10-Q/A 1 0001.txt FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended March 31, 2000 --------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- --------------- Commission file number: 0-2882 --------------------------------- ESCO TRANSPORTATION CO. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 55-0257510 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification no.) incorporation or organization) 4301 EAST PARK DRIVE HOUSTON, TEXAS 77028 -------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 635-1008 -------------- Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: Common Stock $ .001 par value per share --------------------------------------- Title of class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Common Stock, $ .001 Par Value 12,550,497 ------------------------------ ---------- (Class) (Outstanding as of March 31, 2000) The aggregate market value of the voting stock held by nonaffiliates of the Registrant on July 13, 2000 was approximately $1,631,564. TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Balance Sheets for the Three Months Ended March 31, 2000 (unaudited) and for the Year Ended December 31, 1999 3 Statements of Income for the Three Months Ended March 31, 2000 (unaudited) and 1999 (unaudited) 4 Statements of Change in Stockholders' Equity (Deficit) for the Three Months Ended March 31, 2000 (unaudited) 5 Statements of Cash Flows for the Three Months Ended March 31, 2000 (unaudited) and 1999 (unaudited) 6 Notes to the Financial Statements (unaudited) 7 - 16 Item 2. Management's Discussion and Analysis 17 PART II OTHER INFORMATION Item 1. Recent Developments in Legal Proceedings 22 Item 2. Changes in Securities 22 Item 3. Defaults upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports in Form 8-K 22 Signatures 23
PART I FINANCIAL INFORMATION Item 1. Financial Statements ESCO TRANSPORTATION CO. Balance Sheets March 31,2000 December 31,1999 --------------- ------------------ ASSETS (Unaudited) (Audited) CURRENT ASSETS: Cash and Cash Equivalents $ 103,510 $ 109,929 Accounts Receivable - Trade, Net of Allowance for Bad Debts of $395,000 in 2000 and $338,000 in 1999 7,396,771 6,172,164 Truck Maintenance Supplies 147,649 152,557 Employee Advances and Driver Loans 243,598 117,092 Notes Receivable - Employees, Current 132,019 241,830 Notes Receivable - Stockholders 285,993 217,109 Prepaid Expenses 200,318 134,046 Other Current Assets 127,206 26,085 --------------- ------------------ TOTAL CURRENT ASSETS 8,637,064 7,170,812 --------------- ------------------ PROPERTY AND EQUIPMENT Property and Equipment 12,652,864 12,516,566 Less Accumulated Depreciation (4,381,434) (3,980,000) --------------- ------------------ 8,271,430 8,536,566 --------------- ------------------ OTHER ASSETS Intangibles, Net of Accumulated Amortization 501,907 82,871 Other Assets - Non Current 21,248 35,392 --------------- ------------------ Total Other Assets 523,155 118,263 --------------- ------------------ TOTAL ASSETS $ 17,431,649 $ 15,825,641 =============== ================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts Payable - Trade $ 901,548 $ 1,247,094 Bank Overdrafts 812,325 436,838 Accrued and Other Liabilities 1,228,186 980,700 Amounts Due Factor 8,337,559 6,944,085 Current Portion of Long-Term Debt 2,038,470 2,038,470 Current Portion of Obligations under Capital Leases 235,603 235,603 --------------- ------------------ TOTAL CURRENT LIABILITIES 13,553,691 11,882,790 Long-term Debt Long-Term Debt, Net of Current Portion 2,673,232 3,138,735 Obligations under Capital Leases, Net of Current Portion 824,186 852,633 --------------- ------------------ 17,051,109 15,874,158 --------------- ------------------ Stockholders' Equity (Deficit) Preferred Stock, $.001 Par Value: 15,000,000 Shares Authorized: None Issued Common Stock, $.001 Par Value; 20,000,000 Authorized: 12,818,017 and 14,084,017 Issued; 12,550,497 and 13,818,997 Outstanding in 2000 and 1999 1,576 1,560 Additional Paid-In Capital 1,499,499 1,625,765 Retained Earnings (Deficit) (412,386) (396,385) --------------- ------------------ 1,088,689 1,230,940 Less: Notes Receivable from Stockholder (619,577) (1,191,635) Less: Treasury Stock, At Cost (88,572) (87,822) --------------- ------------------ 380,540 (48,517) --------------- ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 17,431,649 $ 15,825,641 =============== ==================
See Notes to Unaudited Condensed Financial Statements. 3
