ 2,094,222 $ 824,020
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (105,938) (4,850,753)
Loans Made 0 (112,366)
Proceeds from Sale of Property and Equipment 244,470 43,432
Loans Collected 0 19,684
Purchase Non-Compete Agreement (135,560) 0
Shareholder Advance (324,463) 0
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Net Cash Used in Investing Activities (321,491) (4,900,003)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Payments on Short-Term Debt (70,319) (182,948)
Proceeds from Long- Term Debt 0 4,555,616
Net Payments on Long-Term Debt (1,512,560) (788,566)
Sale of Stock 0 500,000
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Net Cash Provided (Used) by Financing Activities (1,582,879) 4,084,102
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Net Increase in Cash and Cash Equivalents 189,852 8,119
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 22,678 20,450
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CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 212,530 $ 28,569
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6
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
September 30, 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
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
September 30, 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 nine
months ended September 30, 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 $4,488 for 1997 and $4,482 for 1998.
Lease acquisition costs are capitalized when incurred. Leasehold
improvements are recognized through a charge to operations if the lease
expires or management decides to abandon the Company's interest.
When assets are retired, abandoned or otherwise disposed of, the related
costs and accumulated depreciation are removed from the accounts, and gain
or loss is included in income.
8
ITEM 1. Financial Statements (Continued)
ESCO TRANSPORTATION CO.
Notes to the Financial Statements
September 30, 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 nine months
ended September 30, 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 September 30, 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
September 30, 1998 (Unaudited)
Note 4 - Property and Equipment
- ------------------------------------
Property and equipment consists of the following:
Balance at Balance at
Description 9/30/98 12/31/97
- ------------------------------ ------------ ------------
Land $ 272,519 $ 385,019
Buildings and Improvements 191,782 323,228
Office Equipment 245,348 210,338
Communications Equipment 356,869 353,281
Furniture and Fixtures 30,133 29,483
Trucks, Tractors, and Trailers 9,186,655 9,145,654
Yard Equipment 256,006 164,534
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10,539,312 10,611,537
Less Accumulated Depreciation (2,492,675) (1,511,048)
------------ ------------
$ 8,046,637 $ 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 September 30, 1998, the total amount due to
the factor is $4,153,002.
The following schedule summarizes the Company's long-term debt and capital
leases.
Balance at
Description 9/30/98
- ---------------------------------------- -----------
Stockholder Notes Payable $ 0
Notes Payable and Capital Leases Payable 6,940,366
-----------
$ 6,940,366
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10
ITEM 2. Management's Discussion and Analysis or Plan of Operation
OVERVIEW
- --------
During the third quarter of 1998, the Company ended in a much more positive note
than several previous quarters. The Company saw increases in profits and cash.
The Company continued to pay vendors according to terms. The strong cashflow
was due mostly to the Company's receivables financing described in the prior
quarter.
Quarterly revenue from trucking operations was up $1,391,000 or 24% as compared
to the previous year. The increase in revenue is due to the combined increases
in volume within its Dallas, Texas and Memphis, Tennessee operations plus
overall increased business in the Company's operations.
The Company continued worked to expand its Dallas, Texas and Memphis, Tennessee
operations. Plans were completed in the transfer of personnel from the
Company's Houston, Texas office to the Dallas, Texas region.
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.
11
PART II. OTHER INFORMATION
ITEM 1. Recent Developments in Legal Proceedings
The Company's two litigation matters were previously referenced in the Form
10-QSB dated March 31, 1998 and its statements are incorporated herein by
reference.
ITEM 2. Changes in Securities - NONE
ITEM 3. Defaults Upon Senior Securities - NONE
ITEM 4. Submission of Matters to a Vote of Security Holders - NONE
ITEM 5. Other Information - NONE
ITEM 6. Exhibits and Reports of Form 8-K - NONE
12
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
President/Chief Executive Officer
______________________________ ______________________________
Edwis L. Selph, Jr. Date
Secretary/Treasurer
13