PART I FINANCIAL INFORMATION Item 1. Financial Statements ESCO TRANSPORTATION CO. Statements of Income For the Three Months Ended March 31, 2000 and 1999 2000 1999 ------------ ------------ (Unaudited) (Unaudited) REVENUE: Freight Revenue $11,799,310 $ 7,122,841 Oil and Gas Revenue 1,332 1,171 ------------ ------------ 11,800,642 7,124,012 ------------ ------------ EXPENSES: Cost of Freight Revenue 8,424,318 4,861,439 Operating and Administrative Expenses 2,569,595 1,712,600 Depreciation and Depletion 461,965 364,913 ------------ ------------ 11,455,878 6,938,952 ------------ ------------ OPERATING INCOME 344,764 185,060 OTHER INCOME (EXPENSE) Interest Income 27,708 3,153 Other Income 9,406 8,729 Interest Expense (395,263) (329,695) Gain (Loss) on Sale of Assets (2,616) (6,994) ------------ ------------ Total Other Income (360,765) (324,807) ------------ ------------ NET INCOME (LOSS) BEFORE TAXES (16,001) (139,747) Provision for Federal Income Tax 0 0 ------------ ------------ NET INCOME (LOSS) $ (16,001) $ (139,747) ============ ============ Net Income (Loss) Per Share- Basic and Fully Diluted $ (0.001) $ (0.011) ============ ============ ------------ ------------ Weighted Average Number of Shares Outstanding 13,944,415 13,179,391 ============ ============
See Notes to Unaudited Condensed Financial Statements. 4
PART I FINANCIAL INFORMATION Item 1. Financial Statements ESCO TRANSPORTATION CO. Statement of Changes in Stockholders' Equity (Deficit) For the Three Months Ended March 31, 2000 (Unaudited) Common Stock Retained Treasury Stock --------------------- Additional Earnings --------------------- Shares Amount Paid-In Capital (Deficit) Shares Amount ----------- -------- ----------------- ---------- ---------- --------- Balance - December 31,1999 14,084,017 $ 1,560 $ 1,625,765 $(396,385) (265,020) $(87,822) Shares issued in Quantum Acquisition 159,000 159 476,841 0 0 0 Management Incentive Shares Returned (1,425,000) (143) (569,857) 0 0 0 Shareholder Notes Receivable Interest 0 0 (33,250) 0 0 0 Advances to Stockholders - Stock Purchase 0 0 0 0 0 0 Purchase Treasury Stock 0 0 0 0 (2,500) (750) Net Income (Loss) 0 0 0 (16,001) 0 0 ----------- -------- ----------------- ---------- ---------- --------- Balance - March 31, 2000 12,818,017 $ 1,576 $ 1,499,499 $(412,386) $(267,520) $(88,572) =========== ======== ================= ========== ========== ========= Notes Receivable from Stockholders Total ------------------- --------- Balance - December 31,1999 $ (1,191,635) $(48,517) Shares issued in Quantum Acquisition 0 477,000 Management Incentive Shares Returned 570,000 0 Shareholder Notes Receivable Interest 33,250 0 Advances to Stockholders - Stock Purchase (31,192) (31,192) Purchase Treasury Stock 0 (750) Net Income (Loss) 0 (16,001) ------------------- --------- Balance - March 31, 2000 $ (619,577) $380,540 =================== =========
See Notes to Unaudited Condensed Financial Statements. 5
PART I FINANCIAL INFORMATION Item 1. Financial Statements ESCO TRANSPORTATION CO. Statements of Cash Flows For the Three Months Ended March 31, 2000 and 1999 2000 1999 ------------ ---------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Cash Provided by Operating Activities $ 785,501 $ 644,711 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Property and Equipment (136,295) 0 Purchase of Quantum Transportation (67,874) 0 Proceeds from Sale of Property and Equipment 0 43,542 Stockholder Advances (93,050) (102,981) ------------ ---------- Net Cash Provided (Used) in Investing Activities (297,219) (59,439) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on Long-Term Debt (493,951) (503,145) Purchase of Treasury Stock (750) (18,004) ------------ ---------- Net Cash Provided (Used) in Financing Activities (494,701) (521,149) ------------ ---------- Net Increase (Decrease) in Cash and Cash Equivalents (6,419) 64,123 CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 109,929 25,833 ------------ ---------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 103,510 $ 89,956 ============ ========== Non - Cash Transactions: Stock Issued to Acquire Quantum Transportation $ 477,000 $ 0 Stock Issued to Acquire Business $ 0 $ 40,000 Stock Issued Under Management Incentive Agreement $ (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 March 31, 2000 (Unaudited) Note 1 - Interim Financial Statements ------------------------------------------ The accompanying unaudited financial statements of ESCO Transportation Co., (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. However, the Company believes the disclosures contained herein are adequate to make the information presented not misleading. The financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's financial position and results of operations. Note 2 - Organization ------------------------ The Company was incorporated under the name of Power Oil Company in 1916 in West Virginia. In 1992, the Company was reincorporated as a Delaware corporation. The Company changed its name from "Power Oil Company to "ESCO Transportation Co." in 1994. 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; and Stockton, California. The Company also maintains an Over-The-Road/segment division that performs long haul services for numerous customers within the United States. The main office for this division is located in Springdale, Arkansas and has an expansion office in Selma, Alabama which opened in May 2000. The Company's corporate office is located in Houston, Texas. Note 3 - Summary of Significant Accounting Policies ---------------------------------------------------------- A. Basis of Accounting ------------------- Income and expenses are recorded on the accrual method of accounting for financial and federal income tax reporting purposes. 7 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements March 31, 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. F. Oil and Gas Properties ---------------------- The Company accounts for its oil and gas exploration and development activities using the successful efforts method. Under this method of accounting, exploratory drilling costs which result in the discovery of proved reserves are capitalized. All other exploratory costs, including geological and geophysical costs, are expensed when incurred. Development costs, including development of dry holes, are capitalized when incurred. The Company incurred no exploration and development costs during the three months ended March 31, 2000. 8 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements March 31, 2000 (Unaudited) Note 3 - Summary of Significant Accounting Policies (Continued) ----------------------------------------------------------------------- F. Oil and Gas Properties (Continued) -------------------------------------- Depletion of capitalized costs on producing properties is computed on a property-by-property basis utilizing the unit-of-production method. Depletion expense was $1,496 and $1,494 for the three months ended March 31, 2000 and 1999 respectively. The Company's total capitalized costs as of March 31, 2000 and 1999 were $21,248 and $27,224 respectively. Lease acquisition costs are capitalized when incurred. Leasehold improvements are recognized through a charge to operations if the lease expires or management decides to abandon the Company's interest. When assets are retired, abandoned or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts, and gain or loss is included in income. G. Income Taxes ------------- The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for deductible temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. For the three months ended March 31, 2000, net operating loss benefits were offset by a valuation allowance. 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 March 31, 2000 (Unaudited) Note 3 - Summary of Significant Accounting Policies (Continued) ----------------------------------------------------------------------- H. Net Income Per Share (Continued) ------------------------------------ The Company acquired Quantum Transportation during the quarter ended March 31, 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 three 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 March 31, 2000, an additional 1,431,000 shares would be issued under this agreement. The dilution effect of the additional earnings per share are 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 March 31, 2000 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in the current market exchange. At March 31, 2000, the Company had $905,570 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 March 31, 2000 (Unaudited) Note 4 - Property and Equipment ------------------------------------ Property and equipment consists of the following:
Description 3/31/00 12/31/99 ---------------------------------- ------------ ------------ Land $ 175,975 $ 175,975 Buildings and Improvements 13,554 13,554 Office Equipment 632,703 571,061 Communications Equipment 186,195 183,584 Furniture and Fixtures 46,216 32,699 Leasehold Improvements 44,690 0 Trucks, Tractors, and Trailers 9,841,305 9,827,467 Property Held Under Capital Leases 1,476,881 1,476,881 Yard Equipment 235,345 235,345 ------------ ------------ 12,652,864 12,516,566 Less Accumulated Depreciation (4,381,434) (3,980,000) ------------ ------------ $ 8,271,430 $ 8,536,566 ============ ============
Note 5 - Long-Term Debt and Loans --------------------------------------- The Company has loans from various banks and finance companies for the purchase of transportation equipment including trucks and trailers, communication equipment, leasehold improvements, and portable buildings. The Company's long-term debt was issued to purchase property and equipment. The following is a summary of the loan balances outstanding at March 31, 2000 and December 31, 1999.
March 31, 2000 December 31, 1999 ---------------- ------------------- Notes payable to various banks and finance companies; payable in $ 4,711,702 $ 5,177,205 monthly installments totaling $202,312 including principal and interest; bearing interest at rates ranging from 9.5% to 11.5%; secured by transportation equipment purchased in conjunction with the financing; guaranteed by a major stockholder. The notes mature at varying dates from 2001 through 2004 and also a mortgage note payable to a partnership; bearing interest at 8%; payable in monthly installments of $1,722 including principal and interest; secured by real estate; guaranteed by a major stockholder. The note matures in 2002. ---------------- ------------------- Less: Current Maturities (2,038,470) (2,038,470) ---------------- ------------------- Long Term Debt, Net of Current $ 2,673,232 $ 3,138,735 ================ ===================
11 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements March 31, 2000 (Unaudited) Note 6 - Obligations Under Capital Leases ----------------------------------------------- The Company is lessee of trailers and communication equipment which are held under capital leases expiring in various years. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. Assets are amortized (or depreciated) over the longer of the lease terms or their estimated productive lives. Amortization (or depreciation) of assets under capital leases is included in depreciation expense for 2000 and 1999. Following is a summary of property held under capital leases. 3/31/00 12/31/99 ---------- ---------- Transportation Equipment/Trailers $1,347,697 $1,347,697 Communications Equipment 75,250 75,250 Office Equipment 53,934 53,934 ---------- ---------- $1,476,881 $1,476,881 ========== ========== Interest rates on capitalized leases vary from 8.7% to 12.2% and are imputed based upon the lower of the Company's incremental borrowing rate at the inception of the lease or the lessor's implicit rate of return. Note 7 - Amounts Due to Factor ------------------------------------ Pursuant to a factoring agreement, the Company factors all of its accounts receivable under an agreement with Compass Bank doing business as Commercial Billing Service. Interest is paid on the total outstanding balance at a rate of 12.5% per annum. As of April 20, 2000, the Company renegotiated its agreement with the factoring company (see Note P in the year-end audited financial statements for a description of the revised agreement with the factoring company.) The revised agreement is also accounted for as a secured borrowing rather than a sale of receivables. 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 March 31, 2000 (Unaudited) Note 8 - Segment Information (Continued) ---------------------------------------------
Three Months Ended March 31, 2000 -------------------------------------------------- Depreciation Cost of And Interest Sales Sales Amortization Expense ------------- ---------- ------------- -------- Intermodal $ 7,753,192 $5,694,155 $ 61,909 $250,236 Over-the-Road 3,679,758 2,730,163 373,439 145,027 Storage 366,360 0 26,617 0 Other 1,332 0 0 0 ------------- ---------- ------------- -------- $ 11,800,642 $8,424,318 $ 461,965 $395,263 ============= ========== ============= ========
Three Months Ended March 31, 2000 ----------------------------------------------------- Additions to Earnings Long-Term Long-Lived (Loss) Assets Assets Total Assets -------------- ---------- ----------- ------------- Intermodal $ 36,840 $ 792,360 $ 85,625 $ 7,416,112 Over-the-Road (260,145) 7,321,108 50,673 9,482,575 Storage 205,972 157,962 0 532,962 Other 1,332 0 0 0 -------------- ---------- ----------- ------------- $ (16,001) $8,271,430 $ 136,298 $ 17,431,649 ============== ========== =========== =============
Three Months Ended March 31, 1999 -------------------------------------------------- Depreciation Cost of And Interest Sales Sales Amortization Expense ------------- ---------- ------------- -------- Intermodal $ 4,261,419 $3,094,907 $ 49,779 $175,878 Over-the-Road 2,730,992 1,766,532 308,852 153,817 Storage 130,430 0 6,282 0 Other 1,171 0 0 0 ------------- ---------- ------------- -------- $ 7,124,012 $4,861,439 $ 364,913 $329,695 ============= ========== ============= ========
Three Months Ended March 31, 1999 --------------------------------------------------- Additions to Earnings Long-Term Long-Lived (Loss) Assets Assets Total Assets ---------- ---------- ------------- ------------- Intermodal $ (24,163) $ 952,348 $ 107,111 $ 4,865,555 Over-the-Road (143,988) 6,537,671 11,886 7,980,771 Storage 27,233 272,684 0 403,113 Other 1,171 0 0 0 ---------- ---------- ------------- ------------- $(139,747) $7,762,703 $ 118,997 $ 13,249,439 ========== ========== ============= =============
The segmented information is prepared under generally accepted accounting principles. The amounts also incorporate the allocation of overhead costs based on the number of loads on the various segments operated within the Company. For the period ended March 31, 2000, all of the Company's operations are conducted within the United States. 13 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements March 31, 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 plans to address its historical losses with the preparation and implementation of a detailed operational plan and budget which includes profitability for each division during 2000. The plan includes the continued implementation of budgetary controls and cost control measures in all areas of operation. Management has also implemented procedures to update its accounting and dispatch system 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 also 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 March 31, 2000, the Company paid $31,292 to a family member 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. 14 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements March 31, 2000 (Unaudited) Note 11 - Related Party Transactions (Continued) ------------------------------------------------------ During the quarter ended March 31, 2000, the shares previously issued under a management incentive agreement 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 March 31, 2000, the Company had pledged $100,000 of cash accounts as security for a personal note payable to a majority stockholder. Note 12 - Acquisition of Quantum Transportation ----------------------------------------------------- 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 March 31, 2000, the additional shares of stock to be issued total 1,431,000 shares. The purchase transaction resulted in the recording of goodwill totaling $416,218 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 first quarter ended March 31, 1999 as if the Quantum transaction had occurred at that date. Income before Net Income Net Earnings Revenue extraordinary items (Loss) per share ------------------ ------------------- ------------- ------------ $7,884,254 $(89,201) $(89,201) $(.01) Note 13 - Subsequent Events ------------------------------- Subsequent to March 31, 2000, the Company entered into an informal management agreement with Fisher Trucking (Fisher) in Selma, Alabama, for the Company to assist Fisher in managing its operations with the intent of acquisition during 2000. Management anticipates signing a letter of intent if the due diligence is positive and will proceed to complete the transaction. 15 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements March 31, 2000 (Unaudited) Note 13 - Subsequent Events (Continued) -------------------------------------------- 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. On June 23, 2000 and June 30, 2000, the President and Chief Financial Officer, respectively, resigned from the positions as officers and board members of the Company. 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. Management is currently in negotiations with Compass to extend the deadline referred to in the agreement. 16 ITEM 2. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION OVERVIEW -------- The quarter ended March 31, 2000 was a progressive quarter for the Company. The Company accomplished several milestones that management had been executing for several months. In this quarter, management closed on the transaction to acquire Quantum Transportation Company which expanded its operations to Minneapolis, Minnesota and Ripon, California. During this quarter, management also completed its 2000 five-year business plan and began implementing this plan through the execution of its Year 2000 budget. As in the past, the budget for 2000 has been based upon individual terminal responsibility and each terminal manager is in charge of their cost center with incentives for accomplishing the goals for the year. The Company finished the first quarter with a loss of $(16,001). This loss was attributed to operations in the Company's over-the-road Springdale division and management is further evaluating how to isolate and correct the issues attributed to the loss. Management is evaluating the cost benefit of separating this division into a separate subsidiary and poising it for sale or restructuring. The other divisions and/or segments of the Company were profitable or operated within budget constraints and management anticipates a profitable operation during 2000 in accordance with its budgeted plan. In addition to the first quarter of 2000, management for ESCO entered into a management agreement with Kiser, Inc. (Kiser), a Mississippi corporation located in Gulf Port, Mississippi and several related entities to manage Kiser and its related companies for a limited period of time, the sole purpose of which is to evaluate the feasibility of acquiring and completing an agreement and plan of merger between Kiser and ESCO. Under this agreement, the Company assumed responsibilities of various day to day operations but assumed no responsibilities for liability of other obligations of Kiser and the related companies. (Also see comments regarding this contract in "Subsequent Events.") During the first quarter of 2000, management is also actively pursuing potential investors to re-capitalize the Company. Management is seeking $5,000,000 in additional equity and/or subordinated debt to help improve the working capital ratio and debt-to-equity ratio. OPERATIONS ---------- As stated above, the Company operated at a loss of $(16,001) for the first quarter which, although is below budget, is a substantial improvement over the 1999 operations. Freight revenue exceeded budget by $927,000 or 8% and reflects a 66% increase over the 1999 revenue. A substantial part of the increase relates to revenues generated from the new Minneapolis, Minnesota and Ripon, California offices acquired through Quantum plus the operation of the Company's Fort Smith location which operated for a full quarter during the three months ended March 31, 2000. Throughout the Company's operation, it also experienced strong internal growth through increased business in all regions and divisions of the Company. 17 ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued) OPERATIONS (CONTINUED) ----------------------- The Company's cash flow during the first quarter continued to be limited and 100% of the Company's receivables were factored through Commercial Billing Services and Compass Bank. During the first quarter of 2000, the Company renegotiated its factoring agreement with the bank as stated in our annual audited financial statement. Subsequent to issuance of the report, management and the bank have agreed to cap the line to $9,800,000 and the Company has been able to operate within the limits of the line of credit provided by the bank. The Company's operating profits increased from $185,000 in 1999 to $344,764 in 2000 for a 86% increase in profits before interest expense. Interest expense increased by approximately 20% over the same period in 1999 primarily due to increase in the factoring line and the reduction of long-term debt at lower interest rates. Operating and administrative expenses increased by 50% from 1999 primarily attributable to the new locations in Minneapolis, Minnesota; Ripon, California; and Fort Smith, Arkansas added during the first quarter. However, as a percentage of revenue, operating and administrative costs decreased from 24% to 22% for the same period in 1999. During the first quarter, collections have continued to be a high priority and management has implemented revised collection procedures to decentralize collections from the corporate office to individual terminal offices. Management anticipates this will facilitate collections and location of paperwork and support needed by customers and expects this to improve collections and reduce the total outstanding balance due to the factoring company which will help reduce interest costs. YEAR 2000 ISSUE ----------------- The Year 2000 issue is the result of date coding within computer programs that were written using just two digits rather than four digits to define the applicable year. If not corrected, these date codes could cause computers to fail to calculate dates beyond 2000 and as a result, computer applications could fail or create erroneous results by or at the Year 2000. The Company, together with outside vendors engaged by the Company, have made assessments of the Company's potential Year 2000 exposure related to its computerized information systems. Because of the nature of the Company's operations, many of its computerized information systems will be required to process information which includes post-year 2000 date coding well in advance of January 1, 2000. The Company has substantially completed its overall assessment of Year 2000 issues associated with its current systems and is currently engaged in efforts to remediate potential year 2000 exposure with respect to those systems, including the identification, selection, and implementation of a major new Year 2000 compliant software system. Following the remediation phase, the Company engages in testing of the applicable systems in order to verify Year 2000 compliance. The Company utilizes a variety of remediation and testing methods in connection with its Year 2000 compliance efforts. Management believes that the Company's compliance plan is progressing such that Year 2000 exposures will be mitigated prior to any critical dates. To date, no material information technology projects of the Company have been delayed as a result of the Company's Year 2000 compliance efforts. 18 ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued) YEAR 2000 ISSUE (CONTINUED) ------------------------------ The Company has also made assessments of the potential Year 2000 exposure associated with its embedded technology systems, such as telephone systems, freight hauling tracking systems, and accounting and payment systems. Based on such assessments, the Company does not believe that it has significant Year 2000 exposure with respect to such embedded technology systems. The Company is currently involved in discussion with important suppliers, business partners, customers, and other third parties to determine the extend to which the Company may be vulnerable to the failure of these parties to identify and correct their own Year 2000 issues. In the ongoing acquisition of software and hardware installations, the Company generally requires that its vendors certify the Year 2000 compliance of acquired products. The Company believes that its own software vendors are Year 2000 compliant. The Company is utilizing and will continue to utilize both internal and external resources to reprogram or replace its computer systems such that the systems can be expected to be Year 2000 compliant in advance of respective critical dates. During the three months ended March 31, 2000, the Company capitalized $29,310 with respect to new software purchases and installations which are Year 2000 compliant. The total estimated cost of modification of existing software and new Year 2000 compliant systems is $300,000 which includes costs attributable to the planned purchase and implementation of a new accounting and dispatch system. The cost of this new software is being capitalized. The level of expense anticipated in connection with Year 2000 issues is not expected to have a material effect on the Company's result of operations. The costs of the Company's Year 2000 compliance efforts are expected to be funded out of both operating cash flow and outside financing. During the quarter ended March 31, 2000, the Company continued to implement its Year 2000 plan. The progress made was in accordance with the plan, including progress on the new system which is expected to go online on or before December 2000. There was no new information which came to management's attention that would indicate that the plan should be altered significantly or that the plan would not be successful in the time frame prescribed by the plan. The dates of expected completion and the costs of the Company's Year 2000 remediation efforts are based on management's estimates, which are derived utilizing assumptions of future events, including the availability of certain resources, third party remediation plans, and other factors. There can be no guarantee that these estimates will be achieved, and if the actual timing and costs for the Company's Year 2000 remediation program differ materially from those anticipated, the Company's financial results and financial condition could be significantly affected. Additionally, despite testing by the Company, the Company's systems may contain undetected errors or defects associated with Year 2000 issues for remediation or to complete its Year 2000 remediation and testing efforts prior to respective critical dates, as well as the failure of third parties with whom the Company has an important relationship to identify, remediate, and test their own Year 2000 issues and the resulting disruption which could occur in the Company's systems and could have material adverse effects on the Company's business, results of operations, cash flow, and financial condition. 19 ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued) SAFE HARBOR ------------ This report on Form 10-Q or 10-QSB (the Report) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements necessarily involve risks and uncertainty, including, without limitation, the risk of a significant natural disaster, the expansion or contraction in its various lines of business, the impact of inflation, the impact of Year 2000 issues, the ability of the Company to meet its debt obligation, changing licensing requirements and regulations in the United States pertinent to its business, the ability of the Company to expand its businesses, the effect of pending or future acquisitions as well as acquisitions which have recently been consummated, general market conditions, competition, licensing and pricing. All statements, other than statements of historical facts, included or incorporated by reference in the Report that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including, without limitation, such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement such strategy, competitive strengths, goals, expansion, and growth of the Company's businesses and operations, plans, references to future success, as well as other statements which includes words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions, constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could over time prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report will themselves prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. CORPORATE FILINGS ------------------ The Company filed an amendment to its Articles of Incorporation in January 2000 to clarify the authorized capital stock in the Articles; 20,000,000 shares of common and 15,000,000 of preferred. SUBSEQUENT EVENTS ------------------ Subsequent to March 31, 2000, the Company entered into an informal management agreement with Fisher Trucking (Fisher) in Selma, Alabama, for the Company to assist Fisher in managing its operations with the intent of acquisition during 2000. Management anticipates signing a letter of intent if the due diligence is positive and will proceed to complete the transaction. As stated in the overview, the Company entered into a management agreement with Kiser, Inc. and related entities for the purpose of managing Kiser with the intent of evaluating the feasibility of acquiring Kiser in an agreement and plan of merger transaction. Management determined the acquisition was not practical for the Company at this time and, on May 23, 2000, terminated the Kiser management agreement. 20 ITEM 2. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION (CONTINUED) RELATED PARTY TRANSACTIONS ---------------------------- During the quarter ended March 31, 2000, the Company paid $31,192 to a family member 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 March 31, 2000, the shares previously issued under a management incentive agreement 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 March 31, 2000, the Company had pledged $100,000 of cash accounts as security for a personal note payable to a majority stockholder. 21 PART II. OTHER INFORMATION ITEM 1. Recent Developments in Legal Proceedings The Company's three litigation matters were previously referenced in the Form 10-KSB dated December 31, 1999 and its statements are incorporated herein by reference. Subsequent to the issuance of the 10-KSB, ESCO Transportation and ESCO Acquisition Corporation were involved in the following litigation: Case No. A2401-200185; First Continental Leasing, a Division of BancorpSouth vs. Kiser, Inc., ESCO Transportation Co. and ESCO Transportation Acquisition Corp.; In the Circuit Court of Harrison County, Mississippi, First Judicial District. First Continental Leasing is suing Kiser, Inc., ESCO Transportation Co., and ESCO Acquisition Corporation as a result of the management agreement signed in March 2000. Management does not anticipate any liability related to this litigation and expects a summary disposition on this case. ITEM 2. Changes in Securities - NONE ITEM 3. Defaults Upon Senior Securities - NONE ITEM 4. Submission of Matters to a Vote of Security Holders - NONE ITEM 5. Other Information - NONE ITEM 6. Exhibits and Reports of Form 8-K - NONE 22 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: ------------------------------- -------------------------- Edwis L. Selph, Sr. Date Chairman of the Board ------------------------------- -------------------------- Robert F. Darilek, CPA Date Chief Financial Officer ------------------------------- -------------------------- Becky Clamp, CPA Date Controller 23